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EX-32.1 - CERTIFICATION - NightFood Holdings, Inc.f10k2020ex32-1_nightfood.htm
EX-31.1 - CERTIFICATION - NightFood Holdings, Inc.f10k2020ex31-1_nightfood.htm

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal year ended June 30, 2020

 

OR

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to __________

 

Commission File Number 333-193347

 

NIGHTFOOD HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   46-3885019
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)
     

520 White Plains Road-Suite 500

Tarrytown, New York

  10591
(Address of Principal Executive Offices)   (Zip Code)

 

888-888-6444

(Registrant’s telephone number, including area code) 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☒   No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company ☒ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         

 

Securities registered pursuant to section 12(g) of the Act:

 

 
(Title of Class)

 

 
(Title of Class)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of December 31, 2019: $9,690,126.

 

As of October 12, 2020, the issuer had 65,044,297 shares of its common stock issued and outstanding, par value $0.001 per share.

  

 

 

 

 

  

TABLE OF CONTENTS

 

    Page
PART I
 
Item 1. Business 1
Item 1A. Risk Factors 4
Item 1B. Unresolved Staff Comments 9
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Mine Safety Disclosures 9
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 10
Item 6. Selected Financial Data 11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
Item 9A. Controls and Procedures 19
Item 9B. Other Information 20
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 23
Item 13. Certain Relationships and Related Transactions, and Director Independence 23
Item 14. Principal Accounting Fees and Services 24
     
PART IV
 
Item 15. Exhibits, Financial Statement Schedules 25

 

i

 

 

PART I

  

Forward-Looking Information

 

Certain statements made in this Annual Report involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, technological developments related to business support services and outsourced business processes, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.

 

Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings “Business,” and “Risk Factors”.

 

ITEM 1. BUSINESS

 

Nightfood Holdings, Inc. (“we”, “us” “the Company” or “Nightfood”) is a Nevada corporation organized on October 16, 2013 to acquire all of the issued and outstanding shares of Nightfood, Inc., a New York corporation (“Nightfood”) from its sole shareholder, Sean Folkson. All of our operations are conducted by our Subsidiaries (Nightfood, Inc. and MJ Munchies, Inc.)

 

Nightfood is in the business of manufacturing, marketing and distributing snacks specially formulated and promoted for evening consumption. A large number of Americans snack at night, and the most common options tend to be high in sugar, fat, sodium, and calories; such snacks can impair sleep quality and also impair health in general. Management believes that our products are unique in the food industry and that there is a substantial market for nighttime specific snacks that are formulated with better sleep in mind. 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 many additional web properties. Any information that may appear on our web site should not be deemed to be a part of this report.

 

On January 3, 2018, the Registrant formed a new wholly-owned subsidiary to capitalize on opportunities in the marijuana and cbd edibles space. MJ Munchies, Inc. (“Munchies”) was formed as a Nevada corporation with a capital structure of 10,000 shares of common stock. Since formation, Munchies has built an intellectual property portfolio that includes a registered trademark for “Half-Baked” in the State of California relating to marijuana edibles, two pending federal trademark applications with the USPTO for “Half-Baked” relating to packaged snacks, and beverages, respectively. The Registrant also acquired the HalfBaked.com domain, and several other related domain names and IP assets. 

Industry Overview

 

We are an early-stage company that is seeking to establish a market within the snack industry by offering a line of snack foods that are specifically formulated for evening consumption. It is estimated that American consumers spend over $50 Billion annually on snacks consumed at night, and this figure continues to grow. Moreover, industry data indicates that the most popular nighttime snack choices include products and categories that are traditionally considered high in calories, and “unhealthy” options, such as cookies, salty snacks (chips, pretzels, and popcorn), ice cream, and candy.

 

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Our Products, Present and Proposed

 

Nightfood Holdings runs two distinct operating companies, each serving a different market segment with different products.

 

MJ Munchies, Inc.

 

MJ Munchies, Inc. is a Nevada corporation formed in January of 2018 to exploit legally compliant opportunities in the CBD and marijuana edibles and related spaces. The Company intends to market some of these new products under the brand name “Half-Baked”. This subsidiary was created during the three months ended March 31, 2018 and its operations have a nominal impact on the financial statements contained herein.

 

Since inception, MJ Munchies has applied for U.S. Trademark protection for a brand of Half-Baked snacks. MJ Munchies also acquired HalfBaked.com. In April, 2018, MJ Munchies entered into an initial brand licensing agreement for the Half-Baked mark with a licensed manufacturer of THC-infused edibles in the State of California under which, the licensee manufactured and distributed a small pilot run of Half-Baked branded THC-infused cookies in California. Management continues to seek a suitable licensing partner for the intellectual property the Company has secured.

 

The Company believes significant opportunities will exist to launch successful and legally compliant products in this space, and that such opportunities will continue to grow over time. No assurance can be given that we will begin actual production of products using the Half-Baked trademark. Even if production begins, we can neither assure market acceptance of our products nor that said snacks, perhaps including THC infused edibles, will not face ongoing legal challenges.

 

Nightfood, Inc.

 

Nightfood, Inc. is a snack company focused on manufacturing and distribution of snacks is formulated to be more appropriate for nighttime consumption. Nightfood ice cream was formulated by sleep and nutrition experts to satisfy nighttime cravings in a better, healthier, more sleep-friendly way.

 

Nightfood ice cream was originally manufactured in eight flavors. These are Full Moon Vanilla, Midnight Chocolate, Cold Brew Decaf, After Dinner Mint Chip, Milk & Cookie Dough, Cherry Eclipse, Bed and Breakfast, and Cookies n’ Dreams. Additional flavors have been developed, both dairy, and non-dairy, for future introduction in 2020 based on retailer and consumer demand.

 

In February of 2020, Nightfood secured the endorsement of the American Pregnancy Association. With ice cream being the most widely reported pregnancy craving, and with pickles being another food notorious for pregnancy cravings, the Company manufactured and launched a ninth flavor, Pickles For Two.

 

Management believes consumer demand exists for better nighttime snacking options, and that a new consumer category consisting of nighttime specific snacks will emerge in the coming years. This belief is supported by research from major consumer goods research firms such as IRI Worldwide, and Mintel, who identified nighttime specific foods and beverages as one of the “most compelling and category changing trends” for 2017 and beyond. In recent years, CEO’s and other executives from major consumer goods conglomerates such as Nestle, PepsiCo, Mondelez, and Kellogg’s have commented on consumer nighttime snack habits and the opportunity that exists in solving this problem for the marketplace.

 

It is estimated that over $50 billion is spent annually in the United States on snacks that are consumed between dinner and bed. Company Management believes that a significant percentage of that consumer spend could move from conventional snacks to nighttime specific snacks in coming years.

 

Nightfood has established a Scientific Advisory Board consisting of sleep and nutrition experts to drive product formulation decisions, and provide consumer confidence in the brand promise. The first member of this advisory board was Dr. Michael Grandner, Director of the Sleep and Health Research Program at the University of Arizona. Dr. Grandner has been conducting research on the link between nutrition and sleep for over ten years, and he believes improved nighttime nutritional choices can improve sleep, resulting in many short and long-term health benefits. In March of 2018, the Company added Dr. Michael Breus to their Scientific Advisory Board. Breus, known to millions as The Sleep Doctor™, is believed to be the Nation’s most trusted authority on sleep. He regularly appears in the national media to educate and inform consumers so they can sleep better and lead happier, healthier, more productive lives. In July, 2018, we completed our Scientific Advisory Board with the addition of Lauren Broch, Ph.D, M.S. Dr. Broch is a sleep therapist and former Director of Education & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. Uniquely, Dr. Broch also has a master’s degree in human nutrition. This unique combination allowed her to play an important role in the reformulation of our nutrition bars, and the development of Nightfood ice cream. These experts work with Company management to ensure Nightfood products deliver on their nighttime-appropriate, and sleep-friendly promises.

  

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Production

 

To date, we have utilized contract manufacturers for producing our products, packaging for our products, and 3rd party logistics for warehousing and order fulfillment. Our current ice cream co-packer has confirmed available capacity to manufacture approximately 400,000 pints of Nightfood ice cream monthly. Management has had initial conversations with other manufacturing facilities to establish additional production capacity. When it becomes necessary, we do not anticipate adding additional capacity through another facility to be a problem.

 

Marketing and Distribution

 

Nightfood ice cream is currently available in approximately 750 supermarket locations. These include chains such as Harris Teeter (a division of Kroger), Shaws and Star Markets (a division of Albertsons), Jewel-Osco (also a division of Albertsons, Lowes Foods, Rouses Markets, and Central Market (a division of H-E-B). The product line has garnered extensive media interest, including coverage from outlets such as Oprah Magazine, USA Today, The Wall Street Journal, The Washington Post, The Food Network, The Today Show, Rachael Ray, and more. Consumers seem very enthusiastic about the prospect of a sleep-friendly ice cream.

 

Management is working with our retail partners on various marketing and promotional campaigns to drive trial and repeat purchase at the store level. In addition, marketing initiatives are aimed at both the mainstream consumer and the pregnancy community. Partnerships and sponsorships have been secured and executed with Lamaze International, Ovia Health, the International Childbirth Education Association, and other influential pregnancy organizations and individuals.

 

Competition

 

The nutritional/snack food business is highly competitive and includes such participants as large companies like Mondelez, Nestle S.A. and Quaker Oats and more specialized companies such as Cliff Bar, Quest Nutrition and many smaller companies. Many of these competitors have well established names and products. Nestle recently announced an interest in the nighttime snacking space with the introduction of a candy-type product called GoodNight. We will initially compete based upon the unique nature of our product. However, other companies, including those with greater name recognition than us and greater resources may seek to introduce products that directly compete with our products. Management believes that if a competitor sought to develop a competing product, it could do so and begin to establish retail distribution in 12-24 months. Based on the current acquisition climate in the consumer goods space, Management believes that successful growth of the Nightfood ice cream line would likely bring acquisition offers from potential competitors before it would actually bring competition on the shelf from those same potential competitors.

 

Intellectual Property Rights

 

We own the registered trademark “Nightfood®” for the nutrition bar/snack/meal replacement category, and the ice cream category. We believe these marks will prove important and valuable to our business as we continue to pioneer the development of a new category of snacks that support relaxation with a sleep-friendly nutritional profile, specific to consumption at night, between dinner and bedtime. Additionally, we own the domain Nightfood.com as well as many other relevant domains such as late-night-snack.com, nighttimesnack.com, and nighttimesnacking.com, as well as Nightfood.us, Nightfood.net, TryNightfood.com, GetNightfood.com, NiteFood.com, TryNightfood.com, BuyNightfood.com, NightSnacking.com, and Night-Food.com. We also own the toll-free number 888-888-NIGHT. We rely on proprietary information as to our formulas and have non-disclosure agreements with our suppliers. 

  

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Personnel

 

Nightfood has no employees. Our CEO, Sean Folkson, COO Jenny Mitchell, and other key team members have consulting agreements with the Company. Through vendor and consultant relationships, Nightfood has dozens of personnel contributing to our operations and efforts on a regular basis. Should we be successful in executing our business plan, we anticipate potentially hiring employees at some point to assist with various company functions. However, we also expect to continue to strategically outsource significantly to accomplish work that might otherwise be done by employees in a more traditional company.

 

Customers

 

Our customers consist primarily of supermarkets and entities that distribute ice cream products to supermarkets and other retail outlets. In FY 2020, we had one customer that accounted for approximately 41% of our Gross Sales. Eight other customers each accounted for between 3.7% and 9.7% of our Gross Sales. In FY 2019, two customers made up over 10% of Gross Sales.

 

DEVELOPMENT PLANS

 

Nightfood has nine ice cream flavors already in ongoing production, and an additional ten products have been developed or in late stages of development, these include additional flavors of Nightfood dairy-based ice cream as well as several flavors of non-dairy oat-based ice cream. In addition, Management believes the market exists for nighttime, sleep-friendly snacks in other formats in addition to ice cream pints. In addition to introduction of additional pint products, including such possibilities as non-dairy and keto-friendly versions of Nightfood pints, future expansion could also include frozen novelties, other popular nighttime snack formats, as well as sleep-friendly beverages Management has done preliminary research on CBD infused ice cream. Current FDA guidelines do not currently permit CBD to be used as an additive in food. While some companies are manufacturing and distributing food products with CBD, industry reports indicate that major retailers have been avoiding those products due to current FDA regulations.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the following factors in evaluating our business, operations and financial condition. The occurrence of any the following risks could have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Business

 

We have had limited operations and require substantial additional funds to execute our business plan. We have had limited operations and have not yet established significant traction in the marketplace. We generated Gross Sales of $879,842, and Net Revenue of $241,673 in the year ended June 30, 2020, and Gross Sales of $363,565 and Net Revenues of $352,172 in the year ended June 30, 2019. Unless we are able to continue to leverage our status as a public company into effective fundraising to fund our capital requirements, we will not be able to execute on our business plan and purchasers of our stock will be likely to lose their investment.

 

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Our independent registered public accounting firm have expressed doubt about our ability to continue as a going concern. We received a report on our financial statements for the years ended June 30, 2020 and June 30, 2019 from our independent registered public accounting firm that includes an explanatory paragraph and a footnote stating that there is substantial doubt about our ability to continue as a going concern due to its losses and negative net worth. Inclusion of a “going concern qualification” in the report of our independent accountants may have a negative impact on our ability to obtain financing and may adversely impact our stock price in any market that may develop.

 

We remain uncertain of our proposed products’ market acceptance. Although management firmly believes that snacks designed for evening consumption is a viable niche market with a potential for attractive returns for investors, this belief is largely based on preliminary sales and marketing data, industry awards, industry research, and consumer feedback. If management is wrong in its belief and there is an insufficient market for our products, it is likely we will fail and investors will lose their investment.

  

Our ability to hire additional personnel is important to the continued growth of our business. Our continued success depends upon our ability to attract and retain a group of motivated marketing and business support professionals. Our growth may be limited if we cannot recruit and retain a sufficient number of people. We cannot guarantee that we will be able to hire and retain a sufficient number of qualified personnel.

 

We may face substantial competition. Competition in all aspects of the functional food industry is intense. We will compete against both large conglomerates with substantial resources and smaller companies, including new companies that might be formed with resources similar to our own. Competitors may seek to duplicate the perceived benefits of our products in ways that do not infringe on any proprietary rights that we can protect. As a result we could find that our entire marketing plan and business model is undercut or made irrelevant by actions of other companies under which we have no control. We cannot promise that we can accomplish our marketing goals and as a result may experience negative impact upon our operating results.

 

Our success depends to a large extent upon the continued service of key managerial personnel and our ability to attract and retain qualified personnel. Specifically, we are highly dependent on the ability and experience of our key team member, Sean Folkson, our president and CEO. We have a consulting agreement with Mr. Folkson. The loss of Mr. Folkson would present a significant setback for us and could impede the implementation of our business plan. There is no assurance that we will be successful in acquiring and retaining qualified personnel to execute our current plan of operations.

 

The ability of our officer to control our business will limit minority shareholders’ ability to influence corporate affairs. As of the date of this report, our president, Sean Folkson, owned 16,753,568 shares (directly and through trusts, including 2,680,000 million shares owned by a trust controlled by Mr. Folkson’s wife. (Mr. Folkson disclaims beneficial ownership of these shares).   In addition to his ownership of the common stock, Mr. Folkson owns 1,000 shares of our Series A Preferred Stock (“A Stock”) which votes with the common stock and has an aggregate of 100,000,000 votes. Accordingly, Mr. Folkson controls the majority of the voting power in the Company. Because of his stock ownership, Mr. Folkson will be in a position to continue to elect our board of directors, decide all matters requiring stockholder approval and determine our policies. The interests of our president may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other business decisions. The minority shareholders would have no way of overriding decisions made by our president. This level of control may also have an adverse impact on the market value of our shares because he may institute or undertake transactions, policies or programs that result in losses, may not take any steps to increase our visibility in the financial community and/ or may sell sufficient numbers of shares to significantly decrease our price per share.

 

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If we do not receive additional financing, we will not be able to execute our planned expansion. Over the next  6-12 months, we believe we will require approximately $1,500,000 - $2,500,000 in debt or equity financing to affect a planned expansion of our operations and roll out Nightfood ice cream. Management believes that it will be able to raise the required funds, however this may not prove to be the case. As of June 30, 2020, we had $2,935,400 in outstanding convertible promissory notes. See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION – Liquidity.

 

The full impact of Coronavirus (COVID) remains unknown. Reports indicate that consumer behavior has shifted as a result of COVID and the resulting impact on the economy. Some of these reported changes include fewer supermarket visits, consumer reliance on legacy brands in lieu of trying new branded offerings, and increases in at-home snacking.

 

To date, we have experienced minor issues regarding supply chain and logistics. Order processing function has been perfectly normal to date, and our manufacturers have assured us that their operations are mostly “business as usual” as of the time of this filing.  

  

We may be exposed to potential risks resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual report our assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year. Management has assessed our internal controls over financial reporting and has identified several areas that require improvement, which are being addressed.

 

We do not have a sufficient number of employees and consultants to segregate responsibilities and are presently unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees, and this may impair our ability to effectively comply with Section 404 of the Sarbanes-Oxley Act. We currently do not have any employees and rely on our CEO, Sean Folkson to perform all executive functions. Accordingly, we cannot segregate duties to provide sufficient review of our financial activity. During the course of our testing of our financial procedures, we may identify other deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. Our officers’ lack of experience in accounting and financial matters may make our efforts to comply more difficult and cause us to hire consultants to assist him cutting into our resources.

  

Implications of Being an Emerging Growth Company. As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the JOBS Act. For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. These provisions include:

 

  a requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis included in an initial public offering registration statement;

 

  an exemption to provide less than five years of selected financial data in an initial public offering registration statement;

 

  an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal controls over financial reporting;

 

  an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

  an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

  reduced disclosure about the emerging growth company’s executive compensation arrangements.

 

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An emerging growth company is also exempt from Section 404(b) of Sarbanes Oxley which requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting. Similarly, as a Smaller Reporting Company we are exempt from Section 404(b) of the Sarbanes-Oxley Act and our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until such time as we cease being a Smaller Reporting Company.

 

As an emerging growth company, we are exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval of executive compensation and golden parachutes.

 

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We would cease to be an emerging growth company upon the earliest of:

 

  In our fiscal year ended June 30, 2021,

 

  the first fiscal year after our annual gross revenues are $1 billion or more,

 

  the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or

 

  as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

  

Risks Related to Our Common Stock

 

Commencing August 21, 2015 we began trading under the Symbol NGTF on the OTC Markets. There had been very little trading activity of our stock for some time. In April of 2017, the Company listing moved to the OTCQB, and in August of 2017 an investor awareness campaign was initiated to communicate news of recent company developments and milestones to a broader range of stock market investors. On October 23, 2017, we were advised that our stock had been moved from the OTCQB to the OTCPink marketplace. The Company did not believe the change in OTC Market tiers had any material positive or negative impact on Company operations or the stock price. However, in January, 2019, we determined that it was in the interest of our shareholders to be on the OTCQB and were reinstated on February 11, 2019. Trading volume has increased significantly in the last eighteen months, but there can be no assurances that it will be maintained. Our stock is likely to continue to be subject to significant price fluctuations.

 

In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for the common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception, and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock. Because of the anticipated low price of the securities, many brokerage firms may not be willing to effect transactions in these securities. Any purchasers of our securities should be aware that any market that develops in our stock will likely be subject to the penny stock restrictions.”

  

Our board of directors is authorized to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common shares. We are authorized to issue up to 1,000,000 shares of preferred stock, $0.001 par value. On July 11, 2018, we filed a Certificated of Designation for a class of preferred stock designated Class A Super Voting Preferred Stock (“A Stock”). There are 10,000 shares of A Stock designated. Each share of such stock shall vote with the common stock and have 100,000 votes. A Stock has no conversion, dividend or liquidation rights. Accordingly, the holders of A Stock will, by reason of their voting power be able to control the affairs of the Registrant. The foregoing is only a summary of the certificate of designation for the A Stock, which has been filed as an exhibit to our Current Report on Form 8-K filed July 17, 2018. We have issued 1,000 shares of A Stock to Sean Folkson, giving him 100,000,000 votes in all matters requiring a vote of holders of our Common Stock and effective voting control over our affairs. As of the date of this report, no further shares of preferred stock have been issued outside of the initial 1,000 shares issued to Mr. Folkson and we have no plans at this time to issue further shares or our preferred stock. Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as the Board of Directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights of the holders of the common stock being offered hereby.

 

7

 

 

Our articles of incorporation provide for indemnification of officers and directors at our expense and limit their liability that may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors. Our articles of incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. This indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.

 

We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against these types of liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of these factors would likely materially reduce the market and price for our shares, if such a market ever develops.

 

Any market that develops in shares of our common stock will be subject to the penny stock restrictions that are likely to create a lack of liquidity and make trading difficult or impossible. Until our shares of common stock qualify for inclusion in the NASDAQ system, if ever, the trading of our securities, if any, will be in the over-the-counter market which is commonly referred to as the OTCBB as maintained by OTCMarkets.com. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of our securities.

 

SEC Rule 15g-9 (as most recently amended and effective on September 12, 2005) establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:

 

  the basis on which the broker or dealer made the suitability determination, and

 

  that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

  

Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their securities. Recently, several brokerage firms and clearing firms have adopted special “house rules” which make it more difficult for their customers to hold or trade low priced stock and these rules may make it difficult for our shareholders to sell their stock.

  

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We do not intend to pay dividends on our common stock. We have not paid any dividends on our common stock to date and there are no plans for paying dividends on the common stock in the foreseeable future. We intend to retain earnings, if any, to provide funds for the implementation of our business plan. We do not intend to declare or pay any dividends in the foreseeable future. Therefore, there can be no assurance that holders of our common stock will receive any additional cash, stock or other dividends on their shares of our common stock until we have funds which the Board of Directors determines can be allocated to dividends.

 

If a market develops for our shares, sales of our shares relying upon rule 144 may depress prices in that market by a material amount. 16,753,568 of the outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who has held restricted securities for a prescribed period may, under certain conditions, sell their shares as a result of revisions to Rule 144 which became effective on or about February 15, 2008, there is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least 90 consecutive days) after the restricted securities have been held by the owner for a period of six months. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.

 

Any trading market that may develop may be restricted by virtue of state securities “Blue Sky” laws to the extent they prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states. Although trading activity in our stock has increased recently, generally there is a limited public market for our common stock, and there can be no assurance that an active and regular public market will develop in the foreseeable future. Transfer of our common stock may also be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because our securities have not been registered for resale under the “Blue Sky” laws of any state, the holders of such shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state “Blue Sky” law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions prohibit the secondary trading of our common stock. Accordingly, investors should consider the secondary market for our securities to be a limited one. 

 

Recent issuances of convertible promissory notes may have a negative impact on the trading prices of our common stock. Commencing in March 2017, we have entered into $7,363,103 principal amount of promissory notes with various lenders since our inception of which $2,935,400 was outstanding as of June 30, 2020. These notes are convertible six to twelve months after issuance into free trading shares of our common stock, with certain limitations, at conversion prices below the then market price of our common stock. These notes have been converted on a continual basis for approximately 36 months. It is possible such conversions and that future conversions of these notes have and can have a negative effect on the market for our common stock and may cause dilution to our common stockholders.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Description of Property

 

We currently store our inventory in third party warehouses and fulfillment centers. We believe that our operating procedures are adequate for our current needs and that alternative similar or additional space could be found at similar cost should the need arise. 

 

ITEM 3. LEGAL PROCEEDINGS

 

There are no current, past, pending or threatened legal proceedings or administrative actions either by or against the issuer that could have a material effect on the issuer’s business, financial condition, or operations.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

  

9

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET INFORMATION

 

Our common stock is quoted on the OTCQB Market under the symbol NGTF.

 

The following table sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCMarkets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

The last reported price was $0.1461 on October 12, 2020.

 

Period Ending June 30, 2020  High   Low 
September 30, 2019  $0.59   $0.28 
December 31, 2019   0.36    0.20 
March 31, 2020   0.44    0.16 
June 30, 2020   0.28    0.17 
           
Period Ending June 30, 2019:          
September 30, 2018  $0.42   $0.25 
December 31, 2018   0.36    0.16 
March 31, 2019   0.92    0.17 
June 30, 2019   0.77    0.30 

 

HOLDERS

 

The approximate number of stockholders of record at June 30, 2020 was 210, and as of October 12, 2020 it was 209. The number of stockholders of record does not include beneficial owners of our common stock, whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries. The Company ordered a “NOBO list” report in February 2020 from Broadridge Financial Solutions. The list showed that there were 5,048 unique beneficial owners of NGTF stock as of February, 2020. 

 

DIVIDEND POLICY

 

No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not have the intention of paying cash dividends on our common stock in the foreseeable future.

  

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RECENT SALES OF UNREGISTERED SECURITIES

 

In the year ending June 30, 2020, no shares were issued to any investor for cash. In the year ending June 30, 2019, 84,389 shares were issued to an investor for $50,000 in caseh (at $.59 per share). No underwriter participated in the foregoing transactions, and no underwriting discounts or commissions were paid, nor was any general solicitation or general advertising conducted. The securities bear a restrictive legend and stop transfer instructions are noted on our stock transfer records. These shares were issued in offerings under Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended.  In the year ended June 30, 2020, the company also compensated vendors and consultants with 1,385,990 shares in lieu of payment of $308,768, along with the issuance of 580,666 shares in lieu of interest payments of $88,762. These issuances were exempt from registration under section 4(1) of the Securities Act as sales by an issuer not involving a public offering. During the year ended June 30, 2019, the company compensated vendors and consultants with 483,808 shares in lieu of payment of $345,656, along with the issuance of 667,959 shares in lieu of interest payments of $95,805.

 

During the year ended June 30, 2020, we issued 6,056,168 shares of common stock as consideration for the conversion of debt with a fair value of $961,000 to one investment entity. These issuances were exempt from registration under Section 4 (1) of the Securities Act of 1933, as amended, as transactions by an issuer not involving any public offering.  During the year ended June 30, 2019, the Company issued 281,957 shares for certain accounts payable liabilities valued at $63,850 and issued 400,000 shares of stock related to Mr. Folkson executing warrants valued at $120,000. These issuances were exempt from registration under Section 4 (1) of the Securities Act of 1933, as amended, as transactions by an issuer not involving any public offering. 

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

 

As of June 30, 2020 and 2019, we had no compensation plans under which our equity securities were authorized for issuance.

 

PENNY STOCK REGULATION

 

Shares of our common stock have been and will likely continue to be subject to rules adopted the SEC that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared by the SEC, which contains the following:

 

  a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;
     
  a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities’ laws;
     
  a brief, clear, narrative description of a dealer market, including “bid” and “ask” prices for penny stocks and the significance of the spread between the “bid” and “ask” price;
     
  a toll-free telephone number for inquiries on disciplinary actions;
     
  definitions of significant terms in the disclosure document or in the conduct of  trading in penny stocks; and
     
  such other information and is in such form (including language, type, size and format), as the SEC shall require by rule or regulation.

 

Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:

 

  the bid and offer quotations for the penny stock;
     
  the compensation of the broker-dealer and its salesperson in the transaction;
     
  the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
     
  monthly account statements showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Holders of shares of our common stock may have difficulty selling those shares because our common stock will probably be subject to the penny stock rules.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

  

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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.

 

OVERVIEW

 

We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the following:

 

We are a snack development, marketing and distribution company relying on our unique products, positioning, and team to develop and market nutritional/snack foods that are appropriate for evening snacking.

 

Our first product was the Nightfood nutrition bar, manufactured in two flavors (Cookies n’ Dreams, and Midnight Chocolate Crunch). Management chose to discontinue manufacturing and distribution of Nightfood nutrition bars in the 2nd half of calendar 2019 to ensure additional resources available for the ice cream rollout, which Management believes offers a larger and more compelling market opportunity.

 

Management does envision the Nightfood brand ultimately as a “platform brand”, meaning future offerings would not necessarily all remain within the ice cream category. Possibilities exist to expand the product line into additional snack formats that are popular with consumers at night, including things like cookies, chips, and other formats. Additionally, future reintroduction of the Nightfood nutrition bar also remains a possibility.

 

During calendar 2018, the Company began development of Nightfood ice cream. Having seen the success in the marketplace of “better-for-you” ice cream brands such as Halo Top, Enlightened, and others, Management believes consumers will be receptive to a line of ice cream that has some similar nutritional benefits to those newly successful brands, in addition to a sleep-friendly nutritional profile that is more appropriate for nighttime consumption.

 

With our team of sleep experts, and a leading ice cream research and development team, eight flavors of Nightfood ice cream were developed and bought to market, with the initial production run occurring in January 2019. Nightfood is unique among all other known products in the market in that our ice cream was developed with better sleep in mind. Knowing millions of Americans eat ice cream before bed on any given night, Management tasked our team of sleep and nutrition experts with formulating an ice cream that would be more appropriate for nighttime consumption, while delivering better taste and texture than what is currently found in the other “better-for-you” brands.

 

Compared to regular ice cream, Nightfood is formulated with less fat, less sugar, fewer calories, plus certain minerals, digestive enzymes, and amino acids recommended by our sleep experts.

 

In early February of 2019, it was announced that Nightfood had won the 2019 Product of the Year Award in the ice cream category in a Kantar innovation survey of over 40,000 consumers. In June of 2019, it was announced that Nightfood won both the Best New Ice Cream and Best New Dairy Dessert awards at the World Dairy Innovation Awards.

 

Nightfood has secured distribution in divisions of some of the largest supermarket chains in the country, and has received media coverage in outlets such as The Today Show, Oprah Magazine, The Rachael Ray Show, Food Network Magazine, The Wall Street Journal, USA Today, The Washington Post, Fox Business News, and many more media outlets.

 

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We believe that over the next several years, a subset of consumers will shift their night snacking behavior towards snacks that are formulated to be more “sleep friendly” compared to what is currently being consumed by much of the population. As research continues to explore the links between nutrition and sleep, and consumers continue to seek healthier snacks in general, we expect a “nighttime nutrition” or “sleep-friendly snacking” category to emerge within the marketplace.

 

American consumers spend over $50 Billion annually on snacks consumed at night, and this figure continues to grow. A majority of adults are trying to eat foods and snacks that they understand will prevent or manage health problems and 37% of consumers are willing to pay more for foods with perceived health benefits. Moreover, industry data indicates that the most popular nighttime snack choices include products and categories that are traditionally considered high in calories, and “unhealthy” options, such as cookies, salty snacks (chips, pretzels, and popcorn), ice cream, and candy.

 

In addition to consumer research giants Mintel and IRI supporting the idea that night-specific snacks represented an opportunity for growth and innovation within the snack space, major consumer goods companies such as Nestle have also recently indicated they believe there’s an emerging consumer need for snacks specifically for consumption before bed, and Pepsi announced in September of 2020 that they intend to launch a new nighttime relaxation beverage called Driftwell.

 

Management believes interest in the space from global food and beverage companies such as Nestle and PepsiCo represents early validation for the category concept. While Management continues to iterate on products, distribution, and marketing, the team steadfastly believes that nighttime nutrition is a billion dollar category in the making. Management believes the Nightfood brand can be the pioneer and the leading brand in the night snacking category.

 

DEVELOPMENT PLANS

 

With Nightfood ice cream currently available in divisions of some of the largest supermarket chains in the United States, Management is working to simultaneously secure additional distribution opportunities, while also nurturing revenue growth and consumer growth in our existing points of distribution.

 

During the course of calendar 2019, additional distribution relationships were established with regional ice cream distributors and non-traditional retailers, with varying degrees of success. Management will continue to work within the industry to identify opportunities to grow the Nightfood brand. In the future, outlets such as hotels, college campus bookstores, and other non-traditional outlets could develop into relevant elements of our distribution mix as the brand continues to grow awareness and distribution infrastructure.

   

13

 

   

INFLATION

 

Inflation can be expected to have an impact on our operating costs. A prolonged period of inflation could cause a general economic downturn and negatively impact our results. However, the effect of inflation has been minimal over the past three years.

 

SEASONALITY

 

We do not believe that our business will be seasonal to any material degree.

 

CORONAVIRUS (COVID-19)

 

The outbreak of the novel coronavirus (COVID-19), including the measures to reduce its spread, and the impact on the economy, cannot fully be predicted. Early indications are that there are somewhat offsetting factors relating to the impact on our Company. Industry data shows that supermarket sales remain up, with more people spending more time at home. Anecdotally and statistically, snacking activity is also up. And, industry sales data also shows ice cream as one of the categories experiencing the largest increase with year over year growth averaging over 30% through a series of five one-week periods between March 15 and April 12, 2020 according to IRI data.

 

The offsetting factors are the impact of the virus on the overall economy. Greater unemployment, recession, and other possible unforeseen factors could also have an impact. Research indicates that consumers are less likely to try new brands during economic recession and stress, returning to value and legacy brands.

 

With consumers generally making fewer shopping trips, while buying more on those occasions and reverting back to more familiar brands, certain brand-launch marketing tactics, such as in-store displays and product sampling, are either impaired or impermissible. So, while overall night snacking demand is up, and consumer need/desire for better sleep is also stronger, driving consumer trial and adoption has been more difficult and expensive during these circumstances.

 

From both public statements, and recent exploratory meetings conducted between Nightfood Management and certain global food and beverage conglomerates, it has been affirmed to Management that there is increased strategic interest in the nighttime nutrition space as a potential high-growth opportunity due to recent declines in consumer sleep quality and increases in at-home nighttime snacking.

 

We have experienced no issues with supply chain or logistics. Order processing function has been perfectly normal to date, and our manufacturers have assured us that their operations are “business as usual” as of the time of this filing.

 

While the virus temporarily disrupted the category review schedules and sell-in process for certain supermarket decision-makers during the spring and early summer, most major accounts seem to be back on schedule and are conducting business as usual with regard to review cycles. Meetings are now conducted virtually, and product samples are shipped to decision-makers. While some retailers told us they were limiting new item additions due to changes in consumer shopping behavior, others have confirmed that they view the increase in at-home entertainment and night snacking as a plus for Nightfood products.

 

It is possible that the fallout from 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.

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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.

 

RESULTS OF OPERATIONS

 

Fiscal Year ended June 30, 2020 Compared to Fiscal Year ended June 30, 2019

 

Revenue

 

During the year ended June 30, 2020, the Company sold approximately 260,000 pints of ice cream compared to approximately 63,000 pints in the prior year, representing volume growth on ice cream pints of over 300%.For the year ended June 30, 2020, we had Net Revenues of $241,673 on Gross Sales of $878,849 compared to the year ended June 30, 2019 when we had Net Revenues of $352,172 on Gross Sales of $363,565, of which approximately $150,000 was related to sales of nutrition bars and approximately $205,000 was related to sales of ice cream. While Gross Sales increased by 142%, Net Revenue decreased 31% year over year. This is due to $637,176 in revenue reductions resulting from slotting fee arrangements and consumer promotion activity. Net Revenues are reported as Gross Sales less Slotting Fees 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 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, 2020, approximately $541,500 of Gross Sales were cancelled out due to slotting arrangements with retailers and distributors.

 

In situations where the Company has agreed to pay slotting and promotional fees to accounts (supermarkets, distributors, etc…), 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.

 

15

 

 

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 cost of these expenses, 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.

 

The following tables summarize Gross Sales for the years ended June 30, 2020 and 2019. Net Revenues are net of slotting fees (a onetime fee charged by supermarkets in order to have the product placed on their shelves) and other items mentioned above.

 

   Year Ended June 30, 
   2020   2019 
Gross sales  $878,849   $363,565 
Less:          
Slotting fees  $(541,500)  $- 
Sales discounts and other reductions   (95,676)   (11,373)
Net Revenues  $241,673   $352,172 

 

Operating Expenses

 

Our operating expenses for the year ended June 30, 2020 were $2,723,875 compared to $2,263,722 for the year ended June 30, 2019. Cost of product sold was $472,131, for the year ended June 30, 2020 compared to $190,251 for the year ended June 30, 2019. This increase of 148% is due to the fact that we sold almost 2.5x as much product to our supermarkets and distributors in Fiscal 2020 than in Fiscal 2019.

 

Our income statement shows a decrease in “Advertising and Promotional” from $732,297 for the year ending June 30, 2019 to $403,639 for the year ending June 30, 2020. The Company booked approximately $194,800 in marketing and distribution partnerships it determined would benefit operations for 2020 and beyond. Due to circumstances, including the global coronavirus pandemic, it does not appear these certain distribution partnerships will be as beneficial to the Company as envisioned when entered. As a result, the Company is reporting amortization of intangible assets of $500,000 and a one-time impairment expense of $500,000 in March of 2020. In April, 2020, the Company successfully negotiated a Debt Incentive Agreement with a creditor to whom it owed $731,118, most of which is in conjunction with this impaired asset. This Debt Incentive Agreement provides for the elimination of the entire debt should the Company make payments prior to December 1, 2020 totaling $166,224 in cash, and approximately 4,000 pints of ice cream. Because this reduction in debt is conditional, the full $731,118 is currently included in the liabilities section of our balance sheet, and full expense is reported on our income statement. Should the Company make the payments and retire the debt successfully prior to December 1, 2020, the Company would realize a Gain on Extinguishment of Debt of approximately $560,000 for fiscal 2021. 

 

Selling, general and administrative expenses decreased to $406,072 for the year ending June 30, 2020 compared to $559,996 for the year ending June 30, 2019. This includes items such as web hosting, web marketing services, freight, warehousing, shipping, product liability insurance, travel, and research & development of new products. Professional fees decreased from $781,178 for the year ending June 30, 2019 to $683,706 for the year ending June 30, 2020. This includes legal fees, marketing consulting, and accounting and auditor fees.

 

For the year ended June 30, 2020, interest expense was $441,422 compared to the year ended June 30, 2019 when we reported interest expense of $179,028. For the year ended June 30, 2020, we recorded a loss on debt extinguishment upon note conversion of $395,781 compared to the year ended June 30, 2019 when we recorded a loss on debt extinguishment upon note conversion of $0. For the year ended June 30, 2020, we recorded a change in fair value of derivative liability of ($858,774) compared to the year ended June 30, 2019 when recorded a change in fair value of derivative liability of 712,627. For the year ended June 30, 2020, we recorded an amortization of beneficial conversion feature of $1,709,759 compared to the year ended June 30, 2019 when recorded an amortization of beneficial conversion feature of $1,794,359. A significant portion of these losses recorded in both years stems from the accounting treatment applied to financing activities. 

 

Net Loss

 

For the year ended June 30, 2020, we had a net loss of $4,412,063 compared to the year ended June 30, 2019 when we had a net loss of $4,598,343. 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, 2020 were $2,723,875 and $1,911,550 for the year ended June 30, 2019.

 

Customers

 

Our customers consist primarily of supermarkets and entities that distribute ice cream products to supermarkets and other retail outlets. In FY 2020, we had one customer that accounted for approximately 41% of our Gross Sales. Eight other customers each accounted for between 3.7% and 9.7% of our Gross Sales. In FY 2019, two customers made up over 10% of Gross Sales.

  

Vendors

 

During the year ended June 30, 2020 one vendor accounted for more than 10% of our operating expenses. During the year ended June 30, 2019, two vendors accounted for more than 10% of our operating expenses.

 

16

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2020, we had cash on hand of $197,622, accounts receivable of $61,013, and inventory value of $275,605. As of June 30, 2019, we had cash on hand of $30,142, accounts receivable of $45,086, and inventory value of $406,439. The increase in accounts receivable is due to an increase in overall sales activity relating to the expanded sales and distribution of Nightfood ice cream. The decrease in inventory is due to production scheduling and inventory management. The Company has run multiple production runs subsequent to June 30, 2020 and prior to the date of this filing to continue to meet customer demand, and has additional production planned on an ongoing basis to continue to replenish inventory as existing product is used to fulfill customer orders.

 

During the year ended June 30, 2019, we raised $50,000 through the private sale of our common stock. During the year period ended June 30, 2020, there were no private sales of common stock recorded.

 

As of June 30, 2020, we had accounts payable of $1,286,149 compared to $496,809 on June 30, 2019. This increase is due primarily to certain marketing partnerships, slotting fees, and inventory production. In April, 2020, the Company successfully negotiated a Debt Incentive Agreement with a creditor to whom it owed $731,118. This Debt Incentive Agreement provides for the elimination of the entire debt should the Company make payments prior to December 1, 2020 totaling $166,224 in cash, and approximately 4,000 pints of ice cream. Because this reduction in debt is conditional, the full $731.118 is currently included in the liabilities section of our balance sheet. Should the Company make the payments and retire the debt during calendar 2020, the Company would realize a Gain on Extinguishment of Debt of approximately $560,000 for Fiscal 2021.

 

GOING CONCERN

 

Since our inception, we have sustained operating losses. During the year ended June 30, 2020, we incurred a net loss of $4,412,063 and had a total stockholders’ deficit of $4,481,147.

 

The Company has limited available cash resources and we do not believe our cash on hand will be adequate to satisfy our ongoing working capital needs as we continue to expand distribution. The Company is continuing to raise capital through private placement of our common stock, debt, and the use of convertible debt to finance the Company’s operations, of which it can give no assurance of success. 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.

 

During the year ended June 30, 2020, net cash used in operating activities totaled $1,531,084 compared to $1,567,227 for the year ended June 30, 2019

 

During the year ended June 30, 2020 and, there was an outflow of $333,333 as part of investing activities. During the year ended 2019 respectively, there was not any net cash provided or expended relating to investing activities. 

 

During the year ended June 30, 2020, net cash aggregating $2,031,897 was provided by financing activities, which represents $2,028,000 from the issuance of convertible debt and $3,897 in new short-term debt related to a new line of credit the Company secured in March during the initial phases of the COVID lockdowns.  For the year ended June 30, 2019, net cash aggregating $1,548,928 was provided by financing activities, which represents net proceeds of $50,000 from private sales of our common stock including issuance of warrants, $1,602,005 from the issuance of convertible debt ($102,077 of which was used to repay older debt), and required principal payments of $1,000 of our bank loan. 

 

From our inception in January 2010 through June 30, 2020, we have generated an accumulated deficit of approximately $17,631,122. Assuming we raise additional funds and continue operations, it is expected we would incur additional operating losses during the course of fiscal 2021 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. 

 

Funds on hand are not sufficient to fund our operations and we intend to rely on debt and the sale of stock in private placements to increase liquidity and, we anticipate deriving additional revenue from product sales in fiscal 2021, but we cannot at this time quantify the amount. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations.

 

17

 

  

During Fiscal Year 2020, the Company entered into convertible promissory notes with one lender with principal totaling $2,148,400. We consider our relationship with this lender to be excellent. They have been providing financing for operations for over thirty-six months, and have had conversion rights for over thirty-six months as well through acquisition of older debt. The lender has an understanding of our capital needs for future operations, although no assurances can be given that they will continue to provide the necessary capital needed for national distribution.

 

Effective May 6, 2015, the Company entered into a consulting agreement with Sean Folkson. The agreement was retroactive to January 1st, 2015. In exchange for services provided to the Company by Folkson, the Company agreed to pay Folkson $6,000 monthly. This compensation expense started accruing on January 1, 2015, and accrued on a monthly basis through June of 2020.

 

In June of 2018, and again in June of 2019, the Company entered into updated consulting agreements with Folkson, which included a modified compensation structure. Each new Consulting Agreement contained the identical cash compensation allowance of $6,000 monthly. In addition, Folkson would earn Warrants with a strike price of $.50 or $1 when the Company hit certain revenue milestones. All Warrants earned under Folkson’s current agreement would convert into restricted shares, shall carry a cashless provision, and must be exercised within 90 days of the filing of the 10Q or 10K on which such revenues are reported.

 

In December, 2017, Folkson elected to purchase 80,000 warrants to acquire shares of NGTF stock with a strike price of $.20 and a term of 36 months. To acquire these warrants Folkson paid $.15 per warrant, totaling $12,000, treated as a $12,000 reduction to the amount owed to Folkson. In November, 2018, Folkson exercised an existing warrant option and received 400,000 shares of our common stock in exchange for a $120,000 reduction in the amount of accrued consulting fees he was owed. This activity resulted in a decrease in related party accruals of $164,000.

 

OFF-BALANCE SHEET TRANSACTIONS

 

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

  

18

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements required by Item 8 are presented in the following order:

 

TABLE OF CONTENTS

 

Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as June 30, 2020 and 2019 F-3
   
Consolidated Statements of Operations for years ended June 30, 2020 and 2019 F-4
   
Consolidated Statements of Changes in Stockholders Deficit for years ended June 30, 2020 and 2019 F-5
   
Consolidated Statements of Cash Flows for years ended June 30, 2020 and 2019 F-6
   
Notes to Consolidated Financial Statements F-7

  

19

 

 

Nightfood Holdings, Inc.

 

Consolidated Financial Statements

 

For the years ended June 30, 2020 and 2019

 

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

The Stockholders and the Board of Directors of

Nightfood Holdings, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Nightfood Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended June 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020, in conformity with U.S. generally accepted accounting principles.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, 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 statements do 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

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP  

 

We have served as the Company’s auditor since 2014.

 

New York, NY

October 13, 2020

 

F-2

 

 

Nightfood Holdings, Inc.

CONSOLIDATED BALANCE SHEETS

 

   June 30,   June 30, 
   2020   2019 
         
ASSETS        
         
Current assets:        
Cash  $197,622   $30,142 
Accounts receivable (net of allowance of $0 and $0, respectively)   61,013    45,086 
Inventories   275,605    406,439 
Other current assets   398,085    1,000 
Total current assets   932,325    482,667 
           
Total assets  $932,325   $482,667 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $1,286,149   $496,809 
Accrued expense-related party   9,974    33,974 
Accrued interest   192,625    - 
Convertible notes payable-net of debt discounts and unamortized beneficial conversion feature   2,330,189    1,117,741 
Fair value of derivative liabilities   1,590,638    1,306,748 
Short-term borrowings- line of credit   3,897    - 
Total current liabilities   5,413,472    2,955,272 
           
Commitments and contingencies   -    - 
           
Stockholders’ deficit:          
Preferred stock, ($0.001 par value, 1,000,000 shares authorized, and 1,000 issued and outstanding as of June 30, 2020 and 2019, respectively)   1    1 
Common stock, ($0.001 par value, 200,000,000 shares authorized, and 61,796,680 issued and outstanding as of June 30, 2020 and 53,773,856 issued and outstanding as of June 30, 2019, respectively)   61,797    53,774 
           
Additional paid in capital   13,088,177    10,692,679 
Accumulated deficit   (17,631,122)   (13,219,059)
Total stockholders’ deficit   (4,481,147)   (2,472,605)
Total Liabilities and Stockholders’ Deficit  $932,325   $482,667 

  

The accompanying notes are an integral part of these consolidated financial statements

 

F-3

 

 

Nightfood Holdings, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the   For the 
   Year   Year 
   Ended   Ended 
   June 30,
2020
   June 30,
2019
 
         
Revenues, net of slotting and promotion  $241,673   $352,172 
           
Operating expenses          
Cost of product sold   472,131    190,251 
Amortization of intangible assets   500,000    - 
Impairment of intangible assets   500,000      
Advertising and promotional   403,639    732,297 
Selling, general and administrative   406,072    559,996 
Professional Fees   683,706    781,178 
Total operating expenses   2,965,548    2,263,722 
           
Loss from operations   (2,723,875)   (1,911,550)
           
Other expenses          
Interest expense – bank debt   463    - 
Interest expense – shareholder   281,387    95,805 
Interest expense – other   159,572    83,223 
Loss on debt extinguishment upon note conversion, net   395,781    - 
Change in fair value of derivative liability   (858,774)   712,627 
Amortization of Beneficial Conversion Feature   1,709,759    1,794,359 
Other Expense   -    779 
Total other expenses   1,688,188    2,686,793 
           
Provision for income tax   -    - 
           
Net loss  $(4,412,063)  $(4,598,343)
           
Basic and diluted net loss per common share  $(0.08)  $(0.09)
           
Weighted average shares of capital outstanding – basic and diluted   57,443,347    47,827,114 

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-4

 

 

Nightfood Holdings, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

Years ended June 30, 2020 and 2019

 

   Common Stock   Preferred Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Par Value   Shares   Par Value   Capital   Deficit   Deficit 
Balance, July 1, 2018   42,608,329    42,608          -         -    5,919,152    (8,620,714)   (2,658,954)
Common stock issued for services   483,808    484    1,000    1    345,172    -    345,657 
Common stock issued for interest   667,959    668              95,137    -    95,805 
Common stock issued for cash   84,389    84              49,916    -    50,000 
Common stock issued for accounts payable   281,957    282              63,568         63,850 
Issuance of warrants   400,000    400              164,426    -    164,826 
Issuance of common stock for debt   9,247,414    9,248              1,318,705    -    1,327,953 
Loss on fair value of shares issued upon note conversion   -    -              2,736,601    -    2,736,601 
Net loss   -    -    -    -    -    (4,598,343)   (4,598,343)
Balance, June 30, 2019   53,773,856   $53,774    1,000    1   $10,692,677   $(13,219,059)  $(2,472,605)
Common stock issued for services   1,385,990    1,386              307,382    -    308,768 
Common stock issued for interest   580,666    581              88,181    -    88,762 
Issuance of common stock for debt   6,056,168    6,056              954,944    -    961,000 
Issuance of warrants                                     67,990               67,990  
Loss on fair value of shares issued upon notes conversion   -    -              977,000    -    977,000 
Net loss   -    -              -    (4,412,063)   (4,412,063)
Balance, June  30, 2020   61,796,680    61,797    1,000    1    13,088,177    (17,631,122)   (4,481,147)

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-5

 

 

Nightfood Holdings, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For The
Year
Ended
June 30,
2020
    For The
Year
Ended
June 30,
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (4,412,063 )   $ (4,598,343 )
Adjustments to reconcile net loss to net cash used in operations activities:                
Stock issued for services     308,768       345,656  
Amortization of debt discount and deferred financing fees     1,709,759       1,794,359  
Amortization of intangible assets     500,000       -  
Deferred financing fees and financing costs     159,572       -  
Warrants issued for services     67,990       44,826  
Loss on debt extinguishment upon note conversion, net     395,781       -  
Change in derivative liability     (858,774 )     795,699  
Stock issued for interest     88,762       95,805  
Impairment expense     500,000       -  
Change in operating assets and liabilities:                
Accounts receivable     (15,927 )     (45,086  
Inventories     130,834       (303,230 )
Other current assets     (397,085 )     2,210  
Accounts payable     122,673       344,878  
Accrued expenses     168,626       (44,001 ) 
                 
Net cash used in operating activities     (1,531,084 )     (1,567,227 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Cash paid for purchase of intangible asset     (333,333 )     -  
Net cash provided by investing activities     (333,333 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the sale of common stock     -       50,000  
Proceeds from the issuance of debt-net     2,028,000       1,602,005  
Repayment of convertible debt     -       (102,076 )
Repayment of short-term debt     3,897       (1,000 )
Net cash provided by financing activities     2,031,897       1,548,929  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     167,480       18,298  
                 
Cash and cash equivalents, beginning of year     30,142       48,440  
Cash and cash equivalents, end of year   $ 197,622     $ 30,142  
                 
Supplemental Disclosure of Cash Flow Information:                
Cash Paid For:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  
Summary of Non-Cash Investing and Financing Information:                
Initial derivative liability and Debt discount due to beneficial conversion feature on notes issued   $ 1,684,711     $ 1,482,314  
Stock issued for conversion of debt   $ 961,000     $ 1,327,953  
Derivative liability reclassed to loss on extinguishment of debt upon notes conversion   $ 581,219     $    
Intangible assets acquired and adjusted in accounts payable balance   $ 666,667     $ -  
Stock issued for interest   $ 88,762     $ 95,805  

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-6

 

 

Nightfood Holdings, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of
Business
Nightfood Holdings, Inc. (the “Company”) 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 of its operations are conducted by its two subsidiaries: Nightfood, Inc. (“Nightfood”) and MJ Munchies, Inc.( “Munchies”).   Nightfood’s business model is to manufacture and distribute ice cream specifically formulated for nighttime snacking to help consumers satisfy nighttime cravings in a better, healthier, more sleep friendly way.  Munchies has acquired a portfolio of intellectual property around the brand name Half-Baked, and is seeking to license such property to operating partners in the CBD and marijuana space.

 

    The Company’s fiscal year end is June 30.
       
    The Company currently maintains its corporate address in Tarrytown, New York. 
       
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 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 beneficial conversion features, derivative liabilities, depreciation and amortization, the valuation for non-cash issuances of common stock, and the website, income taxes and contingencies, 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.

       
  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.
       
  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.

 

F-7

 

 

  Reclassification The Company may make certain reclassifications to prior period amounts to conform with the current year’s presentation. These reclassifications did not have a material effect on its consolidated statement of financial position, results of operations or cash flows.
       
  Recent Accounting Pronouncements  

The Company reviews all of the Financial Accounting Standard Board’s updates periodically to ensure the Company’s compliance of its accounting policies and disclosure requirements to the Codification Topics.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, to establish ASC Topic 606, (ASC 606). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of the guidance is that an entity should recognize revenue 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. The guidance 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, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The standard became effective for us beginning on July 1, 2018 and did not have a material impact on our financial statements.

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all investments in equity securities with readily determinable fair value to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information and removes the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. For public companies, the new standard is effective for annual periods beginning after December 15, 2017, including interim periods within the fiscal year. For all other entities, including emerging growth companies, ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company evaluated the impact on the financial statements and implemented the provisions of ASU 2016-01 for the annual financial statements for the year ended June 30, 2020.  This new standard did not have a material impact on our financial statements or related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequently amended the guidance relating largely to transition considerations under the standard in January 2017, to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.

 

The standard became effective for us beginning July 1, 2019. We have reviewed this and have determined that there is no material impact on our financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity and Derivatives and Hedging, which changes the accounting and earnings per share for certain instruments with down round features. The amendments in this ASU should be applied using a cumulative-effect adjustment as of the beginning of the fiscal year or retrospective adjustment to each period presented and is effective for annual periods beginning after December 15, 2018, and interim periods within those periods. We adopted this guidance effective July 1, 2019. The adoption of this guidance did not materially impact our financial statements and related disclosures.

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASC Update No 2018-02 (Topic 220) Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASC update allows for a reclassification into retained earnings of the stranded tax effects in accumulated other comprehensive income (“AOCI”) resulting from the enactment of the Tax Cuts and Jobs Act (“TCJA”). The updated guidance is effective for interim and annual periods beginning after December 15, 2018.  We adopted this guidance effective July 1, 2019. The adoption of this guidance did not materially impact our financial statements and related disclosures.

F-8

 

 

     

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We adopted this guidance effective July 1, 2019. The adoption of this guidance did not materially impact our financial statements and related disclosures.

 

In July 2018, the FASB issued ASU 2018-09 to provide clarification and correction of errors to the Codification. The amendments in this update cover multiple Accounting Standards Updates. Some topics in the update may require transition guidance with effective dates for annual periods beginning after December 15, 2018. We adopted this guidance effective July 1, 2019. The adoption of this guidance did not materially impact our financial statements and related disclosures.

 

The Company will continue to monitor these 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.
       
  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 (FIFO) or net realizable value, 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 $403,639 and $732,297 for the years ended June 30, 2020 and 2019, respectively.

  

F-9

 

  

  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.
       
    The Company offers sales incentives through various programs, consisting primarily of advertising related credits. The Company records advertising related credits with customers as a reduction to revenue as no identifiable benefit is received in exchange for credits claimed by the customer.  
       
   

The Company revenue from contracts with customers provides that an entity should recognize revenue 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. 

 

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.

 

      In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which updates revenue recognition guidance relating to contracts with customers. This standard states that an entity should recognize revenue 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 standard is effective for annual reporting periods, and interim periods therein, beginning after July 1, 2018. The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) during the first quarter of fiscal 2019 using the full retrospective method.

 

F-10

 

 

      Management reviewed ASC 606-10-32-25 which states “Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer). An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in paragraphs 606-10-25-18 through 25-22) that the customer transfers to the entity. If the consideration payable to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with paragraphs 606-10-32-5 through 32-13.”

 

      If the consideration payable to a customer is a payment for a distinct good service, then in accordance with ASC 606-10-32-26, the entity should account for it the same way that it accounts for other purchases from suppliers (expense). Further, “if the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that the entity receives from the customer, then the entity shall account for such an excess as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value of the good or service received from the customer, it shall account for all of the consideration payable to the customer as a reduction of the transaction price.”

 

      Under ASC 606-10-32-27, if the consideration payable to a customer is accounted for as a reduction of the transaction price, “an entity shall recognize the reduction of revenue when (or as) the later of either of the following events occurs:
       
      a) The entity recognizes revenue for the transfer of the related goods or services to the customer.
      b) The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.”
         
      Management reviewed each arrangement to determine if each fee paid is for a distinct good or service and should be expensed as incurred or if the Company should recognize the payment as a reduction of revenue.
           

      The Company recognizes revenue upon shipment based on meeting the transfer of control criteria. The Company has made a policy election to treat shipping and handling as costs to fulfill the contract, and as a result, any fees received from customers are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers.

  

  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, 2020 and 2019 the Company did not have any uninsured cash deposits.
       
       
  Receivables Concentration

As of June 30, 2020, the Company had receivables due from seven customers, two of whom accounted for over 20% of the outstanding balance. Four of the other five accounted for over 10% of the total balance. As of June 30, 2019, the Company had receivables due from six customers, three of whom accounted for over 20% of the outstanding balance.

       
  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.

 

F-11

 

 

  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.
       
  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. 

 

  Income Per Share

Net income per share data for both the years ending June 30, 2020 and 2019, 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, 2020 and 2019, the Management determined and impaired $500,000 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, 2020 and 2019, the Management determined and capitalized $1,000,000 and $-0-, respectively, under ASC 350-50 and accounted as an intangible asset and amortized the costs over the life of the relationship.
       

F-12

 

 

  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.

  

  Restatement of Prior Financial Information   Subsequent to Form 10K for the year ended June 30, 2019 filing, during the interims review and based on such reviews, the following determinations were made by the Company:
       
      Error in Accounting for Slotting and Set-up Fees
       
      During our review, we determined that the accounting treatment for the recognition of slotting fees and other fees paid or payable by the Company to certain strategic partners was incorrect. Specifically, it has been determined that revenue relating to the slotting fee, which was originally capitalized and amortized into expense over an 18-month period should instead be treated as a reduction in revenue at the later of recognition of revenue for the transfer of the Nightfood product or when the Company pays or promised to pay the slotting fee. In addition, certain fees related to platforms to launch our products and advertising efforts should have been capitalized and recorded as an intangible asset. The Company previously recorded a portion of this fee as an intangible asset – placement fee and expensed the remaining amount as advertising expense in the Period Ended December 31, 2019.
       
      In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the corrections of this accounting error are not material to previously issued annual audited and unaudited financial statements. Accordingly, these changes are disclosed herein and will be disclosed prospectively.

  

   As of June 30, 2019 (A) 
   Previously
Reported
   Adjustments   As Corrected 
Consolidated Balance Sheet            
Current assets  $482,667   $487,500   $970,167 
Current liabilities  $2,955,272   $223,333   $3,178,605 
Working capital (deficit)  $(2,472,605)  $264,167   $(2,208,438)
Total assets  $482,667   $487,500   $970,167 
Total liabilities  $2,955,272   $223,333   $3,178,605 
Total stockholders’ deficit  $(2,472,605)  $264,167   $(2,208,438)

 

(A)The balance sheet impact of the errors was corrected in the quarter ended September 30, 2019.

 

F-13

 

 

   As of September 30, 2019 
   Previously
Reported
   Adjustments   As Corrected 
Consolidated Balance Sheet            
Current assets  $858,216   $387,917   $1,246,133 
Current liabilities  $3,287,252   $1,151,666   $4,438,918 
Working capital (deficit)  $(2,429,036)  $(763,749)  $(3,192,785)
Total assets  $858,216   $1,221,250   $2,079,466 
Total liabilities  $3,287,252   $1,151,666   $4,438,918 
Total stockholders’ deficit  $(2,429,036)  $69,584   $(2,359,452)

 

   As of December 31, 2019 
   Previously
Reported
   Adjustments   As Corrected 
Consolidate Balance Sheet            
Current assets  $577,944   $408,294   $986,238 
Current liabilities  $4,514,446   $249,007   $4,763,453 
Working capital (deficit)  $(3,936,502)  $159,287   $(3,777,215)
Total assets  $1,550,298   $102,607   $1,652,905 
Total liabilities  $4,514,446   $249,007   $4,763,453 
Total stockholders’ deficit  $(2,964,148)  $(146,400)  $(3,110,548)

 

   For the Year Ended June 30, 2019 (A) 
   Previously Reported   Adjustments   As Corrected 
Consolidated Statements of Operations            
Revenues  $352,172   $-   $352,172 
Operating expenses  $2,263,722   $(264,167)  $1,999,555 
Loss from operations  $(1,911,550)  $264,167   $(1,647,383)
Other income (expenses)  $2,686,793   $-   $2,686,793 
Net income (loss)  $(4,598,343)  $264,167   $(4,334,176)
Basic & diluted EPS  $(0.09)  $-   $(0.09)

 

(A)The income statement impact of the errors was corrected in the quarter ended September 30, 2019.

 

  

For the Three Months Ended

September 30, 2019

 
   Previously Reported   Adjustments   As Corrected 
Consolidated Statements of Operations            
Revenues  $206,497   $(160,000)  $46,497 
Operating expenses  $570,858   $(229,584)  $341,274 
Loss from operations  $(364,361)  $69,584   $(294,777)
Other income (expenses)  $218,803   $-   $218,803 
Net income (loss)  $(583,164)  $69,584   $(513,580)
Basic & diluted EPS  $(0.01)  $-   $(0.01)

 

  

For the Six Months Ended

December 31, 2019

 
   Previously Reported   Adjustments   As Corrected 
Consolidated Statements of Operations            
Revenues  $379,488   $(271,706)  $107,782 
Operating expenses  $1,326,290   $(125,306)  $1,200,984 
Loss from operations  $(946,802)  $(146,400)  $(1,093,202)
Other income (expenses)  $557,320   $-   $557,320 
Net income (loss)  $(1,504,122)  $(146,400)  $(1,650,522)
Basic & diluted EPS  $(0.02)  $-   $(0.02)

 

F-14

 

 

  

For the Three Months Ended

December 31, 2019

 
   Previously Reported   Adjustments   As Corrected 
Consolidated Statements of Operations            
Revenues  $172,991   $(111,706)  $61,285 
Operating expenses  $755,432   $104,278   $859,710 
Loss from operations  $(582,441)  $(215,984)  $(798,425)
Other income (expenses)  $338,517   $-   $338,517 
Net income (loss)  $(920,958)  $(215,984)  $(1,136,942)
Basic & diluted EPS  $(0.02)  $-   $(0.02)

  

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, 2020, the Company had a net loss of $4,412,063, negative cash flow from operations of $1,531,084 and accumulated deficit of $17,631,122. Management is taking steps to raise additional funds to address its operating and financial cash requirements to continue operations in the next twelve months. 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. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations.

 

      The Company has limited available cash resources and we do not believe our cash on hand will be adequate to satisfy our ongoing working capital needs. The Company is continuing to raise capital through private placement of our common stock and through the use of convertible notes to finance the Company’s operations, of which it can give no assurance of success. However, the Company has a strong ongoing relationship with Eagle Equities and we expect to be able to continue to finance our operations as we have over the previous several quarters, although no assurance can be guaranteed. We believe that our current capitalization structure, combined with ongoing increases in revenues, will enable us to successfully secure required financing to continue our growth. In the short term, the Company plans to continue to take advantage of convertible notes as a financing vehicle, as it allows for today’s operating capital to be either repaid, or converted to equity at future valuations.
       
      Because the business is new and has limited operating history and sales, no certainty of continuation can be stated. 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. 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, we are subject to the continued impact of COVID-19, as further discussed below. See footnote 18.

 

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, 2020 and 2019, respectively.
       
5. Customer Concentrations During the year ended June 30, 2020, one customer accounted for greater than 10% of gross sales. As of June 30, 2020, the Company had receivables due from seven customers, two of whom accounted for over 20% of the outstanding balance. Four of the other five accounted for over 10% of the total balance. As of June 30, 2019, the Company had receivables due from six customers, three of whom accounted for over 20% of the outstanding balance.

 

F-15

 

 

6. Inventories Inventories consists of the following at June 30, 2020 and 2019.

 

   2020   2019 
Finished Goods-bars  $         -   $30,800 
Finished Goods-ice cream   195,817    346,229 
Raw materials - ingredients   26,309    25,477 
Packaging   53,479    3,933 
TOTAL  $275,605   $406,439 

 

     

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, 2020 and 2019. The majority of this amount relates to deposits towards distribution and marketing partnerships i.e. slotting fees.

 

   June 30,
2020
   June 30,
2019
 
Prepaid advertising costs  $398,045   $- 
Vendor deposits – Other  $40   $1,000 
TOTAL  $398,085   $1,000 

 

8.Intangible Assets

 

Intangible assets consist of the following at June 30, 2020 and 2019. The amount of the intangible assets represents fees and expenses in connection with the development and launch of platforms used to track conversions, optimize ads, and scale online customer growth through a hybrid distribution model.

 

   June 30,   June 30, 
   2020   2019 
Intangible assets  $1,000,000   $         - 
Amortization of intangible assets   (500,000)   - 
Impairment of intangible assets   (500,000)     
TOTAL  $-   $- 

 

During the quarter ending March 31, 2020, the Company determined it would be unable to generate sufficient traction from these digital assets.  The Company made the decision to stop utilizing the assets and began conversations with the creditor about eliminating the remaining debt associated with the assets which was successfully negotiated in April 2020. As of the time of this filing, the balance sheet remains unchanged, as this successful renegotiation is conditional upon payment being completed prior to December 1, 2020, which would result in the elimination of $731,118 in total debt should payment be made totaling $166,224 in cash and approximately 4,000 pints of Nightfood ice cream. Should the Company make said payments and retire the debt prior to December 1, 2020, the Company would realize a Gain on Extinguishment of Debt of approximately $560,000. Because this reduction in debt is conditional, the full $731,118.33 is currently included in the liabilities section of our balance sheet.

 

9. Other Current Liabilities Other current liabilities consist of the following at June 30, 2020 and 2019.

 

   2020   2019 
Accrued consulting fees – related party  $9,974   $33,974 
Accrued interest   192,625    - 
           
TOTAL  $202,599   $33,974 

 

F-16

 

 

10. Convertible Notes Payable Convertible Notes Payable consist of the following at June 30, 2020 and 2019.

  

     

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. As of June 30, 2020 and 2019, the debt discount was $0.

 

On June 5, 2018, the Company received cash in conjunction with a convertible promissory note and Securities Purchase Agreement dated June 5, 2018. The note was in the amount of in the amount of $210,000. The lender was Eagle Equities, LLC. The notes have a maturity of June 6, 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 $210,000 Notes was calculated using the Black-Scholes pricing model at $265,498, with the following assumptions: risk-free interest rate of 2.09%, expected life of 1 year, volatility of 200%, and expected dividend yield of zero. Because the fair value of the note exceeded the net proceeds from the $210k Notes, a charge was recorded to “Financing cost” for the excess of the fair value of the note, for a net charge of $55,498. As of June 30, 2020, and 2019, the debt discount was $0. This note has been successfully retired via conversions into shares during the year ended June 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $180,755 included under line item “Loss on debt extinguishment upon note conversion, net”.

 

On July 2, 2018, the Company entered into a convertible promissory note and a security purchase agreement dated July 12, 2018, in the amount of $207,000. The lender was Eagle Equities, LLC. The notes have a maturity of July 12, 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 $207,000 Notes was calculated using the Black-Scholes pricing model at $257,842, with the following assumptions: risk-free interest rate of 2.59%, expected life of 1 year, volatility of 183%, and expected dividend yield of zero. Because the fair value of the note exceeded the net proceeds from the $207k Notes, a charge was recorded to “Financing cost” for the excess of the fair value of the note, for a net charge of $50,842. As of June 30, 2020, and 2019, the debt discount was $0 and $1,134, respectively.

  

F-17

 

 

      This note has been successfully retired via conversions into shares during the year ended June 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $73,760 included under line item “Loss on debt extinguishment upon note conversion, net”.
       
     

On November 16, 2018, the Company entered into a convertible promissory note and a security purchase agreement dated November 16, 2018, in the amount of $130,000. The lender was Eagle Equities, LLC. The notes have a maturity of November 16, 2019 and interest rate of 8% per annum and are convertible at a price of 65% 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 $130,000 Notes was calculated using the Black-Scholes pricing model at $131,898, with the following assumptions: risk-free interest rate of 2.71%, expected life of 1 year, volatility of 150%, and expected dividend yield of zero. Because the fair value of the note exceeded the net proceeds from the $130k Notes, a charge was recorded to “Financing cost” for the excess of the fair value of the note, for a net charge of $1,898. As of June 30, 2020, and 2019, the debt discount was $0 and $48,795, respectively.

       
      This note has been successfully retired via conversions into shares during the year ended June 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $19,845 included under line item “Loss on debt extinguishment upon note conversion, net”.
       
     

On December 18, 2018, the Company entered into a convertible promissory note and a security purchase agreement dated December 18, 2018, in the amount of $130,000. The lender was Eagle Equities, LLC. The notes have a maturity of December 18, 2019 and interest rate of 8% per annum and are convertible at a price of 65% 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 $130,000 Notes was calculated using the Black-Scholes pricing model at $128,976, with the following assumptions: risk-free interest rate of 2.64%, expected life of 1 year, volatility of 144%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $130k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2020, and 2019, the debt discount was $0 and $60,425, respectively.

       
      This note has been successfully retired via conversions into shares during the year ended June 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $36,927 included under line item “Loss on debt extinguishment upon note conversion, net”.

  

F-18

 

 

     

On January 28, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated January 28, 2019, in the amount of $234,000. The lender was Eagle Equities, LLC. The notes have a maturity of January 28, 2020 and interest rate of 8% per annum and are convertible at a price of 65% 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 $234,000 Notes was calculated using the Black-Scholes pricing model at $226,452, with the following assumptions: risk-free interest rate of 2.60%, expected life of 1 year, volatility of 135%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $234k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2020, and 2019, the debt discount was $0 and $131,528, respectively.

       
      This note has been successfully retired via conversions into shares during the year ended June 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $80,394 included under line item “Loss on debt extinguishment upon note conversion, net”.
       
     

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 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 $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, and 2019, the debt discount was $0 and $56,821, respectively. $50,000 of the note has been successfully retired via conversion into shares during the year ended June 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”.

       
     

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 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 $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, and 2019, the debt discount was $0 and $141,204, respectively

  

F-19

 

 

      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 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 $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 $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of June 30, 2020, and 2019, the debt discount was $0 and $227,713, respectively.
       
      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 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 $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, 2020, the debt discount was $2,627.
       
      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 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 $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, 2020, the debt discount was $26,452.
       
      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 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 $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, 2020, the debt discount was $37,833.
       
      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 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 $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, 2020, the debt discount was $27,482.

 

F-20

 

 

      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 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 $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, 2020, the debt discount was $43,074.
       
      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 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 $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, 2020, the debt discount was $75,205.
       
      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, 2020, the debt discount was $94,064.
       
      On February 26, 2020, the Company entered into a convertible promissory note and a security purchase agreement dated February 26, 2020, in the amount of $187,000. 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 $187,000 Notes was calculated using the Black-Scholes pricing model at $150,268, with the following assumptions: risk-free interest rate of 1.18%, expected life of 1 year, volatility of 118%, and expected dividend yield of zero. As of June 30, 2020, the debt discount was $99,218.

 

F-21

 

  

      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. As of June 30, 2020, the debt discount was $106,916.
       
      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. As of June 30, 2020, the debt discount was $129,700.

  

      Below is a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of June 30, 2020:

 

   Principal
($)
   Debt Discount ($)   Net
Value
($)
 
Balance at June 30, 2018   1,576,024    (942,154)   633,870 
Convertible notes payable issued during fiscal year ended June 30, 2019   1,602,005    -    1,602,005 
Note paid   (102,076)   -    (102,076)
Notes converted into shares of common stock   (1,327,953)   -    (1,327,953)
Debt discount associated with new convertible notes   -    (1,482,314)   (1,482,314)
Amortization of debt discount   -    1,794,209    1,794,209 
Balance at June 30, 2019   1,748,000    (630,259)   1,117,741 
Convertible notes payable issued during fiscal year ended June 30, 2020   2,148,400    -    2,148,400 
Notes converted into shares of common stock   (961,000)   -    (961,000)
Debt discount associated with new convertible notes   -    (1,684,711)   (1,684,711)
Amortization of debt discount   -    1,709,759    1,709,759 
Balance at June 30, 2020   2,935,400    (605,211)   2,330,189 

  

F-22

 

 

11. Derivative Liability   Due to the variable conversion price associated with some of these convertible promissory notes disclosed in Note 8 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.

 

      During the year ended June 30, 2020, the Company recorded a gain in fair value of derivative liability of $858,774. The Company will measure the fair value of each derivative instrument in future reporting periods and record a gain or loss based on the change in fair value.
       
      Below is a reconciliation of the derivative liability as presented on the Company’s balance sheet as of June 30, 2020:

  

Derivative liability as of June 30, 2018  $1,765,187 
Initial derivative liability accounted for convertible notes payable issued during the period ended June 30, 2019   1,565,535 
Change in derivative liability during the period   712,627 
Reclassify derivative liability associated with Notes converted   (2,736,601)
Derivative liability as of June 30, 2019  $1,306,748 
Initial derivative liability accounted for convertible notes payable issued during the period ended June 30, 2020   1,723,883 
Change in derivative liability during the period   (858,774)
Reclassify derivative liability associated with Notes converted   (581,219)
Balance at June 30, 2020  $1,590,638 

  

12. Line of Credit   On March 19, 2020, the Company secured a $200,000 line of credit with Celtic Bank Corporation. This LOC has a “Flex Credit” component of calculating interest, which means the interest rate on any draws taken against the LOC is set at the time of said draw. As of the date of this filing, the Company has made one draw against the credit line for a gross amount of $5,000 (including proceeds and draw fees). Three payments have been made against this draw of approximately $368 each. Such payments will continue to be automatically deducted from the corporate checking account until the draw and all fees have been paid in full. The Company may or may not choose to use this line of credit for additional financing needs.

 

   June 30,
2020
   June 30,
2019
 
Line of Credit  $3,897   $0 
Total borrowings   3,897    0 
Less: current portion   3,897    0 
Long term debt  $-   $- 

 

      Interest expense for the years ended June 30, 2020 and 2019, totaled $463 and $0, respectively.

 

F-23

 

 

 

13. Stockholders’ Deficit 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, which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of our directors. 

 

The Company had 61,796,680 and 53,773,856 shares of its $0.001 par value common stock issued and outstanding as of June 30, 2020 and 2019 respectively.

 

  During the year ended June 30, 2020:

 

  The Company issued 1,385,990 shares of common stock for services with a fair value of $308,768
     
  and issued 580,666 shares of common stock in consideration of interest payments with a fair value of $88,762
     
  and issued 6,056,168 shares of common stock as consideration for convertible debt with a fair value of $961,000.

 

  During the year ended June 30, 2019:

 

  the Company sold 84,389 shares of common stock for cash proceeds of $50,000,
     
  and issued 483,808 shares of common stock for services with a fair value of $345,656,
     
  and issued 281,957 shares of common stock for payment of certain accounts payable liabilities with a fair value of $63,850,
     
  and issued 400,000 shares of common stock for the exercise of warrants valued at $120,000,
     
  and issued 667,959 shares of common stock in consideration of interest payments with a fair value of $95,805,
     
  ● 

and issued 9,247,414 shares of common stock as consideration for convertible debt with a fair value of $1,327,953.

 

During the years ended June 30, 2020 and 2019, the Company recorded a Loss on fair value of shares issued upon notes conversion of $977,000 and $2,736,601, respectively.

 

F-24

 

 

   

Preferred Stock

 

On July 9th 2018 the Company was authorized to issue One Million (1,000,000) shares of $0.001 par value per share Preferred Stock. Of the 1,000,000 shares 10,000 shares are designated as Series A preferred Stock Holders of Common 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 our Series A Preferred Stock (“A Stock”) which votes with the common stock and has an aggregate of 100,000,000 votes.

 

Dividends

     
    The Company has never declared dividends.

 

    Warrants

 

   

The following is a summary of the Company’s outstanding common stock purchase warrants. A portion of the 500,000 warrants shown below at an exercise price of $.15 have not yet vested. These warrants were issued as compensation for a four-year advisory agreement. 150,000 warrants vested on July 24, 2018, another 150,000 on July 24, 2019, another would vest 150,000 on July 24, 2020, and the remaining 50,000 on July 24, 2021, should advisor complete the term of his engagement.

 

The aggregate intrinsic value of the warrants as of June 30, 2020 is $28,025. The aggregate intrinsic value of the warrants as of June 30, 2019 was $318,450.

 

      Outstanding at     Issued /           Outstanding  
Exercise Price     June 30,
2018
    (exercised) in
2019
    Expired     June 30,
2019
 
$ 0.15       500,000               -       500,000  
$ 0.20       105,000               -       105,000  
$ 0.30       500,000       (400,000 )     -       100,000  
$ 0.40       -       150,000       -       150,000  
$ 0.75       300,000       -       -       300,000  
          1,405,000       (250,000 )     -       1,155,000  

  

    Outstanding at   Issued /       Outstanding 
Exercise Price   June 30,
2019
   (exercised) in
2020
   Expired   June 30,
2020
 
$0.15    500,000         -    500,000 
$0.20    105,000         -    105,000 
$0.30    100,000         -    100,000 
$0.40    150,000        -    150,000 
$0.75    300,000    -    -    300,000 
      1,155,000         -    1,155,000 

 

    Options
     
    The Company has never issued options.

 

14. 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 2020 and 2019 respectively.

 

F-25

 

 

    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 July 1, 2019, which paid Folkson the same $6,000 monthly consulting fee. In addition, the Company made bonuses available to 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 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.

 

15. Income Tax A reconciliation of the statutory income tax rates and the Company’s effective tax rate is as follows:

 

    June 30,  
    2020     2019  
             
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)     (7.00 )%     (7.00 )%
Permanent differences     7.10 %     6.70 %
Valuation allowance     (20.9 )%     (21.3 )%
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:

 

    2020     2019  
Deferred tax assets:            
Net operating loss carry-forwards   $ 1,460,670       1,155,359  
                 
Valuation allowance     (1,460,670 )     (1,155,359 )
Net deferred tax asset   $ -     $ -  

 

   

At June 30, 2020 the Company had estimated U.S. federal net operating losses of approximately $7,358,518 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. 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, 2020 was an increase of $398,550. 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, 2020 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, 2020, 2019, 2018, June 30, 2017 and 2016 respectively, however it believes due to the reported losses there is no material liability outstanding.

 

F-26

 

 

16. Fair Value of Financial Instruments Cash and Equivalents, Receivables, Other Current Assets, Short-Term Debt, Accounts Payable, Accrued and Other Current Liabilities.
     
    The carrying amounts of these items approximated fair value.
     
    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).
     
    Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
     
    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.
     
    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.
     
    The application of the three levels of the fair value hierarchy under Topic 820-10-35 to our assets and liabilities are described below:

 

   Fiscal 2020 Fair Value Measurements 
   Level 1   Level 2   Level 3   Total Fair
Value
 
Assets                
Other assets  $-   $-   $-   $- 
Total  $-   $-   $-   $- 
Liabilities                    
Short and long-term debt  $         $-   $2,935,400   $2,935,400 
Total  $          $-   $2,935,400   $2,935,400 

 

   Fiscal 2019 Fair Value Measurements 
   Level 1   Level 2   Level 3   Total Fair
Value
 
Assets                
Other assets  $-   $-   $-   $- 
Total  $-   $-   $-   $- 
Liabilities                    
Short and long-term debt  $             $-   $1,748,000   $1,748,000 
Total  $    $-   $1,748,000   $1,748,000 

 

    Fiscal 2020 Fair Value Measurements  
    Level 1     Level 2     Level 3     Total Fair
Value
 
Assets                        
Other assets   $ -        $ -        $ -        $ -     
Total   $ -        $ -        $ -        $ -     
Liabilities                                
Derivative Liabilities   $       $ -        $ 1,590,638     $ 1,590,638     
Total   $       $ -        $ 1,590,638        $ 1,590,638     

 

    Fiscal 2019 Fair Value Measurements  
    Level 1     Level 2     Level 3     Total Fair
Value
 
Assets                                
Other assets   $ -        $ -        $ -        $ -     
Total   $ -        $ -        $ -        $ -     
Liabilities                                
Derivative Liabilities   $       $ -        $ 1,306,748        $ 1,306,748     
Total   $       $ -        $ 1,306,748        $ 1,306,748     

 

F-27

 

 

Management considers all of its derivative liabilities to be Level 3 liabilities. At June 30, 2020 and 2019, respectively the Company had outstanding derivative liabilities, including those from related parties of $1,590,638 and $1,306,748, respectively.

 

17. 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 debt that is convertible into 24,638,241 and 8,538,462 shares of the Company’s common stock are not included in the computation for the fiscal years ended June 30, 2020 and 2019, respectively. Additionally, there are 1,155,000 and 1,155,000 warrants that are exercisable into shares of stock as of June 30, 2020 and June 30, 2019, respectively.

 

   2020