U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended:December 31, 2017September 30, 2020
Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to____________
Commission File Number:000-55406
NightFoodNightfood 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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Nightfood Holdings, Inc Common Stock | NGTF | OTCQB |
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. At February 15, 2018,November 20, 2020, the registrant had outstanding 38,244,52066,741,706 shares of common stock.
Table of Contents
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial | 1 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 2 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | |
Item 4. | Controls and Procedures. | |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings. | |
Item 1A. | Risk Factors. | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |
Item 3. | Defaults Upon Senior Securities. | |
Item 4. | Mine Safety Disclosures. | |
Item 5. | Other Information. | |
Item 6. | Exhibits. | |
Signatures |
i
NightFoodNightfood Holdings, Inc.
Financial Statements
Financial Statements
For the three and six months ended December 31, 2017September 30, 2020 and December 31, 20162019
1
NightFood Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | June 30, | |||||||
2020 | 2020 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 8,360 | $ | 197,622 | ||||
Accounts receivable – net | 65,053 | 61,013 | ||||||
Inventories | 213,384 | 275,605 | ||||||
Other current assets | 272,032 | 398,085 | ||||||
Total current assets | 558,829 | 932,325 | ||||||
Total assets | $ | 558,829 | $ | 932,325 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,147,502 | $ | 1,286,149 | ||||
Accrued expense-related party | 9,974 | 9,974 | ||||||
Accrued expense | 56,923 | - | ||||||
Accrued interest | 214,402 | 192,625 | ||||||
Short term borrowings – line of credit | 2,794 | 3,897 | ||||||
Convertible notes payable – net of discount | 2,348,239 | 2,330,189 | ||||||
Fair value of derivative liabilities | 1,357,245 | 1,590,638 | ||||||
Total current liabilities | $ | 5,137,079 | 5,413,472 | |||||
Commitments and contingencies | - | - | ||||||
Stockholders’ deficit: | ||||||||
Preferred stock, ($0.001 par value, 1,000,000 shares authorized, and 1,000 issued and outstanding as of September 30, 2020 and 1,000 outstanding as of June 30, 2020, respectively) | 1 | 1 | ||||||
Common stock, ($0.001 par value, 200,000,000 shares authorized, and 65,085,597 issued and outstanding as of September 30, 2020 and 61,796,680 outstanding as of June 30, 2020, respectively) | 65,086 | 61,797 | ||||||
Additional paid in capital | 13,931,609 | 13,088,177 | ||||||
Accumulated deficit | (18,574,946 | ) | (17,631,122 | ) | ||||
Total stockholders’ deficit | (4,578,250 | ) | (4,481,147 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 558,829 | $ | 932,325 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, | June 30, | |||||||
2017 | 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets : | ||||||||
Cash | $ | 12,322 | $ | 14,326 | ||||
Accounts receivable (net of allowance of $0 and $0, respectively) | 321 | 382 | ||||||
Inventory | 10,115 | 95,865 | ||||||
Other current assets | 74,968 | 3,491 | ||||||
Total current assets | 97,726 | 114,064 | ||||||
Total assets | $ | 97,726 | $ | 114,064 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 229,897 | $ | 205,961 | ||||
Accrued expense-related party | 192,000 | 180,000 | ||||||
Convertible notes payable – net of discount | 418,992 | 151,020 | ||||||
Fair value of derivative liabilities | 1,016,453 | 44,022 | ||||||
Short-term borrowings | 2,000 | 3.096 | ||||||
Advance from shareholders | 11,795 | 995 | ||||||
Total current liabilities | 1,871,137 | 585.094 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholders’ deficit: | ||||||||
Common stock, ($0.001 par value, 200,000,000 shares authorized, and 35,368,758 issued and outstanding as of December 31, 2017 and 29,724,432 outstanding as of June 30, 2017, respectively) | 35,369 | 29,724 | ||||||
Additional paid in capital | 3,790,954 | 2,880,467 | ||||||
Accumulated deficit | (5,599,734 | ) | (3,381,221 | ) | ||||
Total stockholders’ deficit | (1,773,411 | ) | (471,030 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 97,726 | $ | 114,064 |
For the three months ended September 30, 2020 | For the three months ended September 30, 2019 | |||||||
Revenues | $ | 126,983 | $ | 46,497 | ||||
Operating expenses | ||||||||
Cost of product sold | 229,696 | 146,500 | ||||||
Selling, general and administrative | 433,330 | 28,107 | ||||||
Amortization of intangibles | - | 166,667 | ||||||
Total operating expenses | 663,026 | 341,274 | ||||||
Loss from operations | (536,043 | ) | (294,777 | ) | ||||
Interest expense – bank debt | 337 | - | ||||||
Interest expense – shareholder | 83,955 | 26,598 | ||||||
Loss on extinguishment of debt upon notes conversion | 188,397 | - | ||||||
Change in derivative liability | (207,524 | ) | (190,062 | ) | ||||
Interest expense – other | 322,739 | 382,267 | ||||||
Other expense- non cash | 19,877 | - | ||||||
Total other expense | 407,781 | 218,803 | ||||||
Provision for income tax | - | - | ||||||
Net loss | $ | (943,824 | ) | $ | (513,580 | ) | ||
Basic and diluted net loss per common share | $ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average shares of capital outstanding – basic and diluted | 63,442,930 | 54,482,700 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-1
NightFoodNightfood Holdings, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCHANGES IN STOCKHOLDERS’ DEFICIT
For the three months ended September 30, 2020 and 2019
For the six months ended December 31, 2017 | For the six months ended December 31, 2016 | For the three months ended December 31, 2017 | For the three months ended December 31, 2016 | |||||||||||||
Revenues | $ | 108,726 | $ | 10,507 | $ | 72,284 | $ | 8,043 | ||||||||
Operating expenses | ||||||||||||||||
Cost of product sold | 85,429 | 15,246 | 59,403 | 3,145 | ||||||||||||
Advertising and promotional | 102,372 | 1,058 | 60,548 | 438 | ||||||||||||
Selling, general and administrative | 315,984 | 18,031 | 172,644 | 5,755 | ||||||||||||
Professional Fees | 472,782 | 129,372 | 215,542 | 83,040 | ||||||||||||
Total operating expenses | 976,567 | 163,707 | 508,137 | 92,378 | ||||||||||||
Loss from operations | (867,841 | ) | (153,200 | ) | (435,853 | ) | (84,335 | ) | ||||||||
Interest expense – bank debt | - | 338 | - | 37 | ||||||||||||
Interest expense - shareholder | 3,988 | 5,000 | 1,257 | - | ||||||||||||
Change in derivative liability | 250,465 | - | 147,546 | - | ||||||||||||
Interest expense - other | 444,441 | - | 190,936 | - | ||||||||||||
Other expense | 651,778 | - | 463,146 | - | ||||||||||||
Total other expense | 1,350,672 | 5,338 | 802,885 | 37 | ||||||||||||
Provision for income tax | - | - | - | - | ||||||||||||
Net loss | $ | (2,218,513 | ) | $ | (158,538 | ) | $ | (1,238,738 | ) | $ | (84,372 | ) | ||||
Basic and diluted net loss per common share | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.00 | ) | ||||
Weighted average shares of capital outstanding – basic and diluted | 31,846,459 | 28,552,706 | 33,172,996 | 28,585,220 |
Common Stock | Preferred Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, June 30, 2019 | 53,773,856 | $ | 53,774 | 1,000 | $ | 1 | $ | 10,692,679 | $ | (13,219,059 | ) | $ | (2,472,605 | ) | ||||||||||||||
Common stock issued for services | 122,762 | 123 | - | - | 49,274 | - | 49,397 | |||||||||||||||||||||
Common stock issued for interest | 110,404 | 110 | 26,487 | - | 26,597 | |||||||||||||||||||||||
Issuance of common stock for debt conversion | 1,409,349 | 1,409 | 335,591 | - | 337,000 | |||||||||||||||||||||||
Derivative liability reclassed upon debt conversion | - | - | 213,739 | - | 213,739 | |||||||||||||||||||||||
Net loss | - | - | - | - | - | (513,580 | ) | (513,580 | ) | |||||||||||||||||||
Balance, Three Months ended September 30, 2019 | 55,416,371 | $ | 55,416 | 1,000 | $ | 1 | $ | 11,317,770 | $ | (13,732,639 | ) | $ | (2,359,452 | ) | ||||||||||||||
Balance, June 30, 2020 | 61,796,680 | $ | 61,797 | 1,000 | $ | 1 | $ | 13,088,177 | $ | (17,631,122 | ) | $ | (4,481,147 | ) | ||||||||||||||
Common stock issued for interest | 312,938 | 313 | 36,165 | - | 36,478 | |||||||||||||||||||||||
Issuance of common stock for debt conversion | 2,975,979 | 2,976 | 344,024 | - | 347,000 | |||||||||||||||||||||||
Issuance of warrants | 65,711 | 65,711 | ||||||||||||||||||||||||||
Loss on fair value of shares issued upon debt conversion | - | - | 397,532 | - | 397,532 | |||||||||||||||||||||||
Net loss | (943,824 | ) | (943,824 | ) | ||||||||||||||||||||||||
65,085,597 | $ | 65,086 | $ | 1,000 | $ | 1 | $ | 13,931,609 | (18,574,946 | ) | $ | (4,578,250 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
NightFoodNightfood Holdings, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31, | For the six months ended December 31, | For the three months ended September 30, 2020 | For the three months ended September 30, 2019 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (2,218,513 | ) | $ | (158,538 | ) | $ | (943,824 | ) | $ | (513,580 | ) | ||||
Adjustments to reconcile net loss to net cash used in operations activities: | ||||||||||||||||
Warrants issued for services | 65,711 | - | ||||||||||||||
Stock issued for services | 260,156 | 51,500 | - | 49,397 | ||||||||||||
Stock issued for conversion of debt | 117,000 | - | ||||||||||||||
Stock issued as part of loan agreement | 3,988 | 5,000 | ||||||||||||||
Amortization of debt discount and deferred financing fees | 679,714 | - | ||||||||||||||
Stock issued for interest | - | 26,598 | ||||||||||||||
Amortization of debt discount | 322,739 | 382,267 | ||||||||||||||
Deferred financing fees and financing cost | 45,577 | - | ||||||||||||||
Change in derivative liability | 250,465 | - | (207,524) | (190,062 | ) | |||||||||||
Change decrease in accounts receivable | 61 | (9,677 | ) | |||||||||||||
Loss on extinguishment of debt upon notes conversion | 188,397 | - | ||||||||||||||
Amortization of intangible assets | - | 166,667 | ||||||||||||||
Change in operating assets and liabilities | ||||||||||||||||
Change in accounts receivable | (4,040 | ) | (135,967 | ) | ||||||||||||
Change in inventory | 85,750 | 11,611 | 62,221 | (30,583 | ) | |||||||||||
Change in other current assets | (71,475 | ) | 1,400 | 126,053 | (520,000 | ) | ||||||||||
Change in accounts payable | 23,937 | 33,071 | (81,725 | ) | 804,181 | |||||||||||
Change in accrued expenses | 12,000 | 36,000 | 58,256 | (12,001 | ) | |||||||||||
Net cash used in operating activities | (856,917 | ) | (29,633 | ) | (368,159 | ) | 26,916 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Cash paid for purchase of intangible assets | - | (1,000,000 | ) | |||||||||||||
Net cash used in investing activities | - | - | ||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from the sale of stock | 36,117 | 10,000 | ||||||||||||||
Proceeds from the issuance of debt-net | 884,093 | - | 180,000 | 1,050,000 | ||||||||||||
Advance from shareholders | 10,800 | 21,984 | ||||||||||||||
Advance from related party | - | 28 | ||||||||||||||
Repayment of short-term debt | (1,096 | ) | (1,464 | ) | ||||||||||||
Repayment of related party advance | - | (1,000 | ) | |||||||||||||
Repayment of convertible debt | (75,000 | ) | - | |||||||||||||
Borrowings on line of credit | (1,103 | ) | - | |||||||||||||
Net cash provided by financing activities | 854,914 | 29,548 | 178,897 | 1,050,000 | ||||||||||||
NET (DECREASE) IN CASH AND CASH EQUIVALENTS | (2,004 | ) | (86 | ) | ||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (189,262 | ) | 76,916 | |||||||||||||
Cash and cash equivalents, beginning of period | 14,326 | 5,481 | 197,622 | 30,142 | ||||||||||||
Cash and cash equivalents, end of period | $ | 12,322 | $ | 5,396 | $ | 8,360 | $ | 107,058 | ||||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||||||||||
Cash Paid For: | ||||||||||||||||
Interest | $ | 30 | $ | 301 | $ | 337 | $ | |||||||||
Income taxes | $ | - | $ | - | $ | - | $ | - | ||||||||
Summary of Non-Cash Investing and Financing Information: | ||||||||||||||||
Debt discount due to beneficial conversion feature | $ | 871,755 | $ | - | ||||||||||||
Value of embedded derivative liabilities | $ | 101,511 | $ | - | ||||||||||||
Initial derivative liability and debt discount accounted | $ | 126,029 | $ | 845,903 | ||||||||||||
Derivative liability reclassed to loss on extinguishment of debt upon notes conversion | $ | 189,257 | $ | - | ||||||||||||
Stock issued for conversion of debt | $ | 347,000 | $ | 337,000 | ||||||||||||
Stock Issued for Interest | $ | 36,478 | $ | 26,597 | ||||||||||||
True-up adjustment in debt discount and derivative liability | $ | 37,360 | $ | - |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
NightFood Holdings, Inc.
NOTES TO UNAUDITED CONDENSED 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 | |
● | 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). |
Interim Financial Statements | These unaudited condensed consolidated financial statements
These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the years ended June 30,
| ||
Use of Estimates | ● | The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used in the determination of depreciation and amortization, the valuation for non-cash issuances of common stock, and the website, income taxes and contingencies, valuing convertible notes for BCF and derivative liability, among others. | |
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. |
F-4
Inventories | ● | Inventories consisting of packaged food items and supplies are stated at the lower of cost (FIFO) or | |
Advertising Costs | ● | Advertising costs are expensed when incurred and are included in advertising and promotional expense in the accompanying statements of operations. Although not traditionally thought of by many as “advertising costs”, the Company includes expenses related to graphic design work, package design, website design, domain names, and product samples in the category of “advertising costs”. The Company | |
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 to retailers and | |
● | All sources of revenue | ||
● | 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. |
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. |
F-7
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 |
F-5
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 | |
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 | |
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. |
Stock-Based Compensation | The Company accounts for share-based awards issued to employees in accordance with FASB ASC 718. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. The Company applies ASC 718, “Equity Based Payments to Non-Employees”, with respect to options and warrants issued to non-employees. |
F-6
Customer Concentration | ● | During the | ||
Vendor Concentration | During the quarter ended June 30, 2020, three vendors accounted for more than 10% of | |||
Receivables Concentration | ● | As of | ||
● | Net | |||
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 period ended September 30, 2020 and 2019, the Management determined and impaired $-0- and $-0-, respectively as impairment on intangible asset | ||
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 |
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 | |||
In The standard became effective for | |||
In | |||
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 | |||
In 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 |
3. | Restatement of Prior Financial Information | Subsequent to Form 10K for the year ended June 30, 2019 filing, during the interim reviews 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 was determined that revenue relating to slotting fees, which were 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 |
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. |
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 | ) |
F-11
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 | ) |
F-12
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 three months ended September 30, 2020, the Company had a net loss of $943,824, negative cash flow from operations and other expenses related to financing activities of $368,159 and accumulated deficit of $18,574,946. 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 utilize 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 for one year from the date the financial statements are issued. 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. |
F-7
4. | Accounts receivable | ● | The Company’s accounts receivable arise primarily from the sale of the Company’s |
5. | Inventories | ● | Inventory consists of the following at |
December 31, 2017 | June 30, 2017 | ||||||||
Finished Goods | $ | 10,115 | $ | 87,676 | |||||
Packaging | - | 8,189 | |||||||
TOTAL | $ | 10,115 | $ | 95,865 |
September 30, 2020 | June 30, 2020 | |||||||
Finished goods – ice cream | $ | 141,602 | $ | 195,817 | ||||
Raw material – ingredients | 24,515 | 26,309 | ||||||
Packaging | 47,267 | 53,479 | ||||||
TOTAL | $ | 213,384 | $ | 275,605 |
Inventories are stated at the lower of cost or |
6. | Other current assets | ● | Other current assets consist of the following vendor deposits at |
December 31, 2017 | June 30, 2017 | ||||||||
Vendor deposits - Bars | 52,416 | - | |||||||
Vendor deposits - Packaging | 18,402 | - | |||||||
Vendor deposits - Other | 4,150 | 3,491 | |||||||
TOTAL | $ | 74,968 | $ | 3,491 |
September 30, 2020 | June 30, 2020 | |||||||
Prepaid advertising costs | $ | 263,822 | $ | 398,045 | ||||
Vendor deposits – Other | $ | 8,210 | $ | 40 | ||||
TOTAL | $ | 272,032 | $ | 398,085 |
7. | Intangible Assets |
Intangible assets consist of the following at September 30, 2020 and June 30, 2020. 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.
September 30, | June 30, | |||||||
2020 | 2020 | |||||||
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 is currently included in the liabilities section of our balance sheet.
8. | Other Current Liabilities | ● | Other current liabilities consist of the following at |
December 31, 2017 | June 30, 2017 | ||||||||
Accrued consulting fees – related party | $ | 192,000 | $ | 180,000 | |||||
TOTAL | 192,000 | 180,000 |
F-8
September 30, 2020 | June 30, 2020 | |||||||
Accrued consulting fees – related party | $ | 9,974 | $ | 9,974 | ||||
Accrued interest | 214,402 | 192,625 | ||||||
Accrued slotting fees | 56,923 | - | ||||||
TOTAL | $ | 281,299 | $ | 202,599 |
Notes Payable | ● | Notes Payable consist of the following at |
On
|
|
On September 12, 2017 the Company successfully retired this convertible promissory note dated March, 16, 2017, in the original principal amount of $75,000.
On
|
F-9
On |
On April 29, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated April 29, 2019, in the amount of $208,000. The lender was Eagle Equities, LLC. The notes have a maturity of April 29, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $208,000 Notes was calculated using the Black-Scholes pricing model at $170,098, with the following assumptions: risk-free interest rate of 2.42%, expected life of 1 year, volatility of 118%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $208k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020, and June 30, 2020, the debt discount was $0 and $0, respectively. $208,000 of the note has been successfully retired via conversion into shares during the three months ended September 30, 2020. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $109,561 included under line item “Loss on debt extinguishment upon note conversion, net”. |
On June 11, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated June 11, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of June 11, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $240,217, with the following assumptions: risk-free interest rate of 2.05%, expected life of 1 year, volatility of 16%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020 and June 30, 2020, the debt discount was $0 and $46,726, respectively. The Company fair valued the notes as of conversion date and accounted for a loss on conversion of $42,595 included under line item “Loss on debt extinguishment upon note conversion, net”. | |||
On July 5, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated July 5, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of July 5, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $239,759, with the following assumptions: risk-free interest rate of 1.98%, expected life of 1 year, volatility of 118%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020 and June 30, 2020, the debt discount was $0 and $2,627, respectively. | |||
On August 8, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated August 8, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of August 8, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $254,082, with the following assumptions: risk-free interest rate of 1.79%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020, and June 30, 2020 the debt discount was $0 and $26,452, respectively. |
On August 29, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated August 29, 2019, in the amount of $300,000. The lender was Eagle Equities, LLC. The notes have a maturity of August 29, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $300,000 Notes was calculated using the Black-Scholes pricing model at $234,052, with the following assumptions: risk-free interest rate of 1.75%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $300k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020, and June 30, 2020 the debt discount was $0 and $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 trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $118,009, with the following assumptions: risk-free interest rate of 1.78%, expected life of 1 year, volatility of 113%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $150k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020 and June 30, 2020, the debt discount was $0 and $27,482. | |||
On November 7, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated November 7, 2019, in the amount of $150,000. The lender was Eagle Equities, LLC. The notes have a maturity of November 7, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $121,875, with the following assumptions: risk-free interest rate of 1.58%, expected life of 1 year, volatility of 122%, and expected dividend yield of zero. Because the fair value of the note did not exceed the net proceeds from the $150k Notes, no charge was recorded to “Financing cost” for the excess of the fair value of the note. As of September 30, 2020 and June 30, 2020, the debt discount was $12,354 and $43,074, respectively. | |||
On December 31, 2019, the Company entered into a convertible promissory note and a security purchase agreement dated December 31, 2019, in the amount of $150,000. The lender was Eagle Equities, LLC. The notes have a maturity of December 31, 2020 and interest rate of 8% per annum and are convertible at a price of 70% of the lowest trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $150,000 Notes was calculated using the Black-Scholes pricing model at $189,172, with the following assumptions: risk-free interest rate of 1.59%, expected life of 1 year, volatility of 115%, and expected dividend yield of zero. Because the fair value of the note exceeded 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 September 30, 2020 and June 30, 2020, the debt discount was $37,797 and $75,205, respectively. |
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 trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $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 September 30, 2020 and June 30, 2020, the debt discount was $54,728 and $94,064, respectively. 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 trading price on the primary trading market on which the Company’s Common Stock is then listed for the fifteen (15) trading days immediately prior to conversion. The note may be prepaid, but carries a penalty in association with the remittance amount, as there is an accretion component to satisfy the note with cash. The convertible note qualifies for derivative accounting and bifurcation under ASC 815, “Derivatives and Hedging.” The fair value of the $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 September 30, 2020 and June 30, 2020, the debt discount was $61,342 and $99,218, respectively. | |||
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
| |||
| |||
| |||
On |
F-10
On | |||
|
Below is a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of September 30, 2020:
F-11
| |||
| |||
F-12
Convertible notes payable issued as of June 30, 2017 | $ | 430,000 | |||
Convertible notes payable issued as of December 31, 2017 | $ | 884,093 | |||
Unamortized amortization of debt and beneficial conversion feature | (703,101 | ) | |||
Notes paid | (75,000 | ) | |||
Notes converted into shares of common stock | (117,000 | ) | |||
Balance at December 31, 2017 | $ | 418,992 |
Principal ($) | Debt Discount ($) | Net Value ($) | ||||||||||
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 | ||||||||
Convertible notes payable issued during three months ended September 30, 2020 | 205,700 | - | 205,700 | |||||||||
Notes converted into shares of common stock | (347,000 | ) | - | (347,000 | ) | |||||||
Debt discount associated with new convertible notes | - | (126,029 | ) | (126,029 | ) | |||||||
Amortization of debt discount | - | 322,739 | 322,739 | |||||||||
True-up adjustment in debt discount and derivative liability | - | (37,360) | (37,360) | |||||||||
Balance at September 30, 2020 | 2,794,100 | (445,861 | ) | 2,348,239 |
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
|
December 31, 2017 | June 30, 2017 | ||||||||
Bank loan | $ | 2,000 | $ | 3,096 | |||||
Total borrowings | 2,000 | 3,096 | |||||||
Less: current portion | (2,000 | ) | (3,096 | ) | |||||
Long term debt | $ | - | $ | - |
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, 2019 | 1,723,883 | |||
Change in derivative liability during the period | (858,774 | ) | ||
Reclassify derivative liability associated with Notes converted | (581,219 | ) | ||
Derivative liability as of June 30, 2020 | $ | 1,590,638 | ||
Initial derivative liability accounted for convertible notes payable issued during the period ended September 30, 2020 | 126,029 | |||
True-up adjustment in debt discount and derivative liability | 37,360 | |||
Change in derivative liability during the period | (207,524 | ) | ||
Reclassify derivative liability associated with Notes converted | (189,257) | |||
Balance at September 30, 2020 | $ | 1,357,245 |
11. | 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). As of September 30, 2020, six payments had 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. |
Sept. 30, 2020 | June 30, 2020 | |||||||
Line of Credit | $ | 2,794 | $ | 3,897 | ||||
Total borrowings | 2,794 | 3,897 | ||||||
Less: current portion | 2,794 | 3,897 | ||||||
Long term debt | $ | - | $ | - |
Interest expense for the three months ended |
F-13
Capital Stock Activity | ● | The Company | |
● | During the During the three months ended September 30, 2019 the Company issued 122,762 shares of common stock for services valued at $49,397, issued 1,409,349 shares in regards to debt being converted into stock valued at $337,000, and issued 110,404 shares of common stock valued at $26,598 as part of a loan agreement and payment of interest as part of the debt conversion. |
During the three months ended September 30, 2020 the Company entered into a warrant agreement with one of the Company’s vendors issuing 500,000 warrants at a strike price of $0.50 having a term of five years. The Company valued these warrants using the Black Scholes model utilizing a 107.93% volatility and a risk-free rate of 0.29% | |||
The aggregate intrinsic value of the warrants as of September 30, 2020 is $-0-. |
Outstanding at | Outstanding | |||||||||||||||||
Exercise Price | June 30, 2020 | Issued / (Exercised) in 2020 | Expired | September 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 | |||||||||||||
$ | 0.50 | - | 500,000 | - | 500,000 | |||||||||||||
$ | 0.75 | 300,000 | - | - | 300,000 | |||||||||||||
1,155,000 | 500,000 | - | 1,655,000 |
14. | 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 | |||
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: |
September 30, 2020 Fair Value Measurements | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
Assets | ||||||||||||||||
Other assets | $ | - | $ | - | $ | - | $ | - | ||||||||
Total | $ | - | $ | - | $ | - | $ | - | ||||||||
Liabilities | ||||||||||||||||
Short and long-term debt | $ | $ | - | $ | 2,794,100 | $ | 2,794,100 | |||||||||
Total | $ | $ | - | $ | 2,794,100 | $ | 2,794,100 |
Fiscal 2019 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 2020 Fair Value Measurements | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
Assets | ||||||||||||||||
Other assets | $ | - | $ | - | $ | - | $ | - | ||||||||
Total | $ | - | $ | - | $ | - | $ | - | ||||||||
Liabilities | ||||||||||||||||
Derivative Liabilities | $ | $ | - | $ | 1,357,245 | $ | 1,357,245 | |||||||||
Total | $ | $ | - | $ | 1,357,245 | $ | 1,357,245 |
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 |
Management considers all of its derivative liabilities to be Level 3 liabilities. At September 30, 2020 and June 30, 2020, respectively the Company had outstanding derivative liabilities, including those from related parties of $1,357,245 and $1,590,638, respectively.
F-21
15. | Commitments and Contingencies: | The Company has entered into certain consulting agreements which carry commitments to pay advisors and consultants should certain events occur. An agreement is in place with one Company Advisor that calls for total compensation over the four year Advisor Agreement of 500,000 warrants with an exercise price of $.15 of which 450,000 have vested, should the advisor complete the entire term of the engagement, the remaining 50,000 warrants would vest on July 24, 2021. | |
In April, 2020, the Company successfully negotiated a Debt Incentive Agreement with one of its creditors to whom it owed $731,118. This Debt Incentive Agreement provides for the elimination of the entire debt should the Company make payments in calendar 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 payment and retire the debt during calendar 2020, The Company would realize a Gain on Extinguishment of Debt of approximately $560,000. |
Additional Consulting agreements call for certain Consultants to receive cash and stock bonuses for directly assisting the Company in hitting certain operational milestones, such as national television publicity, achieving revenues of $500,000 monthly, $1,000,000 monthly, and $3,000,000 quarterly. CEO Sean Folkson has a consulting agreement which will reward him with 1,000,000 warrants at a strike price of $.50 when the Company records its first quarter with revenues over $1,000,000, an additional 3,000,000 warrants with a $.50 strike price when the Company records its first quarter with revenues over $3,000,000, and an additional 3,000,000 warrants with a $1 strike price when the Company records its first quarter with revenues over $5,000,000. | |||
16. | Related Party Transactions | ● | During the third quarter of Fiscal Year 2015, Mr. Folkson began accruing a consulting fee of $6,000 per month which the aggregate of
On December 8, 2017, Mr. Folkson |
● | In addition, the Company made bonuses available to Folkson upon the Company hitting certain revenue milestones of $1,000,000 in a quarter, $3,000,000 in a quarter, and $5,000,000 in a quarter. 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 |
Subsequent Events | ● |
| |
On | |||
F-14
● |
| ||
F-15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q 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. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project,” “will” and other words of similar meaning. 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 Quarterly Report on Form 10-Q 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 under the headings “Business” and “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended June 30, 2017,2020, as well as the other information set forth herein.
OVERVIEW
NightFoodNightfood Holdings runs two distinct operating companies, each serving a different market segment with different products.
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”. AsTo date, this subsidiary was created subsequent to the end of the current reporting period, which concluded on December 31, 2017,and its operations have nohad a nominal impact on the financial statements contained herein.
Since inception, MJ Munchies has applied for U.S. Trademark protection the brand name Half-Baked as it relates to certain categories of snacks. The Company also applied for, its brandand was granted, trademark protection in the state of California for the name Half-Baked for snacks currently under development.containing THC. In addition, The Company acquired HalfBaked.com, and has secured other intellectual property in its portfolio. The Company intends to license this IP to operators in the Company has entered into a product development agreement with Abunda Foods, controlled by NGTF shareholder Peter Leighton, whereby Abunda will drive the development of new Half-Baked snack products intended to be marketed onlinecannabis edibles space and in dispensaries throughout the country. Abunda, and Leighton, have a long history of success in consumer snack product development, having successfully done product development work for clients such as Tiger’s Milk, Cascadian Farm, and National Beverage Corp.other related spaces.
NightFood,Nightfood, Inc. is a better-for-you snack company focused on manufacturing and distributing snacks with sleep-friendly formulations and ingredients. The national roll-out of Nightfood ice cream, the first Nightfood product with significant mainstream retail distribution, began in 2019. The Company has since secured distribution in multiple regional supermarket chains, and divisions of nutritional/snack foods that are appropriatenational supermarket chains, including divisions of Kroger (Harris Teeter), and divisions of Albertsons (Jewel-Osco, Shaw’s and Star Market).
Nightfood ice cream won the 2019 Product of the Year award in the ice cream category in a Kantar survey of over 40,000 consumers. The brand also won Best New Ice Cream at the 2019 World Dairy Innovation Awards. In early 2019, the Company proactively secured trademark protection for evening snacking. NightFood’s first product is the NightFood nutrition bar, currently availableNightfood brand in two flavors (Cookies n’ Dreams, and Midnight Chocolate Crunch).several strategic international markets.
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.
In addition to those high-profile public statements, significant strategic interest in the nighttime and sleep-friendly nutrition space has been directly affirmed to Management in recent exploratory discussions initiated by a certain global food and beverage conglomerate. Management anticipates that the multi-national food and beverage companies will necessarily be drawn to the category Nightfood is pioneering because of the volume of nighttime snacking that occurs globally, and the importance of quality sleep to consumers around the world. Growth within the category that Nightfood is creating can bring competitive risk, but also the opportunity that comes with being the pioneer of a growing market segment and the strategic value that the Nightfood brand could deliver to a global partner with significant resources.
It is estimated that over $50B$50 billion is spent annually in the United States on snacks that are consumed between dinner and bed. Company management believes that a significantmeaningful percentage of that consumer spend will move from conventional snacks over to nighttime specific, sleep-friendly snacks in coming years.
A NightFoodThe Nightfood Scientific Advisory Board was recently established.is made up of leading sleep and nutrition experts, who help Nightfood deliver on its brand promise. The first member of this advisory board iswas 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 prominent 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 added 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. Dr. Broch also has a master’s degree in human nutrition. This unique combination allowed her to play an important role in 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.
NightFood has recently reported significant growthIn February 2020, Nightfood was named the Official Ice Cream of the American Pregnancy Association. Compared to regular ice cream, Nightfood is higher in direct-to-consumer sales throughcalcium, magnesium, zinc, protein and fiber, and contains less sugar, fewer calories, and is lower glycemic. Ease of digestion and the NightFood.com websiteimpact of nighttime heartburn were also considerations that went in to Nightfood’s formulations. Management believes the designation and Amazon.recommendation from the American Pregnancy Association could expose the brand to a large base of new consumers and drive a volume of new demand that will support an effective national roll-out of the ice cream line.
2
DEVELOPMENT PLANS
Nightfood has nine ice cream flavors in ongoing production, and an additional ten products have been developed or in late stages of development. Management has also done preliminary research on CBD infused ice cream, current FDA guidelines do not permit CBD to be used as an additive in conventional food. While Management has interest in such a development, it is likely such products will not be allowed under FDA guidelines for several quarters.
Nightfood is currently available in over 750 supermarket locations, and Management is expecting a meaningful increase in points of distribution in early 2021. Management believes that current marketing initiatives and existing sales velocity trends, along with securing the designation of being the Official Ice Cream of the American Pregnancy Association all bode well for securing additional expansion of the Nightfood brand.
Aggressive supermarket expansion could result in additional “slotting fees”. Slotting fees are normal and customary in the consumer goods industry and are fees that certain retailers and distributors charge to introduce a new product into their available assortment.
In some cases, slotting fees, also called “new item placement fees” or “new item placement allowances” can be nominal. In other situations, slotting fees for certain retail and distribution partners could run hundreds of thousands of dollars. Slotting fees are not an auction for shelf (or freezer) space. One brand does not outbid others to get on shelf. Different retailers have established different standard slotting, and that is simply the cost of doing business with those specific partners.
Many large retailers do not charge slotting fees, but most do. The NightFoodManagement of any emerging brand continuescould choose not to focus on online revenue growth at this time. NightFood intends to launch gluten-free versions of NightFood nutrition bars during 2018. It is also expecteddo business with retailers or distributors who charge slotting fees. Such a strategy, while possible, would greatly limit the distribution footprint a brand could establish. Investors should have the expectation that additional flavorsslotting fees will be launched in a similar timeframe. Towards the end of calendar 2018, with new flavors available, and what is expectedcontinue to be a healthy revenue base,significant investment over the Company intends to begin revisiting a retail rollout for NightFood bars.
The Company is also working towards the launch of NightFood ice cream in the latter half of 2018. A major regional ice cream distributor is prepared to bring the NightFood ice cream line to market, provided the product meets certain taste and nutritional standards, which we’re confident it will.
NightFood also intends to addnext one to two new members to its Scientific Advisory Board in the coming months to help ensure NightFood products are able to deliver on their brand promise, and establish additional credibility with consumers, the media, and retail buyers.
MJ Munchies continues to advance the Half-Baked snack line through product R&D and its various industry relationships. Developments are occurring rapidly, as the Company recently announced it had completed U.S. Trademark application for the brand name Half-Baked as it relates to various packaged snacks and baked goods. In addition, the Company has secured the domain name HalfBaked.com. We believe this trademark and domain will prove to be very valuable in the coming months andthree fiscal years as the market for all things related to cannabis and marijuana continues to develop and mature.
Nightfood brand moves towards its goal of national distribution.
Management had previously invested in initiatives relating to distribution and partnerships in the hotel and hospitality vertical. With COVID-19 and its impact on the travel habits of consumers, these initiatives have been impaired and put on hold at this time.
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
There is a significant amount of seasonality in the ice cream industry, with summer months historically delivering the highest consumption. As an early-stage and growing brand, it is unknown how seasonality will impact our brand at this time.
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. Indications to date 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 while consumers are reporting a decrease in sleep quality and sleep satisfaction. 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, partially due to recent declines in consumer sleep quality and increases in at-home nighttime snacking.
We do not believehave experienced no major issues with supply chain or logistics. Order processing function has been normal to date, and our manufacturers have assured us that our business will be seasonal to any material degree.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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIOD ENDED
December 31, 2017September 30, 2020 and December 31, 2016.2019.
For the three months ended December 31, 2017September 30, 2020 and December 31, 20162019 we had revenuesNet Revenues (Net Revenues are defined as Gross Sales, less Slotting Fees, Sales Discounts, and certain other revenue reductions) of $72,284$126,983 and $8,043$46,497 respectively and incurred an operating loss of $1,238,738$536,043 and $84,372$294,777 respectively.
In the three months ended September 30, 2020, the Company recorded Gross Sales of $319,324, the highest quarterly gross sales in company history. Accounting standards require exclusion on the income statement of Gross Sales made to a customer to whom the Company is paying slotting fees (slotting fees are fees occasionally charged by retailers and distributors to add a new product into their product assortment). In those situations, the Gross Sales number is reduced, dollar for dollar, by the slotting fees, until the total cost of the slotting is covered. These slotting fees do not appear on the income statement as an expense. Rather, Slotting Fees, along with Sales Discounts, are applied against Gross Sales, resulting in Net Revenue, as shown below. The revenue increases werenetting of Gross Sales against slotting and sales discounts, as described and shown below, results in the resultNet Revenue number at the top of the income statement. This is not a reflection of the amount of product 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 three months ended September 30, 2020 and 2019. Product sales are net of slotting fees (a typically one-time fee charged by supermarkets in order to have the product placed on their shelves) and sales discounts.
Three Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Gross product sales | $ | 319,324 | $ | 210,383 | ||||
Less: | ||||||||
Slotting fees | $ | (134,222 | ) | $ | (160,000 | ) | ||
Sales discounts, promotions, and other reductions | (58,119 | ) | (3,886 | ) | ||||
Net Revenues | $ | 126,983 | $ | 46,497 |
The Company focus on direct to consumer sales through the new NightFood.com website and having NightFood products listed on Amazon. A result of this increase in sales ishad an increase onin cost of goods sold from $3,145$146,500 for the three months ending December 31, 2016September 30, 2019 to $59,403$229,696 for the three months ending December 31, 2017. As part ofSeptember 30, 2020 because we sold significantly more ice cream to our customers (supermarket chains and distributors) this quarter than the direct-to-consumer initiative, the Company chose to increase spending on advertising and related expenses, resultingsame quarter last year, when measured in Gross Sales.
Our income statement shows an increase in “Advertising and Promotional” from $438198,270 for the three months ending December 31, 2016September 30, 2019 to $60,548$185,289 for the three months ending December 31, 2017. SG&ASeptember 30, 2020. This increase is due to the way certain marketing expenses were accounted for. Further, as discussed on above footnote 3, due to the reclassification $396,250 expenses was reversed and set off with the advertising costs incurred during 2019. The Company invested approximately $396,047 in marketing and distribution partnerships it determined would benefit operations for 2020 and beyond. Due to circumstances, including the global COVID-19 coronavirus pandemic, it does not appear these distribution partnerships will be as beneficial to the Company as envisioned when entered. 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 in calendar 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
Selling, general, and administrative expenses increased from $5,755$101,834 for the three months ending December 31, 2016September 30, 2019 to $172,644$118,167 for the three months ending December 31, 2017, and this increase was largely attributable to the buildout and completion of the new NightFood.com website and video assets, along with an increase inSeptember 30, 2020. This category includes expenses such as web hosting, web services, freight, warehousing, shipping, product liability insurance, investor relations activities.and research & development of new products. Professional fees increased from $83,040$124,234 for the three months ending December 31, 2016September 30, 2019 to $215,524$168,668 for the three months ending December 31, 2017,September 30, 2020. $65,700 of the professional fees in the current quarter are the result of accounting for 500,000 warrants issued to a Company consultant with mucha strike price of this$.50.
For the three months ended September 30, 2019 we experienced an increase resultingin Loss on extinguishment of debt upon notes conversion of $188,397 compared to $0 in the three months ended September 30, 2020. For the three months ended September 30, 2019 compared to the three months ended September 30, 2020, we also experienced changes in derivative liabilities from expenses relating($190,062) to capital raises($207,524) and total interest expense from $218,803 to fund operations$407,783, of which $382,267 and refinance$322,739 respectively were entries directly related to the amortization of preexisting Companydebt discounts and deferred financing fees related to loss on extinguishment of debt. For the three months ended December 31, 2017 compared to the three months ended December 31, 2016, we also experienced increases in derivative liabilities (from $0 to $147,546) and interest expense (from $0 to $190,936).For the three months ended December 31, 2017,September 30, 2020, the Company recorded other expenses“other expenses” of $463,146$19,877 compared to $0 for the three months ended December 31, 2016. These otherSeptember 30, 2019. This was interest expenses consistrelated to loss on extinguishment of non-cash items primarily of $463,146 in amortization of debt discount and deferred financing fees. These are all a direct resultdebt.
Customers
During the three months ended September 30, 2020, the Company had one customer account for approximately 39% of the Company tapping into available sourcesgross sales. One other customer accounted for approximately 21% of capital to begin ongross sales, and two other customers accounted for over 9% of gross sales. During the paththree months ended September 30, 2019, one customer accounted for approximately 34% of significant revenue growth and investor awareness. Although no assurances can be given, management believes that the positive resultsgross sales while two other customers accounted for over 10% of these efforts will lead to more efficient sources of capital in the form of more favorable terms from existing investors, and allowgross sales. As the Company continues to grow the NightFood brand and revenues in a meaningful way, ultimately increasing shareholder value.its distribution base, it is anticipated that revenue distribution will become less concentrated.
For the six months ended December 31, 2017 and December 31, 2016 we had revenues of $108,726 and $10,507 respectively and incurred an operating loss of $2,218,513 and $158,538 respectively. The revenue increases were the result of a Company focus on direct to consumer sales through the new NightFood.com website and having NightFood products listed on Amazon. A result of this increase in sales is an increase on cost of goods sold from $15,246 for the six months ending December 31, 2016 to $85,429 for the six months ending December 31, 2017. As part of the direct-to-consumer initiative, the Company chose to increase spending on advertising and related expenses, resulting in an increase from $1,058 for the six months ending December 31, 2016 to $102,372 for the six months ending December 31, 2017. SG&A increased from $18,031 for the six months ending December 31, 2016 to $315,984 for the six months ending December 31, 2017, and this increase was largely attributable to the buildout and completion of the new NightFood.com website and video assets, along with an increase in investor relations activities. Professional fees increased from $129,372 for the six months ending December 31, 2016 to $472,782 for the six months ending December 31, 2017, with much of this increase resulting from expenses relating to capital raises to fund operations and refinance of preexisting Company debt. For the six months ended December 31, 2017 compared to the six months ended December 31, 2016, we also experienced increases in derivative liabilities (from $0 to $250,465) and interest expense (from $0 to $444,441).For the six months ended December 31, 2017, the Company recorded other expenses of $651,778 compared to $0 for the six months ended December 31, 2016. These other expenses consist of non-cash items primarily of $679,714 in amortization of debt discount and deferred financing fees and a credit of $27,936. These are all a direct result of the Company tapping into available sources of capital to begin on the path of significant revenue growth and investor awareness. Although no assurances can be given, management believes that the positive results of these efforts will lead to more efficient sources of capital in the form of more favorable terms from existing investors, and allow the Company to grow the NightFood brand and revenues in a meaningful way, ultimately increasing shareholder value.
3
Customers
For the three month period ending December 31, 2017, the majority of revenues resulted from sales of NightFood direct to consumer through the NightFood.com website and Amazon’s Fulfilled by Amazon program.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2017,September 30, 2020, we had cash on hand of $12,322$8,360, receivables of $65,053 and inventory value of $10,115.$213,384.
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 fund our projected growth over the next several quarters. We believe that our current capitalization structure, combined with the continued revenueongoing increases in revenues, will enable us to achieve successful financingssuccessfully 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, as well as exploring other capitalization strategies.
Because the business is new and has limited operating history and relatively few sales, no certainty of continuation can be stated. 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.
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.
Since our inception, we have sustained operating losses. During the sixthree months ended December 31, 2017,September 30, 2020, we incurred a net loss of $2,218,513$943,824 compared to $158,538$513,580 for the sixthree months ended December 31, 2016.September 30, 2019. Much of this loss is largely a function of the way certain financing activities are recorded, and does not represent actual operating losses.
During the sixthree months ended December 31, 2017,September 30, 2020, net cash used in operating activities was $856,918$368,159 compared to $29,633net cash provided of $26,916 for the sixthree months ended December 31, 2016. The majoritySeptember 30, 2019. Much of what shows as “net cash used in operating activities” is related to non-cash items associated with to the ongoing capitalization of the Company during the reporting period.
During the sixthree months ended December 31, 2017,September 30, 2020, net cash of $0 was used in investing activities, compared to $1,000,000 for the three months ended September 30, 2019.
During the three months ended September 30, 2020, net cash aggregating $854,914$178,897 was provided by financing activities. Much of this financing activity relatedactivities, compared to a restructuring of pre-existing debts, and consolidation of$1,050,000 for the majority of debt with a single investor at a lower interest rate and similar conversion terms.
three months ended September 30, 2019.
From our inception in January 2010 through December 31, 2017,September 30, 2020, we have generated an accumulated deficit of approximately $5,599,734,$18,574,946, compared to $3,381,221$17,631,122 from inception through June 30, 2017.2020. Assuming we raise additional funds and continue operations, we expect to incur additional operating losses during the next two to three quarters 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.
On November 25, 2016, the company entered into a material definitive agreement. On that date, the company executed and delivered a Plan of Reorganization Including Option to Acquire (the “Plan”) by and among the Registrant, Hook Group, LLC (“Hook”) and Suffield Foods. LLC (“Suffield”). The Plan contemplates the Registrant acquiring an equity interest in and potentially merging Hook and its subsidiary Suffield with and into a wholly owned subsidiary of the Registrant. As of the date of this filing, the agreement has been formally terminated by the Registrant.
As of February 8, 2017, we entered into two agreements with Black Forest, an Equity Purchase Agreement (the “EPA”) and a Registration Rights Agreement (the “RRA”). The two agreements were filed as exhibits to the Registrant’s Current Report on Form 8-K dated February 8, 2017, and this Registration Statement is being filed in order for us to fulfill our obligations under the RRA. The following summary is qualified in its entirety by reference to such exhibits to our Form 8-K. On August 24, 2017, the Company issued its first and, to date, only “put notice” to Black Forest and delivered Black Forest 264,085 shares of common stock in exchange for $30,000. On October 23, 2017, we were advised that our stock has been moved from the OTCQB to the OTCPink marketplace. We may not utilize the EPA facility during the time quoted on the OTCPink. The Company does not believe the change in OTC Market tiers will have any material positive or negative impact on Company operations. If, the Company determines that there is incremental value in being listed on the OTCQB, it is possible that another tier change could occur in the future. Accordingly, future utilization of the EPA is uncertain.
4
During calendar 2017, through the date of this filing, the Company entered into convertible promissory notes with several lenders totaling approximately $1,600,000 Among these notes were promissory notes totaling $120,000 with Black Forest which notes have been assigned to a third party that is not affiliated with Black Forest. During the past several months, the Company has successfully consolidated most of its outstanding notes with a single investor who, although there is no written commitment to do so, management believes will continue to provide funding for operations.
The agreements with Black Forest required us to file a registration statement for the common stock underlying the EPA. Subject to various limitations set forth in the EPA, Black Forest, after effectiveness of such registration statement, will be required to purchase up to $5,000,000 worth of our common stock at a price equal to 85% of the market price as determined under the EPA. The EPA provides for volume limitations on the amount of shares that Black Forest must purchase at any time and provides that we will be paid for the common stock upon electronic delivery of the shares to Black Forest. To date we have raised a net of $28,260.50 through the EPA. No assurance can be given as to the total amount we will raise through the EPA.
We intend to rely on the sale of stock in private placements, and the issuance of morenew debt, to fund our operations. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations.
The Company has received several tranches of capital from a friendly institutional investor, who has been our primary source of capital for the last 30 months. We have entered into other notes as disclosed on our Current Reports on Form 8-K filed on September 20, 2017, and in our Annual Report on Form 10K, filed on October 3, 2017.expect this investor to continue to fund ongoing operations
Effective May 6, 2015, the Company entered into a consulting agreement with Sean Folkson. The agreement iswas retroactive to January 1st, 2015. In exchange for services provided to the Company by Folkson, the Company has agreed to pay Folkson $6,000 monthly. This compensation expense started accruing on January 1, 2015, and will continue to accrueaccrued on a monthly basis untilthrough June of 2018.
In June of 2018, and again in June of 2019, the companyCompany 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, such as when the Company records its first quarter with revenue greater than $1,000,000. 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.
On October 12, 2018, Folkson opted to purchase 400,000 shares of common stock at $.30 per share, by exercising warrants. To make this purchase, Folkson used $120,000 in accrued Nightfood consulting fees.
On February 4, 2019, the Company entered into a “Lock-Up” Agreement with Folkson whereby Folkson agreed to not transfer, sell, or otherwise dispose of any shares of his NGTF stock during the next twelve months. As part of this agreement, Folkson received warrants to acquire 400,000 shares of NGTF common stock at an exercise price of $.30 per share. All warrants in this agreement carried a twelve month term and a cashless provision, and were to expire if not exercised within the twelve month term. Folkson did not have rights to transfer, sell, or otherwise dispose of these warrants at any time, as there were no transfer rights provided for in the Agreement. The warrants that were part of the February 2019 Lock Up Agreement expired unexercised, as the share price was below $.30 at the end of the Agreement.
On January 20, 2020, Folkson and the Company entered into a new Lock-Up Agreement which went into effect on February 4, 2020 and is in a positionplace for twelve months, with identical financial terms to pay Folkson. As of the date of this filing, three payments have been made to Folkson against this accrual.February 4, 2019 Agreement.
The foregoing accounts for the entirety of compensation earned by Folkson since inception.
On February 6, 2019, the Registrant entered into a “Leak-Out” Agreement with Peter Leighton, former affiliate and owner of 4,000,000 shares, which will restrict Leighton’s ability to sell, transfer, or otherwise dispose of his shares above a certain, mutually agreed-upon monthly threshold.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate past judgments and our estimates, including those related to allowance for doubtful accounts, allowance for inventory write-downs and write offs, deferred income taxes, provision for contractual obligations and our ability to continue as a going concern. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Note 2 to the consolidated financial statements, presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017,2020, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. There were no significant changes in our critical accounting estimates during the sixthree months ended December 31, 2017.September 30, 2020.
OFF BALANCE SHEET ARRANGEMENTS
None.
5
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No report required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.
We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017.September 30, 2020. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.
As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.
Changes in internal controls over financial reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
6
We are not engaged in any litigation at the present time, and management is unaware of any claims or complaints that could result in future litigation. Management will seek to minimize disputes with its customers but recognizes the inevitability of legal action in today’s business environment as an unfortunate price of conducting business.
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
Exhibit | Exhibit Description | |
31.1 | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer | |
32.1 | Section 1350 certification of Chief Executive Officer | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
7
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: | By: | /s/ Sean Folkson |
Sean Folkson, Chief Executive Officer (Principal Executive, Financial and Accounting Officer) |
810