The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Nightfood Holdings, Inc. (“we”, “us”,
“the Company” or “Nightfood”) is a Nevada corporation organized on October 16, 2013 to acquire all of the issued
and outstanding shares of Nightfood, Inc., a New York corporation from its sole shareholder, Sean Folkson. All of our operations are
conducted through its subsidiary Nightfood, Inc. We are also the sole shareholder of MJ Munchies, Inc., which owns certain intellectual
property but does not have any operations as of the period covered by these financial statements.
Our corporate address is 520 White Plains Road
– Suite 500, Tarrytown, New York 10591 and our telephone number is 888-888-6444. We maintain a web site at www.nightfood.com, along
with many additional web properties. Any information that may appear on our web site should not be deemed to be a part of this report.
The Company’s fiscal year end is June 30.
2. Summary of Significant Accounting Policies
Management is responsible for the fair presentation
of the Company’s financial statements, prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Interim Financial Statements
These unaudited condensed consolidated financial
statements for the three and nine months ended March 31, 2023 and 2022, respectively, reflect all adjustments including normal recurring
adjustments, which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash
flows for the periods presented in accordance with the accounting principles generally accepted in the United States of America.
These interim unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the
fiscal years ended June 30, 2022, and 2021, respectively, which are included in the Company’s Annual Report on Form 10-K for the
fiscal year ended June 30, 2022 filed with the United States Securities and Exchange Commission on September 28, 2022. The Company assumes
that the users of the interim financial information herein have read, or have access to, the audited consolidated financial statements
for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context.
The results of operations for the three and six months ended December 31, 2022 are not necessarily indicative of results for the entire
year ending June 30, 2023.
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 preferred stock for a “beneficial conversion
feature” (“BCF”) and warrants 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. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. |
Fair Value of Financial Instruments
| |
● |
Statement of
financial accounting standard FASB Topic 820, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for assets
and liabilities qualifying as financial instruments are a reasonable estimate of fair value. |
Inventories
| |
● |
Inventories
consisting of packaged food items and supplies are stated at the lower of cost (FIFO) or net realizable value, including provisions
for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage
is incurred. The Company has no minimum purchase commitments with its vendors. |
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 recorded advertising costs of $38,960 and $218,820 for the three months ended March 31, 2023 and 2022, respectively. The Company recorded advertising costs of $ 129,295 and $684,611 for the nine months ended March 31, 2023 and 2022, respectively. |
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 wholesalers. All sources of revenue are recorded pursuant to FASB Topic 606 Revenue Recognition, to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In addition, this revenue generation requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. |
| |
● |
The Company
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. |
| |
● |
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 March 31, 2023 and June 30, 2022, the Company did not have any uninsured cash deposits. |
Beneficial Conversion Feature
| |
● |
For conventional
convertible debt where the rate of conversion is below market value, the Company records any BCF intrinsic value as additional paid
in capital and related debt discount. |
| |
● |
When the Company
records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument.
The discount is amortized over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the
unamortized amounts is immediately expensed. |
Beneficial Conversion Feature – Series
B Preferred Stock (deemed dividend):
Each share of the Company’s Series B
Preferred Stock, par value $0.001 per share (the “B Preferred” or “B Preferred Stock”) has a
liquidation preference of $1,000 and has no voting rights except as to matters pertaining to the rights and privileges of the B
Preferred. Each share of B Preferred is convertible at the option of the holder thereof into (i) 5,000 shares of the
Registrant’s common stock (one share for each $0.20 of liquidation preference) (the “Conversion Shares”) and (ii)
5,000 common stock purchase warrants, expiring April 16, 2026 (the “Warrants”). The Warrants carried an initial exercise
price of $0.30 per share. Subsequent financing events and debt extinguishment resulted in adjustments to the exercise price of all
warrants created from conversion of B Preferred from $0.30 per share to approximately $0.14364 per share through March 31,
2023. The exercise price of these warrants can continue to adjust as the result of subsequent financing events and stock
transactions. These adjustments can result in an exercise price that is either higher, or lower, than the price as of March 31,
2023.
Based on the guidance in ASC 470-20-20, on
issuance date the Company determined that a BCF existed, as the effective conversion price for the B Preferred at issuance was less
than the fair value of the common stock which the shares of B Preferred are convertible into. A BCF feature based on the intrinsic
value of the date of issuances for the B Preferred was approximately $4.4 million.
Debt Issue Costs
| |
● |
The Company
may pay debt issue costs in connection with raising funds through the issuance of debt whether convertible or not or with other consideration.
These costs are recorded as debt discounts and are amortized over the life of the debt to the statement of operations. |
Equity Issuance Costs
| |
● |
The Company
accounts for costs related to the issuance of equity as a charge to Paid in Capital and records the equity transaction net of issuance
costs. |
Original Issue Discount
| |
● |
If debt is
issued with an original issue discount, the original issue discount is recorded to debt discount, reducing the face amount of the
note and is amortized over the life of the debt to the statement of operations as interest expense. If a conversion of the underlying
debt occurs, a proportionate share of the unamortized amounts is immediately expensed. |
Stock Settled Debt
| |
● |
In certain
instances, the Company will issue convertible notes which contain a provision in which the price of the conversion feature is priced
at a fixed discount to the trading price of the Company’s common shares as traded in the over-the-counter market. In
these instances, the Company records a liability, in addition to the principal amount of the convertible note, as stock-settled debt
for the fixed value transferred to the convertible note holder from the fixed discount conversion feature. |
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. |
Customer Concentration
| | ● | During the nine months ended March 31, 2023, the Company had one customer account for approximately 34% of the gross sales. One other customer accounted for approximately 31% of gross sales, and two other customers accounted for between 10 and 12% of gross sales. During the nine months ended March 31, 2022, the Company had one customer account for approximately 30% of the gross sales. One other customer accounted for approximately 23% of gross sales, and two other customers accounted for between 10 and 15% of gross sales. During the three months ended March 31, 2023, the Company had one customer
account for approximately 94% of the gross sales. During the three months ended March 31, 2022, the Company had one customer account for
approximately 44% of the gross sales and another customer account for approximately 36% of gross sales. |
Vendor Concentration
| | ● | During the three-month period ended March 31,
2023, no vendors accounted for more than 15% of the Company’s operating expenses. During the nine-month period ended March 31, 2023,
no vendor accounted for more than 19% of the Company’s operating expenses.
During the three-month period ended March 31, 2022, no vendors accounted
for more than 9% of the Company’s operating expenses. During the nine-month period ended March 31, 2022 no vendor accounted for
more than 9% of the Company’s operating expenses.
|
Receivables Concentration
| | ● | As
of March 31, 2023, the Company had receivables due from eight customers. One of which accounted for 73% of the total balance, one of
which accounted for 9% of the total balance and one of which accounted for 7% of the total balance. As of June 30, 2022, the Company
had receivables due from six customers, one of which accounted for over 59% of the outstanding balance. One of the remaining five
accounted for 13.5% of the outstanding balance and one accounted for 11% of the outstanding balance. |
Income/Loss Per Share
| |
● |
In accordance
with ASC Topic 260 – Earnings Per Share, the basic loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common stock outstanding. Diluted loss per common share is computed similar to basic
loss per common share except that the denominator is increased to include the number of additional shares of common stock that would
have been outstanding if the potential common stock had been issued and if the additional shares of common stock were dilutive. Potential
common stock consists of the incremental common stock issuable upon convertible notes, stock options and warrants, and classes of
shares with conversion features. The computation of basic loss per share for the three and nine months ended March 31, 2023 and 2022
excludes potentially dilutive securities because their inclusion would be antidilutive. As a result, the computations of net loss
per share for each period presented is the same for both basic and fully diluted losses per share. |
Reclassification
| |
● |
The Company
may make certain reclassifications to prior period amounts to conform with the current year’s presentation. Such reclassifications
would not have a material effect on its consolidated statement of financial position, results of operations or cash flows. |
Recent Accounting Pronouncements
| |
● |
In August 2020,
the FASB issued ASU 2020-06 to simplify the current guidance for convertible instruments and the derivatives scope exception for
contracts in an entity’s own equity. Additionally, the amendments affect the diluted EPS calculation for instruments that may
be settled in cash or shares and for convertible instruments. The update also provides for expanded disclosure requirements to increase
transparency. For SEC filers, excluding smaller reporting companies, this update is effective for fiscal years beginning after December
15, 2022 including interim periods within those fiscal years. The adoption of this guidance does not materially impact our financial
statements and related disclosures. |
| ● | The Company has implemented
all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are
any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results
of operations. |
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 nine months ended March 31, 2023, the Company had an operating and net
loss of $4,775,478 and cash flow used in operations of $995,623 and an accumulated deficit of $33,997,451. |
| |
● |
The Company has limited available cash resources
and it does not believe its cash on hand will be adequate to satisfy its ongoing working capital and growth needs throughout Fiscal Year
2023.
The Company is continuing to seek to raise capital through the sales
of its common stock, including pursuant to its Tier 2 offering pursuant to Regulation A (also known as “Regulation A+”) of
units consisting of common stock and warrants, preferred stock and/or convertible notes, as well as potentially the exercise of outstanding
warrants, to finance the Company’s operations, of which it can give no assurance of success. Management has devoted a significant
amount of time in the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as
a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue.
|
| |
● |
Because the
Company has limited sales, no certainty of continuation can be stated. The Company’s ability to continue as a going concern
is dependent upon raising additional funds through debt and equity financing and generating revenue. In addition, the Company will
receive the proceeds from its outstanding warrants as, if and when such warrants are exercised for cash. There are no assurances
the Company will receive the necessary funding or generate revenue necessary to fund operations. |
| |
● |
Even if the
Company is successful in raising additional funds, the Company cannot give any assurance that it will, in the future, be able to
achieve a level of profitability from the sale of its products to sustain its operations. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments
to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty. |
| |
● |
From both public
statements observed, and conversations conducted between Nightfood Management and current and former executives from 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. |
| |
● |
The Company has experienced no major issues with supply chain or logistics.
Order processing function has been normal to date, and its manufacturers have assured the Company that their operations are “business
as usual” as of the time of this filing. |
4. Accounts receivable
| |
● |
The Company’s
accounts receivable arises primarily from the sale of the Company’s ice cream. On a periodic basis, the Company evaluates each
customer account and based on the days outstanding of the receivable, history of past write-offs, collections, and current credit
conditions, writes off accounts it considers uncollectible. With most of our retail and distribution partners, invoices will typically
be due in 30 days. The Company does not accrue interest on past due accounts and the Company does not require collateral. Accounts
become past due on an account-by-account basis. Determination that an account is uncollectible is made after all reasonable collection
efforts have been exhausted. The Company has not provided any accounts receivable allowances for March 31, 2023 and June 30, 2022,
respectively. |
5. Inventories
| |
● |
Inventory consists
of the following at March 31, 2023 and June 30, 2022: |
| | |
As of | | |
As of | |
| | |
March 31,
2023 | | |
June 30,
2022 | |
| Inventory: Finished Goods | |
$ | 186,210 | | |
$ | 165,470 | |
| Inventory: Ingredients | |
$ | 114,018 | | |
$ | 82,625 | |
| Inventory: Packaging | |
$ | 93,825 | | |
$ | 83,436 | |
| Inventory: Allowance for Unsaleable Invent | |
$ | 1,468 | | |
$ | - | |
| Total Inventory | |
$ | 395,521 | | |
$ | 331,531 | |
Inventories are stated at the lower of cost or
net realizable value. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory
based on its assessment of market conditions and the products relative shelf life. Write-downs and write-offs are charged to loss on
inventory write down.
6. Other current assets
| |
● |
Other current
assets consist of the following vendor deposits at March 31, 2023 and June 30, 2022. |
| | |
March 31,
2023 | | |
June 30,
2022 | |
| Other Current Assets | |
| | |
| |
| Deposits | |
$ | 92,876 | | |
$ | 137,797 | |
| TOTAL | |
$ | 92,876 | | |
$ | 137,797 | |
7. Other Current Liabilities
Other current liabilities consist of the following at March 31, 2023
and June 30, 2022:
| | |
March 31,
2023 | | |
June 30,
2022 | |
| Other Current Liabilities | |
| | |
| |
| Accrued Consulting Fees (related party) | |
$ | 88,676 | | |
$ | 3,000 | |
| TOTAL | |
$ | 88,676 | | |
$ | 3,000 | |
8. Debt
| ● | Convertible Notes Payable consist of the following
at March 31, 2022, |
Convertible
Notes Issued on December 10, 2021
On
December 10, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate of: (i)
$1,086,956.52 in principal amount of Original Issue Discount Senior Secured Convertible Notes (the “Notes”) for
$1,000,000 (representing a 8% original issue discount) (“Purchase Price”) and (ii) warrants to purchase up
to 4,000,000 shares of the Company’s common stock (the “Warrants”) in a private placement (the
“Offering”). Each Note featured an 8% original issue discount, resulting in net proceeds to the Company of
$500,000 for each of the two Notes. The Notes had a maturity of December 10, 2022, an interest rate of 8% per annum,
and were initially convertible at a fixed price of $0.25 per share, with provisions for conversions at a fixed price of
$0.20 per share should the closing trading price of our common stock be below $0.20 per share after June 10, 2022. The
conversion price is also subject to further price adjustments in the event of (i) stock splits and dividends, (ii) subsequent rights
offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the
Company, business combinations, and reorganizations (v) in the event that the Company issues or sells any additional shares of
Common Stock or Common Stock Equivalents at a price per share less than the Exercise Price then in effect or without consideration
then the Exercise Price upon each such issuance shall be reduced to the Dilutive Issuance Price. These Notes, for as long as they
are outstanding, are secured by all assets of the Company and its subsidiaries, senior secured guarantees of the subsidiaries of the
Company, and pledges of the common stock of all the subsidiaries of the Company. The Notes have provisions allowing for repayment at
any time at 115% of the outstanding principal and interest within the first three months, and 120% of the outstanding
principal and interest at any time thereafter.
The Warrants
were initially exercisable at $0.25 per share and, are subject to cashless exercise after six months if the shares underlying
the Warrants are not subject to an effective resale registration statement. The Warrants are also subject to customary adjustments, including
price protections.
In connection
with Securities Purchase Agreement, the Company issued to the Placement Agent (as defined below), an aggregate of 878,260 Common
Stock purchase warrants (“PA Warrants”). The PA Warrants are substantially similar to the Warrants. The fair value of the
PA Warrants at issuance was estimated to be $170,210 based on a risk-free interest rate of 1.25%, an expected term of 5 years,
an expected volatility of 142.53% and a 0% dividend yield.
Spencer
Clarke Holdings LLC (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities pursuant
to the Securities Purchase Agreement. Pursuant to an engagement agreement entered into by and between the Company and the Placement Agent,
the Company agreed to pay the Placement Agent a cash commission of $100,000. Pursuant to the discussion above, the Company also issued
an aggregate of 878,260 PA Warrants to the Placement Agent.
The gross
proceeds received from the Offering were approximately $1,000,000. The cash Placement Agent fees of $100,000 was paid separately.
Also, the Company reimbursed the lead Purchaser $15,192 for legal fees, which was deducted from the required subscription amount
to be paid.
On or around
September 23, 2022, as a result of certain new financing agreements entered into by the Company, as consideration to the Holders, the
Company issued to each Holder a common stock purchase warrant for the purchase of 5,434,783 shares of the Company’s common
stock (as amended from time to time, the “Returnable Warrants”, further the Placement Agent received 1,086,957 (Ref below,
Mast Hill Loan - Promissory Notes Issued on September 23, 2022). The warrants are subject to customary adjustments (including price-based
anti-dilution adjustments) and may be exercised on a cashless basis.
The Company
was required to pay to the Purchasers on December 10, 2022, as extended to December 29, 2022 (as so extended, the “Maturity Date”)
all remaining principal and accrued and unpaid interest on the Maturity Date (the “Owed Amount”) and the failure to so pay
the Owed Amount on the Maturity Date is an event of default. The Owed Amount was not paid by the Company in accordance with the terms
of the Notes. Subsequent to December 31, 2022 the Company entered into a forbearance agreement with the Purchasers as set out below.
Forbearance
and Exchange Agreement
On February
4, 2023, the Company entered into a Forbearance and Exchange Agreement (the “Forbearance Agreement”) with the Purchasers.
Pursuant
to the Forbearance Agreement as amended, among other things:
| | ● | The Company shall pay to each Purchaser in cash the sum of $482,250.00 for
the full and complete satisfaction of the Notes, which includes all due and owing principal, interest and penalties notwithstanding anything
to the contrary in the Notes, as follows: (i) $250,000.00 on or before February 7, 2023; (ii) $50,000.00 on or before February
28, 2023; (iii) $50,000.00 on or before March 31, 2023; (iv) $50,000.00 on or before April 30, 2023; and (v) $82,250.00 on
or before May 31, 2023. |
| |
● |
The Purchasers shall not convert the Notes so long as an event of default
pursuant to the Forbearance Agreement has not occurred. |
| | ● | The Company purchased and retired the Returnable Warrants from the
Purchasers, in exchange for the Company issuing to each of the Holders 1,900,000 restricted redeemable shares of the Company’s
common stock (the “Exchange Shares”). |
| | ● | The Purchasers agreed not to transfer the Exchange Shares prior to
September 24, 2023, subject to certain exceptions, including that the Company shall have the right to redeem all or any portion of the
Exchange Shares from each Purchaser by paying an amount in cash to such Purchaser equal to $0.1109 per share being redeemed. The
Purchaser’s sale of the Exchange Shares on or after September 24, 2023, is subject to a leak-out until all of the Exchange Shares
are sold. In addition, the Purchaser’s sale of any common stock of the Company owned by them other than the Exchange Shares, shall
also be subject to a leak-out during the period ending on the six-month anniversary of the date of the Forbearance Agreement. |
| |
● |
Each Purchaser agrees to forbear from exercising its rights against
the Company under its respective Note until and unless the occurrence of any of the following events: (a) the failure of the Company to
make a scheduled payment pursuant to the Forbearance Agreement, subject to a five day right to cure; (b) the failure of the Company to
observe, or timely comply with, or perform any other covenant or term contained in the Forbearance Agreement, subject to a ten day right
to cure; (c) the Company or any subsidiary of the Company commences bankruptcy and/or any insolvency proceedings; or (d) the delivery
of any notice of default by Mast Hill Fund, L.P. (“Mast Hill”) to the Company with respect to indebtedness owed to Mast Hill
by the Company. |
The Company
evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the
Company has determined that no provisions required derivative accounting.
In accordance
with ASC 470- Debt, the Company first allocated the cash proceeds to the loan and the warrants on a relative fair value basis, secondly,
the proceeds were allocated to the beneficial conversion feature.
Below is
a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of March 31, 2023:
| | |
Principal
($) | | |
Stock-settled
Debt
($) | | |
Debt Discount
($) | | |
Net Value
($) | |
| Balance at June 30, 2021 | |
| - | | |
| - | | |
| - | | |
| - | |
| Convertible notes payable issued during fiscal year ended June 30, 2022 | |
| 1,086,957 | | |
| | | |
| | | |
| 1,086,957 | |
| Debt discount associated with new convertible notes | |
| | | |
| | | |
| (1,018,229 | ) | |
| (1,018,229 | ) |
| Conversion price adjusted from $0.25 to $0.20 | |
| | | |
| 217,391 | | |
| (217,391 | ) | |
| - | |
| Amortization of debt discount | |
| | | |
| | | |
| 275,423 | | |
| 275,423 | |
| Balance at June 30, 2022 | |
| 1,086,957 | | |
| 217,391 | | |
| (960,197 | ) | |
| 344,151 | |
| Cash repayment | |
| (362,319 | ) | |
| | | |
| | | |
| (362,319 | ) |
| Gain on extinguish of portion of principal | |
| | | |
| (72,464 | ) | |
| | | |
| (72,464 | ) |
| Amortization of debt discount | |
| | | |
| | | |
| 960,197 | | |
| 960,197 | |
| Penalty | |
| 181,159 | | |
| | | |
| | | |
| 181,159 | |
| Conversion price change | |
| | | |
| 1,843,475 | | |
| | | |
| 1,843,475 | |
| Balance at December 31, 2022 | |
| 905,797 | | |
| 1,988,402 | | |
| - | | |
| 2,894,199 | |
| Under forbearance Agreement: | |
| 58,703 | | |
| (1,988,402 | ) | |
| | | |
| (1,929,699 | ) |
| Cash repayment | |
| (700,000 | ) | |
| | | |
| | | |
| (700,000 | ) |
| Balance at March 31, 2023 | |
| 264,500 | | |
| - | | |
| - | | |
| 264,500 | |
Below is
a reconciliation of the extinguishment of debt relative to the exchange of Returnable Warrants for shares of common stock by the holders:
| 3,800,000 shares of common stock issued and exchanged for 10,869,566 returnable warrants | |
$ | 342,000 | |
| Loss on conversion price change in December 31, 2022 | |
| 1,051,801 | |
| Stock settled debt | |
| (1,988,402 | ) |
| Financing charges due to returnable warrants issued | |
| 987,060 | |
| Accrued interest payable including penalty | |
| 58,703 | |
| Loss on extinguishment | |
$ | 392,459 | |
Amortization
expense for the three months ended March 31, 2023 and 2022, totaled $0 and $78,634, respectively.
Amortization
expense for the nine months ended March 31, 2023 and 2022, totaled $960,197 and $90,852, respectively.
As of March
31, 2023 and June 30, 2022, the unamortized portion of debt discount was $0 and $960,197, respectively.
Interest
expense for the three months ended March 31, 2023 and 2022, totaled $19,251 and $21,661, respectively.
Interest
expense for the nine months ended March 31, 2023 and 2022, totaled $58,703 and $26,570, respectively.
During the
nine months ended March 31, 2023, the Company paid $39,452 to accrued interest.
Mast
Hill Loan
| (a) | Promissory Notes Issued on September 23, 2022 |
On September
23, 2022, the Company entered into a Securities Purchase Agreement and issued and sold to an institutional investor, a Promissory Note
(the “Promissory Note”) in the principal sum of $700,000.00, which amount is the $644,000 actual amount of the purchase price
plus an original issue discount in the amount of $56,000. In connection with the issuance of the Promissory Note, the Company issued to
the investor warrants to purchase 2,800,000 shares of common stock at an exercise price of $0.225, as well as returnable warrants, which
may only be exercised in the event that the Company were to default on certain debt obligations, to purchase 7,000,000 shares of common
stock at an exercise price of $0.30, in each case subject to adjustment. The Promissory Note may be converted into Company common stock
in the event of an event of default under the Promissory Note by the Company.
As a result
of the transaction, the Purchasers triggered their “most favored nation” clause which resulted in the Company entering into
an MFN Amendment Agreement (the “MFN Agreement”) with the Purchasers (ref: Convertible Notes Issued on December 10, 2021 above)
pursuant to which the Purchasers exercised their options under the most-favored nation terms contained in their existing transaction documents
with the Company. Pursuant to the MFN Agreement, among other things, (a) the Company issued to each of the Purchasers 5,434,783 5-year
Returnable Warrants which may only be exercised in the event that the Company were to default on certain debt obligations at an initial
Exercise Price per share of $0.30, (b) the events of default set forth in the Notes were amended to include certain of the Events of Default
reflected in the Promissory Note, (c) the conversion price of the Notes was amended so that upon an event of default, the conversion price
equaled $0.10, subject to adjustment, (d) the Purchasers are entitled to deduct $1,750 from conversions to cover associated fees,
and $750.00 shall be added to each prepayment to reimburse the Purchasers for administrative fees and (e) the definition of Exempt
Issuance in the note was modified to remove certain clauses of the definition.
The Company
paid to J.H. Darbie & Co., Inc. $32,200 in fees pursuant to the Company’s existing agreement with J.H. Darbie & Co.,
Inc., in relation to the transactions contemplated by the Purchase Agreement plus warrants to purchase 119,260 shares of common stock
at $0.27, subject to adjustment. The Company paid to Spencer Clarke LLC cash fees of $35,000 plus 500,000 shares of common stock.
The proceeds
received by the Company from the Offering, net of the original issue discount, fees and costs including legal fees of $7,000 and
commission fees of $32,200 were $604,800.
| (b) | Promissory Notes Issued on February 5, 2023 |
Defined
terms used under this Subsection heading are specific to this Subsection.
On
February 5, 2023 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
and issued and sold to Mast Hill, a Promissory Note (the “MH Note”) in the principal amount of $619,000.00 (actual amount
of purchase price of $526,150.00 plus an original issue discount (“OID”) in the amount of $92,850.00). Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the Company issued (a) common stock purchase warrants (the
“First Warrants”), allowing Mast Hill to purchase an aggregate of 6,900,000 shares of the Company’s common
stock and (b) common stock purchase warrants (the “Second Warrants”), allowing Mast Hill to purchase an aggregate of 7,000,000 shares
of the Company’s common stock. The Second Warrants shall, without any further action by either party thereto, be cancelled
and extinguished in its entirety if the MH Note is fully repaid and satisfied on or prior to the Maturity Date, subject further to the
terms and conditions of the MH Note.
Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the First Warrants and the Second Warrants, the Company granted
piggy-back registration rights to Mast Hill.
The Company
paid to J.H. Darbie & Co., Inc. $10,000 in fees pursuant to the Company’s existing agreement with J.H. Darbie & Co.,
Inc., in relation to the transactions contemplated by the Purchase Agreement plus warrants to purchase 219,230 shares of common stock
at $0.12, subject to adjustment. The Company paid to Spencer Clarke LLC cash fees of $52,615 plus warrants to purchase 619,000 shares
of common stock at $0.10, warrants to purchase 690,000 shares of common stock at $0.10, and warrants to purchase 700,000 shares of common
stock at $0.30, in each case subject to adjustment.
The Company
used the net proceeds from the sale of the MH Note for required debt service.
The maturity
date of the MH Note is the 12-month anniversary of the Issuance Date, and is the date upon which the principal amount, the OID, as well
as any accrued and unpaid interest and other fees, shall be due and payable.
Mast Hill
has the right, at any time on or following the six month anniversary of the Issuance Date, to convert all or any portion of the then outstanding
and unpaid principal amount and interest (including any default interest) into common stock of the Company, at a conversion price of $0.10,
subject to customary adjustments as provided in the MH Note for stock dividends and stock splits, rights offerings, pro rata distributions,
fundamental transactions and dilutive issuances. In addition, Mast Hill is entitled to deduct $1,750.00 from the conversion amount
upon each conversion, to cover Mast Hill’s fees associated with each conversion. Any such conversion is subject to customary conversion
limitations set forth in the MH Note so Mast Hill beneficially owns less than 4.99% of the common stock of the Company.
At any time
prior to the date that an Event of Default (as defined in the MH Note) occurs under the MH Note, the Company may prepay the outstanding
principal amount and interest then due under the MH Note. On any such event, the Company shall make payment to Mast Hill of an amount
in cash equal to the sum of (a) 100% multiplied by the principal amount then outstanding plus (b) accrued and unpaid interest on
the principal amount to the prepayment date plus (c) $750.00 to reimburse Mast Hill for administrative fees.
In addition,
if, at any time prior to the full repayment or full conversion of all amounts owed under the MH Note, the Company receives cash proceeds
of more than $800,000 (the “Minimum Threshold”) in the aggregate from any source or series of related or unrelated sources
from the issuance of equity (subject to exclusions described in the MH Note), debt or the issuance of securities pursuant to an Equity
Line of Credit (as defined in the MH Note) of the Company, Mast Hill shall have the right in its sole discretion to require the Company
to apply up to 50% of such proceeds after the Minimum Threshold to repay all or any portion of the outstanding principal amount and
interest then due under the MH Note.
The MH Note
contains customary Events of Default for transactions similar to the transactions contemplated by the Purchase Agreement and the MH Note,
which entitle Mast Hill, among other things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid
interest on, the MH Note, in addition to triggering the conversion rights. Any principal amount or interest on the MH Note which is not
paid when due shall bear interest at the rate of the lesser of (i) 16% per annum and (ii) the maximum amount permitted by law from
the due date until the same is paid. Upon the occurrence of any Event of Default, Mast Hill shall no longer be required to cancel and
extinguish the Second Warrants, the MH Note shall become immediately due and payable, and the Company shall pay to Mast Hill an amount
equal to the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment
multiplied by 150%, as well as all costs of collection.
The MH Note
contains restrictions on the Company’s ability to (a) incur additional indebtedness, (b) make distributions or pay dividends, (c)
redeem, repurchase or otherwise acquire its securities, (d) sell its assets outside of the ordinary course, (e) enter into certain affiliate
transactions, (f) enter into 3(a)(9) Transactions or 3(a)(10) Transactions (each as defined in the MH Note), or (g) change the nature
of its business.
Commencing
as of the Issuance Date, and until such time as the MH Note is fully converted or repaid, the Company shall not affect or enter into an
agreement to effect any Variable Rate Transaction (as defined in the Purchase Agreement).
The Purchase
Agreement contains customary representations and warranties made by each of the Company and Mast Hill. It further grants to Mast Hill
certain rights of participation and first refusal, and most-favored nation rights, all as set forth in the Purchase Agreement.
The Company
is subject to customary indemnification terms in favor of Mast Hill and its affiliates and certain other parties.
The First
Warrants have an initial exercise price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution
adjustments) and may be exercised at any time until the five year anniversary of the First Warrants. The First Warrants include a cashless
exercise provision as set forth therein. The exercise of the First Warrants are subject to a beneficial ownership limitation of 4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s
failure to timely deliver shares of Common Stock upon exercise of the First Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the First Warrants.
The Second
Warrants have an initial exercise price of $0.30 per share, subject to customary adjustments (including price-based anti-dilution
adjustments) and may be exercised at any time after February 28, 2024 (if not previously cancelled in accordance with the terms of the
MH Note and the Second Warrant) until the five year anniversary of such date. The Second Warrants include a cashless exercise provision
as set forth therein. The exercise of the Second Warrants are subject to a beneficial ownership limitation of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s failure to
timely deliver shares of Common Stock upon exercise of the Second Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the Second Warrants.
The Company
evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the
Company has determined that no provisions required derivative accounting.
The Company
first allocated the cash proceeds to the warrants, secondly, the proceeds were allocated to the present value of principal.
| (c) | Promissory
Notes Issued on February 28, 2023 |
Defined terms used under this Subsection heading are
specific to this Subsection.
On February
28, 2023 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
and issued and sold to Mast Hill, a Promissory Note (the “MH Note”) in the principal amount of $169,941,18 (actual amount
of purchase price of $136,800.00 plus an original issue discount (“OID”) in the amount of $24,141.18). Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the Company issued (a) common stock purchase warrants (the
“First Warrants”), allowing Mast Hill to purchase an aggregate of 1,790,000 shares of the Company’s common
stock and (b) common stock purchase warrants (the “Second Warrants”), allowing Mast Hill to purchase an aggregate of 1,820,000 shares
of the Company’s common stock. The Second Warrants shall, without any further action by either party thereto, be cancelled
and extinguished in its entirety if the MH Note is fully repaid and satisfied on or prior to the Maturity Date, subject further to the
terms and conditions of the MH Note.
Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the First Warrants and the Second Warrants, the Company granted
piggy-back registration rights to Mast Hill.
The Company
paid to J.H. Darbie & Co., Inc. $6,840.00 in fees pursuant to the Company’s existing agreement with J.H. Darbie & Co.,
Inc., in relation to the transactions contemplated by the Purchase Agreement plus warrants to purchase 57,000 shares of common stock at
$0.12, subject to adjustment. The Company paid to Spencer Clarke LLC warrants to purchase 200,000 shares of common stock at $0.08, warrants
to purchase 179,000 shares of common stock at $0.10, and warrants to purchase 182,000 shares of common stock at $0.30, in each case subject
to adjustment.
The Company
used the net proceeds from the sale of the MH Note for required debt service.
The maturity
date of the MH Note is the 12-month anniversary of the Issuance Date, and is the date upon which the principal amount, the OID, as well
as any accrued and unpaid interest and other fees, shall be due and payable.
Mast Hill
has the right, at any time on or following the six month anniversary of the Issuance Date, to convert all or any portion of the then outstanding
and unpaid principal amount and interest (including any default interest) into common stock of the Company, at a conversion price of $0.10,
subject to customary adjustments as provided in the MH Note for stock dividends and stock splits, rights offerings, pro rata distributions,
fundamental transactions and dilutive issuances. In addition, Mast Hill is entitled to deduct $1,750.00 from the conversion amount
upon each conversion, to cover Mast Hill’s fees associated with each conversion. Any such conversion is subject to customary conversion
limitations set forth in the MH Note so Mast Hill beneficially owns less than 4.99% of the common stock of the Company.
At any time
prior to the date that an Event of Default (as defined in the MH Note) occurs under the MH Note, the Company may prepay the outstanding
principal amount and interest then due under the MH Note. On any such event, the Company shall make payment to Mast Hill of an amount
in cash equal to the sum of (a) 100% multiplied by the principal amount then outstanding plus (b) accrued and unpaid interest on
the principal amount to the prepayment date plus (c) $750.00 to reimburse Mast Hill for administrative fees.
In addition,
if, at any time prior to the full repayment or full conversion of all amounts owed under the MH Note, the Company receives cash proceeds
of more than $800,000 (the “Minimum Threshold”) in the aggregate from any source or series of related or unrelated sources
from the issuance of equity (subject to exclusions described in the MH Note), debt or the issuance of securities pursuant to an Equity
Line of Credit (as defined in the MH Note) of the Company, Mast Hill shall have the right in its sole discretion to require the Company
to apply up to 50% of such proceeds after the Minimum Threshold to repay all or any portion of the outstanding principal amount and
interest then due under the MH Note.
The MH Note
contains customary Events of Default for transactions similar to the transactions contemplated by the Purchase Agreement and the MH Note,
which entitle Mast Hill, among other things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid
interest on, the MH Note, in addition to triggering the conversion rights. Any principal amount or interest on the MH Note which is not
paid when due shall bear interest at the rate of the lesser of (i) 16% per annum and (ii) the maximum amount permitted by law from
the due date until the same is paid. Upon the occurrence of any Event of Default, Mast Hill shall no longer be required to cancel and
extinguish the Second Warrants, the MH Note shall become immediately due and payable, and the Company shall pay to Mast Hill an amount
equal to the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment
multiplied by 150%, as well as all costs of collection.
The MH Note
contains restrictions on the Company’s ability to (a) incur additional indebtedness, (b) make distributions or pay dividends, (c)
redeem, repurchase or otherwise acquire its securities, (d) sell its assets outside of the ordinary course, (e) enter into certain affiliate
transactions, (f) enter into 3(a)(9) Transactions or 3(a)(10) Transactions (each as defined in the MH Note), or (g) change the nature
of its business.
Commencing
as of the Issuance Date, and until such time as the MH Note is fully converted or repaid, the Company shall not affect or enter into an
agreement to effect any Variable Rate Transaction (as defined in the Purchase Agreement).
The Purchase
Agreement contains customary representations and warranties made by each of the Company and Mast Hill. It further grants to Mast Hill
certain rights of participation and first refusal, and most-favored nation rights, all as set forth in the Purchase Agreement.
The Company
is subject to customary indemnification terms in favor of Mast Hill and its affiliates and certain other parties.
The First
Warrants have an initial exercise price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution
adjustments), and may be exercised at any time until the five year anniversary of the First Warrants. The First Warrants include a cashless
exercise provision as set forth therein. The exercise of the First Warrants are subject to a beneficial ownership limitation of 4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s
failure to timely deliver shares of Common Stock upon exercise of the First Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the First Warrants.
The Second
Warrants have an initial exercise price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution
adjustments), and may be exercised at any time after February 28, 2024 (if not previously cancelled in accordance with the terms of the
MH Note and the Second Warrant) until the five year anniversary of such date. The Second Warrants include a cashless exercise provision
as set forth therein. The exercise of the Second Warrants are subject to a beneficial ownership limitation of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s failure to
timely deliver shares of Common Stock upon exercise of the Second Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the Second Warrants.
The Company
evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the
Company has determined that no provisions required derivative accounting.
The Company
first allocated the cash proceeds to the warrants, secondly, the proceeds were allocated to the present value of principal.
| (d) | Promissory Notes Issued on March 24, 2023 |
Defined terms used under this Subsection heading are
specific to this Subsection.
On March
24, 2023 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
and issued and sold to Mast Hill, a Promissory Note (the “MH Note”) in the principal amount of $169,941.18 (actual amount
of purchase price of $136,800.00 plus an original issue discount (“OID”) in the amount of $24,141.18). Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the Company issued (a) common stock purchase warrants (the
“First Warrants”), allowing Mast Hill to purchase an aggregate of 1,790,000 shares of the Company’s common
stock and (b) common stock purchase warrants (the “Second Warrants”), allowing Mast Hill to purchase an aggregate of 1,820,000 shares
of the Company’s common stock. The Second Warrants shall, without any further action by either party thereto, be cancelled
and extinguished in its entirety if the MH Note is fully repaid and satisfied on or prior to the Maturity Date, subject further to the
terms and conditions of the MH Note.
Also pursuant
to the Purchase Agreement, in connection with the issuance of the MH Note, the First Warrants and the Second Warrants, the Company granted
piggy-back registration rights to Mast Hill.
The Company
paid to J.H. Darbie & Co., Inc. $6,840.00 in fees pursuant to the Company’s existing agreement with J.H. Darbie & Co.,
Inc., in relation to the transactions contemplated by the Purchase Agreement plus warrants to purchase 57,000 shares of common stock at
$0.12, subject to adjustment. The Company paid to Spencer Clarke LLC a cash fee of $13,680 plus warrants to purchase 200,000 shares of
common stock at $0.08, warrants to purchase 179,000 shares of common stock at $0.10, and warrants to purchase 182,000 shares of common
stock at $.30, in each case subject to adjustment. Such 182,000 warrants, without any further action by either party thereto, may
be cancelled and extinguished in its entirety if the MH Note is fully repaid and satisfied on or prior to the Maturity Date, subject further
to the terms and conditions of the MH Note.
The Company
used the net proceeds from the sale of the MH Note for required debt service.
The maturity
date of the MH Note is the 12-month anniversary of the Issuance Date, and is the date upon which the principal amount, the OID, as well
as any accrued and unpaid interest and other fees, shall be due and payable.
Mast Hill
has the right, at any time on or following the six month anniversary of the Issuance Date, to convert all or any portion of the then outstanding
and unpaid principal amount and interest (including any default interest) into common stock of the Company, at a conversion price of $0.10,
subject to customary adjustments as provided in the MH Note for stock dividends and stock splits, rights offerings, pro rata distributions,
fundamental transactions and dilutive issuances. In addition, Mast Hill is entitled to deduct $1,750.00 from the conversion amount
upon each conversion, to cover Mast Hill’s fees associated with each conversion. Any such conversion is subject to customary conversion
limitations set forth in the MH Note so Mast Hill beneficially owns less than 4.99% of the common stock of the Company.
At any time
prior to the date that an Event of Default (as defined in the MH Note) occurs under the MH Note, the Company may prepay the outstanding
principal amount and interest then due under the MH Note. On any such event, the Company shall make payment to Mast Hill of an amount
in cash equal to the sum of (a) 100% multiplied by the principal amount then outstanding plus (b) accrued and unpaid interest on
the principal amount to the prepayment date plus (c) $750.00 to reimburse Mast Hill for administrative fees.
In addition,
if, at any time prior to the full repayment or full conversion of all amounts owed under the MH Note, the Company receives cash proceeds
of more than $800,000 (the “Minimum Threshold”) in the aggregate from any source or series of related or unrelated sources
from the issuance of equity (subject to exclusions described in the MH Note), debt or the issuance of securities pursuant to an Equity
Line of Credit (as defined in the MH Note) of the Company, Mast Hill shall have the right in its sole discretion to require the Company
to apply up to 50% of such proceeds after the Minimum Threshold to repay all or any portion of the outstanding principal amount and
interest then due under the MH Note.
The MH Note
contains customary Events of Default for transactions similar to the transactions contemplated by the Purchase Agreement and the MH Note,
which entitle Mast Hill, among other things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid
interest on, the MH Note, in addition to triggering the conversion rights. Any principal amount or interest on the MH Note which is not
paid when due shall bear interest at the rate of the lesser of (i) 16% per annum and (ii) the maximum amount permitted by law from
the due date until the same is paid. Upon the occurrence of any Event of Default, Mast Hill shall no longer be required to cancel and
extinguish the Second Warrants, the MH Note shall become immediately due and payable, and the Company shall pay to Mast Hill an amount
equal to the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment
multiplied by 150%, as well as all costs of collection.
The MH Note
contains restrictions on the Company’s ability to (a) incur additional indebtedness, (b) make distributions or pay dividends, (c)
redeem, repurchase or otherwise acquire its securities, (d) sell its assets outside of the ordinary course, (e) enter into certain affiliate
transactions, (f) enter into 3(a)(9) Transactions or 3(a)(10) Transactions (each as defined in the MH Note), or (g) change the nature
of its business.
Commencing
as of the Issuance Date, and until such time as the MH Note is fully converted or repaid, the Company shall not affect or enter into an
agreement to effect any Variable Rate Transaction (as defined in the Purchase Agreement).
The Purchase
Agreement contains customary representations and warranties made by each of the Company and Mast Hill. It further grants to Mast Hill
certain rights of participation and first refusal, and most-favored nation rights, all as set forth in the Purchase Agreement.
The Company
is subject to customary indemnification terms in favor of Mast Hill and its affiliates and certain other parties.
The First
Warrants have an initial exercise price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution
adjustments), and may be exercised at any time until the five year anniversary of the First Warrants. The First Warrants include a cashless
exercise provision as set forth therein. The exercise of the First Warrants are subject to a beneficial ownership limitation of 4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s
failure to timely deliver shares of Common Stock upon exercise of the First Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the First Warrants.
The Second
Warrants have an initial exercise price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution
adjustments), and may be exercised at any time after February 5, 2024 (if not previously cancelled in accordance with the terms of the
MH Note and the Second Warrant) until the five year anniversary of such date. The Second Warrants include a cashless exercise provision
as set forth therein. The exercise of the Second Warrants are subject to a beneficial ownership limitation of 4.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s failure to
timely deliver shares of Common Stock upon exercise of the Second Warrants, the Company would be obligated to pay a “Buy-In”
amount pursuant to the terms of the Second Warrants.
The Company
evaluated all of the associated financial instruments set out above with respect to convertible notes with Mast Hill in accordance with
ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.
The Company
first allocated the cash proceeds to the warrants, secondly, the proceeds were allocated to the present value of principal.
Below is
a reconciliation of the convertible notes payable (including the Promissory Note) as presented on the Company’s balance sheet as
of March 31, 2023:
| | |
Principal
$ | | |
Debt
Discount
$ | | |
Net Value
$ | |
| Balance at June 30, 2022 | |
| - | | |
| - | | |
| - | |
| Promissory notes payable issued | |
| 1,640,882 | | |
| | | |
| 1,640,882 | |
| Debt discount associated with Promissory notes | |
| | | |
| (1,252,328 | ) | |
| (1,252,328 | ) |
| Amortization of debt discount | |
| | | |
| 202,060 | | |
| 202,060 | |
| Balance at March 31, 2023 | |
$ | 1,649,882 | | |
$ | (1,050,268 | ) | |
$ | 590,614 | |
Amortization
expense for the three months ended March 31, 2023 and 2022, totaled $132,805 and $0, respectively.
Amortization
expense for the nine months ended March 31, 2023 and 2022, totaled $202,060 and $0, respectively.
As of March
31, 2023 and June 30, 2022, the unamortized portion of debt discount was $1,050,268 and $0, respectively.
Interest
expense for the three months ended March 31, 2023 and 2022, totaled $22,996 and $0, respectively.
Interest
expense for the nine months ended March 31, 2023 and 2022, totaled $38,707 and $0, respectively.
As a result
of dilutive issuances during the period the exercise price of all of the aforementioned convertible notes has been reset subsequent to
the period to $0.03333. In addition, certain warrants issued to the noteholders, placement agent and J.H. Darbie have been repriced in
accordance with their respective terms and conditions.
9. Capital
Stock Activity
On October
16, 2013, Nightfood, Inc. became a wholly-owned subsidiary of Nightfood Holdings, Inc. Accordingly, the stockholders’ equity has
been revised to reflect the share exchange on a retroactive basis.
Common
Stock
The Company
is authorized to issue Two Hundred Million (200,000,000) shares of $0.001 par value per share Common Stock. Holders of Common Stock
are each entitled to cast one vote for each Share held of record on all matters presented to shareholders. Cumulative voting is not allowed;
hence, the holders of a majority of the outstanding Common Stock can elect all directors, subject to the rights of the holder of Series
A Stock described below. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out
of funds legally available therefore and, in the event of liquidation, to share pro-rata in any distribution of the Company’s assets
after payment of liabilities. The Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will
be paid unless and until the Company is profitable. Holders of Common Stock do not have pre-emptive rights to subscribe to additional
shares if issued by the Company. There are no conversion, redemption, sinking fund or similar provisions regarding the Common Stock. All
of the outstanding Shares of Common Stock are fully paid and non-assessable and all of the Shares of Common Stock offered thereby will
be, upon issuance, fully paid and non-assessable. Holders of Shares of Common Stock will have full rights to vote on all matters brought
before shareholders for their approval, subject to preferential rights of holders of any series of Preferred Stock. Holders of the Common
Stock will be entitled to receive dividends, if and as declared by the Board of Directors, out of funds legally available, and share pro-rata
in any distributions to holders of Common Stock upon liquidation. The holders of Common Stock will have no conversion, pre-emptive or
other subscription rights. Upon any liquidation, dissolution or winding-up of the Company, assets, after the payment of debts and liabilities
and any liquidation preferences of, and unpaid dividends on, any class of preferred stock then outstanding, will be distributed pro-rata
to the holders of the common stock. The holders of the common stock have no right to require the Company to redeem or purchase their shares.
Holders of shares of common stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding
shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in that event, the
holders of the remaining shares will not be able to elect any of our directors.
On October
24, 2022, the Company launched a Tier 2 offering pursuant to Regulation A (also known as “Regulation A+”) with the intent
to raise capital through an equity crowdfunding campaign. The Company is offering (this “Offering”) up to 5,000,000
units, each unit consisting of 4 shares of common stock and 4 common stock purchase warrants (“Unit”), being offered at a
price range to be determined after qualification pursuant to Rule 253(b).
| | ● | The Company had 114,050,840 and 91,814,484 shares of its $0.001 par value common stock issued and outstanding as of March 31, 2023 and June 30, 2022 respectively. |
| | ● | The Company had 1,950 and 3,260 shares of its B Preferred issued and outstanding as of March 31, 2023 and June 30, 2022 respectively. |
| | ● | During the nine months ended March 31, 2023, the Company issued an aggregate of 532,859 shares of its common stock for services valued at $61,110. |
| | ● | During the nine months ended March 31, 2023, the Company issued 500,000 shares of its common stock as financing cost valued at $60,000. |
| | ● | During the nine months ended March 31, 2023, the Company issued an aggregate of 3,231,697 shares of its common stock for cashless exercise of 4,050,000 stock purchase warrants. |
| | ● | During the nine months ended March 31, 2023, the Company sold 467,950 units at $0.50 per unit, consisting with 1,871,800 shares of common stock under its Regulation A+ Offering. The Company received net proceeds of $229,729. |
| | ● | During the nine months ended March 31, 2023, the Company issued 3,800,000 shares of its common stock in exchange for the return of 10,869,566 returnable warrants. |
| | ● | During the nine months ended March 31, 2023, the Company issued 2,750,000 shares of its common stock in exchange for the return of 2,750,000 stock purchase warrants. |
| | | |
| | ● | During the nine months ended March 31, 2023, holders of the B Preferred converted 1,310 shares of Series B Preferred Stock into 6,550,000 shares of its common stock. |
Preferred Stock
Series A Preferred Stock
The Company
is authorized to issue 1,000,000 shares of $0.001 par value per share Preferred Stock. Of the 1,000,000 shares, 10,000
shares were designated as Series A Preferred Stock (“Series A Stock”). Holders of Series A Stock are each entitled to cast
100,000 votes for each Share held of record on all matters presented to shareholders.
In addition
to his ownership of the common stock, Mr. Folkson owns 1,000 shares of the Series A Stock which votes with the common stock and has an
aggregate of 100,000,000 votes.
The Company
had 1,000 and 1,000 shares of the Series A Stock issued and outstanding as of March 31, 2023, and June 30, 2022, respectively.
Series B
Preferred Stock
In April 2021, the
Company designated 5,000 shares of its Preferred Stock as B Preferred, each share of which is convertible into 5,000 shares
of common stock and 5,000 non-detachable warrants with an initial exercise price of $0.30.
During the
fiscal years ended June 30, 2023 and 2022, the Company sold 0 and 335 shares of its B Preferred for gross cash proceeds
of $0 and $335,000, respectively. These proceeds were used for operating capital. The B Preferred meets the criteria for equity
classification and is accounted for as equity transactions. Specifically, among other factors, this qualifies as equity because redemption
is not invoked at the option of the holder and the B Preferred does not have to be redeemed on a specified date.
During the
nine months ended March 31, 2023, holders of the B Preferred Stock converted 1,310 shares of B Preferred Stock into 6,550,000 shares
of its common stock.
The Company
had 1,950 and 3,260 shares of its B Preferred Stock issued and outstanding as of March 31, 2023, and June 30, 2022, respectively.
Dividends
The Company
has never declared dividends, however as set out below, during the fiscal year ended June 30, 2022 and 2021, upon issuance of a total
of 335 and 4,665 shares of B Preferred, respectively, the Company recorded a deemed dividend as a result of beneficial
conversion feature associated with the transaction.
In connection
with certain conversion terms provided for in the designation of the B Preferred, pursuant to which each share of B Preferred is convertible
into 5,000 shares of common stock and 5,000 warrants, the Company recognized a beneficial conversion feature upon
the conclusion of the transaction in the amount of $4,431,387. The beneficial conversion feature was treated as a deemed dividend,
and fully amortized on the transaction date due to the fact that the issuance of the B Preferred was classified as equity.
10. Warrants
The following
is a summary of the Company’s outstanding common stock purchase warrants.
During the
fiscal year ended June 30, 2022, holders of the Company’s B Preferred converted 1,740 shares of B Preferred into 8,700,000 shares
of its common stock, along with 8,700,000 warrants issued to those holders with an adjusted exercise price of $0.14364 as
of March 31, 2023 ($0.2919 per share – June 30, 2022). Said warrants are subject to further exercise price adjustments
resulting from certain financing activities and equity transactions which could increase or decrease the exercise price in in the future.
During the
fiscal year ended June 30, 2022, 4,000,000 warrants were issued to the holder of outstanding convertible notes with an initial
exercise price of $0.25 per share, and 878,260 warrants issued to the placement agent with an initial exercise price of
$0.25 per share. The Company valued these warrants using the Black Scholes model utilizing a 143.39% volatility and a risk-free
rate of 1.25%.
During the
fiscal year ended June 30, 2022, the Company entered into a warrant agreement with one of the Company’s Directors issuing 100,000 warrants
at a strike price of $0.2626 having a term of five years. The Company valued these warrants using the Black Scholes model utilizing
a 151.07% volatility and a risk-free rate of 0.79%.
During the
nine months ended March 31, 2023, the Company entered into an Agreement For Shareholder Lock-Up And Acquisition of Warrants (the “Lock-Up
Agreement”), with Mr. Folkson, issuing warrants at a strike price of $0.30 having a term of one year. The Company valued
these warrants using the Black Scholes model utilizing a 103.60% volatility and a risk-free rate of 4.30%.
During the
nine months ended March 31, 2023, holders of the Company’s B Preferred converted 1,310 shares of B Preferred into 6,550,00 shares
of its common stock, along with 6,550,000 warrants issued to those holders with an adjusted exercise price of $0.14364 as
of March 31, 2023. Said warrants are subject to further exercise price adjustments resulting from certain financing activities and equity
transactions which could increase or decrease the exercise price in in the future.
During the
nine months ended March 31, 2023, 2,800,000 warrants were issued to the holder of an outstanding promissory note with an initial
exercise price of $0.225 per share, 280,000 warrants were concurrently issued to the Placement Agent with an initial exercise price
of $0.225, and a further 119,260 warrants were issued to the Placement Agent with initial exercise price of $0.27 per share. The Company
valued these warrants using the Black Scholes model utilizing a 122.42% volatility and a risk-free rate of 3.91%. On October
4, 2022, the Company and the Placement Agent entered into an Addendum to amend their Letter of Engagement to cancel compensatory warrants
to purchase 280,000 shares of common stock of the Company and to cancel returnable compensatory warrants to purchase 700,000 shares of
Common Stock of the Company for a one time cash payment of $35,000 and the issuance of 500,000 shares of Common Stock in full satisfaction
of compensation earned.
During the
nine months ended March 31, 2023 the Company issued a cumulative 10,480,000 first warrants to the holder of outstanding promissory notes,
10,640,000 second warrants (which warrants are cancelable in full should the notes be repaid in full on or before maturity), 2,949,000
placement agent warrants, 182,000 placement agent warrants (which warrants are cancelable in full should the notes be repaid in full on
or before maturity) and 333,230 warrants to JH Darbie. The warrants were issued at initial exercise prices between $0.08 and $0.12 per
share and valued on issuance dates with the Black Scholes model utilizing a volatility from 111.36% and 112.33% and a risk-free
rate from 3.41% and 4.18%.
During the
nine months ended March 31, 2023, the Company issued an aggregate of 3,231,697 shares of its common stock for the cashless
exercise of 4,050,000 stock purchase warrants.
During the
nine months ended March 31, 2023, the Company entered into a warrant agreement with one of the Company’s Directors for the issuance
of 100,000 warrants at a strike price of $0.125 having a term of five years. The Company valued these warrants using
the Black Scholes model utilizing a 121.75% volatility and a risk-free rate of 4.06%.
During the nine
months ended March 31, 2023 the Company issued 1,871,800 warrants to various subscribers under its Tier 2 offering pursuant to Regulation
A (also known as “Regulation A+”) pursuant to which the Company is offering up to 5,000,000 units at a price of $0.50
per unit, each unit consisting of 4 shares of common stock and 4 common stock purchase warrants (“Unit”) for exercise at at
a strike price per Share equal to 125% of the price per share of common stock, or $0.15625 per share with a term of 2 years. The
Company valued these warrants using the Black Scholes model on each closing date utilizing a volatility between 106.15% and 111.39% and
a risk-free rate ranging from 4.21% and 4.61%.
Certain
warrants in the below table include dilution protection for the warrant holders, which could cause the exercise price to be adjusted either
higher or lower as a result of various financing events and stock transactions. The result of the warrant exercise price downward
adjustment on modification date is treated as a deemed dividend and fully amortized on the transaction date. In addition to the reduction
in exercise price, with certain wararnts there is a corresponding increase to the number of warrants to the holder on a prorated basis.
Under certain conditions, such as the successful retirement of a convertible note through repayment, it is possible for the exercise price
of these warrants to increase and for the number of warrants outstanding to decrease.
The aggregate
intrinsic value of the warrants as of March 31, 2023 is $1,713,260. The aggregate intrinsic value of the warrants as of June 30, 2022
was $11,650.
| Exercise Price | | |
June 30,
2022 | | |
Issued | | |
Repricing | | |
Exercised | | |
Others | | |
Cancelled | | |
Expired | | |
Redeemed | | |
March 31,
2023 | |
| $ | 0.03333 | | |
| | | |
| 119,260 | | |
| 42,355,472 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 42,474,732 | |
| $ | 0.0500 | | |
| | | |
| 300,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 300,000 | |
| $ | 0.0800 | | |
| | | |
| 379,000 | | |
| (379,000 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.1000 | | |
| | | |
| 12,868,000 | | |
| (12,868,000 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.1200 | | |
| | | |
| 333,230 | | |
| (333,230 | ) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.1250 | | |
| | | |
| 3,400,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 3,400,000 | |
| $ | 0.1333 | | |
| | | |
| | | |
| 1,507,049 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1,507,049 | |
| $ | 0.1436 | | |
| | | |
| | | |
| 29,226,191 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 29,226,191 | |
| $ | 0.1500 | | |
| 500,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (500,000 | ) | |
| | | |
| - | |
| $ | 0.1563 | | |
| | | |
| 1,871,800 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1,871,800 | |
| $ | 0.2000 | | |
| 2,250,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2,250,000 | |
| $ | 0.2250 | | |
| | | |
| 2,800,000 | | |
| | | |
| (2,800,000 | ) | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.2500 | | |
| 4,878,260 | | |
| | | |
| (878,260 | ) | |
| (1,250,000 | ) | |
| (2,750,000 | ) | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.2626 | | |
| 100,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 100,000 | |
| $ | 0.2700 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.2919 | | |
| 10,950,000 | | |
| | | |
| (9,700,000 | ) | |
| (1,250,000 | ) | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.3000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| $ | 0.3000 | | |
| 400,000 | | |
| 7,132,000 | | |
| (6,732,000 | ) | |
| | | |
| | | |
| | | |
| (400,000 | ) | |
| | | |
| 400,000 | |
| $ | 0.5000 | | |
| 500,000 | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 500,000 | |
| | | | |
| 19,578,260 | | |
| 29,203,290 | | |
| 42,198,222 | | |
| (5,300,000 | ) | |
| (2,750,000 | ) | |
| - | | |
| (900,000 | ) | |
| - | | |
| 82,029,772 | |
Returnable
Warrants
A cumulative
total of 18,956,523 Returnable Warrants issued in conjunction with a financing agreement dated as of September 23, 2022, and
a MFN agreement entered into concurrently on September 23, 2022 (ref: Note 8 above) may only be exercised in the event that
the Company were to default on certain debt obligations. The Returnable Warrants have an initial exercise price of $0.30 per share,
subject to customary adjustments (including price-based anti-dilution adjustments) and may be exercised at any time after an Event of
Default until the five-year anniversary of such date. The Returnable Warrants include a cashless exercise provision as set forth therein.
The exercise of the Returnable Warrants are subject to a beneficial ownership limitation of 4.99% of the number of shares of Common
Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s failure to timely deliver shares
of Common Stock upon exercise of the Returnable Warrants, the Company would be obligated to pay a “Buy-In” amount pursuant
to the terms of the Returnable Warrants.
During the
three months ended September 30, 2022, 7,000,000 returnable warrants issued to the holder of a certain Promissory Note
dated September 23, 2022, were initially valued using the Black Scholes model with a volatility of 121.88% and a risk-free rate
of 3.91% resulting in contingent expenses to be recorded as additional financing costs in the cumulative amount of $642,140, which
amount will be recorded in a future reporting period, only in the event the Company defaults on certain debt obligations.
On December
29, 2022, upon an event of default as defined under the MFN agreement, 5,434,785 returnable warrants issued to each of
the Purchasers under the MFN Agreement, and 1,086,957 returnable warrants issued to the Placement Agent, were triggered and
valued using the Black Scholes model with a volatility of 124.14% and a risk-free rate of 3.94% resulting in financing expenses
recorded as additional financing costs in the cumulative amount of $1,085,780. In February, the Company issued 3,800,000
shares of its common stock in exchange for the return of 10,869,566 returnable warrants. The warrants
issued to the Placement Agent remained available for exercise.
During the
three months ended March 31, 2023, the Company issued a cumulative 10,640,000 returnable warrants to the Purchasers of certain convertible
notes and 182,000 returnable warrants to the Placement Agent. Any expense related to such warrants will be recorded in a future reporting
period and only in the event the Company defaults on certain debt obligations. These returnable warrants initially valued using the Black
Scholes model with a volatility of between 111.36% and 112.33% and a risk-free rate of between 3.41% and 4.18% resulting in
contingent expenses to be recorded as additional financing costs in the cumulative amount of $703,440, which amount will be recorded in
a future reporting period, only in the event the Company defaults on certain debt obligations.
11. Fair Value of Financial Instruments
| |
● |
Cash and Equivalents,
Receivables, Other Current Assets, Short-Term Debt, Accounts Payable, Accrued and Other Current Liabilities. |
| |
● |
The carrying
amounts of these items approximated fair value. |
| |
● |
Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. To increase the comparability of fair value measures, Financial Accounting Standards
Board (“FASB”) ASC Topic 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). |
| |
Level 1— |
Valuations
based on quoted prices for identical assets and liabilities in active markets. |
| |
Level 2— |
Valuations
based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data. |
| |
Level 3— |
Valuations
based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market
participants. These valuations require significant judgment. |
At March 31, 2023 and June 30, 2022 , the
Company had no outstanding derivative liabilities.
12. 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 $0.15 per share, of which all have vested. |
| | ● | CEO Sean Folkson has a twelve-month consulting agreement which went into effect on January 1, 2022, and continues on a monthly basis, which will reward him with bonuses earned of 1,000,000 warrants at a strike price of $0.50 when the Company records its first quarter with revenues over $1,000,000, an additional 3,000,000 warrants with a $0.50 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. Mr. Folkson will also be awarded warrants with a strike price of $0.50 should the Company exceed $500,000 in non-traditional retail channel revenue during the term of the agreement, and should the Company enter into a product development or distribution partnership with a multi-national food & beverage conglomerate during the term of the Agreement. As of March 31, 2023, those conditions were not met and therefore nothing was accrued related to this arrangement. |
| |
● |
Litigation:
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to
time that may harm our business. The Company is not aware of any such legal proceedings that we believe will have, individually or
in the aggregate, a material adverse effect on our business, financial condition or operating results. |
13. 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 $18,000 and $54,000 is reflected in professional fees for the
three- and nine-months periods ending March 31, 2023. At March 31, 2023 and June 30, 2022 respectively, Mr. Folkson was owed $21,000 and
$0 in unpaid consulting fees which amounts are included on the balance sheets in accrued expenses- related party. |
| | ● | On January 20, 2023, the Company entered into the Lock-Up Agreement with Mr. Folkson. For purposes of the Lock-Up Agreement, Mr. Folkson is the direct or indirect owner of 16,776,591 shares of the Company’s common stock (the “Shares”), and Mr. Folkson has agreed to not transfer, sell, or otherwise dispose of any Shares through February 4, 2023. The Lock-Up Agreement is substantially similar to, and serves as an extension of, the lock-up agreement previously in place between the Company and Mr. Folkson, which expired in accordance with its terms on February 4, 2022. The Lock-Up Agreement further provides, in exchange for the agreement to lock up the Shares, that Mr. Folkson shall receive warrants to acquire 400,000 shares of Company common stock at an exercise price of $0.30 per share, which warrants carry a twelve month term and a cashless provision, and will expire if not exercised within the twelve month term. On December 8, 2017, Mr. Folkson purchased Warrants, at a cost of $0.15 per Warrant, to acquire up to 80,000 additional shares of Company stock at a strike price of $0.20, and with a term of three years from the date of said agreement. This purchase resulted in a reduction in the accrued consulting fees due him by $12,000. Those warrants were not exercised during that timeframe and have expired. During the second quarter 2019 Mr. Folkson purchased 400,000 shares of stock at a price of $0.30 per share, valued at $120,000 which was charged to his accrual. |
| | ● | In addition, the Company has made bonuses available to Mr. 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 Mr. Folkson warrants with a $0.50 and $1.00 strike price which would need to be exercised within 90 days of the respective quarterly or annual filing. As of March 31, 2023, those conditions were not met and therefore nothing was accrued related to this arrangement.
Folkson
Loan
On February
7, 2023, Sean Folkson, the Chairman and CEO of the Company, loaned $40,000 to the Company, which was evidenced by a promissory note
(the “Folkson Note”). The maturity date under the Folkson Note is February 7, 2024. The Folkson Note bears interest at
a fixed rate of 12.0% per annum, and shall be payable on the maturity date. Notwithstanding the foregoing, the Company shall not
make any payment to Mr. Folkson under the Folkson Note, whether of principal or interest, and whether or not on the maturity date when
due and payable, unless and until all indebtedness of the Company owed or owing to each of Mast Hill, Puritan Partners and Verition has
been repaid in full. The Folkson Note has customary events of default.
The Company
intends to use the proceeds from the Folkson Note for working capital.
|
| | ● | In addition, at March 31, 2023 and 2022, respectively, there was $18,000 and $0 in unpaid directors fees which amounts are included on the balance sheets as accrued expenses- related party. |
14. Subsequent Events
Mast Hill Loan April 17, 2023
Defined terms used under this Subsection heading
are specific to this Subsection.
On April 17, 2023 (the “Issuance Date”),
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) and issued and sold to Mast Hill, a Promissory
Note (the “MH Note”) in the principal amount of $169,941,18 (actual amount of purchase price of $136,800.00 plus
an original issue discount (“OID”) in the amount of $24,141.18). Also pursuant to the Purchase Agreement, in connection with
the issuance of the MH Note, the Company issued (a) common stock purchase warrants (the “First Warrants”), allowing Mast
Hill to purchase an aggregate of 1,790,000 shares of the Company’s common stock and (b) common stock purchase warrants
(the “Second Warrants”), allowing Mast Hill to purchase an aggregate of 1,820,000 shares of the Company’s
common stock.
Also pursuant to the Purchase Agreement, in connection
with the issuance of the MH Note, the First Warrants and the Second Warrants, the Company granted piggy-back registration rights to Mast
Hill.
The Company paid to J.H. Darbie & Co., Inc.
$6,840.00 in fees pursuant to the Company’s existing agreement with J.H. Darbie & Co., Inc., in relation to the transactions
contemplated by the Purchase Agreement plus warrants to purchase 57,000 shares of common stock at $.12, subject to adjustment. The Company
paid to Spencer Clarke LLC a cash fee of $13,680 plus warrants to purchase 200,000 shares of common stock at $.08, 179,000 shares of
common stock at $.10, and 182,000 shares of common stock at $.30, in each case subject to adjustment.
The Company intends to use the net proceeds from
the sale of the MH Note for required debt service.
The maturity date of the MH Note is the 12-month
anniversary of the Issuance Date, and is the date upon which the principal amount, the OID, as well as any accrued and unpaid interest
and other fees, shall be due and payable.
Mast Hill has the right, at any time on or following
the six month anniversary of the Issuance Date, to convert all or any portion of the then outstanding and unpaid principal amount and
interest (including any default interest) into common stock of the Company, at a conversion price of $0.10, subject to customary adjustments
as provided in the MH Note for stock dividends and stock splits, rights offerings, pro rata distributions, fundamental transactions and
dilutive issuances. In addition, Mast Hill is entitled to deduct $1,750.00 from the conversion amount upon each conversion, to cover
Mast Hill’s fees associated with each conversion. Any such conversion is subject to customary conversion limitations set forth
in the MH Note so Mast Hill beneficially owns less than 4.99% of the common stock of the Company.
At any time prior to the date that an Event of
Default (as defined in the MH Note) occurs under the MH Note, the Company may prepay the outstanding principal amount and interest then
due under the MH Note. On any such event, the Company shall make payment to Mast Hill of an amount in cash equal to the sum of (a) 100%
multiplied by the principal amount then outstanding plus (b) accrued and unpaid interest on the principal amount to the prepayment date
plus (c) $750.00 to reimburse Mast Hill for administrative fees.
In addition, if, at any time prior to the full
repayment or full conversion of all amounts owed under the MH Note, the Company receives cash proceeds of more than $800,000 (the
“Minimum Threshold”) in the aggregate from any source or series of related or unrelated sources from the issuance of equity
(subject to exclusions described in the MH Note), debt or the issuance of securities pursuant to an Equity Line of Credit (as defined
in the MH Note) of the Company, Mast Hill shall have the right in its sole discretion to require the Company to apply up to 50%
of such proceeds after the Minimum Threshold to repay all or any portion of the outstanding principal amount and interest then due under
the MH Note.
The MH Note contains customary Events of Default
for transactions similar to the transactions contemplated by the Purchase Agreement and the MH Note, which entitle Mast Hill, among other
things, to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the MH Note, in addition
to triggering the conversion rights. Any principal amount or interest on the MH Note which is not paid when due shall bear interest at
the rate of the lesser of (i) 16% per annum and (ii) the maximum amount permitted by law from the due date until the same is paid.
Upon the occurrence of any Event of Default, Mast Hill shall no longer be required to cancel and extinguish the Second Warrants, the
MH Note shall become immediately due and payable, and the Company shall pay to Mast Hill an amount equal to the principal amount then
outstanding plus accrued interest (including any default interest) through the date of full repayment multiplied by 150%, as well
as all costs of collection.
The MH Note contains restrictions on the Company’s
ability to (a) incur additional indebtedness, (b) make distributions or pay dividends, (c) redeem, repurchase or otherwise acquire its
securities, (d) sell its assets outside of the ordinary course, (e) enter into certain affiliate transactions, (f) enter into 3(a)(9)
Transactions or 3(a)(10) Transactions (each as defined in the MH Note), or (g) change the nature of its business.
Commencing as of the Issuance Date, and until
such time as the MH Note is fully converted or repaid, the Company shall not affect or enter into an agreement to effect any Variable
Rate Transaction (as defined in the Purchase Agreement).
The Purchase Agreement contains customary representations
and warranties made by each of the Company and Mast Hill. It further grants to Mast Hill certain rights of participation and first refusal,
and most-favored nation rights, all as set forth in the Purchase Agreement.
The Company is subject to customary indemnification
terms in favor of Mast Hill and its affiliates and certain other parties.
The First Warrants have an initial exercise price
of $0.10 per share, subject to customary adjustments (including price-based anti-dilution adjustments), and may be exercised at
any time until the five year anniversary of the First Warrants. The First Warrants include a cashless exercise provision as set forth
therein. The exercise of the First Warrants are subject to a beneficial ownership limitation of 4.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such exercise. In the event of the Company’s failure to timely deliver
shares of Common Stock upon exercise of the First Warrants, the Company would be obligated to pay a “Buy-In” amount pursuant
to the terms of the First Warrants.
The Second Warrants have an initial exercise
price of $0.10 per share, subject to customary adjustments (including price-based anti-dilution adjustments), and may be exercised
at any time after February 5, 2024 (if not previously cancelled in accordance with the terms of the MH Note and the Second Warrant) until
the five year anniversary of such date. The Second Warrants include a cashless exercise provision as set forth therein. The exercise
of the Second Warrants are subject to a beneficial ownership limitation of 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to such exercise. In the event of the Company’s failure to timely deliver shares of Common Stock
upon exercise of the Second Warrants, the Company would be obligated to pay a “Buy-In” amount pursuant to the terms of the
Second Warrants.
Share Issuances
| | ● | Effective as of April 17, 2023 (the “Effective Date”), Nightfood Holdings, Inc. (the “Company”) entered into Warrant Amendment and Exercise Agreements (the “Amendment Agreements”) with certain existing warrantholders of the Company (each, a “Warrantholder” and collectively, the “Warrantholders”). The Warrantholders are registered holders of common stock purchase warrants of the Company issued pursuant to the terms of Series B Preferred Stock of the Company (the “Original Warrants”). Pursuant to the Amendment Agreements, (a) the
Original Warrants were amended to reduce the exercise price thereof to $0.05 per share (the “Adjusted Exercise Price”) and
to provide that upon the exercise of the Original Warrants pursuant to the terms and conditions of the Amendment Agreements, upon exercise
the Warrantholders shall also receive, pursuant to the terms of the Amendment Agreements, a further five-year common stock purchase warrant
(“Exercise Warrant”) to purchase an equal number of shares of common stock, par value $0.001 per share, of the Company, at
an initial exercise price per share of $0.125, (b) the Warrantholders agreed to exercise an aggregate of 2,750,000 shares of Common Stock
(or pre-funded warrants in substitution thereof) underlying the Original Warrants (“Exercise Shares”) at the Adjusted Exercise
Price, or an aggregate of $137,500 and (c) the Warrantholders were granted the option to exercise up to an aggregate of an additional
2,750,000 Exercise Shares at the Adjusted Exercise Price, or an aggregate of up to $137,500, by May 31, 2023. Any remaining shares of
Common Stock underlying the Original Warrant not so exercised shall continue to be exercisable in accordance with the terms of the Original
Warrant and not pursuant to the Amendment Agreement.
The Company paid to Spencer Clarke LLC $13,750 in cash fees (plus 275,000 warrants at an exercise price of $.05 per share and 275,000 warrants at an exercise price of $.125 per share (the “Warrant Exercise Commission Warrants”)), pursuant to the Company’s existing agreement with Spencer Clarke LLC, in relation to the transactions contemplated by the Amendment Agreements. The foregoing is a brief description of the Amendment Agreements and the Exercise Warrants, and is qualified in its entirety by reference to the full text of the Amendment Agreements and the Exercise Warrants. |
| | | |
| | ● | On April 13, 2023, a warrantholder exercised 4,023,182
warrants via cashless exercise and was issued 3,317,431 shares of common stock.
|
| | ● | On May 2, 2023, a debtholder converted $49,995 of principal and interest in exchange for 1,500,000 shares of common stock. |
| ● | On
May 18, 2023, the Company entered into an Amendment and Addendum to Letter of Engagement agreement with its banker, Spencer Clarke LLC
(“SC”). The agreement allowed for an extension of the Engagement letter between the parties to June 30, 2023. As
compensation for this extension, and for certain cash and other compensation SC has agreed to forego during the term of the Engagement
Letter for benefit of NGTF, the cash component of which is equal to $479,842, NGTF shall issue to SC 1,000,000 common stock purchase
warrants with an exercise price of $.033 and the parties entered into a Warrant and Exchange Agreement. The Warrant and Exchange
Agreement allowed for SC to exchange a total of 16,181,392 warrants previously earned as success fee warrants with an adjusted exercise
price of $.0747 as of 12/31/22, and subject to further adjustment, for the identical number of warrants with an exercise price which
shall be capped at $.0747. |
The Company’s management has
reviewed all material subsequent events through the date these financial statements were issued in accordance with ASC 855-10.