ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of financial
condition and results of operations is based upon, and should be read in conjunction with our audited financial statements and related
notes thereto included elsewhere in this report.
Forward Looking Statements
Certain information contained in this MD&A
includes “forward-looking statements.” Statements which are not historical reflect our current expectations and projections
about our future results, performance, liquidity, financial condition and results of operations, prospects and opportunities and are based
upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting
our existing and proposed business, including many assumptions regarding future events. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will” “should,” “expect,” “intend,”
“plan,” anticipate,” “believe,” “estimate,” “predict,” “potential,”
“continue,” or similar terms, variations of such terms or the negative of such terms. These statements are only predictions
and involve known and unknown risks, uncertainties, and other factors. Although forward- looking statements, and any assumptions upon
which they are based, are made in good faith, and reflect our current judgment, actual results could differ materially from those anticipated
in such statements. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities
could differ materially and perhaps substantially from those expressed in, or implied by, these forward- looking statements as a result
of various risks, uncertainties and other factors, including those risks described in detail in the section of this Annual Report on Form
10-K entitled “Risk Factors” as well as elsewhere in this Annual Report on Form 10-K.
In light of these risks and uncertainties, and
especially given the nature of our existing and proposed business, there can be no assurance that the forward-looking statements contained
in this section and elsewhere in this Annual Report on Form 10-K will in fact occur. Potential investors should not place undue reliance
on any forward- looking statements. Except as expressly required by the federal securities laws, there is no undertaking to publicly update
or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
OVERVIEW
What you eat before bed matters.
In solving consumers’ nighttime snacking
problem, Nightfood is pioneering the category of sleep-friendly nighttime snacking.
Over 80% of Americans snack regularly at night,
resulting in an estimated 700 million nighttime snack occasions weekly, and an annual spend on night snacks of over $50 billion. The most
popular choices are ice cream, cookies, chips, and candy. Recent research confirms such snacks, in addition to being generally unhealthy,
can impair sleep, partly due to excess fat and sugar consumed before bed.
Nightfood’s sleep-friendly snacks are formulated
by sleep and nutrition experts to contain less of those sleep-disruptive ingredients, along with a focus on ingredients and nutrients
that research suggests can support nighttime relaxation and better sleep quality.
Through partnerships with national distributors
and global hospitality companies, Nightfood is focused on establishing widespread national distribution of its sleep-friendly snacks in
the high-margin hotel vertical. Management believes hotels have an obligation to help guests achieve better sleep, and one important way
to do that is through the snacks hotels curate for sale in their grab-and-go lobby shops.
Management’s vision is for Nightfood snacks
to be sold by every hotel that sells snacks for their guests. National hotel distribution is expected to lead to profitability, consumer
adoption of the nighttime snack category, and a strategically defensible position from which category leadership can be maintained.
Our snack products are manufactured under contract
at third-party manufacturing facilities. We then wholesale those snacks to retailers and distributors.
DEVELOPMENT PLANS
In April, 2022, we received the initial purchase orders for the introduction of
Nightfood ice cream into national hotel distribution.
There are an estimated 56,000 hotels across the
United States. The five largest hotel companies account for approximately half of those locations, distributed among dozens of hotel chains.
Those are (in alphabetical order) Choice Hotels, Hilton Worldwide, Intercontinental Hotels Group, Marriott International, and Wyndham
Hotels & Resorts.
Management has developed corporate-level relationships
at three of those five companies. Two of those companies have executed corporate-level tests of Nightfood ice cream sales in some of their
hotel locations, and both have declared those tests successful.
In May, 2022, one of those companies launched Nightfood
ice cream into one of their national hotel chains, an extended-stay hotel chain with approximately 500 properties in the United States.
To date, our pints are currently in approximately 300 – 350 of those properties, with more of the properties adding our ice cream
over time. In September, 2022, because of our successful sales results across that first hotel chain, that company indicated that Nightfood
will be added two of their additional chains, comprising over 3,000 additional properties, with the introduction planned to begin in October,
2022.
Our ice cream pints are available for purchase
in hundreds of hotel locations across the United States, including select locations of many of the largest hotel chains in the world.
This includes chains such as Holiday Inn, Holiday Inn Express, Fairfield Inn, Courtyard by Marriott, Hyatt Place, Hyatt House, Ramada
by Wyndham, Best Western, Clarion, La Quinta, Staybridge Suites, Candlewood Suites, and many more.
While Nightfood may currently only be available
in just one or a few locations of certain of these chains, we feel the breadth of our distribution reflects the appeal of our snack products
across many segments of the hospitality industry. From select-service to full-service, from short-term to extended stay, we believe every
hotel that sells snacks is a potential distribution point for Nightfood.
In September, 2022, we announced that independent
industry sales data from Impulsify reflected our ice cream pints were selling well relative to more popular brands such as Haagen Dazs
and Ben & Jerry’s. We believe this sales data, collected in only the 3rd and 4th months of our introduction
into national hotel distribution, is a positive sign that our products can compete effectively in the hotel environment.
We believe the concept of sleep-friendly snacking for their guests is important
to hotel decision-makers. We also believe that ongoing strong relative sales will be a contributing factor to establishing distribution
in a significant percentage of the 56,000 hotels across the United States.
Our plans call for the introduction of
Nightfood sleep-friendly versions of many of the most popular nighttime snack formats. In addition to ice cream pints, this includes
single-serve ice cream novelties, cookies, chips, candy, and nutrition bars.
Hotel executives have indicated to us that they
believe their guests can benefit from such a wide brand offering. We also believe having snacks in multiple formats will benefit the Company
through increased trial, revenue, brand awareness, and category development.
In August, 2022, the first commercial production
run of Nightfood Prime-Time Chocolate Chip cookies was completed. We have two additional flavors (cherry oat and snickerdoodle) nearing
completion of R&D at the time of this filing.
We have begun development on both Nightfood single-serve
ice cream novelties, and Nightfood chips. Our goal is to introduce both snack formats in calendar 2023.
Management believes widespread distribution in
the world’s largest and most trusted hotel chains could result in significant increases in gross sales and net revenue and lead
to profitability. Doing business in the hotel vertical effectively eliminates three of the major line items that reduce and delay profitability
for new food and beverage products in the supermarket vertical. These are slotting fees, advertising, and pricing promotions.
In addition to the revenue and contribution margin
from the sales of the product in the hotel environment, Management believes hotel distribution would result in important secondary benefits.
Consumers encountering and purchasing Nightfood in a trusted and respected hotel outlet could be more likely to seek out the product in
local supermarkets than consumers that have not had prior exposure to the brand.
In addition, it is believed that securing widespread
hotel distribution would serve as a validation of the importance of sleep-friendly nutrition and the entire night snack category. We believe
consumers will rightfully interpret the diligence of these leading hotel brands in providing sleep-friendly nutrition for their guests
to be a validation of the core point of view of the Nightfood brand which is “What you eat before bed matters.”
As the brand pioneering and leading the sleep-friendly
snack category, we believe that anything which advances the overall adoption of the category by consumers is, by extension, beneficial
to the Nightfood brand.
INFLATION
Inflation can be expected to have an impact on
our operating costs. Similar to many other industries, we have recently seen increases in the cost of certain ingredients and packaging
materials. Such increases will either result in lower gross margins or necessitate an increase in our wholesale pricing. A prolonged period
of inflation could cause a general economic downturn and negatively impact our results.
SEASONALITY
With a focus on distribution of our snacks in hotels over the next 1-2 years before
we envision revisiting a focus on supermarkets, a certain amount of seasonality is expected. As U.S. hotel occupancy has a history of
peaking in June and July, with occupancy rates approximately 10% above the average, it is possible that we will experience an increase
in sales related to that occupancy peak.
As an early-stage and growing brand, with a product
mix that is expected to include a variety of snacks such as ice cream, cookies, chips, candy, and more, the full impact of seasonality
on our business might not be fully understood for several additional annual cycles.
CORONAVIRUS (COVID-19)
The outbreak of the novel coronavirus (COVID-19), including the measures to reduce
its spread, and the impact on the economy, has still not been fully predicted.
We have experienced minimal issues with supply chain and logistics, except that
there have been recent and significant increases in costs relating to freight and packaging. Order processing function has been normal
to date, and our manufacturers have assured us that their operations are “business as usual” as of the time of this filing.
It is possible that the impact of the pandemic
could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable to meet certain
debts and expenses.
It is impossible to know what the future holds
with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current coronavirus
pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact
its customers, vendors, and business partners. It is difficult to know if the pandemic has materially impacted the results of operations,
and we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties.
The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if
necessary.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition
and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related
to uncollectible receivables, inventory valuation, deferred compensation, fair valve of derivative liabilities and contingencies. We base
our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These
estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
We believe the following accounting policies are
our critical accounting policies because they are important to the portrayal of our financial condition and results of operations, and
they require critical management judgments and estimates about matters that may be uncertain. If actual results or events differ materially
from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods
could be materially affected.
Revenue Recognition |
● | The Company generates its revenue by selling its
nighttime snack products wholesale and direct to consumer. |
| ● | All sources
of revenue are recorded pursuant to FASB Topic 606 Revenue Recognition, to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In addition, this revenue generation requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. |
| ● | For accounts
within the supermarket space, the Company frequently offers sales discounts and promotions to customers through various programs such
as rebates, temporary price reductions, product coupons, and other trade activities. This is standard practice for consumer products
in the competitive and price-sensitive supermarket space. The Company records these activities as a reduction of gross sales
as part of the calculation to arrive at reported net revenue. |
| ● | The Company
incurs costs associated with product distribution, such as freight and handling costs. The Company has elected to treat these costs as
fulfillment activities and recognizes these costs at the same time that it recognizes the underlying product revenue. As this
policy election is in line with the Company’s previous accounting practices, the treatment of shipping and handling activities under
FASB Topic 606 did not have any impact on the Company’s results of operations, financial condition and/or financial statement disclosures. |
| | The adoption of ASC 606 did not result in a change to the
accounting for any of the Company’s revenue streams that are within the scope of the amendments. The Company’s services that
fall within the scope of ASC 606 are recognized as revenue as the Company satisfies its obligation to the customer. |
RESULTS OF OPERATIONS
Fiscal Year ended June 30, 2022 Compared to
Fiscal Year ended June 30, 2021
Revenue
During the year ended June 30, 2022, we had Net Revenues of
$443,538 on Gross Sales of $614,125 compared to the year ended June 30, 2021, when we had Net Revenues of $701,246 on Gross Sales of $1,117,847.
Gross Sales decreased by 45.1% and Net Revenue decreased by 36.8% year over year, as a result of our ice cream being rotated out of distribution
in Walmart locations and other supermarkets, as we simultaneously pivoted to the higher-margin hospitality vertical where we believe our
brand and unique sleep-friendly positioning deliver a competitive advantage.
Net Revenues are reported as Gross Sales less Slotting Fees
(described below) and other contra-revenue accounts such as those related to manufacturers coupons, in-store specials (such as 2 pints
for $8), consumer rebate programs, and more.
Slotting fees are typically one-time fees customarily charged to brands by supermarkets
and distributors to add a new product line into their product assortment. For the year ended June 30, 2022, $22,500 of Gross Sales were
cancelled out due to slotting arrangements with retailers and distributors compared to $223,691 for the year ended June 30, 2021. The
90% decrease in 2022 compared to 2021 was the result of our decreased supermarket distribution.
In situations where the Company agrees to pay
slotting and promotional fees to accounts (such as to supermarkets and distributors), the Gross Sales to those customers are reduced
on the income statement by these amounts (along with other items, such as early payment discounts), dollar for dollar, to arrive at a
Net Revenue number. So, when these customers order product to put on their shelves and sell to consumers, that revenue does not get booked
even though the product is moving through the supply chain.
These dollar for dollar reductions continue, on
a customer-by-customer basis, for any and all sales to each slotting account until the Gross Sales to these accounts exceed the total
of these commitments, at which time the remaining Gross Sales amounts are reported as Net Revenue.
These slotting fees and other promotional expenses
do not appear on the income statement as an expense. Rather, they are applied against Gross Sales, resulting in Net Revenue, as shown
below. The netting of Gross Sales against slotting and sales discounts, as described and shown below, results in the Net Revenue number
at the top of the income statement. This is not a reflection of the amount of product sold by the Company and shipped to customers, but
rather a function of the way certain sales are accounted for when those sales are made to customers who are charging slotting fees. With
a focus on the hospitality vertical, we expect slotting expenses and other revenue reductions to decrease significantly as a percentage
of Gross Sales.
The following tables summarize Gross Sales and Net Revenue for the years ended
June 30, 2022 and 2021.
| |
Year Ended June 30, | |
| |
2022 | | |
2021 | |
Gross sales | |
$ | 614,125 | | |
$ | 1,117,847 | |
Less: | |
| | | |
| | |
Slotting fees | |
$ | (22,500 | ) | |
$ | (223,691 | ) |
Sales discounts and other reductions | |
| (148,087 | ) | |
| (192,910 | ) |
Net Revenues | |
$ | 443,538 | | |
$ | 701,246 | |
Operating Expenses
Our operating expenses for the year ended June 30, 2022, were $2,372,873, compared
to $3,210,875 for the year ended June 30, 2021. The decrease in operating expenses is due largely to decreases in Cost of product sold
to $486,163, for the year ended June 30, 2022, compared to $721,777 for the year ended June 30, 2021. This decrease in cost of product
sold is due to a decrease in pints sold which is offset to some extent by an increase in per-unit freight costs as a proportion of gross
sales due to increases in fuel prices and due to more orders being shipped outside of the consolidated Walmart shipping lanes.
Our income statement shows an increase in Advertising and Promotional expenses
to $596,331 for the year ending June 30, 2022, from $588,172 for the year ending June 30, 2021. This includes items such as social media
advertising, consumer promotions, marketing partnerships, paid advertising, samples expense and public relations. The two most significant
components of Advertising and Promotional were paid advertising and promotion related expenses. For each of those line items, more than
two-thirds of the expense during Fiscal 2022 occurred in the first quarter of the fiscal year. Our Advertising and Promotional expenses
since September 30, 2021 decreased significantly compared to previous quarters. We expect that trend to continue with our focus on distribution
through the higher-margin hotel vertical as compared to conventional supermarkets.
Selling, general and administrative expenses increased
to $492,713 for the year ending June 30, 2022, compared to $479,881 for the year ending June 30, 2021. This includes items such as web
hosting, web marketing services, freight, warehousing, shipping, product liability insurance, research & development of new products.
The selling, general, and administrative expenses for the year ended June 30, 2021 included a one-time gain on extinguishment of debt
of $715,075. There was no such one-time gain in the year ended June 30, 2022, which is the reason that a significant decrease in selling,
general, and administrative is not reported for the current reporting period. Professional fees decreased from $1,421,045 for the year
ending June 30, 2021, to $797,666 for the year ending June 30, 2022. This includes legal fees, marketing consulting, accounting and auditor
fees, and other paid consultants. The decrease is largely due to the absence of significant capital raising activities during the year
ending June 30, 2022 and the fees that tend to accompany such transactions, a significant portion of which do not involve cash expenditures,
but are tied to the valuation of shares and warrants.
For the year ended June 30, 2022, total interest expense was $318,519 compared
to the year ended June 30, 2021, when we reported total interest expense of $281,505. Part of the reason for the increased interest expense
was our incurrence of additional indebtedness in December 2021. For the year ended June 30, 2022, we recorded a loss on debt extinguishment
upon note conversion of $0 compared to the year ended June 30, 2021, when we recorded a loss on debt extinguishment upon note conversion
of $1,442,325.
For the year ended June 30, 2022, we recorded a change in fair value of derivative
liability of $0 compared to the year ended June 30, 2021, when we recorded a change in fair value of derivative liability of ($853,329).
For the year ended June 30, 2022, we recorded an amortization of beneficial conversion feature of $275,423 compared to the year ended
June 30, 2021, when we recorded an amortization of beneficial conversion feature of $814,769. A significant portion of these amounts recorded
in both years stems from the accounting treatment applied to financing activities.
Net Loss
For the year ended June 30, 2022, we had a net loss of $2,523,277,
compared to the year ended June 30, 2021 when we had a net loss of $3,479,824. A significant portion of the losses recorded in both years
stems from the accounting treatment applied to financing activities. Operating losses for the year ended June 30, 2022, were $1,929,335
and $2,509,629 for the year ended June 30, 2021.
Deemed Dividend
The Company has never declared dividends, however
as set out below, during the fiscal year ended June 30, 2022, upon issuance of the final 335 shares of the total 5,000 designated shares
of Series B Preferred stock the Company recorded a deemed dividend as a result of the beneficial conversion feature associated with the
transaction.
In connection with certain conversion terms provided
for in the designation of the Series B Preferred Stock, pursuant to which each share of Series B Preferred Stock is convertible into 5,000
shares of common stock and 5,000 warrants, the Company recognized a beneficial conversion feature upon the conclusion of the transaction
in the amount of $4,467,235. The beneficial conversion feature (BCF) was treated as a deemed dividend, and fully amortized on transaction
date due to the fact that the issuance of the Series B preferred stock was classified as equity. In connection with certain clauses under
sale of Series B Stock, the Company recognized a discount created by separating a BCF from this.
Customers
Our customers consist primarily of distributors that sell snack product to hotels
and supermarkets. In FY 2022, we had one customer that accounted for over 20% of our Gross Sales. Two other customers each accounted for
16% and four others each accounted for between 8.5% and 9.9%. In FY 2021, we had one customer that accounted for over 30% of our Gross
Sales. Three other customers each accounted for between 7.8% and 23%. As a result of our efforts to shift our primary focus away from
traditional supermarket distribution to focus on hotel distribution, we expect the mix of distributors, at least in the short term, to
trend towards more hotel distribution and less supermarket distribution.
Vendors
During the year ended June 30, 2022, no vendors
accounted for more than 10% of our operating expenses. During the year ended June 30, 2021, one vendor accounted for more than 10% of
our operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2022, we had cash on hand of $280,877, accounts
receivable of $93,674, and inventory value of $331,531. As of June 30, 2021, we had cash on hand of $1,041,899, accounts receivable of
$109,589, and inventory value of $387,736. The decrease in cash is the result of us funding ongoing operations while executing a strategic
pivot towards the hospitality vertical, including investing in sales, business development, and research and development expenses related
to bringing new products to market in a new channel. The decrease in accounts receivable is due to a decrease in overall sales activity
relating to sales and distribution of Nightfood ice cream.
Since June 30, 2022, we raised $576,800 in net proceeds from
the sale of a promissory note and warrants to an institutional investor
As of June 30, 2022, we had accounts payable of $234,152 compared
to $459,703 on June 30, 2021. This decrease is due primarily to paying down certain payables combined with lower operating expenses.
Since our inception, we have sustained operating losses. During
the year ended June 30, 2022, we incurred a net loss of $2,523,277 and had total stockholders’ equity of $265,576.
The Company has limited available cash resources and we do
not believe our cash on hand will be sufficient to fund our operations and growth throughout Fiscal 2023 or adequate to satisfy our ongoing
working capital needs as we continue to expand distribution. The Company is continuing to raise capital through the sale of its securities,
including common stock, preferred stock, and debt (including convertible debt) to finance the Company’s operations, of which it
can give no assurance of success. In addition, we will receive the proceeds from our outstanding warrants as, if and when such warrants
are exercised for cash.
On July 17, 2022, the Company made an initial filing with
the Securities and Exchange Commission for a Tier 2 offering pursuant to Regulation A (also known as “Regulation A+) with the intent
to raise capital through an equity crowdfunding campaign We believe this offering, if and upon its successful qualification and launch,
will enable us to raise the capital needed to eliminate all corporate debt and operate the company until profitability is achieved.
Based on the results from the 2021 test, we projected that
distribution of our ice cream pints in approximately 4,000 hotel locations would bring the company to profitability. However, due to
recent and significant inflation-related increases in costs related to freight, packaging, and ingredients, combined with significantly
higher retail prices charged by certain hotels and out-of-stock situations at a meaningful percentage of hotels, Management believes
distribution of our ice cream in a larger number of hotels might be required to attain profitability. Similar to many other food and
beverage companies in the current economic climate, Management is assessing the possibility of an increase in wholesale pricing to offset
lower gross margins resulting from recent cost increases.
If we are unable to raise cash through the sale of our securities,
we may be required to severely restrict our operations. However, we believe that our current capitalization structure, combined with the
continued expansion of operations, will enable us to achieve successful financings to continue our growth.
Even if the Company is successful in raising additional
funds, the Company cannot give any assurance that it will, in the future, be able to achieve a level of profitability from the sale of
its products to sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on recoverability
and reclassification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
From our inception in January 2010 through June
30, 2022, we have generated an accumulated deficit of approximately $28,101,458. This accumulated deficit is not debt, and there is no
obligation or liability associated with it. An accumulated deficit reflects a negative balance of retained earnings and an accumulation
of historical losses over time, related to both operations and financing activities. It is not unusual for growing companies to have
significant accumulated deficit, even after turning profitable. Many large, fast growing, and successful companies have reported accumulated
deficits in recent years, such as Warby Parker, The Honest Company, Beyond Meat, Roblox, Robinhood, Sweetgreen, Oatly, Rivian, Celsius
Holdings, Chobani, and Tesla. In our case, like many of these others, an accumulated deficit is a function of losses sustained over time,
along with the costs associated with raising operating capital.
Assuming we raise additional funds and continue
operations, it is expected we may incur additional operating losses during the course of Fiscal 2023 and possibly thereafter. We plan
to continue to pay or satisfy existing obligation and commitments and finance our operations, as we have in the past, primarily through
the sale of our securities and other forms of external financing until such time that we are able to generate sufficient funds from the
sale of our products to finance our operations, of which we can give no assurance.
We anticipate deriving additional revenue from
product sales and new distribution arrangements in Fiscal 2023, but we cannot at this time quantify the amount.
CASH FLOWS
During the year ended June 30, 2022, net cash used in operating
activities totaled $2,070,030, compared to $1,439,828 for the year ended June 30, 2021. This increase is due largely to the way certain
financing activities completed in the year ended June 30, 2021 significantly decreased reported net cash used in operating activities.
There were no similar financing activities completed in the year ended June 30, 2022.
During each of the fiscal years ended June 30, 2022 and 2021,
there was net cash provided by investing activities of $0.
During the year ended June 30, 2022, net cash aggregating
$1,309,008 was provided by financing activities, which represents net proceeds of $984,808 from the issuance of convertible debt, $308,200
from the sale of Series B Preferred Shares, and $16,000 from the proceeds of warrants exercised. During the year ended June 30, 2021,
net cash aggregating $2,284,105 was provided by financing activities, which represents net proceeds of $720,000 from the issuance of common
stock for convertible debt, $2,868,000 from the sale of newly designated Series B Preferred Shares, ($1,300,000) related to the repayment
of convertible debt, and ($3,895) from repayment of short-term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are presented in the following
order:
TABLE OF CONTENTS
Nightfood Holdings, Inc.
Consolidated Financial
Statements
For the years ended June
30, 2022 and 2021
|
|
Gries
& Associates, LLC
Certified Public Accountants
501 S. Cherry Street, Suite 1100
Denver, Colorado 80246 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
Nightfood Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet
of Nightfood Holdings, Inc. (the Company) as of June 30, 2022, and the related statement of operations, stockholders’ deficit and
cash flows for the period 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 June 30, 2022, and the results
of its operations and its cash flows for each of the period then ended 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
audit. 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 audit 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 audit, 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 audit 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 audit 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.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 3 to the financial statements, the Company has incurred
losses since inception of $28,101,458 and a net loss of $2,523,277. These factors create an uncertainty as to the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 3. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Emphasis of Matters-Risks and Uncertainties
The Company is not able to predict the
ultimate impact that COVID -19 will have on its business. However, if the current economic conditions continue, the pandemic could
have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the
Company plans to operate.
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We have served as the Company’s auditor since 2022. |
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Denver, Colorado
September 28, 2022
PCAOB ID 6778 |
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blaze@griesandassociates.com |
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400 South Colorado Blvd, Suite 870, Denver, Colorado 80246 (O)720-464-2875 (M)773-255-5631 (F)720-222-5846
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Report of Independent Registered Public Accounting
Firm
The Stockholders and the Board of Directors of
Nightfood
Holdings, Inc. and Subsidiaries
Opinion on the Financial Statement
We have audited the accompanying consolidated balance sheet of Nightfood
Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of June 30, 2021, and the related consolidated statement
of operations, changes in stockholders equity and cash flow for the year in the period ended June 30, 2021, and the related
notes (collectively referred to as the “consolidated financial statement”). In our opinion, the consolidated financial
statement present fairly, in all material respects, the financial position of the Company at June 30, 2021, and the result of its operations
and its cash flows for the year in the period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.
The Company’s Ability to Continue as
a Going Concern
The accompanying consolidated financial statement has been prepared
assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statement, the Company
has suffered recurring losses from operations, will require additional capital to fund its current operating plan, and has an accumulated
deficit that raise substantial doubt exists about the Company’s ability to continue as a going concern. Management’s plans
regarding these matters are also described in Note 3. The consolidated financial statement does not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may
result from the outcome of this uncertainty.
Basis for Opinion
The financial statement is the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statement based on our
audit. 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 audit 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
statement is 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 audit 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 audit included performing procedures to assess the risks of material
misstatement of the financial statement, 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 audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statement. We believe that our audit provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from
the current period audit of the financial statement 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.
We determined that there are no critical audit matters.
We have served as the Company’s auditor since 2014.
New York, NY
October 13, 2021
Nightfood Holdings, Inc.
CONSOLIDATED BALANCE SHEETS
| |
June 30, | | |
June 30, | |
| |
2022 | | |
2021 | |
ASSETS | |
| | |
| |
| |
| | |
| |
Current assets: | |
| | |
| |
Cash | |
$ | 280,877 | | |
$ | 1,041,899 | |
Accounts receivable (net of allowance of $0 and $0, respectively) | |
| 93,674 | | |
| 109,589 | |
Inventory | |
| 331,531 | | |
| 387,736 | |
Other current asset | |
| 137,797 | | |
| 33,480 | |
Total current assets | |
| 843,879 | | |
| 1,572,704 | |
| |
| | | |
| | |
Total assets | |
$ | 843,879 | | |
$ | 1,572,704 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 234,152 | | |
$ | 459,703 | |
Accrued expense - related party | |
| - | | |
| 3,000 | |
Convertible notes payable - net of discounts | |
| 344,151 | | |
| - | |
Total current liabilities | |
| 578,303 | | |
| 462,703 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| - | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Series A Stock, ($0.001 par value, 1,000,000 shares authorized, and 1,000 issued and outstanding as of June 30, 2022 and June 30, 2021, respectively) | |
| 1 | | |
| 1 | |
Series B Stock, ($0.001 par value, 5,000 shares authorized, and 3,260 and 4,665 issued and outstanding as of June 30, 2022 and June 30, 2021, respectively) | |
| 3 | | |
| 5 | |
Common stock, ($0.001 par value, 200,000,000 shares authorized, and 91,814,484 issued and outstanding as of June 30, 2022 and 80,707,467 issued and outstanding as of June 30, 2021, respectively) | |
| 91,814 | | |
| 80,707 | |
Additional paid in capital | |
| 28,275,216 | | |
| 26,226,159 | |
Accumulated deficit | |
| (28,101,458 | ) | |
| (25,196,871 | ) |
Total Stockholders’ Equity | |
| 265,576 | | |
| 1,110,001 | |
Total Liabilities and Stockholders’ Equity | |
$ | 843,879 | | |
$ | 1,572,704 | |
The accompanying notes are an integral part of
these consolidated financial statements
Nightfood Holdings, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
For the
Year Ended | | |
For the
Year Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | |
| |
| | |
| |
Revenues, net of slotting and promotion | |
$ | 443,538 | | |
$ | 701,246 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Cost of product sold | |
| 486,163 | | |
| 721,777 | |
Advertising and promotional | |
| 596,331 | | |
| 588,172 | |
Selling, general and administrative | |
| 492,713 | | |
| 479,881 | |
Professional fees | |
| 797,666 | | |
| 1,421,045 | |
Total operating expenses | |
| 2,372,873 | | |
| 3,210,875 | |
| |
| | | |
| | |
Loss from operations | |
| (1,929,335 | ) | |
| (2,509,629 | ) |
| |
| | | |
| | |
Other (income) and expenses | |
| | | |
| | |
(Gain) on accounts payable settlement | |
| - | | |
| (715,075 | ) |
Interest expense – bank debt | |
| - | | |
| 1,012 | |
Interest expense – shareholder | |
| - | | |
| 177,693 | |
Interest expense – other | |
| 48,309 | | |
| 102,800 | |
Interest expense – financing cost | |
| 270,210 | | |
| - | |
Loss (Gain) on debt extinguishment upon note conversion, net | |
| - | | |
| 2,100,405 | |
(Gain) on debt extinguishment upon refinancing | |
| - | | |
| (658,080 | ) |
Change in fair value of derivative liability | |
| - | | |
| (853,329 | ) |
Amortization of Beneficial Conversion Feature | |
| 275,423 | | |
| 814,769 | |
Total other (income) and expenses | |
| 593,942 | | |
| 970,195 | |
| |
| | | |
| | |
Provision for income tax | |
| - | | |
| - | |
| |
| | | |
| | |
Net loss | |
$ | (2,523,277 | ) | |
$ | (3,479,824 | ) |
| |
| | | |
| | |
Deemed dividend on Series B Stock | |
| 381,310 | | |
| 4,085,925 | |
Net loss attributable to common stockholders | |
$ | (2,904,587 | ) | |
$ | (7,565,749 | ) |
| |
| | | |
| | |
Basic and diluted net loss per common share | |
$ | (0.03 | ) | |
$ | (0.11 | ) |
| |
| | | |
| | |
Weighted average shares of capital outstanding – basic and diluted | |
| 87,521,595 | | |
| 71,090,407 | |
The accompanying notes are an integral part of
these consolidated financial statements
Nightfood Holdings, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
Years ended June 30, 2022 and 2021
| |
Common Stock | | |
Preferred Stock A | | |
Preferred Stock B | | |
Additional
Paid in | | |
Accumulated | | |
Total Stockholders’ | |
| |
Shares | | |
Par Value | | |
Shares | | |
Par Value | | |
Shares | | |
Par Value | | |
Capital | | |
Deficit | | |
Equity | |
Balance, June 30, 2020 | |
| 61,796,680 | | |
$ | 61,797 | | |
| 1,000 | | |
$ | 1 | | |
| - | | |
$ | - | | |
| 13,088,177 | | |
| (17,631,122 | ) | |
| (4,481,147 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for services | |
| 1,661,210 | | |
| 1,661 | | |
| | | |
| | | |
| | | |
| | | |
| 370,592 | | |
| | | |
| 372,253 | |
Common stock issued for interest | |
| 1,946,080 | | |
| 1,946 | | |
| | | |
| | | |
| | | |
| | | |
| 182,328 | | |
| | | |
| 184,274 | |
Issuance of common stock for debt conversion | |
| 15,303,497 | | |
| 15,303 | | |
| | | |
| | | |
| | | |
| | | |
| 1,417,697 | | |
| | | |
| 1,433,000 | |
Issuance of warrants | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 613,009 | | |
| | | |
| 613,009 | |
Fair value of shares issued upon debt conversion | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,100,435 | | |
| | | |
| 2,100,435 | |
Preferred Stock B from extinguishment of convertible notes | |
| | | |
| | | |
| | | |
| | | |
| 1,500 | | |
| 2 | | |
| 1,499,999 | | |
| | | |
| 1,500,001 | |
Preferred Stock B issued from private placement, net of financing cost (Includes 15 shares issued for services | |
| | | |
| | | |
| | | |
| | | |
| 3,165 | | |
| 3 | | |
| 2,867,997 | | |
| | | |
| 2,868,000 | |
Deemed dividend associated with Preferred Stock B | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 4,085,925 | | |
| (4,085,925 | ) | |
| - | |
Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (3,479,824 | ) | |
| (3,479,824 | ) |
Balance, June 30, 2021 | |
| 80,707,467 | | |
$ | 80,707 | | |
| 1,000 | | |
$ | 1 | | |
| 4,665 | | |
$ | 5 | | |
$ | 26,226,159 | | |
$ | (25,196,871 | ) | |
$ | 1,110,001 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for services | |
| 848,325 | | |
| 848 | | |
| | | |
| | | |
| | | |
| | | |
| 213,277 | | |
| | | |
| 214,125 | |
Common stock from conversion | |
| 8,700,000 | | |
| 8,700 | | |
| | | |
| | | |
| (1,740 | ) | |
| (2 | ) | |
| (8,698 | ) | |
| | | |
| - | |
Preferred B issued from private placement | |
| | | |
| | | |
| | | |
| | | |
| 335 | | |
| - | | |
| 335,000 | | |
| | | |
| 335,000 | |
Preferred B issued - financing cost | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (26,800 | ) | |
| | | |
| (26,800 | ) |
Unissued shares previously allocated for services | |
| (41,308 | ) | |
| (41 | ) | |
| | | |
| | | |
| | | |
| | | |
| 41 | | |
| | | |
| - | |
Discount on issuance of convertible notes | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 931,272 | | |
| | | |
| 931,272 | |
Warrants issued as financing cost | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 170,210 | | |
| | | |
| 170,210 | |
Deemed dividends associated with Preferred B | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 289,935 | | |
| (289,935 | ) | |
| - | |
Deemed dividends associated with warrants related dilutive adjustments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 91,375 | | |
| (91,375 | ) | |
| - | |
Issuance of warrants | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 39,045 | | |
| | | |
| 39,045 | |
Exercise of warrants | |
| 1,600,000 | | |
| 1,600 | | |
| | | |
| | | |
| | | |
| | | |
| 14,400 | | |
| | | |
| 16,000 | |
Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (2,523,277 | ) | |
| (2,523,277 | ) |
Balance, June 30, 2022 | |
| 91,814,484 | | |
$ | 91,814 | | |
| 1,000 | | |
$ | 1 | | |
| 3,269 | | |
$ | 3 | | |
$ | 28,275,216 | | |
$ | (28,101,458 | ) | |
$ | 265,576 | |
The accompanying notes are an integral part of
these consolidated financial statements
Nightfood Holdings, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the Years ended
June 30, | |
| |
2022 | | |
2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
Net loss | |
$ | (2,523,277 | ) | |
$ | (3,479,824 | ) |
Adjustments to reconcile net loss to net cash used in operations activities: | |
| | | |
| | |
Stock issued for services | |
| 214,125 | | |
| 372,253 | |
Amortization of debt discount and deferred financing fees | |
| 275,423 | | |
| 917,569 | |
Warrants issued for services | |
| 39,045 | | |
| 613,009 | |
Warrants issued for financing | |
| 170,210 | | |
| - | |
(Gain) on accounts payable settlement | |
| - | | |
| (715,075 | ) |
Loss on debt extinguishment upon note conversion, net | |
| - | | |
| 2,100,405 | |
(Gain) on debt extinguishment upon refinancing | |
| - | | |
| (658,080 | ) |
Change in derivative liability | |
| - | | |
| (853,329 | ) |
Stock issued for interest | |
| - | | |
| 184,274 | |
Non cash expense | |
| 15,192 | | |
| - | |
Allowance for Inventories | |
| - | | |
| 24,403 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 15,915 | | |
| (48,576 | ) |
Inventories | |
| 56,205 | | |
| (136,534 | ) |
Other current assets | |
| (104,317 | ) | |
| 152,450 | |
Accounts payable | |
| (228,551 | ) | |
| 93,840 | |
Accrued expenses | |
| - | | |
| (6,613 | ) |
Net cash used in operating activities | |
| (2,070,030 | ) | |
| (1,439,828 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Net cash provided by investing activities | |
| - | | |
| - | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from the sale of preferred stock B - net | |
| 308,200 | | |
| 2,868,000 | |
Proceeds from the issuance of debt-net | |
| 984,808 | | |
| 720,000 | |
Proceeds from exercise warrants | |
| 16,000 | | |
| - | |
Repayment of convertible debt | |
| - | | |
| (1,300,000 | ) |
Repayment of short-term debt | |
| - | | |
| (3,895 | ) |
Net cash provided by financing activities | |
| 1,309,008 | | |
| 2,284,105 | |
| |
| | | |
| | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | |
| (761,022 | ) | |
| 844,277 | |
| |
| | | |
| | |
Cash and cash equivalents, beginning of year | |
| 1,041,899 | | |
| 197,622 | |
Cash and cash equivalents, end of year | |
$ | 280,877 | | |
$ | 1,041,899 | |
| |
| | | |
| | |
Supplemental Disclosure of Cash Flow Information: | |
| | | |
| | |
Cash Paid For: | |
| | | |
| | |
Interest | |
$ | - | | |
$ | 1,012 | |
Income taxes | |
$ | - | | |
$ | - | |
Summary of Non-Cash Investing and Financing Information: | |
| | | |
| | |
Debt and warrants discount accounted on convertible notes | |
$ | 931,272 | | |
$ | - | |
Common stock issued for preferred stock conversion | |
$ | 7,950 | | |
$ | - | |
Deemed dividend associated with preferred stock B and warrants dilutive adjustment | |
$ | 381,310 | | |
$ | 4,085,925 | |
Initial derivative liability and Debt discount due to beneficial conversion feature on notes issued | |
$ | - | | |
$ | 512,993 | |
Stock issued for conversion of debt | |
$ | - | | |
$ | 1,433,000 | |
Derivative liability reclassed to loss on extinguishment of debt upon notes conversion | |
$ | - | | |
$ | 2,100,405 | |
Stock issued for interest | |
$ | - | | |
$ | 184,274 | |
True-up adjustment in debt discount and derivative liability | |
$ | - | | |
$ | 37,360 | |
Preferred Stock B from extinguishment of convertible notes | |
$ | - | | |
$ | 1,500,001 | |
The accompanying notes are an integral part of
these consolidated financial statements
Nightfood Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. |
Description of
Business |
Nightfood Holdings, Inc. (the “Company”, “we”, “us” or “our”)
is a Nevada Corporation organized October 16, 2013 to acquire all of the issued and outstanding shares of Nightfood, Inc., a New
York Corporation from its sole shareholder, Sean Folkson. All our operations are conducted by our Subsidiaries (Nightfood,
Inc. and MJ Munchies, Inc.).
Our corporate address is 520 White Plains
Road – Suite 500, Tarrytown, New York 10591 and our telephone number is 888-888-6444. We maintain a web site at www.nightfood.com,
along with several additional web properties. Any information that may appear on our web site should not be deemed to be a part of
this report.
The Company’s fiscal year end is June
30. |
2. | Summary of Significant Accounting Policies | ● | Management is responsible for the fair presentation of the Company’s financial statements, prepared in accordance with U.S. generally accepted accounting principles (GAAP). |
|
|
|
The audited
consolidated financial statements include the accounts of Nightfood Holdings, Inc. and its wholly owned subsidiaries, NightFood,
Inc. and MJ Munchies, Inc. The Company consolidates all majority-owned and controlled subsidiaries in accordance with applicable
standards. All material intercompany accounts and balances have been eliminated in consolidation. |
| Use of Estimates | ● | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Estimates are used in the determination of depreciation and amortization, the valuation for non-cash issuances of common stock, and the website, income taxes and contingencies, valuing convertible notes for BCF (as defined below) and derivative liability, among others. |
| Beneficial Conversion Feature | ● | For conventional convertible debt where the rate of conversion is below market value, the Company records any “beneficial conversion feature” (“BCF”) intrinsic value as additional paid in capital and related debt discount. |
| | | When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument. The discount is amortized over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. |
| | | |
| | | Beneficial Conversion Feature – Series B Preferred Stock (deemed dividend): Each share of B Preferred has a liquidation preference of $1,000 and has no voting rights
except as to matters pertaining to the rights and privileges of the B Preferred. Each share of B Preferred is convertible at the option
of the holder thereof into (i) 5,000 shares of the Registrant’s common stock (one share for each $0.20 of liquidation preference)
(the “Conversion Shares”) and (ii) 5,000 common stock purchase warrants, expiring April 16, 2026 (the “Warrants”).
The Warrants carried an initial exercise price of $0.30 per share. Subsequent financing events resulted in adjustments to the exercise
price of all warrants created from conversion of B Preferred from $.30 per share to approximately $.2919 per share through June 30, 2022.
See Note 20. Subsequent Events, below. Based on the guidance in ASC 470-20-20, the Company determined that a beneficial conversion
feature existed, as the effective conversion price for the Series B Stock (as defined below) at issuance was less than the fair value
of the common stock which the preferred shares are convertible into. A beneficial conversion feature based on the intrinsic value of the
date of issuances for the Series B Stock was approximately $4.4 million. |
| Debt Issue Costs | ● | The Company may pay debt issue costs in connection with raising funds through the issuance of debt whether convertible or not or with other consideration. These costs are recorded as debt discounts and are amortized over the life of the debt to the statement of operations as amortization of debt discount. |
| Equity Issuance Costs | ● | The Company accounts for costs related to the issuance of equity as a charge to Paid in Capital and records the equity transaction net of issuance costs |
| Original Issue Discount | ● | If debt is issued with an original issue discount, the original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized over the life of the debt to the statement of operations as amortization of debt discount. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. |
| Valuation of Derivative Instruments | ● | ASC 815 “Derivatives and Hedging” requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option pricing formula. Upon conversion of a note where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives and debt discounts and recognizes a net gain or loss on debt extinguishment. |
| Reclassification | ● | The Company may make certain reclassifications to prior period amounts to conform with the current year’s presentation. Such reclassifications do not have a material effect on its consolidated statement of financial position, results of operations or cash flows. |
| Recent Accounting Pronouncements | ● | In August 2020, the FASB issued ASU 2020-06 to simplify the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The update also provides for expanded disclosure requirements to increase transparency. For SEC filers, excluding smaller reporting companies, this update is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2023, including interim periods therein. The Company believes the adoption of this guidance will not materially impact its financial statements and related disclosures. The Company will continue to monitor these and other emerging issues to assess any potential future impact on its financial statements. |
| Derivative Financial Instruments | ● | The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments. |
|
|
|
Once determined,
derivative liabilities are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair
value from inception is made quarterly and appears in results of operations as a change in fair market value of derivative liabilities. |
| Cash and Cash Equivalents | ● | The Company classifies as cash and cash equivalents amounts on deposit in the banks and cash temporarily in various instruments with original maturities of three months or less at the time of purchase. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits |
| Fair Value of Financial Instruments | ● | Statement of financial accounting standard FASB Topic 820, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value. |
| Inventories | ● | Inventories consisting of packaged food items and supplies are stated at the lower of cost or net realizable value (on a FIFO basis), including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage is incurred. |
| Advertising Costs | ● | Advertising costs are expensed when incurred and are included in advertising and promotional expense in the accompanying statements of operations. Included in this category are expenses related to public relations, investor relations, new package design, website design, design of promotional materials, cost of trade shows, cost of products given away as promotional samples, and paid advertising. The Company recorded advertising costs of $596,331 and $588,172 for the years ended June 30, 2022, and 2021, respectively. The two most significant components of Advertising and Promotional were paid advertising and promotion related expenses. For each of those line items, more than two-thirds of the expense during Fiscal 2022 occurred in the first quarter of the fiscal year. Our Advertising and Promotional expenses since September 30, 2021 decreased significantly compared to previous quarters, and we expect that trend to continue with our focus on distribution through the higher-margin hotel vertical as compared to conventional supermarkets. |
| Income Taxes | ● | The Company has not generated any taxable income, and, therefore, no provision for income taxes has been provided. |
|
|
● |
Deferred income
taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported
for income tax purposes in accordance with FASB Topic 740, “Accounting for Income Taxes”, which requires the use of the
asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits 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 for tax loss and credit carry-forwards. 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 Company
provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization
is more likely than not. |
|
|
● |
A valuation
allowance has been recorded to fully offset the deferred tax asset even though the Company believes it is more likely than not that
the assets will be utilized. |
|
|
● |
The Company’s
effective tax rate differs from the statutory rates associated with taxing jurisdictions because of permanent and temporary timing
differences as well as a valuation allowance. |
| Revenue Recognition | ● | The Company generates its revenue by selling its nighttime snack products wholesale and direct to consumer. |
|
|
● |
All sources
of revenue are recorded pursuant to FASB Topic 606 Revenue Recognition, to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
This includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In addition, this revenue generation
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. |
|
|
● |
For accounts
within the supermarket space, the Company frequently offers sales discounts and promotions to customers through various programs
such as rebates, temporary price reductions, product coupons, and other trade activities. This is standard practice for consumer
products in the competitive and price-sensitive supermarket space. The Company records these activities as a reduction
of gross sales as part of the calculation to arrive at reported net revenue. |
|
|
● |
The Company
incurs costs associated with product distribution, such as freight and handling costs. The Company has elected to treat these costs
as fulfillment activities and recognizes these costs at the same time that it recognizes the underlying product revenue. As this
policy election is in line with the Company’s previous accounting practices, the treatment of shipping and handling activities
under FASB Topic 606 did not have any impact on the Company’s results of operations, financial condition and/or financial statement
disclosures. |
|
|
|
The adoption
of ASC 606 did not result in a change to the accounting for any of the Company’s revenue streams that are within the scope
of the amendments. The Company’s services that fall within the scope of ASC 606 are recognized as revenue as the Company satisfies
its obligation to the customer. |
| Concentration of Credit Risk | ● | Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places its cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal. At June 30, 2022 and 2021 the Company did not have any uninsured cash deposits. |
| Receivables Concentration | ● | As of June 30, 2022, the Company had receivables due from six customers, one of who accounted for over 59% of the outstanding balance. One of the remaining five accounted for 13.5% of the outstanding balance and one accounted for 11% of the outstanding balance. As of June 30, 2021, the Company had receivables due from five customers, one of who accounted for over 73% of the outstanding balance. One of the remaining four accounted for 11.5% of the outstanding balance |
| | | |
| Vendor Concentration | ● | During the year ended June 30, 2022 no vendors accounted for more than 10% of the Company’s operating expenses. During the year ended June 30, 2021, one vendor accounted for more than 10% of the Company’s operating expenses. |
| Income Per Share | ● | Net income per share data for both the years ending June 30, 2022 and 2021, is based on net income available to common shareholders divided by the weighted average of the number of common shares outstanding. |
| Impairment of Long-lived Assets | ● | The Company accounts for long-lived assets in accordance with the provisions of FASB Topic 360, Accounting for the Impairment of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair values are determined based on quoted market value, discounted cash flows or internal and external appraisals, as applicable. During the years ended June 30, 2022 and 2021, the Company made a determination and impaired $-0- and $-0-, respectively as, impairment on intangible asset |
|
|
|
ASC 350-50-05-01
states “on accounting for costs incurred to develop a website, including whether to capitalize or expense the following
types of costs: |
|
|
|
a) |
Costs incurred
in the planning stage |
|
|
|
b) |
Costs incurred in the
website application and infrastructure development stage |
|
|
|
c) |
Costs incurred to develop
graphics |
|
|
|
d) |
Costs incurred to develop
content |
|
|
|
e) |
Costs incurred in the
operating stage.” |
|
|
|
ASC 350-50-25-6
states “Costs incurred to purchase software tools, or costs incurred during the application development stage for internally
developed tools, shall be capitalized unless they are used in research and development and meet either of the following conditions: |
|
|
|
a) |
They do
not have any alternative future uses. |
|
|
|
b) |
They are internally
developed and represent a pilot project or are being used in a specific research and development project (see paragraph 350-40-15-7).” |
|
|
|
Further, at
ASC 350-50-25-7, “Costs to obtain and register an Internet domain shall be capitalized under Section 350-30-25.” |
|
|
|
During the
years ended June 30, 2022 and 2021, the Company made a determination and capitalized $-0- and $-0-, respectively, under ASC 350-50 and accounted
as an intangible asset and amortized the costs over the life of the relationship. |
3. |
Going Concern |
● |
The Company’s
financial statements are prepared using generally accepted accounting principles, which contemplate the realization of assets and
liquidation of liabilities in the normal course of business. Because the business is new and has limited operating history
and relatively few sales, no certainty of continuation can be stated. |
| | ● | The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. For the year ended June 30, 2022, the Company had a net loss of $2,523,277, cash used in operations of $2,070,030, cash provided from financing activities of $1,309,008 and accumulated deficit of $28,101,458 and total stockholders’ equity of $256,576. The Company has limited available cash resources and it does not believe its cash on hand will be adequate to satisfy our ongoing working capital and growth needs throughout Fiscal Year 2023. The Company is continuing to seek to raise capital through the sales of its common
stock, preferred stock and/or convertible notes, as well as potentially the exercise of outstanding warrants, to finance the Company’s
operations, of which it can give no assurance of success. Management has devoted a significant amount of time in the raising of capital
from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising
additional funds through debt and equity financing and generating revenue. The Company believes that its current capitalization structure,
combined with ongoing increases in revenues, will enable it to successfully secure required financing to continue its growth. |
|
|
|
Because the Company has limited sales, no certainty of continuation can be stated.
The Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing
and generating revenue. In addition, the Company will receive the proceeds from its outstanding warrants as, if and when such warrants
are exercised for cash. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations. |
|
|
|
Even if the Company is successful in raising
additional funds, the Company cannot give any assurance that it will, in the future, be able to achieve a level of profitability
from the sale of its products to sustain its operations. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future
effects on recoverability and reclassification of assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Further, the Company is subject to the continued impact of COVID-19, as further discussed
below. See Note 19. |
4. |
Accounts receivable |
● |
The Company’s
accounts receivable arise primarily from the sale of the Company’s snack products. On a periodic basis, the Company evaluates
each customer account and based on the days outstanding of the receivable, history of past write-offs, collections, and current credit
conditions, writes off accounts it considers uncollectible. With most of our retail and distribution partners, invoices will typically
be due in 30 days or less. The Company does not accrue interest on past due accounts and the Company does not require collateral.
Accounts become past due on an account-by-account basis. Determination that an account is uncollectible is made after all reasonable
collection efforts have been exhausted. The Company has not provided any sales allowances for June 30, 2022 and 2021, respectively. |
5. | Customer Concentrations | ● | In FY 2022, we had one customer that accounted for over 20% of our Gross Sales. Two other customers each accounted for 16% and four others each accounted for between 8.5% and 9.9%. In FY 2021, one customer accounted for greater than 30% of gross sales and two other customers accounted for more than 15% of gross sales. As of June 30, 2021, the Company had receivables due from five customers, one of whom accounted for over 70% of the outstanding balance. |
6. |
Inventories |
● |
Inventories consists of the following
at June 30, 2022 and 2021. |
| |
June
30,
2022
| | |
June
30,
2021
| |
| |
| | |
| |
Finished Goods-ice cream | |
$ | 165,470 | | |
$ | 338,369 | |
Raw materials - ingredients | |
| 82,625 | | |
| 14,760 | |
Packaging | |
| 83,436 | | |
| 59,010 | |
Allowance for unsaleable product | |
| | | |
| (24,403 | ) |
TOTAL | |
$ | 331,531 | | |
$ | 387,736 | |
|
|
|
Inventories
are stated at the lower of cost (FIFO) or net realizable value. The Company periodically reviews the value of items in inventory
and provides write-downs or write-offs of inventory based on its assessment of market conditions and the products relative shelf
life. Write-downs and write-offs are charged to loss on inventory write down. |
7. |
Other current
assets |
● |
Other current
assets consist of the following vendor deposits at June 30, 2022 and 2021: |
| |
June 30, 2022 | | |
June 30, 2021 | |
Prepaid advertising costs | |
$ | - | | |
$ | - | |
Vendor deposits – Other | |
$ | 134,797 | | |
$ | 33,480 | |
TOTAL | |
$ | 134,797 | | |
$ | 33,480 | |
8. |
Settlement
of Accounts Payable |
In April, 2020, the Company successfully negotiated
a Debt Incentive Agreement with a creditor to whom it owed $947,260. This Debt Incentive Agreement provided for the elimination of the
entire debt should the Company make payments prior to December 1, 2020 totaling $166,224 in cash, and delivery of approximately 4,000
pints of ice cream. Because this reduction in debt was conditional, the full $947,260 was included in the liabilities section of the
Company’s balance sheet as of June 30, 2020. Due to the circumstances surrounding the original payable, and the business environment
at the time, in April of 2021, the creditor agreed to settle for $20,000 in cash. The Company recorded a gain on extinguishment of accounts
payable in the amount of $715,075.
Below is a reconciliation of the gain on accounts
payable settlement as presented on the Company’s statement of operations for the fiscal year ended June 30, 2021:
Written off accounts payable | |
$ | 947,260 | |
Written of prepaid advertising costs in other assets | |
| (212,185 | ) |
Cash payment | |
| (20,000 | ) |
Gain on accounts payable settlement | |
$ | 715,075 | |
9. |
Other Current Liabilities |
● |
Other current liabilities consist
of the following at June 30, 2022 and 2021. |
| |
2022 | | |
2021 | |
Accrued consulting fees – related party | |
$ | - | | |
$ | 3,000 | |
TOTAL | |
$ | - | | |
$ | 3,000 | |
10. |
Convertible Notes Payable |
● |
Convertible
Notes Payable consist of the following at June 30, 2022 and 2021. As of June 30, 2022, each of the notes below had been
retired. |
| | | On April 30, 2018, the Company entered into a convertible promissory note and a security purchase agreement dated April 30, 2018, in the amount of $225,000. The lender was Eagle Equities, LLC. The notes have a maturity of April 30, 2019, and interest rate of 8% per annum and are convertible at a price of 60% of the lowest closing bid price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” |
| | | |
| | | The fair value of the $225,000 Notes was calculated using the Black-Scholes pricing model at $287,174, with the following assumptions: risk-free interest rate of 2.24%, expected life of 1 year, volatility of 202%, and expected dividend yield of zero. Because the fair value of the note exceeded the net proceeds from the $225k Notes, a charge was recorded to “Financing cost” for the excess of the fair value of the note, for a net charge of $62,174. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On February 14, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated February 14, 2019, in the amount of $104,000. The lender was Eagle Equities, LLC. The notes have a maturity of February 14, 2020, and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $104,000 Notes was calculated using the Black-Scholes pricing model at $90,567, with the following assumptions: risk-free interest rate of 2.53%, expected life of 1 year, volatility of 136%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $104k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2020, the debt discount was $0. $50,000 of the note has been successfully retired via conversion into shares during the year ended June 30, 2020 and $54,000 of the note has been successfully retired via conversion into shares during the three months ended September 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $4,098 included under line item “Loss on debt extinguishment upon note conversion, net” during 2020 fiscal year and accounted for a loss on conversion of $36,242. |
| | | On April 29, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated April 29, 2019, in the amount of $208,000. The lender was Eagle Equities, LLC. The notes have a maturity of April 29, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $208,000 Notes was calculated using the Black-Scholes pricing model at $170,098, with the following assumptions: risk-free interest rate of 2.42%, expected life of 1 year, volatility of 118%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $208k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2020, the debt discount was $0. $208,000 of the note has been successfully retired via conversion into shares during the three months ended September 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $109,561 included under line item “Loss on debt extinguishment upon note conversion, net”. |
| | | On June 11, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated June 11, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of June 11, 2020, and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $240,217, with the following assumptions: risk-free interest rate of 2.05%, expected life of 1 year, volatility of 16%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300,000 Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021, the debt discount was $0. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $42,595 included under line item “Loss on debt extinguishment upon note conversion, net”. |
| | | On July 5, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated July 5, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of July 5, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $239,759, with the following assumptions: risk-free interest rate of 1.98%, expected life of 1 year, volatility of 118%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the 300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021 the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | |
| | | On August 8, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated August 8, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of August 8, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $254,082, with the following assumptions: risk-free interest rate of 1.79%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021, the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On August 29, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated August 29, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of August 29, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $234,052, with the following assumptions: risk-free interest rate of 1.75%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300,000 Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021, the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On September 24, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated September 24, 2019, in the amount of $150,000. The lender was Eagle Equities, LLC. The notes have a maturity of September 24, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $118,009, with the following assumptions: risk-free interest rate of 1.78%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $150k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021 the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On November 7, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated November 7, 2019, in the amount of $150,000. The lender was Eagle Equities, LLC. The notes have a maturity of November 7, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $121,875, with the following assumptions: risk-free interest rate of 1.58%, expected life of 1 year, volatility of 122%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $150k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021 the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On December 31, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated December 31, 2019, in the amount of $150,000. The lender was Eagle Equities, LLC. The notes have a maturity of December 31, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $189,172, with the following assumptions: risk-free interest rate of 1.59%, expected life of 1 year, volatility of 115%, and expected dividend yield of zero. Because the fair value of the note exceed the net proceeds from the $150k Notes, $39,172 was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2021 the debt discount was $0. This note has been successfully retired via conversions into shares as of June 30, 2021. |
| | | On February 6, 2020, the Company entered into a convertible promissory note and a security purchase agreement dated February 6, 2020, in the amount of $200,000. The lender was Eagle Equities, LLC. The notes have a maturity of February 6, 2021 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest closing bid price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $200,000 Notes was calculated using the Black-Scholes pricing model at $156,061, with the following assumptions: risk-free interest rate of 1.51%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. As of June 30, 2021 the debt discount was $0. |
| | | |
| | | This note was settled as part of a debt settlement with Eagle Equities, LLC in conjunction with the Nightfood Holdings, Inc. financing/refinancing in April 2021. The Company fair valued the notes as of refinancing date and accounted for a loss on refinancing of $91,880 included under line item “Loss on debt extinguishment upon note conversion, net”. |
| | | On April 30, 2020, the Company entered into a convertible promissory note and a security purchase agreement dated April 30, 2020, in the amount of $205,700. This note carried an Original Discount of 10% or $18,700 which was included in interest expense at the time of valuation. The lender was Eagle Equities, LLC. The notes have a maturity of April 30, 2021 and interest rate of 8% per annum and are convertible at a price of 78% of the lowest closing bid price on the primary trading market on which the Company’s Common Stock is then listed for the twenty (20) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $205,700 Notes was calculated using the Black-Scholes pricing model at $128,369, with the following assumptions: risk-free interest rate of 0.16%, expected life of 1 year, volatility of 106%, and expected dividend yield of zero. This note was settled as part of a debt settlement with Eagle Equities, LLC in conjunction with the financing/refinancing in April 2021. |
| | | On June 23, 2020, the Company entered into a convertible promissory note and a security purchase agreement dated June 23, 2020, in the amount of $205,700. This note carried an Original Discount of 10% or $18,700 which was included in interest expense at the time of valuation. The lender was Eagle Equities, LLC. The notes have a maturity of June 23, 2021 and interest rate of 8% per annum and are convertible at a price of 78% of the lowest closing bid price on the primary trading market on which the Company’s Common Stock is then listed for the twenty (20) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $205,700 Notes was calculated using the Black-Scholes pricing model at $132,236, with the following assumptions: risk-free interest rate of 0.18%, expected life of 1 year, volatility of 108%, and expected dividend yield of zero. The Company accounted for a loss on refinancing of $25,722 for unamortized of discount included under line item “Loss on debt extinguishment upon note conversion, net”. |
| | | This note was settled as part of a debt settlement with Eagle Equities, LLC in conjunction with the Nightfood Holdings, Inc. financing/refinancing in April 2021. |
| | | |
| | | On August 12, 2020, the Company entered into a convertible promissory note and a security purchase agreement dated August 12, 2020, in the amount of $205,700. This note carried an Original Discount of 10% or $18,700 which was included in interest expense at the time of valuation. The lender was Eagle Equities, LLC. The notes have a maturity of August 12, 2021 and interest rate of 8% per annum and are convertible at a price of 78% of the lowest closing bid price on the primary trading market on which the Company’s Common Stock is then listed for the twenty (20) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $205,700 Notes was calculated using the Black-Scholes pricing model at $126,029, with the following assumptions: risk-free interest rate of 0.13%, expected life of 1 year, volatility of 101%, and expected dividend yield of zero. This note was settled as part of a debt settlement with Eagle Equities, LLC in conjunction with the Nightfood Holdings, Inc. financing/refinancing in April 2021. |
| | | |
| | | On December 10, 2021, the Company entered into a securities purchase agreement
(the “Securities Purchase Agreement”) with certain accredited and institutional investors (the “Purchasers”) for
the purchase and sale of an aggregate of: (i)$1,086,956.52 in principal amount of Original Issue Discount Senior Secured Convertible
Notes (the “Notes”) for $1,000,000 (representing a 8% original issue discount) (“Purchase Price”) and
(ii) warrants to purchase up to 4,000,000 shares of the Company’s common stock (the “Warrants”) in a private
placement (the “Offering”). Each note featured an 8% original issue discount, resulting in net proceeds to the Company
of $500,000 for each of the two notes. The Notes have a maturity of December 10, 2022, an interest rate of 8% per annum,
and are convertible at a fixed price of $.25 per share of Company common stock, with provisions for conversions at a fixed price
of $.20 per share of Company common stock should the closing trading price of our common stock be below $.20 per share after
June 10, 2022, subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata
distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations,
and reorganizations. The Debentures do not have any price protection or price reset provisions with respect to future issuances of securities.
These notes, for as long as they are outstanding, are secured by all assets of the Company and its subsidiaries, senior secured guarantees
of the subsidiaries of the Company, and pledges of the common stock of all the subsidiaries of the Company. . The Notes have provisions
allowing for repayment at any time at 115% of the outstanding principal and interest within the first three months, and 120%
of the outstanding principal and interest at any time thereafter. |
| | | The Warrants are initially exercisable at $0.25 per share and, are subject
to cashless exercise after six months if the shares underlying the Warrants are not subject to an effective resale registration statement.
The Warrants are also subject to customary adjustments, including price protections. |
| | | In connection with Securities Purchase Agreement, the Company issued to the Placement
Agent (as defined below), an aggregate of 878,260 Common Stock purchase warrants (“PA Warrants”). The PA Warrants
are substantially similar to the Warrants. The fair value of the PA Warrants at issuance was estimated to be $170,210 based on a
risk-free interest rate of 1.25%, an expected term of 5 years, an expected volatility of 142.53% and a 0% dividend
yield. |
| | | Spencer Clarke Holdings LLC (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities pursuant to the Securities Purchase Agreement. Pursuant to an engagement agreement entered into by and between the Company and the Placement Agent, the Company agreed to pay the Placement Agent a cash commission of $100,000. Pursuant to the discussion above, the Company also issued an aggregate of 878,260 PA Warrants to the Placement Agent. The gross proceeds received from the Offering were approximately $1,000,000. The cash Placement Agent fees of $100,000 was paid separately. Also, the Company reimbursed the lead Purchaser $15,192 for legal fees, which was deducted from the required subscription amount to be paid. The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting. In accordance with ASC 470- Debt, the Company first allocated the cash proceeds to the loan and the warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature. |
Below is a reconciliation of the convertible
notes payable as presented on the Company’s balance sheet as of June 30, 2022:
| |
Principal ($) | | |
Debt Discount ($) | | |
Net Value ($) | |
Balance at June 30, 2020 | |
| 2,935,400 | | |
| (605,211 | ) | |
| 2,330,189 | |
Convertible notes payable issued during fiscal year ended June 30, 2021 | |
| 822,800 | | |
| - | | |
| 822,800 | |
Notes converted into shares of common stock | |
| (1,433,000 | ) | |
| - | | |
| (1,433,000 | ) |
Debt discount associated with new convertible notes | |
| | | |
| (512,993 | ) | |
| (512,993 | ) |
Amortization of debt discount | |
| | | |
| 814,769 | | |
| 814,769 | |
True-up adjustment in debt discount and derivative liability | |
| | | |
| (37,360 | ) | |
| (37,360 | ) |
Notes retired due to refinancing | |
| (2,325,200 | ) | |
| 340,795 | | |
| (1,984,405 | ) |
Balance at June 30, 2021 | |
| - | | |
| - | | |
| - | |
Convertible notes payable issued during fiscal year ended June 30, 2022 | |
| 1,086,957 | | |
| | | |
| 1,086,957 | |
Debt discount associated with new convertible notes | |
| | | |
| (1,018,229 | ) | |
| (1,018,229 | ) |
Amortization of debt discount | |
| | | |
| 275,423 | | |
| 275,423 | |
Balance at June 30, 2022 | |
| 1,086,957 | | |
| 742,806 | | |
| 344,151 | |
Amortization expense for the years ended June
30, 2022 and 2021, totaled $275,423 and $814,769 respectively.
As of June 30, 2022 and June 30, 2021, the unamortized
portion of debt discount was $742,807 and $0, respectively.
Interest expense for the fiscal year ended June
30, 2022 and 2021, totaled $48,309 and $177,693, respectively.
11. |
Derivative Liability |
|
Due to the
variable conversion price associated with some of these convertible promissory notes disclosed in Note 10 above, the Company has
determined that the conversion feature is considered a derivative liability for instruments which are convertible and have not yet
been settled. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the
derivatives on the date they are deemed to be derivative liabilities. |
|
|
|
Below is a reconciliation of the
derivative liability as presented on the Company’s balance sheet as of June 30, 2022 and 2021: |
Balance at June 30, 2020 | |
$ | 1,590,638 | |
Initial derivative liability accounted for convertible notes payable issued during the period ended June 30, 2021 | |
| 512,993 | |
True-up adjustment in debt discount and derivative liability | |
| 37,360 | |
Change in derivative liability during the period | |
| (853,329 | ) |
Notes retired due to refinancing | |
| (1,287,662 | ) |
Derivative liability as of June 30, 2021 | |
$ | - | |
Derivative liability as of June 30, 2022 | |
$ | - | |
12. | Refinancing Agreement | | In April 2021, the Company extinguished certain convertible promissory notes held by Eagle Equities, LLC by way of full settlement of approximately $2,511,214, consisting of 2,325,200 in principal and $186,014 interest, paid as follows: |
| | | |
| | | | (i) | 1,500 shares B Preferred, valued at $1,500,000 as a part of the Preferred offering; and |
| | | | | |
| | | | (ii) | $1,300,000 in cash from the proceeds of the offering. |
| | | | | |
| | | Since the debt was exchanged in whole, the fair value of the consideration paid should be compared to the fair value of the debt settled (including related derivative liabilities), with the variance accounted for as a gain or loss on settlement. |
Total Gain/Loss Related to Extinguishment in Fiscal Year Ended June 30, 2021:
| |
| |
Debt principal ($2,325,200) plus interest payable ($186,014) | |
$ | 2,511,214 | |
Derivative liability | |
| 1,287,662 | |
Unamortized debt of discount | |
| (340,795 | ) |
Cash paid from Escrow account | |
| (1,300,000 | ) |
1,500 shares of Preferred B | |
| (1,500,001 | ) |
Gain on extinguishment of debt upon refinancing | |
$ | 658,080 | |
Below is a reconciliation of the loss on debt extinguishment as presented
on the Company’s statement of operations for the fiscal year ended June 30, 2021:
Loss on convertible notes upon conversion | |
$ | 2,100,435 | |
(Gain) upon refinancing | |
| (658,080 | ) |
Loss on extinguishment debt | |
$ | 1,442,325 | |
14. |
Stockholders’ Equity |
● |
On October
16, 2013, the Nightfood, Inc. became a wholly-owned subsidiary of Nightfood Holdings, Inc. Accordingly, the stockholders’ equity
has been revised to reflect the share exchange on a retroactive basis. |
| | ● | The Company is authorized to issue Two Hundred Million (200,000,000) shares of $0.001 par value per share Common Stock. Holders of Common Stock are each entitled to cast one vote for each Share held of record on all matters presented to shareholders. Cumulative voting is not allowed; hence, the holders of a majority of the outstanding Common Stock can elect all directors. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore and, in the event of liquidation, to share pro-rata in any distribution of the Company’s assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will be paid unless and until the Company is profitable. Holders of Common Stock do not have pre-emptive rights to subscribe to additional shares if issued by the Company. There are no conversion, redemption, sinking fund or similar provisions regarding the Common Stock. All of the outstanding Shares of Common Stock are fully paid and non-assessable and all of the Shares of Common Stock offered thereby will be, upon issuance, fully paid and non-assessable. Holders of Shares of Common Stock will have full rights to vote on all matters brought before shareholders for their approval, subject to preferential rights of holders of any series of Preferred Stock. Holders of the Common Stock will be entitled to receive dividends, if and as declared by the Board of Directors, out of funds legally available, and share pro-rata in any distributions to holders of Common Stock upon liquidation. The holders of Common Stock will have no conversion, pre-emptive or other subscription rights. Upon any liquidation, dissolution or winding-up of the Company, assets, after the payment of debts and liabilities and any liquidation preferences of, and unpaid dividends on, any class of preferred stock then outstanding, will be distributed pro-rata to the holders of the common stock. The holders of the common stock have no right to require the Company to redeem or purchase their shares. Holders of shares of common stock do not have cumulative voting rights. The Company had 91,814,484 and 80,707,467 shares of its $0.001 par value common stock issued and outstanding as of June 30, 2022, and 2021 respectively. |
|
During the
Fiscal Year ended June 30, 2022: |
| ● | The Company issued 848,325 shares of common stock for services with a fair value of $214,125. |
| | |
| ● | The Company issued 1,600,000 shares of common stock from the exercise of warrants with a fair value of $16,000 |
| | |
| ● | The Company issued 8,700,000 as the result of converting Preferred Class B |
|
During the
year ended June 30, 2021: |
| ● | The Company issued 1,661,210 shares of common stock for services with a fair value of $372,253. |
| | |
| ● | The Company issued 17,249,577 shares of common stock as consideration for convertible debt in the principal amount of $1,433,000 and in the accrued interest payable of $184,274, with a fair value of $3,717,709. |
| ● | During the fiscal years ended June 30, 2022 and 2021, the Company recorded a Loss on fair value of shares issued upon notes conversion of $0 and $2,100,435 respectively. |
| | Preferred Stock Series A Stock On July 9, 2018, the Company was authorized to issue 1,000,000 shares of $0.001 par value per share Preferred Stock. Of the 1,000,000 shares. 10,000 shares were designated as Series A Preferred Stock (“Series A Stock”). Holders of Series A Stock are each entitled to cast 100,000 votes for each Share held of record on all matters presented to shareholders. In addition to his ownership of the common stock, Mr. Folkson owns 1,000 shares of the Series A Stock which votes with the common stock and has an aggregate of 100,000,000 votes. The Company had 1,000 and 1,000 shares of its $0.001 par value preferred Series A stock issued and outstanding as of June 30, 2022 and 2021 respectively. Series B Stock In April 2021, the Company designated 5,000 shares of its Preferred Stock as Series
B Preferred Stock, $0.001 par value per share (“Series B Stock”), each Series B share of which is convertible into 5,000 shares
of common stock and 5,000 non-detachable warrants with an initial exercise price of $.30.
During the fiscal year ended June 30, 2022, the Company sold 335 shares
of its Series B Stock for gross cash proceeds of $335,000. These proceeds were used for operating capital. The Series B stock meets the
criteria for equity classification and is accounted for as equity transactions. Specifically, among other factors, this qualifies as equity
because redemption is not invoked at the option of the holder and the Series B stock does not have to be redeemed on a specified date. During the fiscal year ended June 30, 2022, holders of the Series B Stock converted 1,740 shares of Series B Stock into 8,700,000 shares of its common stock. During Fiscal Year 2021, the Company issued 4,650 shares of Series B Stock to investors in exchange for invested capital at a price of $1,000 per share and issued 15 shares to a legal firm associated with this financing activities. These proceeds were used to retire pre-existing debt and for operating capital. 1,500 shares of Series B Stock were issued in conjunction with $1,300,000 in cash to settle $2,325,000 of convertible note principal. An additional 3,150 B Shares provided $3,150,000 of cash. The Series B stock meets the criteria for equity and is accounted for as equity. Specifically, among other factors, this qualifies as equity because redemption is not invoked at the option of the holder and the Series B stock does not have to be redeemed on a specified date.
The Company had 3,269 and 4,665 shares of its Series B Stock issued and outstanding as of June
30, 2022, and June 30, 2021, respectively Dividends |
| | |
| | ● | The Company has never declared dividends, however as set out below, during the fiscal year ended June 30, 2022 and 2021, upon issuance of a total of 335 and 4,665 shares of Series B Stock, respectively, the Company recorded a deemed dividend as a result of beneficial conversion feature associated with the transaction. |
| | | |
| | ● | In connection with certain conversion terms provided for in the designation of the
Series B Stock, pursuant to which each share of Series B Stock is convertible into 5,000 shares of common stock and 5,000 warrants, the
Company recognized a beneficial conversion feature upon the conclusion of the transaction in the amount of $4,085,925. The
beneficial conversion feature was treated as a deemed dividend, and fully amortized on the transaction date due to the fact that the issuance
of the Series B Stock was classified as equity. |
| | ● | The following is a summary of the Company’s outstanding common stock purchase warrants. |
| | | |
| | | During the fiscal year ended June 30, 2021 the Company issued a warrant agreement to one of the Company’s vendors for 500,000 underlying shares of common stock at a strike price of $0.50 per share and having a term of five years. The Company valued these warrants using the Black Scholes model utilizing a 107.93% volatility and a risk-free rate of 0.29%, respectively. |
| | | |
| | | In exchange for an agreement to lock up Mr. Folkson’s shares, Folkson received warrants to acquire 400,000 shares of Company common stock on February 4, 2021, at a strike price of $.30, and with a term of 12 months from the date of that agreement. The warrants include a provision for cashless exercise and expired without exercise on February 4, 2022. The Company valued these warrants using the Black Scholes model utilizing a 107.93% volatility and a risk-free rate of 0.50%. |
| | | |
| | | The Company issued to the Placement Agent 360,000 retainer warrants on February 2, 2021 and further received 1,240,000 retainer warrants on April 13, 2021 at a strike price of $.01. The warrants included a provision for cashless exercise and carried a 5 years term. The Company valued these warrants using the Black Scholes model utilizing a 107.93% ~ 156.11% volatility and a risk-free rate of 0.45% ~ 0.85%. All of such warrants were exercised during the fiscal year ended June 30, 2022 for cash proceeds of $16,000 Additionally, the Placement Agent received 2,250,000 success warrants at a strike price of $0.20 and 2,250,000 success warrants at a strike price of $0.30, with expiration in 5 years. The Company recorded the retainer warrants into consulting expenses and recognized value of success warrants as part of financing costs issued as an equity instrument with the fair value debited to additional paid in capital. There is no accounting effect for these transactions associated with these success warrants. |
| | | |
| | | During the fiscal year ended June 30, 2022, holders of the Company’s Series B Stock converted 1,740 shares of Series B Stock into 8,700,000 shares of its common stock, along with 8,700,000 warrants issued to those holders with an adjusted exercise price of $.2919 per share. |
| | | |
| | | During the fiscal year ended June 30, 2022, 4,000,000 warrants were issued to the holder of outstanding convertible notes with an initial exercise price of $.25 per share, and 878,260 warrants issued to the placement agent with an initial exercise price of $.25 per share. The Company valued these warrants using the Black Scholes model utilizing a 143.39% volatility and a risk-free rate of 1.25% |
| | | |
| | | During the fiscal year ended June 30, 2022, the Company entered into a warrant agreement with one of the Company’s Directors issuing 100,000 warrants at a strike price of $0.2626 having a term of five years. The Company valued these warrants using the Black Scholes model utilizing a 151.07% volatility and a risk-free rate of 0.79%. |
| | | |
| | | During the fiscal year ended June 30, 2022, the Company entered into an Agreement For Shareholder Lock-Up And Acquisition of Warrants (the “Lock-Up Agreement”), with Mr. Folkson, issuing warrants at a strike price of $0.30 having a term of one year. The Company valued these warrants using the Black Scholes model utilizing a 80.67% volatility and a risk-free rate of 0.89%. |
| | | |
| | | Certain warrants in the below table include dilution protection for the warrant holders, which could cause the exercise price to be reduced as a result of a financing event at a valuation below the exercise price in effect at the time. For example, as a result of the convertible note financing, we completed in December 2021 which would allow the new noteholders to convert their debt to shares of common stock at an exercise price of $.20/share, some of the $.30 warrants outstanding in the table below had their exercise price reduced from $.30 to $.2952 which were further adjusted to $.2919 prior to June 30, 2022. This reduction of less than one penny in the exercise price of the 25,000,000 warrants associated with our Class B Preferred stock would result in proceeds to the Company of $7,297,500 rather than $7,500,000 should all those cash warrants be exercised. The result of the warrant exercise price downward adjustment on modification date was treated as a deemed dividend and fully amortized on the transaction date, and the Company recorded $91,375 to additional paid in capital and retained earnings on the Company’s balance sheets. |
| | | |
| | | The aggregate intrinsic value of the warrants as of June 30, 2022 is $11,650. The aggregate intrinsic value of the warrants as of June 30, 2021 was $613,009 |
Exercise Price | | |
June
30,
2021 | | |
Issued | | |
Repricing | | |
Expired | | |
Redeemed | | |
June 30, 2022 | |
$ | 0.01 | | |
| 1,600,000 | | |
| | | |
| | | |
| | | |
| (1,600,000 | ) | |
| - | |
$ | 0.15 | | |
| 500,000 | | |
| | | |
| | | |
| - | | |
| | | |
| 500,000 | |
$ | 0.20 | | |
| 2,250,000 | | |
| | | |
| | | |
| | | |
| | | |
| 2,250,000 | |
$ | 0.25 | | |
| | | |
| 4,878,260 | | |
| | | |
| | | |
| | | |
| 4,878,260 | |
$ | 0.2626 | | |
| | | |
| 100,000 | | |
| | | |
| | | |
| | | |
| 100,000 | |
$ | 0.2919 | | |
| | | |
| 8,700,000 | | |
| 2,250,000 | | |
| | | |
| | | |
| 10,950,000 | |
$ | 0.30 | | |
| 2,650,000 | | |
| 400,000 | | |
| (2,250,000 | ) | |
| (400,000 | ) | |
| | | |
| 400,000 | |
$ | 0.40 | | |
| 150,000 | | |
| | | |
| | | |
| (150,000 | ) | |
| | | |
| - | |
$ | 0.50 | | |
| 500,000 | | |
| | | |
| | | |
| - | | |
| | | |
| 500,000 | |
$ | 0.75 | | |
| 300,000 | | |
| | | |
| | | |
| (300,000 | ) | |
| | | |
| - | |
$ | 1.00 | | |
| 100,000 | | |
| | | |
| | | |
| (100,000 | ) | |
| | | |
| - | |
| | | |
| 8,050,000 | | |
| 14,078,260 | | |
| - | | |
| (950,000 | ) | |
| (1,600,000 | ) | |
| 19,578,260 | |
|
|
Options |
|
|
|
|
|
● |
The Company has never issued options. |
15. | Related Party Transactions | ● | During the third quarter 2015, Mr. Folkson began accruing a consulting fee of $6,000 per month which the aggregate of $72,000 and $72,000 is reflected in professional fees and presented in the accrued expenses – related party for 2022 and 2021 respectively. |
| | ● | The original consulting agreement for Mr. Folkson had a term of one year, and then converted into a month-to-month agreement effective January 1, 2016. A new twelve-month consulting agreement was entered into for Mr. Folkson effective January 1, 2021, which paid Mr. Folkson the same $6,000 monthly consulting fee. In addition, the Company made bonuses available to Mr. Folkson upon the Company hitting certain revenue milestones of $1,000,000 in a quarter and $3,000,000 in a quarter. Achieving those milestones would earn Mr. Folkson warrants with a $.50 and $1 strike price which would need to be exercised within 90 days of the respective quarterly or annual filing. As of the date of this filing, said milestones have not been achieved and therefore no bonus warrants have been issued yet in association with these milestones. |
| | | |
| | | On January 20, 2022, the Company entered into the Lock-Up Agreement
with Mr. Folkson. For purposes of the Lock-Up Agreement, Mr. Folkson is the direct or indirect owner of 16,776,591 share of
the Company’s common stock (the “Shares”), and Mr. Folkson has agreed to not transfer, sell, or otherwise dispose of
any Shares through February 4, 2023. The Lock-Up Agreement is substantially similar to, and serves as an extension of, the lock-up agreement
previously in place between the Company and Mr. Folkson, which expired in accordance with its terms on February 4, 2022. The Lock-Up Agreement further provides, in exchange for the agreement to lock up the Shares, that Mr. Folkson shall receive warrants to acquire 400,000 shares of Company common stock at an exercise price of $.30 per share, which warrants carry a twelve month term and a cashless provision, and will expire if not exercised within the twelve month term. During the fiscal year ending June 30, 2022, and 2021, Mr. Folkson accrued consulting fee of $6,000 per month which the aggregate of $72,000 is reflected in general and administrative. Accrued expenses – related party with a balance of $0 and $3,000 at June 31, 2022 and June 30, 2021, respectively. On December 8, 2017, Mr. Folkson purchased Warrants, at a cost of $.15 per Warrant, to acquire up to 80,000 additional shares of Company stock at a strike price of $.20, and with a term of three (3) years from the date of said agreement. This purchase resulted in a reduction in the accrued consulting fees due him by $12,000. Those warrants were not exercised during that timeframe and have expired. During the second quarter 2019 Mr. Folkson purchased 400,000 shares of stock at a price of $0.30 per share, valued at $120,000 which was charged to his accrual. In addition, the Company made bonuses available to Mr. Folkson upon such events as the Company hitting certain revenue milestones of $1,000,000 in a quarter, $3,000,000 in a quarter, and $5,000,000 in a quarter, and other potential bonuses. Achieving such milestones would earn Mr. Folkson warrants with a $.50 and $1 strike price which would need to be exercised within 90 days of the respective quarterly or annual filing. As of June 30, 2022, those conditions were not met and therefore there were no accruals related to this arrangement. |
16. |
Income Tax |
A reconciliation
of the statutory income tax rates and the Company’s effective tax rate is as follows: |
| |
June 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Statutory U.S. federal rate | |
| (21.00 | )% | |
| (21.00 | )% |
Effect of higher U.S. Federal statutory tax rate | |
| - | % | |
| - | % |
State income taxes (net of federal tax benefit) | |
| (6.50 | )% | |
| (7.00 | )% |
Permanent differences | |
| -(11.9 | )% | |
| 7.10 | % |
Valuation allowance | |
| (26.4 | )% | |
| (20.9 | )% |
True up of net operating loss | |
| - | % | |
| - | % |
| |
| 0.0 | % | |
| 0.0 | % |
|
|
The tax effects
of the temporary differences and carry forwards that give rise to deferred tax assets consist of the following: |
| |
June 30, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | |
| |
Net operating loss carry-forwards | |
$ | 2,573,365 | | |
| 1,958,304 | |
| |
| | | |
| | |
Valuation allowance | |
| (2,573,365 | ) | |
| (1,958,304 | ) |
Net deferred tax asset | |
$ | - | | |
$ | - | |
| | At June 30, 2022 the Company had estimated U.S. federal net operating losses of
approximately $12,391,173 for income tax purposes. $2,614,000 will expire between 2031 and 2037 while the balance of
the tax operating loss can be carried forward indefinitely, they are limited in any single year to 80% of taxable income. For financial
reporting purposes, the entire amount of the net deferred tax assets has been offset by a valuation allowance due to uncertainty regarding
the realization of the assets. The net change in the total valuation allowance for the year ended June 30, 2022 was an increase of $655,182.
The Company follows FASC 740-10-25 P which requires a company to evaluate whether a tax position taken by the company will “more
likely than not” be sustained upon examination by the appropriate tax authority. The Company has analyzed filing positions in all
of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions.
The Company believes that its income tax filing positions and deductions would be sustained on audit and does not anticipate any adjustments
that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been
recorded. |
| | The Company may not be able to utilize the net operating loss carryforwards for its US income taxes in future periods should it experience a change in ownership as defined in Section 382 of the Internal Revenue Code (“IRC”). Under section 382, should the Company experience a more than 50% change in its ownership over a 3 year period, the Company would be limited based on a formula as defined in the IRC to the amount per year it could utilize in that year of the net operating loss carryforwards. As of June 30, 2022 the Company had not performed an analysis to determine if the Company was subject to the provisions of Section 382. The Company is subject to U.S. federal income tax including state and local jurisdictions. Currently, no federal or state income tax returns are under examination by the respective taxing jurisdictions. The Company’s accounting policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company has not accrued interest for any periods. The Company has not filed its federal and state income tax returns for the fiscal years ended June 30, 2022, 2021, 2020, 2019, 2018, June 30, 2017 and 2016, however it believes due to the reported losses there is no material liability outstanding. |
17. |
Fair Value of Financial Instruments |
The carrying
amounts of Cash and Equivalents, Receivables, Other Current Assets, Short-Term Debt, Accounts Payable, Accrued and Other Current
Liabilities approximated fair value. |
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Fair value is defined as
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. To increase the comparability of fair value measures, Financial Accounting Standards Board (“FASB”)
ASC Topic 820-10-35 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 measurement) and the lowest priority to unobservable inputs (level 3 measurements). |
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Level 1—Valuations
based on quoted prices for identical assets and liabilities in active markets. |
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Level 2—Valuations
based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data. |
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Level 3—Valuations
based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment. |
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The application of the
three levels of the fair value hierarchy under Topic 820-10-35 to our assets and liabilities are described below: |
Management considers all of its derivative liabilities
to be Level 3 liabilities. At June 30, 2022 and 2021 the Company had not outstanding derivative liabilities.
18. | Net Loss per Share of Common Stock | ● | The Company has adopted FASB Topic 260, “Earnings per Share,” which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Basic net loss per common share is based upon the weighted average number of common shares outstanding during the period. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Convertible preferred equity, in the form of 3,269 and 4,665 of the Company’s
Class B Preferred Stock, which is convertible into 16,345,000 and 23,325,000 shares of common stock, is not included in the computation
for the fiscal year ended June 30, 2022 and 2021, respectively. Such conversions would also create 16,345,000 and 23,325,000 cash warrants
with an exercise price of approximately $.29. During the fiscal year ended June 30, 2022, 1,740 shares of Series B Stock had exercised
conversions, so 8,700,000 related warrants were issued and outstanding as of June 30, 2022. Additionally, there are 19,578,260 and 8,050,000 warrants that are exercisable into shares of stock as of June 30, 2022 and 2021, respectively. |
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2022 | | |
2021 | |
Numerator - basic and diluted loss per share net loss | |
$ | 2,523,277 | | |
$ | (3,479,824 | ) |
Deemed dividend on Series B stock | |
| 381,310 | | |
| 4,085,925 | |
Net loss available to common stockholders | |
$ | 2,904,587 | | |
$ | (7,565,749 | ) |
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Denominator – basic and diluted loss per share – weighted average common shares outstanding | |
| 87,521,595 | | |
| 71,090,407 | |
Basic and diluted earnings per share | |
$ | (.03 | ) | |
$ | (0.11 | ) |
19. |
Commitments and Contingencies |
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As of June
30, 2022 and 2021, the Company has no material commitments or contingencies. |
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Litigation: 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. The Company is not aware of any such legal proceedings that we believe will have, individually or in the aggregate,
a material adverse effect on our business, financial condition or operating results. |
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The outbreak of the novel coronavirus (COVID-19), including the measures to reduce its spread, and the impact on the economy, has still not been fully predicted. |
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We have experienced minimal issues with supply chain and logistics, except that there have been recent and significant increases in costs relating to freight and packaging, including as a result of more orders being shipped outside of Walmart shipping lanes. Order processing function has been normal to date, and our manufacturers have assured us that their operations are “business as usual” as of the time of this filing. |
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It is possible that the impact of the pandemic could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable to meet certain debts and expenses. |
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It is impossible to know what the future holds with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current coronavirus pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, vendors, and business partners. It is difficult to know if the pandemic has materially impacted the results of operations, and we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if necessary. |
20. | Subsequent Events | ● | Subsequent to the end of the fiscal year on June 30, 2021, the Company issued 164,653 shares of common stock to vendors, consultants and directors in exchange for services rendered, at an average value of $.213 per share. |
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| | ● | Subsequent to the end of the fiscal year on June 30, 2021, 810 shares of Class B Preferred Stock were converted by Class B Shareholders into 4,050,000 shares of NGTF Common Stock at a value of $.20 per share. |
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| | ● | On September 23, 2022, the Company entered into a Securities Purchase Agreement
and issued and sold to an institutional investor, a Promissory Note in the principal sum of $700,000.00, which amount is the $644,000
actual amount of the purchase price plus an original issue discount in the amount of $56,000. In connection with the issuance of the note,
the Company issued to the investor warrants to purchase 2,800,000 shares of common stock at an exercise price of $0.225, as well as returnable
warrants to purchase 7,000,000 shares of common stock at an exercise price of $0.30, in each case subject to adjustment. As a result of
the transaction, the Company’s existing lenders triggered their “most favored nation” clause which resulted in their
existing notes receiving some of the same terms and conditions the Company granted to the new investor’s notes and warrants, including
that the existing investors were issued returnable warrants to purchase an aggregate of 5,434,783 shares of common stock at an exercise
price per share of $0.30 (subject to adjustment). As a result of the financing, the Company is required to pay cash fees to its bankers
(including the Placement Agent), which amounts are being determined but will not be less than $$67,000, and to issue compensatory warrants
to the Placement Agents to purchase 280,000 shares of common stock at an exercise price of $0.225, warrants to purchase 119,260 shares
of common stock at an exercise price of $0.27, and returnable warrants to purchase 700,000 shares of common stock at an exercise price
of $0.30, in each case subject to adjustment. This financing will cause an adjustment in the exercise price of
the warrants associated with our Series B preferred stock, resulting in a new exercise price for those warrants of approximately $0.286
from their previous exercise price of $0.2919. |