Summary of Significant Accounting Policies |
2.
Summary of Significant Accounting Policies
Management
is responsible for the fair presentation of the Company’s financial statements, prepared in accordance with U.S. generally accepted
accounting principles (GAAP).
Interim
Financial Statements
These
unaudited condensed consolidated financial statements for the three months ended September 30, 2022, and 2021, respectively, reflect
all adjustments including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in accordance with the accounting principles generally accepted
in the United States of America.
These
interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial
statements and notes thereto for the fiscal years ended June 30, 2022, and 2021, respectively, which are included in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2022 filed with the United States Securities and Exchange Commission on
September 28, 2022. The Company assumes that the users of the interim financial information herein have read, or have access to, the
audited consolidated financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The results of operations for the three months ended September 30, 2022 are not necessarily
indicative of results for the entire year ending June 30, 2023.
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 depreciation and amortization, the valuation for non-cash
issuances of common stock, and the website, income taxes and contingencies, valuing convertible preferred stock for a “beneficial
conversion feature” (“BCF”) and warrants among others. |
Cash
and Cash Equivalents
| ● | The Company classifies as cash and cash equivalents amounts on deposit in the banks and cash temporarily in various instruments with original maturities of three months or less at the time of purchase. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. |
Fair
Value of Financial Instruments
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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. |
Inventories
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Inventories
consisting of packaged food items and supplies are stated at the lower of cost (FIFO) or net realizable value, including provisions
for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of sales during the period spoilage
is incurred. The Company has no minimum purchase commitments with its vendors. |
Advertising
Costs
| ● | Advertising costs are expensed when incurred and are included in advertising and promotional expense in the accompanying statements of operations. Although not traditionally thought of by many as “advertising costs”, the Company includes expenses related to graphic design work, package design, website design, domain names, and product samples in the category of “advertising costs”. The Company recorded advertising costs of $37,166 and $305,016 for the three months ended September 30, 2022 and 2021, respectively. |
Income
Taxes
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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 carryforwards. 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. |
Revenue
Recognition
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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. |
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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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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. |
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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. |
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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. |
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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 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. |
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 September
30, 2022 and June 30, 2022, the Company did not have any uninsured cash deposits. |
Beneficial
Conversion Feature
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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.. |
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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. |
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 resulted in adjustments to the exercise
price of all warrants created from conversion of B Preferred from $0.30 per share to approximately $0.2725 per share through September
30, 2022.
Based on the guidance in ASC 470-20-20, the Company
determined that a BCF existed, as the effective conversion price for the B Preferred at issuance was less than the fair value of the common
stock which the shares of B Preferred are convertible into. A BCF feature based on the intrinsic value of the date of issuances for the
B Preferred was approximately $4.4 million.
Debt
Issue Costs
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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. |
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. |
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 interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed. |
Stock Settled Debt
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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
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The
Company accounts for share-based awards issued to employees in accordance with FASB ASC 718. Accordingly, employee share-based payment
compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite
service period. Additionally, share-based awards to non-employees are expensed over the period in which the related services
are rendered at their fair value. The Company applies ASC 718, “Equity Based Payments to Non-Employees”, with respect
to options and warrants issued to non-employees. |
Customer
Concentration
| ● | During the three months ended September 30, 2022, the Company had five customers each accounting for sales exceeding 10% of the gross sales. During the three months ended September 30, 2021, the Company had five customers, each accounting for sales exceeding 10% of the gross sales. |
Vendor Concentration
| ● | During the three-month period ended September 30, 2022, one vendor accounted for more than 10% of our operating expenses. During the three-month period ended September 30, 2021, one vendor accounted for more than 10% of our operating expenses. |
Receivables Concentration
| ● | As of September 30, 2022, the Company had receivables due from nine customers. One accounted for 32% of the total balance, one accounted for 22% of the total balance and one accounted for 15% of the total balance. As of June 30, 2022, the Company had receivables due from six customers, one of who accounted for over 59% of the outstanding balance. One of the remaining five accounted for 13.5% of the outstanding balance and one accounted for 11% of the outstanding balance. |
Income/Loss Per Share
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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 months ended September 30, 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
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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
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ASU
No. 2019-12, Simplifying the Accounting for Income Taxes |
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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. |
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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. |
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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, 2021 including interim periods within those fiscal years. The adoption of this guidance does not materially impact
our financial statements and related disclosures. |
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The Company
will continue to monitor these emerging issues to assess any potential future impact on its financial statements. |
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