Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and description of business

Generation NEXT Franchise Brands, Inc. (referred to herein collectively with its subsidiaries as “we”, the “Company”, “our Company”, or “GNext”) operates as a franchisor, owner, managing member, and direct seller of unattended retail kiosks that feature cashless payment devices and remote monitoring software through its wholly-owned subsidiaries, Reis & Irvy’s, Inc. (“R&I”), 19 Degrees, Inc. and Generation Next Vending Robots, Inc. The Company uses in-house location specialists that are responsible for securing locations for its kiosks; additionally, the Company has negotiated discounts with certain of its consumable manufacturers and distributors.

The subsidiary 19 Degrees, Inc. is also the managing member of 19 Degrees Corporate Service, LLC, a robot investment fund (the “Fund”) that will allow accredited investors (i.e. franchisees and other direct purchase investors) to contribute kiosks to the Fund and receive quarterly distributions of net proceeds from operating the robots.

During fiscal year 2017, we obtained the exclusive rights to sell a new frozen yogurt vending robot, branded Reis & Irvy’s. As of the date of this report, we have received approval to sell franchises in all U.S. states, other than South Dakota. Through franchise agreements or contracts, we sell robots, franchise fees, and location fees. All contracts require a deposit and contracts which include exclusive territory clauses will also contain a minimum robot and franchise fee commitment. We refer to units associated with a deposit as a “booking” and units associated with exclusive territory minimums as “commitments”. At March 31, 2019, the Company had a backlog of 957 bookings with a future revenue value of approximately $43 million and further commitments for 2,666 robots aggregating $103 million of future revenue.

Through March 31, 2019, the Company delivered 220 Reis & Irvy’s branded frozen yogurt vending kiosks. During February and March, the Company removed 34 robots for upgrades and retrofits leaving a net of 186 kiosks deployed in the United States, Canada, and Australia. The upgraded units will be redeployed to locations after passing functional and cosmetic tests.

The Company has spent approximately $5.2 million and $2.6 million in research, development, and engineering expenses through June 30, 2018 and March 31, 2019, respectively. The Company anticipates it will incur additional research, development and engineering expenses through fiscal year 2019.

On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt and ice cream vending robots, using RFI’s trademarked name of Reis & Irvy’s (the “Acquisition”). The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was a purchase of an asset. As a result, the estimated fair of the assets acquired were capitalized. The intent of the purchase was to combine robotics and artificial intelligence platforms to facilitate the manufacture of an unattended robot in order to disrupt traditional frozen yogurt and ice cream retail establishments and, on a larger scale, establish ourselves as an industry leader in the emerging and fast-growing space of unattended retail. Since acquisition, we have developed a state-of-the art robotic soft serve vending robot that is a completely unique vending machine and entertainment experience. The robot accepts cash, credit cards, and is the first of its kind to accept bitcoin. A proprietary software platform is utilized that allows us to readily monitor the sales of kiosks, which assists our franchisees and us in facilitating the management and maintenance of the vending robot. In order to protect the Company’s rights, several U.S. and international patents have been approved and granted. Our vending standards are UL (“ Underwriters Laboratories ”) (approval in process), NSF (“ National Sanitation Foundation ”) recognized, and National Automated Merchandising Association (“ NAMA”) certified, which we believe are among the highest standards in the industry. This ensures food temperature compliance, which includes auto-contingency processes should electrical or hardware malfunction; it also ensures that ambient air stays within specified parameters at all times. Our third-party cashless payment technology provides the highest level of data and network security compliance while ensuring complete transparency. As a result, our robotic soft serve vending kiosks will contain minimal amounts of cash. All transactions are managed by third parties to facilitate financial compliance with local and national laws and regulations. Funds from all electronic transactions are collected by Reis & Irvy’s and remitted to the franchisee within ten days of the subsequent month.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 28, 2019, the Company entered into an Asset Purchase Agreement with Print Mates, LLC (“Print Mates”), (see Note 11 Related Party Transactions). The agreement provides for the purchase of all of Print Mates rights, title, and interest to all assets of the Print Mates business, including intellectual property. The Company considered the guidance in ASC 805, Business Combinations , and determined the transaction was an asset acquisition. As a result, the estimated fair value of the assets acquired, and amount of liabilities assumed are included in the accompanying balance sheet as of March 31, 2019. Print Mates kiosks offer instant high-resolution printing of photographs from touchscreen kiosks. Print Mates kiosks are operated with a proprietary software interface that takes advantage of the kiosk’s large touch-sensitive screen, allowing customers to swipe and scroll through various menus as well as edit and crop their images before printing. The Company intends to own and operate the kiosks, collecting 100% of the revenues generated, and will sell kiosks and license software to business owners.

In January 2019, the Company announced the launch of 19 Degrees Corporate Service, LLC as a corporate operated Robot Investment Fund (“the Fund ”). This advantages kiosk owners through the switch from active to passive income; more even distribution of revenue; faster installation of kiosks; a “no hassle” maintenance program provided by CSA Server Solutions; a nationwide on-site flavor promotion plan managed by Dannon, access to a newly designed back-office portal that will allow members of the fund to remotely access each kiosk’s sales performance in “real time” as well as a plethora of software features used to guide the fund’s performance. Member ownership units in the LLC will be issued under the registration exemption Rule 506(c) of Regulation D of the Securities Act of 1933 and will be available only to accredited investors. Under Rule 506(c), general solicitation of offerings is permitted, however, purchasers in a Rule 506(c) offering must be “accredited investors.” The SEC defines the term "accredited investor" in Rule 501(a). Generally, individuals are considered accredited investors if they have a net worth greater than $1 million (excluding their primary residence) or incomes in excess of $200,000 in the last two years with the expectation of the same in the current year (or $300,000 with a spouse).

In September 2018 it was determined the assets of the Company’s wholly-owned subsidiary, Fresh Healthy Vending LLC ("FHV LLC"), were insufficient to satisfy FHV LLC’s obligations to creditors. As such, on FHV LLC executed an Assignment for the Benefit of Creditors under California law, whereby all of its assets were assigned to a third-party fiduciary who will liquidate such assets and distribute the proceeds to FHV LLC’s creditors pursuant to the priorities established and permitted by law.

2. Summary of Significant Accounting Policies

Basis of accounting

The included condensed consolidated balance sheet as of June 30, 2018, which has been derived from audited consolidated financial statements and the unaudited condensed consolidated statements as of March 31, 2019 and for the three and nine months ended March 31, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Accordingly, these unaudited condensed consolidated statements do not include all of the information and disclosures required by GAAP or SEC rules and regulations for complete consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s filings with the SEC, including its most recent annual report on Form 10-K for the fiscal year ended June 30, 2018 filed on October 19, 2018.

Liquidity and capital resources

For the nine months ended March 31, 2019 we had a net loss totaling approximately $15,468,000 with negative cash flows from operations totaling approximately $9,794,000. Our cash balance at March 31, 2019 was approximately $415,000. Our production and installation of kiosks has been slower than anticipated through March 2019, due to delays caused by engineering and manufacturing deficiencies, which have since been corrected. The impacts of production delays have been decreased revenue recognition and less accounts receivable collections. Also, we used cash on hand to retire liabilities associated with the franchise rescissions, for research, development and engineering expenditures related to our robotic soft serve vending kiosks and for the purchase of robot inventory. The combined result of these events was a substantial decrease in our cash balances and an increase in our outstanding liabilities. In order to ensure sufficient liquidity for our continuing operations, the Company is actively pursuing additional capital in the form of either debt or equity financing (or a combination thereof). We anticipate generating a portion of our required capital resources from deposits on sales of new franchises, unit sales of kiosks for the Fund, royalties from existing and future franchise installs and revenue from investment in, and management of the Fund. Management believes the additional funding required can be obtained on terms acceptable to the Company, although there can be no assurance that we will be successful.

Our current plans include research and development expenditures for the production of the next generation robot, payments required for the purchase of the Robofusion intellectual property (previous owner of the frozen yogurt robot intellectual property), capital expenditures for the purchase of franchisee and owned and operated robotic soft serve vending kiosks, as well as the repurchase of machines from franchisees opting to rescind their franchise agreements. Given our current cash position, we may be forced to delay the production and purchase of robotic soft serve vending kiosks until such time that we may able to prepay for future robots.

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Reis & Irvy’s, Inc., FHV LLC (recorded as discontinued operations), 19 Degrees, Inc., Generation Next Vending Robots, The Fresh and Healthy Vending Corporation, and FHV Acquisition, Corp. All significant intercompany accounts and transactions are eliminated.

Use of estimates

The preparation of our Company’s financial statements 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 our financial statements and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ significantly from those estimates. Significant estimates include our provisions for bad debts, franchisee rescissions and refunds, legal estimates, stock-based compensation, derivative liability and the valuation allowance on deferred income tax assets. It is at least reasonably possible that a change in the estimates will occur in the near term.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Cash and cash equivalents

All investments with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value. We had no cash equivalents at March 31, 2019 and June 30, 2018. We may maintain our cash and cash equivalents in amounts that may, at times, exceed federally insured limits. At March 31, 2019, bank balances, per our bank, exceeding federally insured limits totaled approximately $165,000. We have not experienced any losses with respect to cash, and we believe our Company is not exposed to any significant credit risk with respect to our cash.

Certain states require the Company to maintain customer deposits in escrow accounts until the Company has substantially performed its obligations. Furthermore, certain franchisees have elected to pay their remaining balance due directly to an escrow account for the beneficiary of the Company’s contract manufacturer and inventory suppliers. At March 31, 2019 and June 30, 2018, the Company had approximately $4,296,000 and $3,710,000, respectively maintained in escrow accounts for these purposes.

Contract assets – due from franchisees, net

Contract assets – due from franchisees arise primarily from kiosk sales and are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customers deemed credit worthy. Ongoing credit evaluations are performed, and potential credit losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts. Our allowance for doubtful accounts aggregated approximately $174,000 and $0 at March 31, 2019 and June 30, 2018, respectively.

Inventory

Inventory is carried at the lower of cost or market, with cost determined using the average cost method.

Property and equipment

Property and equipment are carried at cost and depreciated using the straight-line method over their estimated useful lives of the individual assets, generally five to seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful life of the asset. Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.

Intangible assets

Intangible assets consist primarily of patents, trademarks and trade names. Amortization of intangible assets is recorded as amortization expense in the consolidated statements of operations and amortized over the respective useful lives using the straight-line method.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Impairment of long-lived assets

Impairment losses are recognized on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There were no impairments of long-lived assets for the periods ended March 31, 2019 and June 30, 2018, respectively.

Deferred rent

The Company entered into an operating lease for our corporate offices in San Diego, California that contains provisions for future rent increases, leasehold improvement allowances and rent abatements. We record monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between the rent expense recorded and the amount paid is credited or charged to deferred rent, which is reflected as a separate line item in the accompanying consolidated balance sheet.

Acquisition

On March 28, 2019, the Company entered into an Asset Purchase Agreement with Print Mates, LLC (“Print Mates”), (see Note 11 Related Party Transactions). The agreement provides for the purchase of all of Print Mates rights, title, and interest to all assets of the Print Mates business, including intellectual property. The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was an asset acquisition. As a result, the estimated fair value of the assets acquired, and amount of liabilities assumed are included in the accompanying balance sheet as of March 31, 2019.

The condensed consolidated financial statements include the results of Print Mates from the date of acquisition. The purchase price has been allocated based on estimated fair values as of the acquisition date. The purchase price was allocated as follows:

During the three months ended March 31, 2019, the Company had accumulated cash advances of $162,695 to Print Mates. The advances to Print Mates in the amount of $162,695 on March 29, 2019 was used as an asset purchase transaction.

The purchase price allocation has been prepared on a preliminary basis based on the information that was available to the Company at the time the condensed consolidated financial statements were prepared, and revisions to the preliminary purchase price allocation may result as additional information becomes available.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In determining the purchase price allocation, management will consider, among other factors, the Company’s intention to use the acquired assets. The intangible assets will be amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized, with no expected residual value.

Revenue, Contract liabilities – franchisees advances and deferred revenue, and Contract assets – due from franchisees

The Company relies upon ASC 606, Revenue from Contracts with Customers , to recognize revenue, Contract liabilities-deposits from franchisees and Contract assets-due from franchisees.

Reis & Irvy’s, Inc

The primary revenue sources consisted of the following:

Revenues from robotic soft serve vending kiosks and franchise fees are recognized when the Company has substantially performed or satisfied all material services or conditions relating to the franchise agreement. Substantial performance has occurred when: 1) no remaining obligations are unfulfilled under the franchise agreement; 2) there is no intent to refund any cash received or to forgive any unpaid amounts due from franchisees; 3) all of the initial services in the franchise agreement have been performed; and 4) all other material conditions or obligations have been met. During the three and nine months ended March 31, 2019, 50 and 220 robotic soft serve vending kiosks were installed and operational, respectively, and the Company had no further material conditions or obligations. There were no vending kiosks operational during the same periods in the prior year. During the three and nine months ended March 31, 2019 the Company recognized revenue of approximately $2,000,000 and $8,088,000, respectively for robotic soft serve vending kiosks and approximately $16,000 and $29,000, respectively in franchise fees.

Upon the execution of a franchise agreement, a deposit from the franchisee is required, and generally consists of 40% - 50% of the sales price of the frozen yogurt and ice cream robots, 50% - 100% of the initial franchise fees, and 40% - 50% of location fees. In accordance with ASC 606, the Company recognizes the contract as a Contract liability – customer deposits and deferred revenue when the Company receives consideration or is due consideration. As of March 31, 2019, and June 30, 2018, the Company’s customer advances and deferred revenues were approximately $36,571,000 and $37,222,000, respectively.

The Company recognizes Contract assets – due from franchisees when the Company has a conditional right to consideration. As of March 31, 2019, and June 30, 2018, the Company’s Contract assets – due from franchisees was approximately $4,296,000 and $7,251,000, respectively.

It is not the Company’s policy to allow for returns, discounts or warranties to our franchisees. Under certain circumstances, including as the result of regulatory action, the Company may become obligated to offer our franchisees amounts in rescission to reacquire their existing franchises, including the robotic soft serve vending kiosks Additionally, if the Company is unable to fulfill its obligations under a franchise agreement the Company may, at its sole discretion, agree to refund or reduce part or all of a franchisees payments or commitments to pay.

Generation NEXT Franchise Brands, Inc. and Subsidiariesv

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of March 31, 2019, and June 30, 2018, the Company’s provision for Reis & Irvy’s franchisee rescissions and refunds totaled approximately $6,052,000 and $1,924,000, respectively. The balance is based on executed termination agreements and an estimate of future terminations. Executed termination agreements contain multi-month payment schedules to refund deposits made on robots, franchise fees, and location fees. Based on these schedules, the current provision balance is expected to be paid gradually through August 2020.

Fresh Healthy Vending, LLC

During the quarter ended September 30, 2018 it was determined the assets of FHV LLC were insufficient to satisfy FHV LLC’s obligations to creditors. As such, on September 28, 2018, FHV LLC executed an Assignment for the Benefit of Creditors under California law, whereby all of its assets were assigned to a third-party fiduciary who will liquidate such assets and distribute the proceeds to FHV LLC’s creditors pursuant to the priorities established and permitted by law. Consequently, the Company has accounted for FHV LLC as a discontinued operation in the accompanying financial statements.

19 Degrees, Inc.

The Company recognizes revenue from the sale of products from company-owned robotic soft serve vending kiosks when products are purchased. During the three and nine months ended March 31, 2019 the Company recognized approximately $2,000 and $44,000, respectively. During the three and nine months ended March 31, 2018 the Company recognized approximately $25,000 and $121,000, respectively. During the three months ended March 31, 2019, 19 Degrees Inc entered into a management agreement with 19 Degrees Corporate Service (the “Fund)

The Company recognizes the value of company-owned machines as inventory when purchased. Subsequent to installation, the purchased cost is recognized in fixed assets and depreciated over its estimated useful life. As of March 31, 2019, there were no company-owned robotic soft serve vending kiosks included in fixed assets.

Marketing and advertising

Marketing and advertising costs are expensed as incurred. There are no existing arrangements under which the Company provides or receives marketing and advertising services from others for any consideration other than cash. Marketing and advertising expense totaled approximately $398,000 and $1,684,000 for the three and nine months ended March 31, 2019, respectively. Marketing and advertising expense totaled approximately $419,000 and $1,874,000 for the three and nine months ended March 31, 2018, respectively.

Research, development and engineering costs

Research, development and engineering costs are expensed as incurred. For the three and nine months ended March 31, 2019, the Company recorded approximately $371,000 and $2,595,000, respectively. For the three and nine months ended March 31, 2018, the Company recorded approximately $1,693,000 and $3,618,000, respectively.

Generation NEXT Franchise Brands, Inc. and Subsidiariesv

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Concentration of manufacturers

Our robotic soft serve vending kiosks have been manufactured by one supplier, and we are in the process of transitioning to alternative supplier. During the transition period, both suppliers will be producing kiosks. This change in suppliers could cause a delay in deliveries. Subsequent to March 31, production and the resulting installations, has increased beyond any previous levels. If production levels decline, the Company could experience a loss of sales, which would adversely affect the Company’s operating results.

The Company uses a single supplier for its frozen confectionary consumables. Although there are a limited number of product suppliers with the product selection and distribution capabilities required by the franchise network, other manufacturers and distributors could provide similar products on comparable terms.

See Note 11 for purchase commitments from our manufacturers for inventory.

Discontinued Operations

Pursuant to ASC 205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be presented as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company; that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable, are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The historical financial position of discontinued operations is aggregated and separately presented in our accompanying condensed consolidated balance sheets.

Reclassifications

Certain amounts in previously issued financial statements have been reclassified to conform to the presentation following the Assignment for the Benefit of Creditors, which includes the reclassification of the combined financial position and results of operations of FHV LLC as discontinued operations (see Note 12) for all periods presented.

Net loss per share

The Company calculates basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents. Common stock equivalents are only included in the calculation of diluted EPS when their effect is dilutive.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company relies upon ASC 280, Segment Reporting, to determine and disclose reportable operating segments, and is organized such that each subsidiary represents a different operating purpose. As a result, the Company analyzed each subsidiary to determine reportable operating segments. (Not sure why this is here – MB)

For the periods presented, the Company determined that Reis and Irvy’s, Inc., , 19 Degrees, Inc., Generation Next Vending Robots, Inc,, and FHV, LLC (see Note 12 – Discontinued operations) were reportable operating segments; Generation Next Franchise Brands, Inc., , The Fresh and Healthy Vending Corporation, and FHV Acquisition, Corp. were not material segments and therefore have not been reported as such. Reis & Irvy’s, Inc. represents the sale of frozen yogurt and ice cream robots, franchise fees, royalties, location fees, and product rebates. 19 Degrees, Inc. is primarily a management company for 19 Degrees Corporate Service, LLC. Generation Next Vending Robots, Inc. will earn revenues from the sale of the newly acquired Print Mates brand photograph kiosks. FHV, LLC represents the sale of fresh and healthy vending machines, franchise fees, royalties and product rebates.

Related Party Transactions

The Company has been involved in transactions with related parties. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management, and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

Recently Issued Accounting Pronouncements  

In July 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-11 - Inventory (Topic 330) related to simplifying the measurement of inventory, which applies to all inventory except that which is measured using last-in, first-out (“LIFO”) or the retail inventory method. Inventory measured using first-in, first-out (“FIFO”) or average cost is within the scope of the new guidance and should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance is applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The Company adopted ASU 2015-11 effective July 1, 2017, which had no material impact on its consolidated financial statements or financial statement disclosures.

In January 2017, the FASB issued ASU 2017-04 Intangibles - Goodwill and Other (Topic 350). ASU 2017-04 provides new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash . ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows, and transfers between cash and cash equivalents and restricted cash are no longer presented within the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU 2016-18 for the reporting period ended December 31, 2017 and the standard was applied retrospectively for all periods presented which had no material impact on prior years. As a result of the adoption of ASU 2016-18, the Company no longer presents the change within restricted cash in the consolidated statement of cash flows.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718). ASU 2016-09 provides new guidance for employee share-based compensation which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, forfeiture estimates, statutory tax withholding requirements, and classification in the statements of cash flows. Under the new guidance any future excess tax benefits or deficiencies are recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. This guidance was effective for the Company in fiscal year 2017. The Company has determined there is no material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning March 1, 2020 and subsequent interim periods. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU. 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40). ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service contract. The amendments under ASU 2018-15 are effective for interim and annual fiscal periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been issued. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company can elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 requires an entity to recognize the 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 and services. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. The New Revenue Standard provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

This five-step process will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which defers the effective date of ASU 2014-09 by one year. Early adoption is permitted but not before the original effective date. The Company’s adoption of ASU 2014-09 will change the timing of the recognition of initial franchise fees. ASU 2014-09 requires these fees to be recognized over the term of the related franchise license for the respective robot, which had a material impact to revenue recognized for initial franchise fees and renewal franchise fees. ASU 2014-09 allows for non-cancellable franchise contract agreements for the Company to recognize revenue under the provisions of ASC 606-10-25, Revenue Recognition – Revenue from Contracts with Customers.

In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update change the accounting for certain stock-based compensation transactions, including the income tax consequences and cash flow classification for applicable transactions. The amendments in this update are effective for annual periods beginning after December 31, 2016 and interim periods within those annual periods. The Company is currently evaluating the impact that this amendment will have on its consolidated financial statements.

Effective January 2017, FASB issued ASU No. 2016-15 “Statement of Cash Flows” (Topic 230). This guidance clarifies diversity in practice on where in the Statement of Cash Flows to recognize certain transactions, including the classification of payment of contingent consideration for acquisitions between Financing and Operating activities. The Company has determined there is no material impact on our consolidated financial statements.

On January 5, 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (Topic ASC 805), guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace the missing elements. This ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. The Company has determined there is no material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation” (Topic 718) - Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This ASU is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. We are currently evaluating the impact that this amendment will have on our consolidated financial statements.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In August 2018, the FASB issued ASU 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ”, which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company is evaluating the provisions of this ASU and plans to adopt this ASU effective July 1, 2020.

3. Inventory

Inventory consisted of the following:

See Note 10 for purchase commitments from our manufacturers for inventory.

4. Property and equipment

Property and equipment consisted of the following:

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

For the three and nine months ended March 31, 2019, depreciation expense was $5,000 and $33,000 respectively. For the three and nine months ended March 31, 2018, depreciation expense was $7,000 and $28,000 respectively.

5. Intangible property

Intangible property consisted of the following:

For the three and nine months ended March 31, 2019, amortization expense was $97,000 and $292,000 respectively. For the three and nine months ended March 31, 2018, amortization expense was $96,000 and $288,000 respectively.

Patents

On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt vending kiosks/cubes, using RFI’s trademarked name of Reis & Irvy’s (the “Acquisition”). Pursuant to the Agreement, the Company provided RFI, and its designees, a cash payment of $440,000, The Company also issued to RFI a three-year, $2 million note and a five-year common stock purchase warrant for 1,520,000 shares with a strike price of $0.50 per share. Furthermore, certain RFI Officers, Directors and Shareholders will be subject to a five-year, non-compete agreement. Also, the Agreement provides for indemnification and set-off of up to $1 million, under certain circumstances. Through the date of this report, the Company entered into four settlements related to the intellectual property totaling approximately $401,000. Furthermore, the Company made approximately $268,000 in payments. All settlement payments are a reduction of the note payable. (See Note 6).

RFI previously granted the Company an exclusive license to market RFI’s frozen yogurt vending kiosks/robots, using RFI’s trademarked name of Reis & Irvy’s, in the United States and its territories (excluding Puerto Rico) and Canada. The assets acquired pursuant to the Agreement, are substantially all of the assets previously licensed to the Company.

The Company intends to own and operate the kiosks, collecting 100% of the revenues generated, and will sell kiosks and license software to business owners.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Computer software represents capitalized costs of the customer relationship management software utilized by the Company.

Print Mates – Patents, trademark and software

On March 28, 2019, the Company entered into an Asset Purchase Agreement with Print Mates, LLC, (see Note 11 Related Party Transactions). The agreement provides for the purchase of all of Print Mates rights, title, and interest to all assets of the Print Mates business (“Print Mates”), including intangible-intellectual property. Print Mates kiosks offer instant high-resolution printing of photographs from touchscreen kiosks. Print Mates patented kiosk are operated with a proprietary software interface that takes advantage of the kiosk’s large touch-sensitive screen, allowing customers to swipe and scroll through various menus as well as edit and crop their images before printing.

Amortization expense on Print Mates intangible assets amounted to $0 and $0 for the quarters ended March 31, 2019 and 2018.

6. Notes payable (see also Note 11 - Related party debt)

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Senior secured promissory notes

On February 25, 2014, we issued Senior Secured Promissory Notes (the “Initial Notes”) to three investors in exchange for cash totaling $501,000. The Initial Notes were set to mature on February 24, 2015 and bear simple interest at a rate of 12% paid monthly over the term of the loan. The Initial Notes also provide that our Company can raise up to $1.5 million in proceeds from the issuance of additional notes (the “Additional Notes”) which would have the same seniority and security rights. The Initial Notes are secured by substantially all assets of the Company. On September 23, 2014, the holders of the Company’s Initial Notes extended the maturity date from February 24, 2015 to March 15, 2016, and on March 15, 2016, the Notes were further extended to September 30, 2016. The notes have been further extended to December 31, 2018 and $478,000 of the notes, plus accrued interest, were converted to common stock at $.16 per share during fiscal 2018. The remaining outstanding notes, aggregating $23,000, were granted conversion rights at $.16 per share and were converted to common stock during the quarter ended September 30, 2018. The conversion right granted was fixed at the closing trading price of the stock. As a result, the Company determined that the conversion right was not a derivative in accordance with ASC 815, Derivatives and Hedges, the host instrument was conventional convertible, and that no beneficial conversion feature was present. The modification of the debt terms was not deemed substantive and therefore, was not accounted for as an extinguishment of debt with the recognition of a gain or loss.

As of March 31, 2019, and June 30, 2018, the outstanding balance was approximately $0 and $23,000, respectively.

Convertible secured debt (Financing and security agreement)

On September 23, 2014, the Company entered into a Financing and Security Agreement (the “Financing Agreement”) with the following terms:

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

At March 31, 2019 and June 30, 2018, there was $125,000 and $250,000, respectively, outstanding under the Financing Agreement, of which $150,000 originally matured on September 23, 2016 and $100,000 originally matured on December 15, 2016. On January 20, 2017, the Company extended both tranches until December 31, 2018. As part of the extension, the holder was granted conversion rights at $.16 per share. The conversion right granted was fixed at the closing trading price of the stock. As a result, the Company determined that the conversion right was not a derivative in accordance with ASC 815, Derivatives and Hedges, the host instrument was conventional convertible, and that no beneficial conversion feature was present. The modification of the debt terms was not deemed substantive and therefore, was not accounted for as an extinguishment of debt with the recognition of a gain or loss. On December 27, 2018, the maturity date was further extended to June 30, 2019.

On March 29, 2019, the lenders elected to convert at $.16 per share, outstanding principal of $125,000 and accrued interest of $50,199, to 1,094,988 shares of common stock.

The lender of the has informed the Company that he does not intend to lend additional amounts under the Financing Agreement.

As of March 31, 2019, and June 30, 2018, accrued interest was approximately $50,000 and $81,000, respectively.

For the three and nine months ended March 31, 2019, interest expense was approximately $6,200 and $18,700, respectively. For the three and nine months ended March 31, 2018, interest expense was approximately $6,100 and $18,700, respectively.

Robofusion note payable

On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt vending kiosks/robots, using RFI’s trademarked name of Reis & Irvy’s (the “Acquisition”). Pursuant to the Agreement, the Company provided RFI, and its designees, a cash payment of $440,000. The Company also issued to RFI a three-year, $2 million note.

In connection with the issuance of the note payable, the Company issued a five-year common stock purchase warrant for 1,520,000 shares with a strike price of $0.50 per share (see Note 5). At inception, the estimated fair value of the warrant was approximately $174,000 and was recognized as a debt discount. During the three and nine months ended March 31, 2019 approximately $12,500 and $37,000 was accreted to interest expense in the accompanying statements of operations. During the three and nine months ended March 31, 2018 approximately $12,500 and $37,000 was accreted to interest expense in the accompanying statements of operations.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of March 31, 2019, and June 30, 2018, the outstanding balance was approximately $1,141,000 and $1,441,000, respectively. During the nine months ended March 31, 2019, principal payments were approximately $96,000 and indemnification payments were approximately $204,000. During fiscal 2018, principal payments were approximately $424,000 and indemnification payments were approximately $135,000.

As of March 31, 2019, and June 30, 2018, accrued interest was approximately $43,000 and $12,000, respectively.

For the three and nine months ended March 31, 2019, interest expense was approximately $9,000 and $31,000, respectively. For the three and nine months ended March 31, 2018, interest expense was approximately $14,000 and $45,000, respectively.

During the quarter ended December 31, 2018, Robofusion exercised 250,000 warrants for a purchase price of $125,000.

The Company is in arrears approximately $206,000 as of March 31, 2019 under the Robofusion note and expects forbearance from the lender.

Bridge notes payable

The bridge notes payable were repaid during the fiscal year ended June 20, 2018.

On February 28, 2017, the Company executed two short-term bridge notes aggregating $345,000. The notes bear interest at 0% per annum and matured on July 28, 2017. In connection with the note issuances, the Company recognized an original issue discount of approximately $45,000 and a debt discount approximately $57,000 related to the issuance of 75,000 shares of the Company’s common stock (Note 7), for a total debt discount of approximately $102,000. The debt discount was amortized over the life of the loan.

Convertible promissory note

The principal balance of $600,000 plus accrued interest on the convertible promissory note was repaid during the first quarter of fiscal year 2018.

On June 10, 2015, the Company issued a $600,000 convertible promissory note (the “Promissory Note”) with interest payable at 10% per annum. In connection with the issuance of the Promissory Note, the Company also issued 2,000,000 common stock purchase warrants, with a term of four years, at an exercise price of $.75 per share.

The Promissory Note matures twelve months from issuance, may be extended for an additional three months, and may be converted at any time in whole or in part, at the lesser of:

In connection with the issuance of the Promissory Note and warrant, the Company has recorded the fair value of the warrant of $78,707 as additional paid-in capital. Furthermore, the Company has recorded a discount on the Promissory Note of $480,100 and a derivative liability of $401,393 due to the lack of explicit limit on the number of shares that may be required to be issued upon future conversion. The discount is amortized as accretion of discount on notes payable over the term of the loan using the effective interest rate method. There was no derivative gain or loss during the three months ended March 31, 2018.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

We calculated the value of the discount using a binomial option pricing model employing the following assumptions: volatility of common stock – 76%; risk-free interest rate – 0.28%; forfeiture rate – 0%; value per share of common stock - $0.45; strike price - $0.75; term – 4 years.

The Promissory Note maturity may also be extended for an additional three months. Furthermore, there will be a full ratchet, anti-dilution with respect to the shares of common stock only (no adjustments will be made to the warrants), for any equity or Convertible Debt financing completed or a definitive Term Sheet exercised within twelve months of closing or fifteen months if the Company exercises its one-time extension. The ratchet does not come into effect for any non-convertible debt offering arranged by the Company, its advisors or bankers.

The conversion terms of the Promissory Note were amended pursuant to a first amendment to Promissory Note, dated October 14, 2015. The adjustable pricing mechanism commencing 6 months after the Promissory Note issuance date at a 20% discount to the lowest trading price 10 business days prior to conversion was removed. The negative covenants set forth in the subscription agreement were also amended pursuant to a first amendment to subscription agreement, dated October 14, 2015. The modification of an embedded conversion feature is separately accounted for as a derivative before the modification, after the modification or both. Since the bifurcated conversion option is accounted for at fair value both before and after the modification, any changes in the fair value of the conversion option would be reflected in earnings. Furthermore, the Promissory Note was extended for an additional six months from the original maturity.

On January 20, 2017, the note was extended through June 30, 2017 and the warrant price was reduced to $.30 per share, provided that the warrants must be exercised for cash. Furthermore, the warrant expiration date was amended to June 20, 2018. The modification of the debt terms was not deemed substantive and therefore, was not accounted for as an extinguishment of debt with the recognition of a gain or loss.

7. Stockholders’ deficit

For the nine months ended March 31, 2019, the Company issued or recognized:

8. Stock-based compensation

2013 Equity Incentive Plan

On August 14, 2013, our Board of Directors approved the adoption of the 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by a majority of our shareholders (as determined by shareholdings) on September 4, 2013. The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan were initially not exceed in the aggregate 2,600,000 shares of the common stock of our Company. On July 13, 2015, the Company increased the total number of shares that may be issued under the 2013 Plan to 4,000,000. Furthermore, in April 2016, the Company further increased the total number of shares that may be issued under the Plan to 6,000,000.

Generation NEXT Franchise Brands, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the nine months ended March 31, 2019, the Company granted no stock options under its 2013 Equity Incentive Plan. Stock-based compensation related to these awards is recognized on a straight-line basis over the applicable vesting period (generally 24 months) and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2019 and 2018. The options issued were valued using a binomial method assuming the following:

The expected volatility was estimated based on the volatility of the Company’s stock. The risk-free rate was based on the U.S. Treasury note rate over the expected life of the options. The expected life was determined using the simplified method as we have no historical experience. We recorded stock-based compensation expense of approximately $19,000 and $110,000 during the three and nine months ended March 31, 2019, respectively. We recorded stock-based compensation expense of approximately $67,000 and $211,000 during the three and nine months ended March 31, 2018, respectively. Remaining stock-based compensation to be recognized is approximately $84,000.

The following table summarizes the stock option activity under the 2013 Plan through March 31, 2019: