FRTG Frontera Group Inc (CE)

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FRONTERA GROUP INC.

June 30, 2022

Index to the Financial Statements

See accompanying notes to the financial statements.

See accompanying notes to the financial statements.

See accompanying notes to the financial statements.

See accompanying notes to the financial statements.

Note 1 – Organization and Operations

Frontera Group Inc. (the “Company,” “Frontera,” “we,” “our,” “us”) was incorporated under the laws of the State of Nevada on November 21, 2013. Frontera Group Inc. strategically acquires revenue generating companies and intellectual property in low-multiple, mature industries within the technology and human capital spaces. With an aggressive four-tier acquisition and implementation strategy, Fronter’s overarching goal is to bring substantial increases in profitability to mature industries with traditionally low and stagnant EBITA multiples. Frontera creates revenue streams through subscriptions, licensing agreements and data analytics, while growing EBITA by leveraging synergistic acquisitions that maximize scalability.

On May 11, 2022, Immersient IP, LLC (“Immersient”) was formed and registered in the State of Nevada. Immersient is a wholly-owned subsidiary of Frontera Group, Inc. Immersient was formed to hold all intellectual property acquired by Frontera. All operations are derived from Immersient.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying financial statements have been prepared using the accrual basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates and Assumptions

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that impact the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates include, but are not limited to, the recognition of revenues and expenses, the valuation of intangible assets, including amortization, the valuation of derivatives, and the valuation of the warrant issued. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying amounts of assets and liabilities. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Expected Credit Losses

Our receivables primarily arise from the billing of royalties for the use of our intellectual property (“IP”). We currently have one royalty agreement in place. We estimate expected credit losses based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of each customer. Management believes that the historical loss information it has compiled is a reasonable base on which to determine expected credit

losses for trade receivables held at June 30, 2022, because the composition of the trade receivables at that date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its credit practices have not changed significantly over time).

Intangible Assets

Intangible assets deemed to have finite lives are generally amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows.

Fair Value of Financial Instruments

We measure the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value as follows:

The conversion option on the Note and the Warrant are required to be presented at fair value on a recurring basis. Carrying values of non-derivative financial instruments, including cash, accounts receivable, accounts payable, and short-term debt approximated their fair value due to the short maturity of these financial instruments. There were no changes in methods or assumptions during the periods presented.

Derivative Instruments

Convertible Note and Common Stock Warrant Liability

On March 11, 2022, we issued a convertible note (the “Note”) with warrant (“Warrant”) with default and fundamental transaction adjustment; variable rate default provision; and full reset features. The Note is a 10% $300,000 promissory note which is convertible upon an event of default. The Warrant gives the holder the right to purchase 1,000,000 shares of our Common Stock at an exercise price of $0.50. We shall not affect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, to the extent that after giving effect to issuance of Warrant Shares upon exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after the giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Warrant will expire on March 11, 2027 and may be assigned by the holder to a third party, in whole or in part, without the need to obtain our consent thereto. This Warrant remained outstanding as of June 30, 2022.

We evaluated the conversion option of the Note and the Warrant under ASC 815, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded they do not meet the criteria to be classified in shareholders’ equity. The conversion feature of the Note should be valued as a derivative liability based on the guidance in ASC 815, Derivatives and Hedging—Contracts in Entity’s Own Equity, and EITF 07-05, Determining

Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock. The Warrant liability is valued to provide a discount for the note at issuance. The occurrence of a default will trigger a tainted equity environment due to market based variable rate conversion prices resulting in an indeterminate number of shares. The warrant will then be treated as tainted derivative liabilities. These derivative liabilities will need to be marked-to-market each period with the change in fair value recorded in the income statement.

Revenue Recognition

Our primary source of revenues is from the development and licensing of our IP to our customers. Revenues are presented net of any taxes that are collected from our customers and remitted to governmental authorities. We are the principal in all our relationships with our customers.

At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. The performance obligation in all of our contracts with customers is to provide them a license to use our IP. Because our customers are granted a right to access the IP, including new patents, we recognize revenues ratably over the term of the agreement.

As of June 30, 2022, we have one customer to whom we license our IP.

Advertising and Marketing

Advertising and marketing costs for promoting our corporate image as incurred and included in general and administrative expenses.

Income Taxes

We account accounts for income taxes under ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties, if any, related to unrecognized tax benefits are included within the provision for income tax.

Earnings (loss) per Share

Earnings (loss) Per Share (“EPS”) is the amount of earnings (loss) attributable to each share of Common Stock. EPS is computed pursuant to section 260-10-45 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification. Pursuant to Accounting Standards Codification (“ASC”) Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS is computed by dividing net income (loss) available to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period.

The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangements, stock options or warrants. When we have a loss, dilutive shares are not included as they would be antidilutive.

The following table shows the computation of basic and diluted earnings (loss) per share for the years ended June 30, 2022 and 2021:

We apply the treasury stock method to determine the dilutive effect of potentially dilute securities. Potentially dilutive securities representing 382,716 shares of our Common Stock were excluded from the computation of diluted earnings per share during the year ended June 30, 2022 because their effect would have been antidilutive due to a loss in that period. There were no potentially dilutive shares during the year ended June 30, 2021.

Recently Issued Accounting Pronouncements

Convertible Instruments Beginning with 2022 interim reporting, we early-adopted ASU No. 2020-06, “Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (ASU 2020-06). ASU 2020-06 eliminated certain separation models regarding cash conversion and beneficial conversion features to simplify reporting for convertible instruments as a single liability or equity, with no separate accounting for embedded conversion features. Additionally, ASU 2020-06 requires that instruments which may be settled in cash or stock are presumed settled in stock in calculating diluted earnings per share. The adoption of this standard had no effect on our financial statements. We considered the guidance in this standard when we issued a convertible note on March 11, 2022.

Note 3 – Going Concern

As reflected in the accompanying financial statements, we have a deficit of $1,456,327 at June 30, 2022, a net loss of $1,320,550 for the year ended June 30, 2022 and net cash used in operating activities of $485,348 for the year ended June 30, 2022. These factors raise substantial doubt about our ability to continue as a going concern.

We are attempting to commence operations and generate sufficient revenue; however, our cash position is not sufficient to support our daily operations. Management intends to raise additional funds by way of a private or public offering. While we believe in the viability of its strategy to commence operations and generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of asset or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.

Note 4 – Intangible Assets

In March 2022, we purchased intellectual property (“IP”) consisting of patents, trademarks, copyrights and domain names for $5,000,000 from Intellimedia Networks, Inc., a U.S. corporation. Payment of the $5,000,000 will occur over the subsequent twelve months.

Intellimedia India, an India entity (not related to Intellimedia Networks, Inc.) had licensed the use of this IP to third parties and we receive the benefit of these arrangements through the acquisition of the IP. We will continue to use Intellimedia India for the further development and maintenance of this IP in the future and currently, they are our only vendor for costs of revenue.

We began amortizing these patents over their useful life of twenty years during the three months ended June 30, 2022. We will recognize $250,000 of amortization expense in each of the next five years.

Note 5 – Fair Value Measurements

Our financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows:

Fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate the recorded value due to the short period of time to maturity. The Company’s Warrant is classified within Level 3 of the fair value hierarchy because its fair value is based on significant inputs that are unobservable in the market.

The valuation of the Warrant uses assumptions and estimates we believe would be made by a market participant in making the same valuations. We assess these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained.

We determined the fair value of the Warrant using Monte Carlo option-pricing models and the quoted price of our Common Stock. The Monte Carlo technique applied generates many possible (but random) price paths for the underlying (or underlyings) via simulation, and then calculates the associated payment value of the derivative features. The price of the underlying Common Stock is modeled such that it follows a geometric Brownian motion with constant drift, and constant volatility. The stock price is determined by a random sampling from a normal distribution. Since the underlying random process is the same, for enough price paths, the value of derivative is derived from path dependent scenarios and outcomes.

The features in the notes that were analyzed and incorporated into the model included the only the default provisions. The features in the warrants that were analyzed and incorporated into the model included the exercise features (including a call option) and the full ratchet reset provisions.

The model simulates the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e., stock price, conversion price, etc.). Probabilities were assigned to each variable such as the timing and pricing of events

(future financings – potential resets, fundamental transaction, exercise, redemption, and default) over the remaining term of the instruments based on management projections.

The following table present significant assumptions utilized in the valuation of the Warrant at the issuance date of March 11, 2022 and June 30, 2022.

For the year ended June 30, 2022, the change in the fair value of the Warrant resulted from the change in price of our Common Stock. The changes in fair value are included in the consolidated statements of operations as a component of change in fair value of warrant liabilities and in the consolidated balance sheets as other liabilities.

Note 6 – Accrued Liabilities

Accrued liabilities at June 30, 2022 primarily consisted of accrued interest of $3,667 and a liability of $5,000,000 for the patents purchased in March 2022. There were no accrued liabilities at June 30, 2021.

Note 7 – Convertible Notes Payable and Warrants

On March 11, 2022, we entered into a Securities Purchase Agreement (collectively, the “Purchase Agreement”) with AJB Capital Investments LLC (the “Investor”), for the sale of a convertible promissory note with a principal amount of $300,000 (the “Note”) and Warrants to purchase 1,000,000 shares of the Company’s common stock (collectively, the “Warrants”).

We entered into an agreement for a convertible note and warrants with AJB Capital Fund for $300,000 with a 6-month maturity due and maturing on September 11, 2022 and 1,000,000 options at $0.50 with the following terms:

Note 8 – Common Stock Warrant Liability

The Warrant was recorded at fair value as other long-term liabilities in the consolidated balance sheets. The fair value of the Warrant was remeasured as of June 30, 2022, resulting in a $22,285 non-cash change in fair value gain in the consolidated statements of operations for the three months ended June 30, 2022.

Note 9– Shareholders’ Deficit

Shares authorized

Upon formation, the total number of shares of all classes of stock which the Company was authorized to issue seventy-five million (75,000,000) shares of Common Stock, par value $0.001 per share. On February 23, 2016, the Company increased its authorized common shares to one billion (1,000,000,000) shares and decreased the par value to $0.00001 per share. On March 16, 2022, the Board of Directors of Frontera amended the Articles of Incorporation to change 10,000,000 shares of Common Stock into Preferred Stock. In addition, the Preferred Stock was further split to create 5,000,000 shares of Series A Preferred Stock. The part value of $0.0001 per share did not change for any class of shares.

Common Shares

Holders of Common Stock have no preemptive rights to purchase additional shares of Common Stock or other subscription rights. The Common Stock carries no conversion rights and is not subject to redemption or to any sinking fund provisions. All shares of Common Stock are entitled to share equally in dividends from sources legally available; therefore, when, as and if declared by the Board of Directors, and upon liquidation or dissolution of Frontera, whether voluntary or involuntary, to share equally in the assets of Frontera available for distribution to shareholders.

The Board of Directors is authorized to issue additional shares of Common Stock not to exceed the amount authorized by Frontera’s Articles of Incorporation, on such terms and conditions and for such consideration as the Board may deem appropriate without further shareholder action.

Voting Rights of Common Shares

Each holder of Common Stock is entitled to one vote per share on all matters on which such shareholders are entitled to vote. Since the shares of Common Stock do not have cumulative voting rights, the holders of more than 50% of the shares voting for the election of Directors can elect all the Directors if they choose to do so and, in such event, the holders of the remaining shares will not be able to elect any person to the Board of Directors.

Dividend Policy for Common Shares

Holders of our Common Stock are entitled to dividends if declared by the Board of Directors out of funds legally available. We do not anticipate the declaration or payment of any dividends in the foreseeable future. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions, and other factors. Therefore, there can be no assurance that any dividends of any kind will ever be paid.

Preferred Shares

Shares of Preferred Stock may be issued in one or more series. The number of shares included in any series of Preferred Stock and the full or limited voting rights, if any, the cumulative or non-cumulative dividend rights, if any, the conversion, redemption or sinking fund rights, if any and the priorities, preferences and relative, participating, optional and other special rights, if any, in respect of the Preferred Stock, any series of Preferred Stock or any rights pertaining thereto, and the qualification, limitations or restrictions on the Preferred Stock, any series of Preferred Stock or any rights pertaining thereto, shall be those set forth in the resolution or resolutions providing for the issuance of the Preferred Stock or such series of Preferred Stock adopted at any time and from time to time by the board of directors of the Corporation (the “Board”) and filed with the Secretary of State of the State of Nevada. The holders of Series A Preferred Stock shall have the right to transfer each share of the Series A Preferred Stock to any third party at any time in such holder’s sole and absolute discretion, subject to compliance with applicable securities laws.

Preferred Stock is not convertible.

Series A Preferred Stock

Voting Rights of Series A Preferred Stock

The holders of Series A Preferred Stock shall be entitle to two hundred (200) votes per share of Series A Preferred Stock.

Dividend Policy for Series A Preferred Stock

The holders of Series A Preferred Stock is not entitled to any dividend.

Note 10 – Income Tax Provision

Deferred Tax Assets

We operate in the United States; accordingly, federal and state income taxes have been provided based upon the tax laws and rates of the United States deferred taxes are determined based on the temporary differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates, which will be in effect when these differences reverse.

We are subject to United States income taxes at a rate of 21%. The reconciliation of the provision for income taxes at the United States statutory rate compared to our income tax expense as reported is as follows:

The following tables set forth the components of deferred income taxes as of June 30, 2022:

As of June 30, 2022, we had federal, state, and local net operating loss carryforwards of $305,829 that are available to offset future liabilities for income taxes. We have generally established a valuation allowance against these carryforwards based on an assessment that it is more likely than not that these benefits will not be realized in future years.

We are currently not subject to examination in federal, state, and local jurisdictions in which we conduct our operations and files tax returns.

We have made an assessment of the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical merits and determined that no unrecognized tax benefits associated with the tax positions exist

Note 11 – Related Party Transactions

In March 2022, we purchased intellectual property (“IP”) consisting of patents, trademarks, copyrights and domain names for $5,000,000 from Intellimedia Networks, Inc. (“IMNI”), a U.S. corporation. Mr. Gessesse and Mr. Sedani were employed by IMNI at the time of this purchase. They became employees of Frontera on

July 22, 2022 (see Note 12 – Subsequent Events for more details). The balance due to IMNI is included in accrued liabilities on our Consolidated Balance Sheet as of June 30, 2022.

Mr. De Luna and Mr. Toussaint are co-owners of Bayou Moon Capital (“Bayou Moon”). Bayou Moon sent Frontera $5,000 on June 30, 2022 for working capital purposes. This balance due to Bayou Moon is included in accrued liabilities on our Consolidated Balance Sheet as of June 30, 2022.

Mr. Toussaint sent Frontera $3,500 on June 30, 2022 for working capital purposes. This balance due to Mr. Toussaint is included in accrued liabilities on our Consolidated Balance Sheet as of June 30, 2022.

The following table sets forth certain information regarding beneficial ownership of our Common and Series A Preferred Stock as of June 30, 2022 by each person or entity known by us to beneficially own more than five percent (5%) of any class of our outstanding shares. There are 18,750,000 shares of our Common Stock held by our Chairman of the Board. There are 5,000,000 shares of our Series A Preferred Stock held by a company under direct control of our officers or directors. As of June 30, 2022, there were 47,563,483 shares of our Common Stock outstanding and 5,000,000 shares of our Series A Preferred Stock outstanding: