| ● | 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. During the three months ended September 30, 2023 the Company wrote down inventory balances by $113,196 as a result of damage, loss and spoilage. |
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 $53,169($7,131) and $158,040$37,166 for the three months ended December 31,September 30, 2023 and 2022, and 2021, respectively. The Company recorded advertising costs of $ 90,335 and $465,791 for the six months ended December 31, 2022 and 2021, 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 December 31, 2022September 30, 2023 and June 30, 2022,2023, 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 $0.07474$0.1324 per share through December 31, 2022.September 30, 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 December 31, 2022.September 30, 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 through June 30, 2022 was approximately $4.4 million. During the year ended June 30, 2023 the Company recorded an additional deemed dividend of approximately $1.1 million in relation to the B Preferred stock and downward price adjustments to certain warrants.
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
| ● | DuringIn the six monthsthree-month period ended December 31, 2022, the CompanySeptember 30, 2023, we had one customer account for approximately 35% of the gross sales, one customerwhich accounted for approximately 26% of gross sales, and one customer accounted for approximately 12% and another customer accounted for approximately 10% of gross sales. During the six months ended December 31, 2021, the Company had one customer account for 26% of the gross sales. One other customer accounted for 18% of the gross sales and two other customers each account for more than 10% of the gross sales. During the three months ended December 31, 2022, the Company had one customer account for approximately 74% of the gross sales. One other customer accounted for approximately 23% of gross sales. During the three months ended December 31, 2021,September 30, 2022, the Company had one customer accountfive customers each accounting for 36% of the gross sales. One other customer accounted for 22%sales exceeding 10% of the gross sales. |
Vendor Concentration
| ● | DuringIn the three-month period ended December 31, 2022, two vendorsSeptember 30, 2023, one vendor accounted for more than 10% of the Company’s operating expenses.our costs of goods sold. During the six-monththree-month period ended December 31,September 30, 2022, two vendorsone vendor accounted for more than 10% of the Company’s operating expenses During the three and six-month periods ended December 31, 2021, no vendors accounted for more than 10%our costs of the Company’s operating expenses.goods sold. |
Receivables Concentration
| ● | As of December 31, 2022,September 30, 2023, the Company had receivables due from elevennine customers. One accounted for 57% of the total balance, one accounted for 21%53% of the total balance, and onethree of the others each accounted for 8%between 10% and 14% of the totaloutstanding balance. As of June 30, 2022,2023, the Company had receivables due from sixnine customers, one of whichwho accounted for over 59%56% of the outstanding balance. OneThree of the remaining fiveothers each accounted for 13.5% of the outstanding balancebetween 10% and one accounted for 11%14% 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 six months ended December 31,September 30, 2023 and 2022 and 2021 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
| ● | ASU No. 2019-12, Simplifying the Accounting for Income Taxes |
| ● | In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The ASU is intended to enhance and simplify aspects of the income tax accounting guidance in ASC 740 as part of the FASB’s simplification initiative. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted. The Company has adopted this ASU and there is no material impact on our Consolidated Financial Statements. |
| ● | In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. This ASU is applied prospectively and becomes effective immediately upon the transition from LIBOR. The Company has analyzed the guidance and the Company has no contract or hedging relationships that will be affected by this guidance. The adoption of this guidance will have no impact on its consolidated financial statements. |
| ● | 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 will continue to monitor these emerging issues to assesshas implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any potential futureother new accounting pronouncements that have been issued that might have a material impact on its financial statements.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 sixthree months ended December 31, 2022,September 30, 2023, the Company had an operating and net loss of $5,761,372 and$1,433,042, cash flow used in operations of $738,165$89,763 and an accumulated deficit of $37,548,495.$36,441,939. |
| ● | The Company has limited available cash resources and it doeswe do not believe itsour cash on hand will be sufficient to fund our operations and growth throughout fiscal year 2024 or adequate to satisfy our immediate or ongoing working capital and growth needs throughout Fiscal Year 2023.needs. We are currently in default with respect to the terms of several of our convertible notes payable.
The Company is continuing to seek to raise capital through the sales of its common stock, including pursuant to its recently launched 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 into the raising of capital from additional debt and equity financing. However, the Company’s ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating revenue. The Company believes that its current capitalization structure, combined with ongoing increases in revenues, will enable itAdditionally, management is investing the acquisition of additional revenue generating assets through the issuance of debt and/or equity to successfully secure required financing to continue its growth.further assist the Company’s growth initiatives. |
| ● | 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. |
| ● | The outbreak of the novel coronavirus (COVID-19), including the measures to reduce its spread, and the impact on the economy, cannot fully be understood and identified. Indications to date are that there are somewhat offsetting factors relating to the impact on our Company. Industry data shows that supermarket sales remain up, with more people spending more time at home. Anecdotally and statistically, snacking activity is also up while consumers are reporting a decrease in sleep quality and sleep satisfaction. |
| ● | The offsetting factors are the impact of the virus on the overall economy, and the impact that a down economic period can have on consumer behavior, including potential reductions in travel, hotel occupancy, and trial of new brands. Greater unemployment, recession, and other possible unforeseen factors are shown to have an impact. Research indicates that consumers are less likely to try new brands during economic recession and stress, returning to the legacy brands they’ve known for decades. |
| ● | From both public statements observed, and conversations conducted between Nightfood Managementmanagement and current and former executives from certain global food and beverage conglomerates, it has been affirmed to Managementmanagement that there is increased strategic interest in the nighttime nutrition space as a potential high-growth opportunity, partially due to recent declines in consumer sleep quality and increases in at-home nighttime snacking. |
| ● | We haveThe Company has experienced no major issues with supply chain or logistics. Order processing function has been normal to date, and ourits manufacturers have assured usthe Company that their operations are “business as usual” as of the time of this filing. |
| ● | It is possible that the fallout from the pandemic could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable to meet certain debts and expenses. |
| ● | It is impossible to know what the future holds with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current coronavirus pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, vendors, and business partners. It is difficult to know if the pandemic has materially impacted the results of operations, and we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if necessary. |
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 December 31, 2022September 30, 2023 and JuneSeptember 30, 2022, respectively. |
5. Inventories
| ● | Inventory consists of the following at December 31, 2022September 30, 2023 and June 30, 2022:2023: |
| | | As of | | As of | | | September 30,
2023 | | | June 30,
2023 | | | | | December 31,
2022 | | June 30,
2022 | | | | Inventory: Finished Goods - Ice Cream | | $ | 113,132 | | | $ | 165,470 | | | | Inventory: Ingredients & Finished Goods - Cookies | | | 54,171 | | | | - | | | | Inventory: Finished Goods | | | $ | 124,241 | | | $ | 163,644 | | | Inventory: Ingredients | | $ | 156,253 | | | $ | 82,625 | | | | 28,193 | | | | 63,734 | | | Inventory: Packaging | | $ | 128,593 | | | $ | 83,436 | | | | 8,322 | | | | 48,824 | | | Inventory: Allowance for Unsaleable Invent | | $ | 1,468 | | | $ | - | | | | Total Inventory | | $ | 453,617 | | | $ | 331,531 | | | $ | 160,756 | | | $ | 276,202 | |
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. During the three months ended September 30, 2023 the Company wrote down inventory balances totaling $113,196 as a result of inventory damage and spoilage.
6. Other current assets
| ● | Other current assets consist of the following vendor deposits at December 31, 2022September 30, 2023 and June 30, 2022. 2023. |
| | | December 31,
2022 | | June 30,
2022 | | | September 30,
2023 | | | June 30,
2023 | | | Other Current Assets | | | | | | | | | | | | Prepaid expenses | | | $ | 9,020 | | | $ | - | | | Deposits | | $ | 103,026 | | | $ | 137,797 | | | | 29,396 | | | | 92,726 | | | TOTAL | | $ | 103,026 | | | $ | 137,797 | | | $ | 38,416 | | | $ | 92,726 | |
7. Other Current LiabilitiesAccounts Payable and Accrued liabilities
Other current liabilities consist of the following at December 31, 2022September 30, 2023 and June 30, 2022:2023:
| | | September 30,
2023 | | | June 30,
2023 | | | Interest Payable | | $ | 82,578 | | | $ | 40,779 | | | Accounts payable | | | 615,682 | | | | 563,737 | | | TOTAL | | $ | 698,260 | | | $ | 604,516 | |
| | | December 31,
2022 | | | June 30,
2022 | | | Other Current Liabilities | | | | | | | | Accrued Consulting Fees (related party) | | $ | 27,000 | | | $ | 3,000 | | | TOTAL | | $ | 27,000 | | | $ | 3,000 | |
8. Debt
| ● | Convertible Notes Payable consist of the following at December 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 $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 havehad a maturity of December 10, 2022, an interest rate of 8% per annum, and arewere 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, which resulted in an adjustment of the conversion price to $0.0333.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 arewere 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.
Pursuant to the terms of Note, among other things, the
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 the December 31, 2022 the Company entered into a forbearance agreement with the Purchasers as disclosed on Form 8K filed onset out below. Forbearance and Exchange Agreement On February 8, 2023.4, 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 $0.1109 per share being redeemed. The Purchaser’s sale of the Exchange Shares on or after September 24, 2023, is subject to a leak-out until all of the Exchange Shares are sold. In addition, the Purchaser’s sale of any common stock of the Company owned by them other than the Exchange Shares, shall also be subject to a leak-out during the period ending on the six-month anniversary of the date of the Forbearance Agreement. |
| ● | Each Purchaser agrees to forbear from exercising its rights against the Company under its respective Note until and unless the occurrence of any of the following events: (a) the failure of the Company to make a scheduled payment pursuant to the Forbearance Agreement, subject to a five day right to cure; (b) the failure of the Company to observe, or timely comply with, or perform any other covenant or term contained in the Forbearance Agreement, subject to a ten day right to cure; (c) the Company or any subsidiary of the Company commences bankruptcy and/or any insolvency proceedings; or (d) the delivery of any notice of default by Mast Hill Fund, L.P. (“Mast Hill”) to the Company with respect to indebtedness owed to Mast Hill by the Company. |
The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.
In accordance with ASC 470- Debt, the Company first allocated the cash proceeds to the loan and the warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature.
Below is a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of December 31, 2022:
| | | Principal
($) | | | 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 | |
Amortization expense for the three months ended December 31, 2022 and 2021, totaled $420,627 and $12,218, respectively.
Amortization expense for the six months ended December 31, 2022 and 2021, totaled $960,197 and $12,218, respectively.
As of December 31, 2022 and June 30, 2022,2023:
| | | Principal
($) | | | 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 | | | Under forbearance Agreement: | | | 58,703 | | | | (1,988,402 | ) | | | | | | | (1,929,699 | ) | | Cash repayment | | | (964,500 | ) | | | | | | | | | | | (964,500 | ) | | Balance at June 30, 2023 | | | - | | | | - | | | | - | | | | - | |
Below is a reconciliation of the unamortized portionextinguishment of debt discount was $0 and $960,197, respectively.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 | | | Principal increased due to penalty | | | 58,703 | | | Loss on extinguishment | | $ | 392,459 | |
Interest expense for the three months ended December 31, 2022 and 2021, totaled $20,071 and $4,909, respectively.expenses associated with above convertible note are as follows:
| | | For Three Months Ended | | | | | September 30, | | | | | 2023 | | | 2022 | | | Amortization | | $ | - | | | $ | 539,570 | | | Interest on the convertible notes | | | - | | | | 21,546 | | | Total | | $ | - | | | $ | 561,116 | |
Interest expense for the six months ended December 31, 2022 and 2021, totaled $41,617 and $4,909, respectively.
During the six monthsfiscal years ended December 31,June 30, 2023 and 2022, the Company paid $39,452 and $43,478 to accruedinterest. As of September 30, 2023 and June 30, 2023, the interest leaving 6,995 as unpaid interest under accounts payable. (June 30, 2022 - $4,831)payable was $0.
Mast Hill Promissory Notes Issued on September 23, 2022(MH Notes)
| (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,Mast Hill, 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, (the “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, and further down to $0.0333 subject to adjustment, (d) the Purchasers are entitled to deduct $1,750 from conversions to cover associated fees, and $750.00$750 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.
As a result of the financing, theThe Company is requiredpaid to pay cashJ.H. Darbie & Co., Inc. $32,200 in fees to its bankers (including the Placement Agent), which amounts are being determined but will not be less than $67,000, and to issue compensatory warrantspursuant to the Placement AgentsCompany’s existing agreement with J.H. Darbie & Co., Inc., in relation to purchase 280,000 shares of common stock at an exercise price of $0.225,the transactions contemplated by the Purchase Agreement plus warrants to purchase 119,260 shares of common stock at an exercise price of $0.27, in each case 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. Subsequently, On May 2, 2023, a debtholder converted a total of $49,995, in which $16,088 of principal and $33,907 of interest payable, in exchange for 1,500,000 shares of common stock. | (b) | Promissory Notes Issued on February 5, 2023 |
On February 5, 2023, the Company alsoentered into a Securities Purchase Agreement and issued and sold to Mast Hill, a Promissory Note in the principal amount of $619,000.00 (actual amount of purchase price of $526,150.00 plus an original issue discount in the amount of $92,850.00). In connection with the issuance of the Promissory Note, the Company issued to the investor warrants to purchase 6,900,000 shares of common stock at an exercise price of $0.10, 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. 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 Placement Agent fees of $35,000.$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.
| (c) | Promissory Notes Issued on February 28, 2023 |
On February 28, 2023, the Company entered into a Securities Purchase Agreement and issued and sold to Mast Hill, a Promissory Note in the principal amount of $169,941 (actual amount of purchase price of $136,800 plus an original issue discount in the amount of $24,141). In connection with the issuance of the Promissory Note, the Company issued to the investor warrants to purchase 1,790,000 shares of common stock at an exercise price of $0.10, 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 1,820,000 shares of common stock at an exercise price of $0.10, 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. 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 returnable warrants to purchase 182,000 shares of common stock at $0.30, in each case subject to adjustment.
| (d) | Promissory Notes Issued on March 24, 2023 |
On March 24, 2023, the Company entered into a Securities Purchase Agreement and issued and sold to Mast Hill, a Promissory Note in the principal amount of $169,941 (actual amount of purchase price of $136,800 plus an original issue discount in the amount of $24,141). In connection with the issuance of the Promissory Note, the Company issued to the investor warrants to purchase 1,790,000 shares of common stock at an exercise price of $0.10, 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 1,820,000 shares of common stock at an exercise price of $0.10, 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. 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. | (e) | Promissory Notes Issued on April 17, 2023 |
On April 17, 2023, the Company entered into a Securities Purchase Agreement and issued and sold to Mast Hill, a Promissory Note in the principal amount of $169,941 (actual amount of purchase price of $136,800 plus an original issue discount in the amount of $24,141). In connection with the issuance of the Promissory Note, the Company issued to the investor warrants to purchase 1,790,000 shares of common stock at an exercise price of $0.10, 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 1,820,000 shares of common stock at an exercise price of $0.10, 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. 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, warrants to 179,000 shares of common stock at $.10, and returnable warrants to 182,000 shares of common stock at $.10, in each case subject to adjustment. | (f) | Promissory Notes Issued on June 1, 2023 |
On June 1, 2023 the Company entered into a Securities Purchase Agreement and issued and sold to Mast Hill, a Promissory Note in the principal amount of $200,000 (actual amount of purchase price of $170,000 plus an original issue discount in the amount of $30,000). Also pursuant to the Purchase Agreement, in connection with the issuance of the Note: (a) Sean Folkson, the Company’s Chairman of the Board and Chief Executive Officer, pursuant to a Pledge Agreement dated the Effective Date (the “Pledge Agreement”), pledged to Mast Hill, and granted to Mast Hill a security interest in, all common stock and common stock equivalents of the Company owned by Mr. Folkson; (b) the Company, Nightfood Inc. and MJ Munchies, Inc., each wholly-owned subsidiaries of the Company (collectively, the “Subsidiaries” and with the Company, the “Debtors”) entered into a Security Agreement dated the Effective Date (the “Security Agreement”), pursuant to which each of the Debtors granted Mast Hill a perfected security interest in all of their property to secure the prompt payments, performance and discharge in full of all of the Debtors’ obligations under the Note and the other transaction documents entered into in connection with the Purchase Agreement and the Note (the “Transaction Documents”); (c) The Subsidiaries entered into a Subsidiary Guarantee dated the Effective Date (the “Guarantee”), pursuant to which the Subsidiaries unconditionally and irrevocably guaranteed to Mast Hill the prompt and complete payment and performance by the Company and the Subsidiaries when due, of the obligations under the Transaction Documents.
The Company paid to (a) J.H. Darbie & Co., Inc. 298,875 warrants at an exercise price of $0.05688 per share pursuant to the Company’s existing agreement with J.H. Darbie & Co., Inc., in relation to the transactions contemplated by the Purchase Agreement. The Company paid to (b) Spencer Clarke LLC 1,111,110 warrants at an exercise price of $.033, in each case subject to adjustment. The maturity date of the MH Notes are the 12-month anniversary of the Issuance Date, and are 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. Fourth Man, LLC Promissory Notes (Fourth Man Notes) | (a) | Promissory Notes Issued on June 29, 2023 |
On June 29, 2023, the Company the Company entered into a Securities Purchase Agreement and issued and sold to Fourth Man, LLC (“Fourth Man”), a Promissory Note (the “Note”) in the principal amount of $65,000.00 (actual amount of purchase price of $55,250 plus an original issue discount in the amount of $9,750). In connection with the issuance of the Promissory Note, the Company issued the investor warrants to purchase 600,000 shares of common stock at an exercise price of $0.10 and 1,969,697 shares of Common Stock as commitment shares, 1,477,272 of which shall be cancelled and returned to the Company’s treasury upon repayment of the Note on, or prior to, the date that is 180 calendar days after the date of the Agreement; and (b) granted piggy-back registration rights to Fourth Man. The Company paid to J.H. Darbie & Co., Inc. $2,763 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 23,021 shares of common stock at $.10, subject to adjustment. The Company issued Spencer Clarke LLC warrants to purchase 618,079 shares of common stock at $.033, in each case subject to adjustment. The maturity date of the Note is the 12-month anniversary of the Effective 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. | (b) | Promissory Notes Issued on August 28, 2023 |
On August 28, 2023, the Company entered into a Securities Purchase Agreement and issued and sold to Fourth Man, LLC (“Fourth Man”), a Promissory Note (the “Note”) in the principal amount of $60,000.00 (actual amount of purchase price of $51,000 plus an original issue discount in the amount of $9,000). In connection with the issuance of the Promissory Note, the Company issued the investor warrants to purchase 650,000 shares of common stock at an exercise price of $0.10 and 3,333,333 shares of Common Stock as commitment shares, 1,666,667 of which shall be cancelled and returned to the Company’s treasury upon repayment of the Note on, or prior to, the date that is 180 calendar days after the date of the Agreement; and (b) granted piggy-back registration rights to Fourth Man. The Company paid to J.H. Darbie & Co., Inc. $2,550 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 21,250 shares of common stock at $.12, subject to adjustment. The maturity date of the Note is the 12-month anniversary of the Effective 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. The Company evaluated all of thethese 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 proceeds of issuance is first allocated among the convertible instrument and the other detachable instruments based on their relative fair values. 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)above debts (Mast Hills Notes and Fourth Man Notes) as presented on the Company’s balance sheet as of December 31, 2022:
| | | Principal $ | | | Debt Discount $ | | | Net Value
$ | | | Balance at June 30, 2022 | | | - | | | | - | | | | - | | | Promissory notes payable issued during the three months ended September 30, 2022 | | | 700,000 | | | | | | | | 700,000 | | | Debt discount associated with Promissory notes | | | | | | | (346,070 | ) | | | (346,070 | ) | | Amortization of debt discount | | | | | | | 69,256 | | | | 69,256 | | | Balance at December 31, 2022 | | $ | 700,000 | | | $ | (276,814 | ) | | $ | 423,186 | |
Amortization expense for the three months ended December 31, 2022 and 2021, totaled $64,280 and $0, respectively. Amortization expense for the six months ended December 31, 2022 and 2021, totaled $69,256 and $0, respectively.
As of December 31, 2022September 30, 2023 and June 30, 2022,2023:
| | | Principal
$ | | | Debt
Discount
$ | | | Net Value
$ | | | Balance at June 30, 2022 | | | - | | | | - | | | | - | | | Promissory notes payable issued | | | 2,066,823 | | | | | | | | 2,066,823 | | | Principal converted to common stock | | | (16,088 | ) | | | | | | | (16,088 | ) | | Debt discount associated with Promissory notes | | | | | | | (864,713 | ) | | | (864,713 | ) | | Amortization of debt discount | | | | | | | 305,697 | | | | 305,697 | | | Balance at June 30, 2023 | | | 2,050,735 | | | | (559,016 | ) | | | 1,491,719 | | | | | | | | | | | | | | | | | Promissory notes payable issued | | | 60,000 | | | | | | | | 60,000 | | | Debt discount associated with Promissory notes | | | | | | | (18,878 | ) | | | (18,878 | ) | | Amortization of debt discount | | | | | | | 212,259 | | | | 212,259 | | | Balance at September 30, 2023 | | $ | 2,110,735 | | | $ | (365,635 | ) | | $ | 1,745,100 | |
Interest expenses associated with above convertible note are as follows: | | | For Three Months Ended | | | | | September 30, | | | | | 2023 | | | 2022 | | | Amortization | | $ | 212,259 | | | $ | 4,975 | | | Interest on the convertible notes | | | 41,799 | | | | 1,400 | | | Total | | $ | 254,058 | | | $ | 6,375 | |
As of September 30, 2023 and June 30, 2023, the unamortized portioninterest payable was $82,578 and $40,779, respectively. As a result of debt discount was $276,814dilutive 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 $0, respectively.
Interest expense for the threeJ.H. Darbie have been repriced in accordance with their respective terms and six months ended December 31, 2022, totaled $14,311 and $15,711, respectively.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 common stock $0.001 par value per share Common Stock.(the “Common Stock”). Holders of Common Stock are each entitled to cast one vote for each Shareshare 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 Sharesshares of Common Stock are fully paid and non-assessable and all of the Sharesshares of Common Stock offered thereby will be, upon issuance, fully paid and non-assessable. Holders of Sharesshares 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 99,812,854126,921,301 and 91,814,484123,587,968 shares of its $0.001 par value common stock issued and outstanding as of December 31, 2022September 30, 2023 and June 30, 20222023 respectively. |
| ● | The Company had 2,300 and 3,2601,950 shares of its B Preferred stock issued and outstanding as of December 31, 2022September 30, 2023 and June 30, 2022 respectively.2023. |
| During the three months ended September 30, 2023: |
| ● | The Company issued 3,333,333 shares of common stock for services with a fair value of $50,000. |
During the six months ended December 31, 2022, the three months ended September 30, 2022: | ● | The Company issued an aggregate of 282,859100,000 shares of its common stock for services valued at $52,010.$20,010. |
| ● | During the six months ended December 31, 2022, the Company issued 500,000 shares of its common stock as financing cost valued at $60,000. |
| ● | During the six months ended December 31, 2022, the Company issued an aggregate of 586,111 shares of its common stock for cashless exercise of 750,000 stock purchase warrants. |
| ● | During the six months ended December 31, 2022, the Company sold 457,350 units at $0.50 per unit, consisting with 1,829,400 shares of common stock under its Regulation A+ Offering. The Company received net proceeds of $224,615. |
| ● | During the six months ended December 31, 2022, holdersHolders of the B Preferred converted 960810 shares of Series B Preferred Stock into 4,800,0004,050,000 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 Shareshare 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 stockCommon 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 December 31, 2022,September 30, 2023, and June 30, 2022, respectively.2023.
Series B Preferred Stock
In April 2021, the Company designated 5,000 shares of its Preferred Stock as Series B Preferred (the “B Preferred”), each share of which is convertible into 5,000 shares of common stock and 5,000 non-detachable warrants with a strikean initial exercise price of $0.30.
During the fiscal years ended June 30, 20222023 and 2021,2022, the Company sold 3350 and 4,665335 shares of its B Preferred for gross cash proceeds of $335,000$0 and $3,150,000,$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 fiscal yearsyear ended June 30, 2023, holders of the B Preferred converted 1,310 shares of B Preferred into 6,550,000 shares of Common Stock. During the fiscal year ended June 30, 2022, and 2021, holders of the B Preferred converted 1,740 shares of B Preferred into 8,700,000 shares of its common stock.Common Stock.
During the six months ended December 31, 2022, holders of the B Preferred Stock converted 960 shares of B Preferred Stock into 4,800,000 shares of its common stock
The Company had 2,300 and 3,2601,950 shares of its B Preferred Stock issued and outstanding as of December 31, 2022,September 30, 2023, and June 30, 2022, respectively.2023.
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. During the year ended June 30, 2023 the Company recorded an additional deemed dividend of $1,136,946, fully amortized on the transaction dates, in relation to the B Preferred stock and downward price adjustments to certain warrants.
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,Common Stock, along with 8,700,000 warrants issued to those holders with an adjusted exercise price of $0.0747 as of December 31, 2022 ($0.2919 per share – June 30, 2022).warrants. Said warrants are subject to further exercise price adjustments resulting from certain financing activities and equity transactions which couldmay increase or decrease the exercise price in in the future. At June 30, 2022, all warrants issued to the Company’s B Preferred holders had an adjusted exercise price of $0.2919.
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%. In addition, 167,500 warrants issued to the placement agent with an initial exercise price of $0.20 per share and 167,500 warrants issued to the placement agent with an initial exercise price of $0.30 per share. The Company valued these warrants using the Black Scholes model utilizing a 148.06% volatility and a risk-free rate of 0.83%.
During the fiscal year ended June 30, 2022, the Company entered into a warrant agreement with one of the Company’s Directors issuing 100,000 warrants at a strike price of $0.2626 having a term of five years. The Company valued these warrants using the Black Scholes model utilizing a 151.07% volatility and a risk-free rate of 0.79%.
During the fiscal year ended June 30, 2022, the Company entered into an Agreement For Shareholder Lock-Up And Acquisition of Warrants (the “Lock-Up Agreement”), with Mr. Folkson, issuing 400,000 warrants at a strike price of $0.30 having a term of one year. The Company valued these warrants using the Black Scholes model utilizing a 80.67%107.93% volatility and a risk-free rate of 0.89%0.50%.
During the six monthsfiscal year ended December 31, 2022,June 30, 2023, holders of the Company’s B Preferred converted 9601,310 shares of B Preferred into 4,800,006,550,00 shares of its common stock,Common Stock, along with 4,800,000 warrants issued to those holders with an adjusted exercise price of $0.0747 as of December 31, 2022.6,550,000 warrants. Said warrants are subject to further exercise price adjustments resulting from certain financing activities and equity transactions which couldmay increase or decrease the exercise price in in the future. At June 30, 2023 all warrants issued to the Company’s B Preferred holders had an adjusted exercise price of $0.13796.
During the three monthsfiscal year ended SeptemberJune 30, 2022,2023, 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 wtoto 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 timeone-time cash payment of $35,000 and the issuance of 500,000 shares of Common Stock in full satisfaction of compensation earned.
During the six monthsfiscal year ended December 31, 2022,June 30, 2023 the Company issued a cumulative 12,870,000 warrants to the holder of outstanding promissory notes, 19,460,000 returnable warrants (which warrants are cancelable in full should the notes be repaid in full on or before maturity), 4,875,189 placement agent warrants, 546,000 returnable placement agent warrants (which warrants are cancelable in full should the notes be repaid in full on or before maturity) and 831,386 warrants to JH Darbie. The warrants were issued at initial exercise prices between $0.033 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 fiscal year ended June 30, 2023, the Company issued an aggregate of 586,1116,549,128 shares of its common stockCommon Stock for the cashless exercise of 750,0004,928,260 original issued stock purchase warrants.
During the six monthsfiscal year ended December 31, 2022,June 30, 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 six monthsfiscal year ended December 31, 2022June 30, 2023, the Company entered into an Agreement For Shareholder Lock-Up And Acquisition of Warrants (the “Lock-Up Agreement”), with Mr. Folkson, issuing 400,000 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 fiscal year ended June 30, 2023 the Company issued 1,829,4001,871,800 warrants to various subscribers under its Tier 2 offering pursuant to Regulation A (also known as “Regulation A+”) whereunderpursuant 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 stockCommon Stock and 4 common stockCommon Stock purchase warrants (“Unit”) for exercise at at a strike price per Share equal to 125% of the price per share of common stock,Common Stock, or $0.15625 per share with a term of 2 years. During the fiscal year ended June 30, 2023, the Company issued an aggregate of 5,750,000 shares of its Common Stock for cash exercise of 5,750,000 original issued stock purchase warrants at $0.05 per share. The Company received net proceeds of $276,066. In addition, as incentive to induce the aforementioned warrant holders to exercise existing warrants, the Company issued an aggregate of 6,900,000 replacement warrants to investors and placement agents. The warrants were issued at initial exercise prices between $0.05 and $0.125 per share and valued on issuance dates with the Black Scholes model utilizing a volatility from 110.80% and 111.31% and a risk-free rate from 3.69% and 4.27%. A total of $377,560 was expensed on issuance as financing costs. During the fiscal year ended June 30, 2023, the Company issued 1,000,000 retainer warrants under an Amendment and Addendum to Letter of Engagement agreement at a strike price of $.033. The warrants included a provision for cashless exercise and carried a 5 years term. The Company valued these warrants using the Black Scholes model on each closing date utilizing a 113.71% volatility between 106.15% and 111.39% and a risk-free rate of 3.69%. The Company recorded the value of the retainer warrants as consulting expenses. During the fiscal year ended June 30, 2023, under the terms of a Warrant Exchange Agreement, among other agreements, SC exchanged an aggregate of 16,181,393 of its existing warrants originally issued in fiscal 2021 with initial exercise prices ranging from 4.21%$0.20 to $0.30, the exercise price of which had been subject to downward price adjustments following issuance and 4.61%%were exercisable at $0.0747 per share as a result of anti-dilution provisions as of February 2023, for a like amount of new warrants to purchase Company Common Stock at a price per share capped at $0.0747 (the “New Warrants”).
During the three months ended September 30, 2023, the Company issued cumulative 650,000 warrants to the holder of outstanding promissory notes, and 21,250 warrants to JH Darbie as commission fees. The warrants were issued at initial exercise prices between $0.10 and $0.12 per share and valued on issuance dates with the Black Scholes model utilizing a volatility at 124.86% and a risk-free rate at 4.38%.
During the three months ended September 30, 2023, 7,000,000 returnable warrants became non-returnable warrants as a result of the Company’s default on certain debt obligations and $699,350 was recorded as additional financing costs. During the three months ended September 30, 2023, a total of 23,147,255 outstanding share purchase warrants issued in connection with conversion of the Company’s B Preferred into Common Stock were adjusted as a result of certain antidilution clauses resulting in a total of 24,098,865 outstanding share purchase warrants with a downward adjusted exercise price of $0.1324 per share. 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. For example, as a result of the December 2021 Offering, which would allow the new noteholders to convert their debt to shares of common stock at an exercise price of $0.20/share, some of the $0.30 warrants outstanding in the table below had their exercise price reduced from $0.30 to $0.2919 which was further adjusted to $0.0747 prior to December 31, 2022 upon the occurrence of a further dilutive event. The result of the warrant exercise price downward adjustment on modification date wasis treated as a deemed dividend and fully amortized on the transaction date, and the Company recorded $3,685,665 to additional paid in capital and retained earnings on the Company’s balance sheets.date. In addition to the reduction in exercise price, with certain warrants 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 December 31, 2022September 30, 2023 is $2,590,862.$3,299,000 The aggregate intrinsic value of the warrants as of June 30, 20222023 was $11,650.$4,215,000.
| Exercise Price | | | June 30,
2022 | | | Issued | | | Repricing | | | Cancelled | | | Expired | | | Exercised | | | December 31,
2022 | | | $ | 0.15 | | | | 500,000 | | | | | | | | | | | | | | | | | | | | | | | | 500,000 | | | $ | 0.20 | | | | 2,250,000 | | | | | | | | | | | | | | | | | | | | | | | | 2,250,000 | | | $ | 0.25 | | | | 4,878,260 | | | | | | | | (878,260 | ) | | | | | | | | | | | (750,000 | ) | | | 3,250,000 | | | $ | 0.0488 | | | | | | | | 1,653,980 | | | | 878,260 | | | | | | | | | | | | | | | | 2,532,240 | | | $ | 0.2626 | | | | 100,000 | | | | | | | | | | | | | | | | | | | | | | | | 100,000 | | | $ | 0.2919 | | | | 10,950,000 | | | | | | | | (10,950,000 | ) | | | | | | | | | | | | | | | - | | | $ | 0.30 | | | | 400,000 | | | | | | | | | | | | | | | | | | | | | | | | 400,000 | | | $ | 0.50 | | | | 500,000 | | | | | | | | | | | | | | | | | | | | | | | | 500,000 | | | $ | 0.30 | | | | | | | | 4,050,000 | | | | (4,050,000 | ) | | | | | | | | | | | | | | | - | | | $ | 0.0747 | | | | | | | | 34,337,400 | | | | 15,000,000 | | | | | | | | | | | | | | | | 49,337,400 | | | $ | 0.225 | | | | | | | | 3,080,00 | | | | (2,800,000 | ) | | | (280,000 | ) | | | | | | | | | | | - | | | $ | 0.0333 | | | | | | | | 2,800,000 | | | | | | | | | | | | | | | | | | | | 2,800,000 | | | $ | 0.27 | | | | | | | | 119,200 | | | | (119,200 | ) | | | | | | | | | | | | | | | - | | | $ | 0.0333 | | | | | | | | | | | | 119,200 | | | | | | | | | | | | | | | | 119,200 | | | $ | 0.30 | | | | | | | | 11,956,523 | | | | (11,956,523 | ) | | | | | | | | | | | | | | | - | | | $ | 0.0333 | | | | | | | | | | | | 11,956,523 | | | | | | | | | | | | | | | | 11,956,523 | | | $ | 0.125 | | | | | | | | 100,000 | | | | | | | | | | | | | | | | | | | | 100,000 | | | $ | 0.1563 | | | | | | | | 1,829,400 | | | | | | | | | | | | | | | | | | | | 1,829,400 | | | | | | | | 19,578,260 | | | | 57,126,503 | | | | - | | | | (280,000 | ) | | | - | | | | (750,000 | ) | | | 75,674,763 | |
Exercise
Price | | | June 30,
2023 | | | Issued | | | Repricing | | | Exercised | | | Others | | | Cancelled | | | Expired | | | Redeemed | | | September 30,
2023 | | | $ | 0.03333 | | | | 70,935,941 | | | | - | | | | 65,475,796 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 136,411,737 | | | $ | 0.0747 | | | | 16,181,392 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 16,181,392 | | | $ | 0.1000 | | | | 600,000 | | | | 650,000 | | | | (600,000 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | 650,000 | | | $ | 0.1200 | | | | - | | | | 21,250 | | | | (21,250 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | $ | 0.1250 | | | | 100,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 100,000 | | | $ | 0.1380 | | | | 23,147,255 | | | | - | | | | (23,147,255 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | $ | 0.1324 | | | | - | | | | - | | | | 24,098,865 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 24,098,865 | | | $ | 0.1563 | | | | 1,871,800 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,871,800 | | | $ | 0.2626 | | | | 100,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 100,000 | | | $ | 0.3000 | | | | 400,000 | | | | 7,000,000 | | | | (7,000,000 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | 400,000 | | | $ | 0.5000 | | | | 500,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 500,000 | | | | | | | | 113,836,388 | | | | 7,671,250 | | | | 58,806,156 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 180,313,794 | |
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. Subsequent toIn February, the periods reportedCompany issued 3,800,000 shares of its common stock in these financial statements, suchexchange for the return of 10,869,566 returnable warrants. The warrants issued to the Purchasers were exchangedPlacement Agent remained available for common stock of the Company and were terminated. See Note 14-Subsequent Events. exercise.
During the fiscal year ended June 30, 2023, the Company issued cumulative 12,460,000 returnable warrants to the Purchasers of certain convertible notes issued after September 2022, and cumulative 546,000 returnable warrants to the Placement Agent. Any surviving Returnable Warrantsexpense related to such warrants will be revalued accordinglyrecorded in a future reporting period and only in the event the Company defaults on such date should ancertain debt obligations. These returnable warrants were initially valued using the Black Scholes model with a volatility of between 111.36% and 112.33% and a risk-free rate of between 3.67% and 3.91% resulting in contingent expenses to be recorded as additional financing costs in the cumulative amount of $809,800, which amount will be recorded in a future reporting period, only in the event of a default to the Company defaults on certain debt obligations occur, triggering exercisability.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 December 31, 2022September 30, 2023 and June 30, 2022 ,2023, 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 December 31, 2022,September 30, 2023 and June 30, 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. |
| ● | The outbreak of the novel coronavirus (COVID-19), including the measures to reduce its spread, and the impact on the economy, has still not been fully predicted. |
We have experienced minimal issues with supply chain and logistics, except that there have been recent and significant increases in costs relating to freight and packaging, including as a result of more orders being shipped outside of Walmart shipping lanes. Order processing function has been normal to date, and our manufacturers have assured us that their operations are “business as usual” as of the time of this filing.
It is possible that the impact of the pandemic could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable to meet certain debts and expenses. It is impossible to know what the future holds with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current coronavirus pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, vendors, and business partners. It is difficult to know if the pandemic has materially impacted the results of operations, and we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if necessary.
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 $36,000 is reflected in professional fees for the three-three months ended September 30, 2023 and six-months periods December 31, 2022. At December 31, 2022September 30, 2023 and June 30, 2022 respectively,2023 Mr. Folkson was owed $9,000$45,000 and $0$33,000 in unpaid consulting fees which amounts are included on the balance sheets asin accounts payable and accrued expenses-liabilities- related party. |
| | ● | On January 20, 2022,2023, 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 shareshares 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 stockCommon Stock at an exercise price of $0.30 per share, which warrants carry a twelve monthtwelve-month term and a cashless provision, and will expire if not exercised within the twelve monthtwelve-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,Folkson Loan
On February 7, 2023, Sean Folkson, the Chairman and CEO of the Company, made bonuses availableloaned $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 uponunder 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 hitting certain revenue milestonesowed or owing to each of $1,000,000Mast Hill, Puritan Partners and Verition has been repaid in a quarter, $3,000,000 in a quarter, and $5,000,000 in a quarter. Achieving those milestones would earn full. The Folkson Note has customary events of default. Mr. Folkson warrants with a $0.50was owed $43,076 and $1.00 strike price$41,876 as of September 30, 2023 and June 30, 2023, respectively, which would needamounts are included on the balance sheets in accounts payable and accrued liabilities- related party. The Company intends to be exercised within 90 days ofuse the respective quarterly or annual filing. As of December 31, 2022, those conditions were not met and therefore nothing was accrued related to this arrangement proceeds from the Folkson Note for working capital. |
| | ● | In addition, at December 31, 2022September 30, 2023 and 2021,June 30, 2023, respectively, there was $18,000$44,625 and $0$27,000 in unpaid directors fees which amounts are included on the balance sheets asn accounts payable and accrued expenses-liabilities- related party. |
14.15. Subsequent Events
Lock up agreement
On January 30,October 6, 2023, Nightfood Holdings, Inc. (the “Company”) consummated the Company entered into an Agreement For Shareholder Lock-Up And Acquisition of Warrants (the “Lock-Up Agreement”), with its Chairman, CEO and largest shareholder, Sean Folkson. For purposes of the Lock-Up Agreement, Mr. Folkson, the beneficial owner of 16,776,644 shares of the Company’s common stock (the “Shares”), has agreedtransactions pursuant to not transfer, sell, or otherwise dispose of any Shares through February 4, 2024. The Lock-Up Agreement is substantially similar to, and serves as an extension of, the lock-up agreement currently in place between the Company and Mr. Folkson, which runs through February 4, 2023.
The Lock-Up Agreement further provides, in exchange for the agreement to lock up the Shares, that Mr. Folkson shall receive warrants to acquire 400,000 shares of Company common stock at an exercise price of $.30 per share (the “Warrants”). The Warrants carry a twelve-month term and a cashless provision and will expire if not exercised within the twelve month term.
Forbearance and Exchange Agreement
On February 4, 2023, the Company entered into a Forbearance and Exchange Agreement (the “Forbearance Agreement”) with Puritan Partners LLC, a New York limited liability company (“Puritan Partners”), and Verition Multi-Strategy Master Fund Ltd. (“Verition,” and collectively with Puritan Partners, the “Holders”).
As previously disclosed by the Company, (a) on December 10, 2021, the Company entered into (i) that Securities Purchase Agreement (the “Purchase Agreement”) dated as of December 10, 2021, as amendedOctober 5, 2023 (the “Securities Purchase Agreement”“Effective Date”) and issued and sold to Mast Hill Fund, L.P. (“Mast Hill”), with Puritan Partners and Verition and (ii) the Notes (as defineda Promissory Note (the “Note”) in the Securities Purchase Agreement, and as amended), (b) pursuant toprincipal amount of $62,000.00 (actual amount of purchase price of $52,700 plus an original issue discount (“OID”) in the applicable Note, among other things, the Company was required to pay to the Holders 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 eventamount of default and (c) on or around September 23, 2022, 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”)$9,300).
Pursuant to the Forbearance Agreement as amended, among other things:
| ● | The Company shall pay to each Holder 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 Holders 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 Holders, 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 Holders 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 Holder by paying an amount in cash to such Holder equal to $0.1109 per share being redeemed. The Holder’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 Holders’ 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 Holder 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. |
Mast Hill Loan
On February 5,November 17, 2023 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) dated as of November 16, 2023, and issued and sold to Mast Hill Fund, L.P. (“Mast Hill”), a Promissory Note (the “MH Note”) in the principal amount of $619,000.00$62,000 (actual amount of purchase price of $526,150.00$52,700 plus an original issue discount (“OID”) in the amount of $92,850.00)$9,300). Also pursuant Mast Hill has the right, at any time on or following the date that an Event of Default occurs to convert all or any portion of the then outstanding and unpaid Principal Amount and interest, to convert all or any portion of the then outstanding and unpaid principal amount and interest (including any default interest) into Common Stock, at a conversion price of $0.033, subject to customary adjustments as provided in the Note for stock dividends and stock splits, rights offerings, pro rata distributions, fundamental transactions and dilutive issuances. On December 7, 2023 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement in connection with the issuance(the “Purchase Agreement”) dated as of the MH Note, the CompanyDecember 6, 2023, and issued (a) common stock purchase warrants (the “First Warrants”), allowingand sold to Mast Hill toFund, L.P. (“Mast Hill”), a Promissory Note (the “MH Note”) in the principal amount of $170,588 (actual amount of purchase price of $145,000 plus an aggregateoriginal issue discount (“OID”) in the amount of 6,900,000 shares$25,588). The use 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.
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. The Company is currently determining the fees payable to Spencer Clarke LLC (which may include cash and/or warrants), pursuant to the Company’s existing agreement with Spencer Clarke LLC, in relation to the transactions contemplated by the Purchase Agreement.
The Company intends to use the net proceeds from the sale of the MH Note is strictly for required debt service.expenses related to ongoing acquisition and uplist activity and for no other purpose.
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 anniversarydate that an event of default occurs under the Issuance Date,Note, to convert all or any portion of the then outstanding and unpaid principal amountPrincipal Amount and interest (including any default interest) into common stock of the Company,Common Stock, at a conversion price of $0.10,$0.033, 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 Company has evaluated events for 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 inperiod through the MH Note so Mast Hill beneficially owns less than 4.99%date of the common stockissuance of the Company. these financial statements and determined that there are no additional events requiring disclosure. 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 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.
Sean 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.
Share Issuances
| ● | On January 6, 2023, the Company issued 336,765 shares of its common stock for cashless exercise of 500,000 stock purchase warrants. | | | |
| ● | On January 13, 2023, the Company issued 250,000 shares of its common stock in conjunction with a consulting agreement dated January 13, 2023. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENT INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project,” “will” and other words of similar meaning. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, technological developments related to business support services and outsourced business processes, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.
Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth under the headings “Business” and “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023 as filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2023, as well as the other information set forth herein.
OVERVIEW
The Nighttime Snack Problem and Opportunity
What you eat before bed matters.
Nightfood is pioneering the category of sleep-friendly nighttime snacking.
Research indicates that humans are biologically hard-wired to load up on sweets and fats at night. Loading a surplus of calories (fuel) into the body before the long nightly fast is believed to be an outdated survival mechanism from our hunter-gatherer days. Unfortunately, while modern consumers know this type of consumption isn’t necessary for survival, willpower also weakens at night, so consumers are more likely to succumb to these unhealthy nighttime cravings for excess “survival calories”.
As a result, over 85%90% of American adults report snacking regularly between dinner and bed (according to SleepFoundation.org), resulting in an estimated 700 million1 billion nighttime snack occasions weekly in the US,United States, and an annual spend on night snacks of over $50$60 billion. Because of our hard-wired evolutionary preferences at night for calorie-dense choices that increasefoods which increased the odds of short-term survival for our ancestors, the most popular nighttime snacks are ice cream, cookies, chips, and candy. These are all understood to be generally unhealthy. They can also impair sleep quality.
And, because these cravings are biologically hardwired, we believe such significant consumer spend onmodern unhealthy nighttime snacking optionsbehavior will continue. And the actual consumption of unhealthy snacks at night is expectedcontinue to remainbe a pattern and a problem for a significant portion of the population.population in developed nations around the world. We believe it’s a problem that demands a solution.
In recent years, billions of dollars of consumer spend have shifted to better-for-you versions of consumers’ favorite snacks. But we do not believe any of those products were nutritionally formulated to support better sleep. Nightfood snacks are not only formulated to be better-for-you, but they’re alsouniquely formulated by sleep experts and nutritionists to provide a better nutritional foundation for quality sleep.
Almost halfA significant portion of all snackingtotal snack consumption takes place between dinner and bed. Nutrition is an important part of sleep-hygiene because what one eats at night impacts sleep. Recent industryIndustry surveys indicatedindicate that most modern consumers have begun to seek functional benefits from their snacks, and most consumers would also prefer better sleep.
As the pioneers of the nighttime snacking category, Nightfood accepts the responsibility to educate consumers and build the awareness required to grow the nighttime segment of the overall snack market. Along with that responsibility comes the opportunity to be the category king. We envision a future where nighttime specific, sleep-friendly snacks comprise a multi-billion-dollar segmentmeaningful subsegment of the estimated $150 billion American snack market.
Management believes significant latent consumer demand exists for better nighttime snacking options, and that a new consumer category, consisting of nighttime specific snacks, is set to emerge in the coming years. This belief is supported by research from major consumer goods research firms such as IRI Worldwide, and Mintel, who identified nighttime specific foods and beverages as one of the “most compelling and category changing trends” for 2017 and beyond. In recent years, CEO’sCEOs and other executives from major consumer goods conglomerates such as Nestle, PepsiCo, Mondelez, and Kellogg’s have commented on consumer nighttime snack habits and patterns and alluded to the opportunity that might exist in solving this problem for consumers.the marketplace.
Our Scientific Advisors
Nightfood has established a highly credentialed Scientific Advisory Board consisting of sleep and nutrition experts to drive product formulation decisions and provide consumer confidence in the brand promise. The first member of this advisory board was Dr. Michael Grandner, Director of the Sleep and Health Research Program at the University of Arizona. Dr. Grandner has been conducting research on the link between nutrition and sleep for over fifteen years, and he believes improved nighttime nutritional choices can improve sleep, resulting in many short and long-term health benefits. In March of 2018, the Company added Dr. Michael Breus to their Scientific Advisory Board. Dr. Breus, known to millions as The Sleep Doctor™, is believed to be the Nation’s most trusted authority on sleep. He regularly appears in the national media to educate and inform consumers so they can sleep better and lead happier, healthier, more productive lives. In July 2018, we completed our Scientific Advisory Board with the addition of Dr. Lauren Broch, Ph.D, M.S. Dr. Broch is a sleep therapist and former Director of Education & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. Dr. Broch also has a master’s degree in human nutrition. This combination allows her to play an important role in the formulation of Nightfood snacks. These experts work with Company management to ensure Nightfood products deliver on their nighttime-appropriate, and sleep-friendly promises.
Our Products
The most widely consumed nighttime snacks are cookies, chips, candy, and ice cream. Our goal is to offer consumers sleep-friendly versions of each of those snack formats as well as others.
Compared to regular ice cream, Nightfood is formulated to contain less sugar, less fat, fewer calories,with more tryptophan, more protein, more prebiotic fiber, more vitamin B6, more calcium, magnesium, and zinc.
zinc, more protein and more prebiotic fiber. Nightfood also contains less fat, less sugar, and fewer calories than traditional ice cream, has been produced in nine flavors. These are Full Moon Vanilla, Midnight Chocolate, Cold Brew Decaf, After Dinner Mint Chip, Milk & Cookie Dough, Cherry Eclipse, Bed and Breakfast, Cookies n’ Dreams, and Pickles For Two. The Company is currently focused on two of those flavors, Midnight Chocolate and Cookies n’ Dreams, which are the two flavors in national hotel distribution. Pickles for Two has been discontinued, and the other 6 flavors are not scheduled for additional production in the short term. Management anticipates bringing some or all of those flavors back into production in the future, if and when Nightfood ice cream pints are reintroduced into supermarket distribution. Until such time, existing inventory of those flavors will be sold off via Company website, and perhaps future appearances on QVC and other potential outlets.lactose free. Nightfood mini-cookies were introduced in September, 2022. Our Prime-Time Chocolate Chip cookies are in limited hotel distribution and available for sale direct-to-consumer on our website. In February 2023, these cookies became available for wholesale purchase through both US Foods Direct and Sysco’s Supplies on the Fly. Two additional flavors of Nightfood mini-cookies, Snoozerdoodle and Date Night Cherry Oat, are expected to be produced in early 2023. Our cookies offer similar nutritional benefits when compared to conventional cookies as our ice cream does when compared to conventional ice cream. Nightfood cookiescookies. They feature less sugar, less fat, fewer calories, more protein, more prebiotic fiber, and contain added inositol and vitamin B6.
On December 12, 2022, the Company announced two corporate-level partnership tests for a single-serve 25-gram Nightfood Prime-Time Chocolate Chip cookie. One test is with a national hotel chain, and the other is with an international airline.
On February 21, 2023, The Company signed a vendor agreement with the parent company of the testing hotel chain. The hotel test is expected to begin on or before March 14, 2023. This test is scheduled to last 30 days. If the test is successful, the hotel chain intends to make Nightfood cookies an amenity gifted to guests at check-in. The initiation of such a program would likely be the revenue and profit contribution equivalent of Nightfood snacks securing retail distribution in thousands of hotel lobby shops.
The airline test is currently projected to begin on or about March 31, 2023, and is expected to last approximately 45 days. We expect both tests to execute according to the schedules presented and be successful. However, either or both of these tests could get delayed, extended, or cancelled, and either or both may be declared a failure by our testing partners.
Sleep-friendly versions of additional popular nighttime snack formats are anticipated to be introduced in 2023 and beyond, subject to available funds and interest from our hotel partners and customers. Our development roadmap includes chips, single-serve ice cream novelties, candy, and more. We believe hotels can benefit from having sleep-friendly snacks available in their lobby shops in multiple formats, so that, whatever snack format a guest might be in the mood for on any given night, there would be a sleep-friendly version available for them, alongside the traditional legacy brands such as Haagen Dazs and Chips Ahoy.
Each new Nightfood snack format would be expected to deliver sleep-friendly snacking in a way that is appropriate for that format. For example, Nightfood chips would not necessarily contain significantly more tryptophan than other brands of chips but would be expected tomay be more sleep-friendly in other ways.
The Competitive Landscape
The nutritional/snack food business is highly competitive and includes such participants as companies like Mondelez, Nestle S.A., Hershey’s, Hormel, Kraft/Heinz, Kellogg’s, Ferrero, Campbell Soup Company, Utz, General Mills, Mars, Post Holdings, The Simply Good Foods Company, Wells Enterprises, Froneri, Unilever, Hostess, PepsiCo, and more. Many of these competitors have well-established names and products.
In February of 2019, Nestleit was announced interestthat Nightfood had won the 2019 Product of the Year Award in the nighttime snacking space with the introductionice cream category in a Kantar innovation survey of a candy-type product called GoodNight.over 40,000 consumers. In 2020, PepsiJune of 2019, it was announced the launch of a “relaxation” drink called Driftwell. In January 2023, Post Holdings introduced a cereal called Sweet Dreams. On the Post website, it indicates that Sweet Dreams is “part of a healthy sleep routine” and includes a “nighttime herbal blend”. In 2021, Unilever announced they had initiated a year-long research study to identify how nutrition could be used to improve sleep, through impact on the gut microbiome. In September 2021, the Chief Medical Officer of Pepsi stated that Pepsi researchers were examining how foods and beverages affect neurochemical pathways, and that the company was interested in how this research could be used to impact sleep.
Such interest expressed in the link between nutrition and sleep, and the nighttime snack occasion, by some of the largest food and beverage companies in the world, indicates to us that the opportunity we’re pursuing is both financially and strategically significant.
Nightfood competes based upon the unique characteristics and positioning of our products and we expect to derive significant leverage from being the pioneer and creator of the emerging night snack category. However, other companies, including those with greater name recognition than us and greater resources may seek to introduce products that directly compete with our products. Management believes that if a competitor sought to develop a competing product, it could do so and begin to establish retail distribution in 12-24 months.
Management speculates that full-scale entry into our category by one of the global players would significantly benefit our Company by advancing the growth of the category while also significantly increasing the strategic value of our brand and distribution partnerships to the other global competitors. Such entrance into our category by a global competitor would likely force the other global snack players to enter the space, perhaps sooner than they’re prepared for. We believe that such a hypothetical situation would likely result in one or more suitors looking to acquire the Nightfood brand to allow them to better and more quickly compete in this potentially pivotal consumer category.
Based on the current acquisition climate in the consumer goods space, Management believes that successful growth of the Nightfood snack line would likely bring acquisition offers from potential competitors as quickly as it might actually bring competition on the shelf from those same potential competitors.
Leveraging Hotels
Management believes widespread distribution in the lobby shops of the world’s largest hotel chains will provide the Nightfood brand a unique and powerful competitive advantage within the sleep-friendly nighttime snack category. In the hotel vertical, the brand can be insulated from potential competition compared to in the supermarket environment. In addition, deep and wide hotel penetration could serve to entrench Nightfood as the leading brand within the category, with a de-facto endorsement by the hotel industry serving as a distinct competitive advantage for Nightfood when competing head-to-head with competitors in other segments of the marketplace.
Independent sales data from multiple sources reinforces our belief that Nightfood snacks can compete favorably with leading national brands withinwon both the context of hotel lobby markets. The Company expects to be able to expand its current hotel distribution based on that sales dataBest New Ice Cream and Best New Dairy Dessert awards at the overall wellness trend that plays an important role in today’s hospitality industry.
We believe the very nature of the hotel lobby shops, with small retail footprint and limited selection, will afford Nightfood a protected position in that high-margin vertical during the formative years of our category. Furthermore, management believes widespread hotel rollout of Nightfood snacks will serve to validate the concept of sleep-friendly nutrition and night snacks in the minds of consumers, potentially accelerating the adoption of the Nightfood brand in additional relevant retail verticals.
DEVELOPMENT PLANS
The Company is focused on building the nighttime snack category by leveraging the expanding distribution of its snack products through hotel lobby marketplaces.
There are approximately 56,000 hotels in the United States. The five largest hotel companies account for approximately half of those locations, distributed among dozens of hotel chains. Those are (in alphabetical order) Choice Hotels, Hilton Worldwide, InterContinental Hotels Group, Marriott International, and Wyndham Hotels & Resorts.
Management is working directly with three of those five companies to establish expansion and/or introduction of Nightfood snacks. Two of those companies have executed corporate-level tests of Nightfood ice cream sales in some of their hotel locations, and both have declared those tests successful. Management expects corporate-level commitment to the introduction of sleep-friendly snacks from these and other major hotel chains, despite experiencing delays in scaling distribution related to changes in hotel personnel, priorities, and timelines.
Hotel lobby shops continue to evolve in terms of size, product assortment, and increased emphasis from hotel brands as a source of revenue and customer service and satisfaction.
Management believes hotels have an obligation to support wellness and better sleep for their guests at every touchpoint. Unfortunately, the most popular snacks in hotel lobby shops tend to be both unhealthy, and disruptive to sleep quality.
With focus on sleep and wellness trending powerfully within the hospitality vertical, Management believes sleep-friendly nighttime snacks will soon become standard within the hotel industry, and that Nightfood will remain the leading brand as the category matures.
As a result of our decision to focus on highly relevant and higher-margin hotel distribution, we have temporarily shifted our focus away from traditional supermarket distribution. While it is likely that Nightfood pints can still be found on shelves in certain supermarkets, we have no supermarket distribution relationships that we would consider active currently. Management expects widespread hotel distribution to generate significant incremental sales with higher gross and net margins than the supermarket vertical, where slotting, advertising, and trade promotion expenses make profitability more difficult to attain. More importantly, we believe hotels are where our brand can thrive, even against the most popular legacy brands in snacking.
Hotel DistributionWorld Dairy Innovation Awards.
In May, 2022, oneNovember of 2021, Nightfood won the five global hotel companies mentionedReal California Milk Excelerator Dairy Innovation competition, with a top prize of $150,000 in this section launched Nightfood ice cream into one of their hotel chains, an extended-stay hotel brand which contains approximately 500 properties inmarketing support. Executives and judges from the United States. To date, our pints have been placed in approximately 300 – 350 of those properties, with more of the properties adding our ice cream over time. In September, 2022, as a result of successful sales results observed in that first hotel chain, that company notified Management that Nightfood pints would begin to be introduced in two of their additional chains, comprising over 3,000 additional properties. That introduction was expected to begin in October, 2022. Subsequent internal restructuring at the hotel company resulted in delaysCalifornia Milk Advisory Board and modifications to that plan which are being worked on currently. Management is actively working with the new decision-makers with our goal of establishing Nightfood distribution across multiple hotel chains, including the two aforementioned chains, and other national chains within that company.
Nightfood has been introduced into approximately 500 hotel lobby shops across the United States. This includes select locations from leading national and international hotel chainscorporate entities such as Holiday Inn Express, Fairfield Inn, CourtyardHershey’s, Coca-Cola, and Whole Foods commended the unique problem the Nightfood brand addresses for consumers, and the opportunities and strategic advantages afforded by Marriott, Hyatt House, Staybridge Suites, Candlewood Suites, Springhill Suites, and more.
Nightfood ice cream is availablewidespread hotel distribution for hotels to purchase nationally through Vistar, a leading national wholesale distributor serving the hospitality vertical. After a months-long process, in February of 2023, Nightfood cookies secured dropship distribution through US Foods Direct and through Sysco’s Supplies on the Fly. US Foods and Sysco are leading broadline distributors that sell extensively to the hotel industry.
Recent Hotel Sales Data
Impulsify is an industry leader in hotel marketplace intelligence, compiling real-time proprietary retail sales data from millions of hotel retail transactions rung into their point-of-sale solutions. Impulsify data was analyzed for the months of July 2022 through December 2022, across the subset of approximately 30 Impulsify-reporting hotels which sold both Nightfood and Haagen Dazs pints, and no other brands. During that 6-month period, reports showed that Nightfood captured 37.9% of the unit sales while Haagen Dazs captured 62.1%. The average selling price for Nightfood in those hotels was $.28 higher per pint than Haagen Dazs.
A separate set of independent point-of-sale data, with zero overlap to the previously mentioned data set, showed Nightfood outselling Ben & Jerry’s and Baskin Robbins pints in a controlled test which included more than 30 lobby shops, across many popular hotel brands. Pints from all three brands were priced at $8.50. Nightfood captured 43% of the total pint volume, Ben & Jerry’s had 34%, and Baskin Robbins had 23%. This data was collected over nine weeks ending October 31, 2022.brand pioneering sleep-friendly nighttime snacking.
During the first six weeks of the test, ads for Nightfood were runhas received media coverage in a segment of the hotels. Surprisingly, Nightfood had stronger relative sales in the hotels without ads. For the final three weeks, there were no ads for any of the brands in any of the properties. With all ads removed, Nightfood’s sales remained constant while theoutlets such as The Today Show, Oprah Magazine, The Rachael Ray Show, Food Network Magazine, The Wall Street Journal, USA Today, The Washington Post, Fox Business News, and many other brands sales decreased. As a result, Nightfood’s share of overall pint sales surged from 40% in the first six weeks to 50% for the final three weeks.media outlets.
The conclusions drawn from the test were that ads for Nightfood ice cream pints actually lifted sales of the more well-known competitors (which is not uncommon), and that sleep-friendly Nightfood, without ads, was decisively the top-selling pint for the entire test period.
The Future
Management believes strong sales results in hotels relative to well-established, decades-old national brands will enable Nightfood to secure additional hotel chain brand-level distribution arrangements for our sleep-friendly snacks.
While the dollar value of ice cream pint sales in any individual hotel shop are understood to be modest, Nightfood’s strong relative sales data obtained over recent months, and so quickly after our launch, affirms our belief that sleep-friendly snacks can sell very well alongside legacy snack brands in the high-margin hotel environment.
The Company anticipates adding new distribution in thousands of hotels in the coming months through relationships it has established with some of the largest companies in the world in the hospitality vertical. We have built what we believe is a very valuable network and distribution infrastructure, which includes global hospitality companies, group purchasing organizations, hotel management groups, and distributors.
The Company is currently finalizing coordination of two tests of individually-wrapped 25 gram Nightfood Prime-Time Chocolate Chip cookies as an amenity. One test is with an international airline, and the other is with a national hotel chain with several hundred properties in the United States.
On February 21, 2023, The Company signed a vendor agreement with the parent company of the testing hotel chain. The hotel test is expected to begin on or before March 14, 2023. This test is scheduled to last 30 days. If the test is successful, the hotel chain intends to make Nightfood cookies an amenity gifted to guests at check-in. The initiation of such a program would likely be the revenue and profit contribution equivalent of Nightfood snacks securing retail distribution in thousands of hotel lobby shops.DEVELOPMENT PLANS
The airline test is currently projected to begin on or about March 31, 2023, and is expected to last approximately 45 days.Company has recently experienced a substantial decline in sales as a result of pivoting away from supermarket distribution. We expect both tests to execute accordingrevisit supermarket and traditional retail distribution after we have established a meaningful revenue base and achieved a higher level of consumer awareness. We have plans to leverage direct-to-consumer sales and hotel distribution to enhance revenue, grow brand awareness, and establish the schedules presented and be successful. However, either or both of these tests could get delayed, extended, or cancelled, and either or both may be declared a failure by our testing partners.
Assleep-friendly snack category we add retail and amenity distribution and exposure in additional hotels and chains, we believe such distribution will create added pressure on the rest of the hotel industry to also offer sleep-friendly snacks or risk falling behind in the eyes of wellness-conscious travelers.are pioneering.
We believe that consumers seeing our snacks in some of the most trusted hotel chains in the United States will drive awareness not only of our brand, but of the fact that what one eats before bed can impact sleep quality. We believe broad acceptance of this key consumer insight will help bring the nighttime snacking category to life.INFLATION
In addition to revenue growth, increased awareness, and operating profitability, Management believes that national hotel distribution of its sleep-friendly nighttime snacks will provide the foundation on which the nighttime snack category can be built.
The primary goal of the company is to successfully develop and nurture the nighttime snack category.
Management believes that success in attaining this goal will create significant value for shareholders, as it would likely result in Nightfood not only being the category pioneer, but also establishing a position from which Nightfood can remain the dominant brand in this potential multi-billion dollar consumer category.
INFLATION
Inflation can be expected to have an impact on our operating costs. Similar to many other industries, we have recently seen increases in the cost of certain ingredients and packaging materials. Such increases will either result in lower gross margins or necessitate an increase in our wholesale pricing. A prolonged period of inflation could cause a general economic downturn and negatively impact our results.
SEASONALITY SEASONALITY
With a focus on distribution of our snacks in hotels over the next 1-2 years before we envision revisiting a focus on supermarkets, a certain amount of seasonality is expected. As U.S. hotel occupancy has a history of peaking in June and July, with occupancy rates approximately 10% above the average, it is possible that we will experience an increase in sales related to that occupancy peak.
As an early-stage and growing brand, with a product mix that is expected to include a variety of snacks such as ice cream, cookies, chips, candy, and more, the full impact of seasonality on our business might not be fully understood for several additional annual cycles.
CORONAVIRUS (COVID-19)
The outbreak of the novel coronavirus (COVID-19), including the measures to reduce its spread, and the impact on the economy, has still not been fully predicted.
We have experienced minimal issues with supply chain and logistics, except that there have been recent and significant increases in costs relating to freight and packaging. Order processing function has been normal to date, and our manufacturers have assured us that their operations are “business as usual” as of the time of this filing.
It is possible that the impact of the pandemic could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable to meet certain debts and expenses.
It is impossible to know what the future holds with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current coronavirus pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, vendors, and business partners. It is difficult to know if the pandemic has materially impacted the results of operations, and we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if necessary.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODSTHREE-MONTH PERIOD ENDED DECEMBER 31,SEPTEMBER 30, 2023 AND 2022 AND 2021.
Revenue For the three months ended December 31,September 2023 and 2022, and 2021 we had Gross Sales of $38,424$8,802 and $104,463$99,223, respectively and Net Revenues (Net Revenues are defined as Gross Sales, less slotting fees, promotions, rebates, coupons and sales discounts,Slotting Fees, Sales Discounts, and certain other revenue reductions) of $13,369$8,470 and $79,374$79,790, respectively, and incurred operating losses of $425,190 and $558,607, respectively. The substantial decline in revenues is a net operating loss of $677,539 and $478,390 respectively.
| | | Three Months Ended
December 31, | | | | | 2022 | | | 2021 | | | Gross product sales | | $ | 38,424 | | | $ | 104,463 | | | Less: | | | | | | | | | | Slotting fees | | $ | - | | | $ | - | | | Sales discounts, promotions, and other reductions | | | (25,055 | ) | | | (25,089 | ) | | Net Revenues | | $ | 13,369 | | | $ | 79,374 | |
The decrease in Gross Sales relative to the same period in 2021 was largely thedirect result of our strategic pivot away from supermarket channel accounts during fiscal 2023 and the delay in distribution to focus exclusivelyexpansion of Nightfood products within the hotel vertical.
Accounting standards require exclusion on the higher contextincome statement of Gross Sales made to a customer to whom the Company is paying slotting fees and higher margin hotel vertical, where our products can more favorably competecertain other payments (slotting fees are fees occasionally charged by retailers and distributors to add a new product into their product assortment). In those situations, the Gross Sales number is reduced, dollar for dollar, by the slotting fees and other payments, until the total cost is covered. These payments do not appear on the income statement as an expense. Rather, Slotting Fees, along with Sales Discounts, are applied against more established traditional brands.Gross Sales, resulting in Net Revenue, as shown below. The netting of Gross Sales against slotting and sales discounts, as described and shown below, results in the Net Revenue number at the top of the income statement. This is not a reflection of the amount of product shipped to customers, but rather a function of the way certain sales are accounted for when those sales are made to customers who are charging slotting fees.
| GROSS SALES | | For the
three months
period ended
September 30,
2023 | | | For the
three months
period ended
September 30,
2022 | | | Gross product sales | | $ | 8,802 | | | $ | 99,223 | | | Less: | | | | | | | | | | Slotting fees | | | - | | | | - | | | Sales discounts, promotions, and other reductions | | | (332 | ) | | | (19,253 | ) | | Net Revenues | | $ | 8,470 | | | $ | 79,970 | |
Furthermore, the hotel sales project to be significantly more profitable on a per unit basis, as sales will be conducted at full wholesale pricing, and line items such as slotting, advertising, and pricing promotions project to be greatly reduced or entirely eliminated.
Costs and expenses For the three months ended December 31September 30, 2023 and 2022, and 2021, Cost of Product Sold totaled $41,996decreased to $57,580 from to $125,121. The primary reason Cost of Product Sold exceeds gross revenues is significant freight and $88,105, respectively. shipping costs incurred on a per unit basis related to the transportation of ice cream. This is partly due to increases in gas prices driving up freight costs in general, and also due to our average shipment being substantially smaller than for the same period last year. For the three months ended December 31,September 30, 2023 and 2022, CostAdvertising and Promotional Expenses decreased from $37,166 to a gain of Product Sold exceeded Net Revenues$7,131. This decrease is largely due to us pausing advertising and promotional efforts during the fact that our freightperiod. In addition, the gain in advertising and promotional costs remain significantly elevated on a per-unit basis in the short termthree months ended September 30, 2023 is a result of certain previously booked marketing expenditures which were reversed in the current three month period, and when offset with actual costs in the period, resulted in a gain. For the three months ended September 30,2023 and 2022, Selling, General, and Administrative expenses increased from $126,343 to $160,012. The largest component of this increase was the result of a write down of inventory of $113,196 as a result of inventory spoils and damage. For the three months ended September 30, 2023 and 2022, Professional Fees decreased from $349,949 to $223,200. This decrease was largely due to reduced expenses in the factcurrent three months ended September 30, 2023, as we did not have costs associated with the preparation, filing, and qualification of our Tier 2 offering pursuant to Regulation A, which offering received notice of qualification from the SEC on October 25, 2022. For the three months ended September 30, 2023 and 2022, Total Operating Expenses decreased from $638,577 to $433,660. As discussed above, the major component of this decrease was the reduction in advertising and marketing spend, selling, general and administrative costs and professional fees. For the three months ended September 30, 2023, our Total Operating Expenses were $433,660. Of that, most$217,103 is related to running our snack business operations, and $216,557 is related to financing, compliance, and other non-operational activities. For the three months ended September 30, 2022, our Total Operating Expenses were $638,577. Of that, $274,598 is related to running our business operations, and $363,979 is related to financing, compliance, and other non-operational activities.
Total Operating Expenses include those expenses associated with running the operating portion of our business (such as the manufacturing our snacks, advertising for our product, warehousing, freight, and the like). It also includes certain cash and non-cash expenses incurred by us related to activities such as SEC compliance, fundraising activities, and maintaining our public entity in good standing. Our revenues and operations are currently limited, therefore expenses relating to financing and compliance activities make up a larger portion of our total expenses than they might in a larger company. Other Income (Expense) For the three months ended September 30, 2023 and 2022, Loss From Operations decreased from $558,609 to $425,190. This decrease was due to decreased expenses across all operating and non-operating categories in the current three months as sales and associated costs of sales decreased, professional fees and selling and general administrative expenses decreased, and we reduced the spend on advertising and promotion. Decreases to operating and non operating expenditures were offset in the current three months by inventory write downs of $113,196, as set out above. For the three months ended September 30, 2023 and 2022, Total Other Expenses increased to $1,007,852 from $642,503. The majority of these expenses are related to accounting treatment applied to financing costs, debt and the amortization of debt discount. During the three months ended September 30, 2023 we recorded amortization of debt discount of $212,259 and financing costs of $751,900. During the three months ended September 30, 2022 we recorded amortization of debt discount of $544,545 and financing costs of $132,983. This is not an actual cash expense but is a function of the orders shippedway certain financing activities are accounted for. Interest expenses totaled $43,693 and $22,946 in the three months ended September 30, 2023 and 2022, respectively. Other expense in the three months ended September 30, 2022 was offset by a gain of $57,971 with respect to our wholesale customers during this period were partial palletsthe extinguishment of certain debt in the period. Net Loss Our net loss in the three months ended September 30, 2023 totaled $1,433,042 as compared to accommodate our current ramp-up phase. As more points$1,201,110 in the three months ended September 30, 2022. The increase to the net loss is directly related to an increase in financing costs, amortization of distribution are added, average order sizes are expected to increase, which is expected to significantly drive down freight costs as a percentage of sales, improving marginsdebt discount and ultimately allowing for profitability. interest expenses.
Selling, General, and Administrative expenses increased from $72,316 inCustomers
During the three months ended December 31, 2021 to $104,292 in the three months ended December 31, 2022 largely due to increases in insurance expense, web services, and fees relating to fundraising activities such as filing fees and transfer agent fees.
For the three months ended December 31, 2022, and 2021, total operating expenses increased to $690,908 from $557,764. This was a direct result of increases to professional fees and Selling, General, and Administrative expenses in the three months ended December 31, 2022, offset by a substantial reduction in advertising and promotion period over period. The increase in professional fees is largely due to fees related to our RegA+ filing and related fundraising efforts along with non-cash expenses related to certain financing provisions including the repricing of certain warrants and a default on certain notes.
For the three months ended December 31, 2022, and 2021, total Other Expenses increased to $3,882,723 from $302,529. The majority of the other expenses category consist of non-cash expenses related to financing events.
For the three months ended December 31, 2022, and 2021 we incurred net losses of $4,560,262 and $780,919 respectively. This increase in net losses is due largely to increases in other expenses (non-cash) related to financing activities.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2022 AND 2021.
For the six months ended December 31, 2022, and 2021 we had Gross Sales of $137,647 and $293,394 and Net Revenues of $93,339 and $193,827, respectively, and incurred operating losses of $1,236,146 and $1,312,065 respectively.
| | | Six Months Ended
December 31, | | | | | 2022 | | | 2021 | | | Gross product sales | | $ | 137,647 | | | $ | 293,394 | | | Less: | | | | | | | | | | Slotting fees | | $ | - | | | $ | - | | | Sales discounts, promotions, and other reductions | | | (44,308 | ) | | | (99,567 | ) | | Net Revenues | | $ | 93,339 | | | $ | 193,827 | |
The decrease in Gross Sales relative to the same period in 2021 was largely the result of our strategic pivot away from supermarket distribution to focus exclusively on the higher context and higher margin hotel vertical, where our products can more favorably compete against more established traditional brands.
Furthermore, the hotel sales project to be significantly more profitable on a per unit basis, as sales will be conducted at full wholesale pricing, and line items such as slotting, advertising, and pricing promotions project to be greatly reduced or entirely eliminated.
For the six months ended December 31, 2022, and 2021, Cost of Product Sold totaled $167,117 and $212,979, respectively. Cost of Product Sold exceeded Net Revenues due to the fact that our freight costs remain significantly elevated on a per-unit basis in the short term due to the fact that most of the orders shipped to our wholesale customers during this period were partial pallets to accommodate our current ramp-up phase. As more points of distribution are added, average order sizes are expected to increase, which is expected to significantly drive down freight costs as a percentage of sales, improving margins and ultimately allowing for profitability.
Selling, General, and Administrative expenses decreased from $344,953 in the six months ended December 31, 2021 to $230,636 in the six months ended December 31, 2022 largely due to decreases in research & development and investor relations.
For the six months ended December 31, 2022, and 2021, total operating expenses decreased to $1,329,485 from $1,505,892. This was a direct result of substantial decreases to Selling, General, and Administrative expenses, and advertising expenses in the six months ended December 31, 2022, offset by a substantial increase in professional fees. The increase in professional fees is largely due to fees related to our RegA+ filing and related fundraising efforts along with non-cash expenses related to certain financing provisions including the repricing of certain warrants and a default on certain notes, and the debt financing which occurred in September 2022.
For the six months ended December 31, 2022 and 2021, total Other Expenses increased to $4,525,226 from $302,529. The majority of the other expenses category consist of non-cash expenses related to financing events.
For the six months ended December 31, 2022, and 2021 we incurred net losses of $5,761,372 and $1,614,594 respectively. This increase in net losses is due largely to increases in non-cash expenses and non-cash professional fees related to our recent financing activities.
Customers
During the six months ended December 31, 2022,30, 2023, the Company had one customer accountaccounting for approximately 35%over 10% of the gross sales, onesales. This customer accounted for approximately 26%100% of the gross sales, and one customer accountedsales.
During the three months ended September 30, 2022, the Company had five customers accounting for approximately 12% and another customer accounted for approximatelyover 10% of gross sales. During the six months ended December 31, 2021, the Company had one customer account for 26%One of the gross sales. One other customerthose accounted for 18%approximately 29% of the gross sales and two other customers each account for more than 10% of the gross sales.
During the three months ended December 31, 2022, the Company had one customer account for approximately 74% of the gross sales. One other customeranother accounted for approximately 23% of gross sales.. During the three months ended December 31, 2021, the Company had one customer account for 36% of the gross sales. One other customer accounted for 22% of the gross sales.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2022,September 30, 2023, we had cash on hand of $49,008,$5,424, receivables of $74,421$30,281 and inventory value of $453,617.valued at $160,756.
Our cash on hand is not adequate to satisfy our long-term working capital needs or to satisfy our existing and expected liabilities as they become due. While we continue toneeds. We believe that our current capitalization structure, combined with ongoing increases in distribution, revenues, and market capitalization, will enable us to successfully secure the required financing to continue our growth. In addition, we are currently seeking the acquisition of additional revenue generating businesses to bolster our growth we can give no assurances of success in this regard considering the delays experienced in the roll-out ofand strengthen our products in the hotel vertical.balance sheet. On October 24, 2022,As discussed above, the Company launched a Tier 2 offering pursuanthas limited available cash resources and we do not believe our cash on hand will be sufficient to Regulation A (also known as “Regulation A+”) with the intentfund our operations and growth in fiscal year 2024 or adequate to satisfy our immediate or ongoing working capital needs. The Company is continuing to raise capital through an equity crowdfunding campaign. We believe this offering, if we successfully raise the maximum amount being offered, will enable ussale of its securities, including common stock, preferred stock, and debt (including convertible debt) to eliminate all corporate debt and operate the company until significant growth milestones are achieved, perhaps including attaining profitability; however, we believe that as a result of the delays experienced in the roll-out of our products in the hotel vertical, we have not been as successful as we had expected to be with respect to the Regulation A+ offering.
Because the business has limited operating history and sales, no certainty of continuation can be stated. Management has devoted a significant amount of time in the raising of capital from additional debt and equity financing. However,finance the Company’s ability to continue as a going concern will again be dependent upon raising additional funds through debt and equity financing, including our Regulation A+ offering, and generating revenue. There areoperations, of which it can give no assurances the Companyassurance of success. In addition, we will receive the necessary funding or generate revenue necessary to fund operations long-term.proceeds from our outstanding warrants as, if and when such warrants are exercised for cash.
If we are unable to raise cash through the sale of our securities, we may be required to severely restrict or cease our operations. The
Even if the Company is successful in raising additional funds, the Company cannot give any assurance that it will, in the future, be able to achieve a level of profitability from the sale of its products to sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Since our inception, we have sustained operating losses. During the three months ended December 31, 2022, we incurred a net loss of $4,560,262 compared to $780,919 for the three months ended December 31, 2021. The majority of our net loss for this current reporting period is related to the way certain financing activities were accounted for, and not related to losses from business operations.
During the six months ended December 31, 2022,Subsequent to September 30, 2023, we raised additional gross proceeds, net cash used in operating activities was $738,165 compared to net cash used of $1,440,431 for the six months ended December 31, 2021. This decrease is largely due to an increase in accounts payable and the impactoriginal issuance discounts, of various noncash financing activities for the six months ended December 31, 2022 compared to the prior year.
We did not use any cash in investing activities, during the six months ended December 31, 2022 or December 31, 2022.
During the six months ended December 31, 2021, net cash aggregating $1,193,034 was provided by financing activities, compared to $506,296 for the six months ended December 31, 2022. In the Six months ended December 31, 2021, our financing activities consisted of sales of our Series B Preferred Stock and proceeds from debt financing. In the six months ended December 31, 2022, our financing activities consisted of the issuance of debt in the form of convertible promissory notes and sales of Reg A units for cash, offset by repayments of previously incurred convertible notes.$105,400.
From ourSince inception in January 2010 through December 31, 2022,September 30, 2023, we have generated an accumulated deficit of approximately $37,548,495.$36,441,939. This accumulated deficit is not debt, and thisthere is not an amount that needs to be paid out at any point in the future.no obligation or liability associated with it. An accumulated deficit reflects a negative balance of retained earnings and an accumulation of historical losses over time, related to both operations and financing activities. It is not unusual for early-stagegrowing companies to have significant accumulated deficit, even after turning profitable. Many large, fast growing, and successful companies have reported accumulated deficits in recent years, such as Warby Parker, The Honest Company, Beyond Meat, Roblox, Robinhood, Sweetgreen, Oatly, Rivian, Celsius Holdings, Chobani, and Tesla. In our case, like many of these others, an accumulated deficit is a function of losses sustained over time, along with the costs associated with raising operating capital.
Assuming we raise additional funds and continue operations, it is expected we expect tomay incur additional operating losses during the next two to four quarterscourse of fiscal year 2024 and possibly thereafter. We plan to continue to pay or satisfy existing obligationsobligation and commitments and finance our operations, as we have in the past, primarily through the sale of our securities and other forms of external financing until such time that we are able to generate sufficient funds from the sale of our products to finance our operations, of which we can give no assurance.
We anticipate deriving additional revenue from product sales and new distribution arrangements in fiscal year 2024, but we cannot at this time quantify the amount.
Cash Flow from Operating Activities During the three months ended September 30, 2022, net cash used in operating activities was $414,610 compared to net cash used of $89,763 for the three months ended September 30, 2023. This decrease in net cash used is largely due to the overall reduction in our operating and non-operating activities in the most recently completed three-month period. While we continue to report increases to accounts payable and other liabilities as well as non-cash expenses such as financing costs including costs of the issuance of warrants in respect to financings and services, the overall size of the increase to our operating liabilities is substantially reduced to results reported in the three months ended September 30, 2022. Cash Flow from Investing Activities We did not use any cash in investing activities, during the three months ended September 30, 2023 or September 30, 2022. Cash Flow from Financing Activities During the three months ended September 30, 2023, net cash of $51,000 was raised through the issuance of debt in the form of convertible notes. In the three months ended September 30, 2022, our financing activities consisted of the issuance of debt in the form of convertible notes totaling $644,000, offset by repayments to debt of $289,855. Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate past judgments and our estimates, including those related to allowance for doubtful accounts, allowance for inventory write-downs and write offs, deferred income taxes, provision for contractual obligations and our ability to continue as a going concern. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Note 2 to the consolidated financial statements, presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022,2023, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. There were no significant changes in our critical accounting estimates during the sixthree months ended December 31, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No report required.September 30, 2023.
ITEM 4.3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.
We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022.September 30, 2023. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on that evaluation, our chief executive officer concluded that our disclosure controls and procedures were not effective at December 31, 2022September 30, 2023 due to the lack of full-time accounting and management personnel. We will consider hiring additional employees when we obtain sufficient capital.
As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.
Changes in internal controls over financial reporting There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not engaged in any litigation or governmental regulatory proceeding at the present time, and management is unaware of any other claims or complaints that could result in future litigation or proceeding, in any case that would or would be expected to, individually or in the aggregate, have a material adverse effect on us or our business.litigation. Management will seek to minimize disputes with its customers but recognizes the inevitability of legal action in today’s business environment as an unfortunate price of conducting business. ITEM 1A. RISK FACTORS.
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no sales of equity securities during the period covered by this Report that were not registered under the Securities Act and/or were not previously reported in a Current Report on Form 8-K filed by the Company other than as set out below: | ● | During the six months ended December 31, 2022, the Company issued an aggregate of 586,111 shares of its common stock for cashless exercise of 750,000 stock purchase warrants. The securities were issued in a private transaction in reliance uponDuring the three months ended September 30, 2023, the Company issued 3,333,333 shares of Common Stock for services with a fair value of $50,000. The shares were issued in reliance on an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, as a transaction not involving any public offering. |
| ● | During the six months ended December 31, 2022, the Company sold 457,350 units at $0.50 per unit, each unit consisting of 4 shares of common stock and 4 share purchase warrants, for a total of 1,829,400 shares of common stock under its Regulation A+ Offering. The Company received net proceeds of $224,615. The securities were issued in a private transaction in reliance upon an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, as a transaction not involving any public offering. |
| ● | During the six months ended December 31, 2022, holders of the B Preferred converted 960 shares of Series B Preferred Stock into 4,800,000 shares of its common stock. The securities were issued in a private transaction in reliance upon an exemption from registration pursuant to Section 4(a)(2) of the Securities Act and/or Section 3(a)(9) of the Securities Act. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On December 10, 2021 the Company entered into certain agreements including Secured Convertible Promissory Notes (the “Notes”) and Securities Purchase Agreements with certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate $1,086,956.52 in proceeds. The 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. During the six months ended December 31, 2022 the Company made certain repayments, however, 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”). The Owed Amount was not paid by the Company in accordance with the terms of the Notes during the six months ended December 31, 2022, and the failure to so pay the Owed Amount on the Maturity Date created an event of default. At December 31, 2022, the Owed Principal Amount, including default penalties, totaled $905,767. Subsequent to the December 31, 2022 the Company entered into a forbearance agreement with the Purchasers whereby the Purchasers have agreed to forbear on all rights against the Company provided the Company adheres to the agreed-upon payment schedule to satisfy the notes in full.Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.On October 11, 2023, the Company was informed that our independent registered accounting firm since April 2022, Gries & Associates, LLC (“Gries”) had sold its business to GreenGrowth CPAs (“GreenGrowth”). On November 7, 2023, the Company engaged and executed an agreement with GreenGrowth as the Company’s new independent accountant to replace Gries.
ITEM 6. EXHIBITS.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Nightfood Holdings, Inc. | | | | Dated: February 21,December 29, 2023 | By: | /s/ Sean Folkson | | | Sean Folkson,
Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer) |
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