Summary of Significant Accounting Policies |
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Summary of
Significant
Accounting Policies |
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Management is responsible for the fair presentation
of the Company’s financial statements, prepared in accordance with U.S. generally accepted accounting principles (GAAP).
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The consolidated financial statements include
the accounts of Nightfood Holdings, Inc. and its wholly owned subsidiaries, NightFood, Inc. and MJ Munchies, Inc. The Company consolidates
all majority-owned and controlled subsidiaries in accordance with applicable standards. All material intercompany accounts and balances
have been eliminated in consolidation.
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Use of Estimates |
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The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Estimates are used in the determination of beneficial conversion features, derivative liabilities, depreciation and amortization,
the valuation for non-cash issuances of common stock, and the website, income taxes and contingencies, among others. |
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Beneficial Conversion
Feature |
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For conventional convertible debt where the
rate of conversion is below market value, the Company records any “beneficial conversion feature” (“BCF”)
intrinsic value as additional paid in capital and related debt discount.
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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. |
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Beneficial Conversion Feature – Series B
Preferred Stock (deemed dividend):
Each share of B Preferred has a liquidation preference
of $1,000 and has no voting rights except as to matters pertaining to the rights and privileges of the B Preferred. Each share of B Preferred
is convertible at the option of the holder thereof into (i) 5,000 shares of the Registrant’s common stock (one share for each $0.20
of liquidation preference) (the “Conversion Shares”) and (ii) 5,000 common stock purchase warrants, expiring April 16, 2026
(the “Warrants”). The Warrants have an initial exercise price of $0.30 per share.
Based on the guidance in ASC 470-20-20, the Company determined that
a beneficial conversion feature existed, as the effective conversion price for the Series B Preferred Stock at issuance was less than
the fair value of the common stock which the preferred shares are convertible into. A beneficial conversion feature based on the intrinsic
value of the date of issuances for the Series B Preferred Stock was approximately $4.1 million.
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Debt Issue Costs |
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The
Company may pay debt issue costs in connection with raising
funds through the issuance of debt whether convertible or not or with other consideration. These costs are recorded as debt discounts
and are amortized over the life of the debt to the statement of operations as amortization of debt discount.
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Equity Issuance Costs |
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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
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Original Issue Discount |
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If debt is issued with
an original issue discount, the original issue discount is recorded to debt discount, reducing the face amount of the note and is
amortized over the life of the debt to the statement of operations as amortization of debt discount. If a conversion of the underlying
debt occurs, a proportionate share of the unamortized amounts is immediately expensed. |
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Valuation of Derivative
Instruments |
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ASC 815 “Derivatives
and Hedging” requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative
instruments such as warrants, on their issuance date and measured at their fair value for accounting purposes. In determining the
appropriate fair value, the Company uses the Black-Scholes option pricing formula. Upon conversion of a note where the embedded conversion
option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all
related notes, derivatives and debt discounts and recognizes a net gain or loss on debt extinguishment. |
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Reclassification |
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The Company may make certain
reclassifications to prior period amounts to conform with the current year’s presentation. These reclassifications did not
have a material effect on its consolidated statement of financial position, results of operations or cash flows. |
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Recent Accounting
Pronouncements |
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The Company reviews all of the Financial
Accounting Standard Board’s (“FASB”) updates periodically to ensure the Company’s compliance of its accounting
policies and disclosure requirements to the Codification Topics.
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Derivative
Financial Instruments |
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The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine
if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and then is revalued at
each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative
financial instruments, fair value accounting requires bifurcation of embedded derivative instruments such as conversion features
in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate
fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines
if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature
requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation
process of these instruments as derivative financial instruments.
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Once determined, derivative liabilities are adjusted to reflect fair value at the end of each reporting period. Any increase or decrease in the fair value from inception is made quarterly and appears in results of operations as a change in fair market value of derivative liabilities. |
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Cash and Cash Equivalents |
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The Company classifies
as cash and cash equivalents amounts on deposit in the banks and cash temporarily in various instruments with original maturities
of three months or less at the time of purchase. |
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Fair Value of Financial Instruments |
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Statement of financial
accounting standard FASB Topic 820, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated
fair values of financial instruments. The carrying amounts reported in the statements of financial position for assets and liabilities
qualifying as financial instruments are a reasonable estimate of fair value. |
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Inventories |
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Inventories consisting
of packaged food items and supplies are stated at the lower of cost or net realizable value (on a FIFO basis), including
provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the
period spoilage is incurred. |
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Advertising Costs |
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Advertising costs are expensed
when incurred and are included in advertising and promotional expense in the accompanying statements of operations. Included
in this category are expenses related to public relations, investor relations, new package design, website design, design of promotional
materials, cost of trade shows, cost of products given away as promotional samples, and paid advertising. The Company
recorded advertising costs of $588,172 and $403,639 for the years ended June 30, 2021 and 2020, respectively. |
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Income Taxes |
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The Company
has not generated any taxable income, and, therefore, no provision for income taxes has been provided. |
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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. |
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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. |
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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. |
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Revenue Recognition |
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The Company
generates its revenue by selling its nighttime snack products wholesale and direct to consumer. |
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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. |
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The Company offers sales
incentives through various programs, consisting primarily of advertising related credits. The Company records advertising related
credits with customers as a reduction to revenue as no identifiable benefit is received in exchange for credits claimed by the customer.
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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.
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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.” |
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If the consideration
payable to a customer is a payment for a distinct good or 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.” |
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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: |
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The entity recognizes revenue for the transfer of the related goods or services to the customer. |
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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.” |
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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. |
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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. |
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Concentration of Credit Risk |
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Financial instruments
that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At
various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company
places its cash deposits only with high credit quality institutions. Management believes the risk of loss is minimal. At
June 30, 2021 and 2020 the Company did not have any uninsured cash deposits. |
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Receivables Concentration |
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As of June 30, 2021, the
Company had receivables due from five customers, one of who accounted for over 73% of the outstanding balance (this customer operates
42 distribution centers). One of the remaining four accounted for 11.5% of the outstanding balance. As of June 30, 2020, the Company
had receivables due from seven customers, two of whom accounted for over 20% of the outstanding balance. Four of the other five accounted
for over 10% of the total balance. |
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Vendor Concentration |
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During the year ended June 30, 2021 one vendor accounted for more than
10% of the Company’s operating expenses. During the year ended June 30, 2020, one vendor accounted for more than 10% of the Company’s
operating expenses. |
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Income Per Share |
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Net income per share data for both the years ending June 30, 2021 and 2020, is based on net income available to common shareholders divided by the weighted average of the number of common shares outstanding. |
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Impairment of Long-lived Assets |
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The Company accounts for long-lived assets in accordance with the provisions of FASB Topic 360, Accounting for the Impairment of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair values are determined based on quoted market value, discounted cash flows or internal and external appraisals, as applicable. During the years ended June 30, 2021 and 2020, the Management determined and impaired $-0- and $500,000, respectively as impairment on intangible asset |
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ASC 350-50-05-01 states “on accounting for costs incurred to develop a website, including whether to capitalize or expense the following types of costs: |
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Costs incurred in the planning stage |
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Costs incurred in the website application and infrastructure development stage |
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Costs incurred to develop graphics |
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Costs incurred to develop content |
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Costs incurred in the operating stage.” |
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ASC 350-50-25-6 states “Costs incurred to purchase software tools, or costs incurred during the application development stage for internally developed tools, shall be capitalized unless they are used in research and development and meet either of the following conditions: |
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They do not have any alternative future uses. |
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They are internally developed and represent a pilot project or are being used in a specific research and development project (see paragraph 350-40-15-7).” |
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Further, at ASC 350-50-25-7, “Costs to obtain and register an Internet domain shall be capitalized under Section 350-30-25.” |
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During the years ended June 30, 2021 and 2020, the Management determined and capitalized $-0- and $1,000,000, respectively, under ASC 350-50 and accounted as an intangible asset and amortized the costs over the life of the relationship. |
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