ITEM 1. BUSINESS
Nightfood Holdings, Inc. (“we”,
“us” “the Company” or “Nightfood”) is a Nevada corporation organized on October 16, 2013 to
acquire all of the issued and outstanding shares of Nightfood, Inc., a New York corporation (“Nightfood”) from its
sole shareholder, Sean Folkson. All of our operations are conducted by the Subsidiary. We are in the business of manufacturing,
marketing and distributing snacks specially formulated and promoted for evening consumption. A large number of Americans consume
nighttime snacks that are high in sugar, fat, sodium, and calories; such snacks can impair sleep and also impair health in general.
Management believes that our products are unique in the food industry and that there is a substantial market for our products.
Our corporate address is 520 White Plains Road – Suite 500, Tarrytown, New York 10591 and our telephone number is 888-888-6444.
We maintain a web site at www.Nightfood.com, along with many additional web properties. Any information that may appear on our
web site should not be deemed to be a part of this report.
On January 3, 2018, the Registrant formed
a new wholly-owned subsidiary to capitalize on opportunities in the marijuana and cbd edibles space. MJ Munchies, Inc. (“Munchies”)
was formed as a Nevada corporation with a capital structure of 10,000 shares of common stock. Since formation, Munchies has built
an intellectual property portfolio that includes a registered trademark for Half-Baked in the State of California relating to
marijuana edibles, a pending federal trademark application with the USPTO for Half-Baked relating to packaged snacks, the federal
trademark for The Half Baked Cookie Co., HalfBaked.com, and several other related domain names.
Industry Overview
We are an early-stage company that is
seeking to establish a market within the snack industry by offering a line of snack foods that are specifically formulated for
evening consumption. It is estimated that American consumers spend over $50 Billion annually on snacks consumed at night, and
this figure continues to grow. Moreover, industry data indicates that the most popular nighttime snack choices include products
and categories that are traditionally considered high in calories, and “unhealthy” options, such as cookies, salty
snacks (chips, pretzels, and popcorn), ice cream, and candy.
Our Products, Present and Proposed
Nightfood Holdings runs two distinct operating
companies, each serving a different market segment with different products.
MJ Munchies, Inc.
MJ Munchies, Inc. is a Nevada corporation
formed in January of 2018 to exploit legally compliant opportunities in the CBD and marijuana edibles and related spaces. The
Company intends to market some of these new products under the brand name “Half-Baked”. This subsidiary was created
during the three months ended March 31, 2018 and its operations have a nominal impact on the financial statements contained herein.
Since inception, MJ Munchies has applied
for U.S. Trademark protection for its brand of Half-Baked snacks, currently under development. MJ Munchies also acquired HalfBaked.com.
In April, 2018, MJ Munchies entered into an initial brand licensing agreement for the Half-Baked mark with a licensed manufacturer
of THC-infused edibles in the State of California under which, the licensee manufactured and distributed a small pilot run of
Half-Baked branded THC-infused cookies in California. Management continues to seek a suitable licensing partner for the intellectual
property the Company has secured.
The Company believes tremendous opportunities
currently exist to launch successful and legally compliant products in this space, and that such opportunities will continue to
grow over time. No assurance can be given that the patent will be granted, that it will afford meaningful protection to us if
granted, or that we will begin actual production of products using the Half-Baked trademark. Even if production begins, we can
neither assure market acceptance of our products nor that THC infused edibles will not face ongoing legal challenges.
Nightfood, Inc.
Nightfood, Inc. is a snack company focused
on manufacturing and distribution of ice cream that is formulated to be more appropriate for nighttime consumption. Nightfood’s
initial line of products, Nightfood nutrition bars, are currently being phased out with the focus shifting to the national ice
cream rollout.
Nightfood ice cream has been manufactured
in eight flavors to date. These are Full Moon Vanilla, Midnight Chocolate, Cold Brew Decaf, After Dinner Mint Chip, Milk &
Cookie Dough, Cherry Eclipse, Bed and Breakfast, and Cookies n’ Dreams. Additional flavors have been developed, both dairy,
and non-dairy, for introduction in 2020 based on retailer demand. In addition, the Company has partnered with celebrities to manufacture
and distribute custom flavors. The celebrity partners are Michael Clifford, guitarist of the award-winning, multi-platinum band
5 Seconds of Summer, and Richard Sherman, NFL star who plays for the San Francisco 49ers. These celebrity flavors are in various
stages of development at the time of this filing, and Management anticipates both to be on shelf in spring of 2020.
Management believes consumer demand exists
for better nighttime snacking options, and that a new consumer category consisting of nighttime specific snacks will emerge in
the coming years. This belief is supported by research from major consumer goods research firms such as IRI Worldwide, and Mintel,
who identified nighttime specific foods and beverages as one of the “most compelling and category changing trends”
for 2017 and beyond.
It is estimated that over $50 billion
is spent annually in the United States on snacks that are consumed between dinner and bed. Company management believes that a
significant percentage of that consumer spend will move from conventional snacks to nighttime specific snacks in coming years.
Nightfood has established a Scientific
Advisory Board consisting of sleep and nutrition experts to drive product formulation decisions, and provide consumer confidence
in the brand promise. The first member of this advisory board was Dr. Michael Grandner, Director of the Sleep and Health Research
Program at the University of Arizona. Dr. Grandner has been conducting research on the link between nutrition and sleep for over
ten years, and he believes improved nighttime nutritional choices can improve sleep, resulting in many short and long-term health
benefits. In March of 2018, the Company added Dr. Michael Breus to their Scientific Advisory Board. Breus, known to millions as
The Sleep Doctor™, is believed to be the Nation’s most trusted authority on sleep. He regularly appears in the national
media to educate and inform consumers so they can sleep better and lead happier, healthier, more productive lives. In July, 2018,
we completed our Scientific Advisory Board with the addition of Lauren Broch, Ph.D, M.S. Dr. Broch is a sleep therapist and former
Director of Eductation & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. Uniquely, Dr. Broch
also has a master’s degree in human nutrition. This unique combination allowed her to play an important role in the reformulation
of our nutrition bars, and the development of Nightfood ice cream. These experts work with Company management to ensure Nightfood
products deliver on their nighttime-appropriate, and sleep-friendly promises.
Production
To date, we have utilized contract manufacturers
for producing our products, packaging for our products, and 3rd party logistics for warehousing and order fulfillment. Our current
ice cream co-packer has capacity to manufacture approximately 400,000 pints of ice cream monthly. Management has had initial conversations
with other manufacturing facilities to establish additional production capacity as it becomes necessary.
Marketing and Distribution
Nightfood ice cream is currently available
in 4 major supermarket chains. These are Meijer, Woodman’s, Lowes Foods, and Harris Teeter. The product line has garnered
extensive media interest from outlets such as Oprah Magazine, USA Today, The Wall Street Journal, The Washington Post, and more.
Consumers seem very enthusiastic about the prospect of a sleep-friendly ice cream. Management is working with these retail partners
on various marketing and promotional campaigns to drive trial and repeat purchase at the store level.
Competition
The nutritional/snack food business is
highly competitive and includes such participants as large companies like Mondelez, Nestle S.A. and Quaker Oats and more specialized
companies such as Cliff Bar, Quest Nutrition and many smaller companies. Many of these competitors have well established names
and products. Nestle recently announced an interest in the nighttime snacking space with the introduction of a candy-type product
called GoodNight. We will initially compete based upon the unique nature of our product. However, other companies, including those
with greater name recognition than us and greater resources may seek to introduce products that directly compete with our products.
Management believes that if a competitor sought to develop a competing product, it could do so and begin to establish retail distribution
in 12-24 months. Based on the current acquisition climate in the consumer goods space, Management believes that successful growth
of the Nightfood ice cream line would likely bring acquisition offers from potential competitors before it would actually bring
competition on the shelf from those same potential competitors.
Intellectual Property Rights
We own the registered trademark “Nightfood®”
for the nutrition bar/snack/meal replacement category, and have applied for registration for the same mark for ice cream. While
this process will take several months, management believes the mark will be granted in due time with no concerns or issues. We
believe these marks will prove important to our business. Additionally, we own the domain Nightfood.com as well as many other
relevant domains such as late-night-snack.com, nighttimesnack.com, and nighttimesnacking.com, as well as Nightfood.us, Nightfood.net,
TryNightfood.com, GetNightfood.com, NiteFood.com, TryNightfood.com, BuyNightfood.com, NightSnacking.com, and Night-Food.com. We
also own the toll-free number 888-888-NIGHT. We rely on proprietary information as to our formulas and have non-disclosure agreements
with our suppliers.
Personnel
Nightfood currently has no employees except
Sean Folkson, our President and CEO. Through vendor and consultant relationships, Nightfood has dozens of people contributing
to our operations and efforts on a regular basis. Should we be successful in executing our business plan, we anticipate hiring
additional employees in the future to assist with various company functions. However, we also expect to continue to strategically
outsource significantly to accomplish work that might otherwise be done by employees in a more traditional company.
Customers
In FY 2019, sales were concentrated among
a handful of customers that each accounted for over 10% of our revenue. We expect this type of revenue concentration to continue
as our business model involves selling large quantities of ice cream wholesale to large accounts (major supermarket chains, national
distribution organizations), who then sell to the consumer. With more widespread distribution, the concentration would decrease
to some extent.
DEVELOPMENT PLANS
Nightfood has eight ice cream flavors
already in ongoing production, and an additional ten products have been developed or in late stages of development. These include
two custom celebrity flavors, four new ice cream flavors, and four non-dairy flavors. Management has done preliminary research
on CBD infused ice cream, current FDA guidelines do not permit CBD to be used as an additive in food, and Management does not
believe such products will be allowed under FDA guidelines for several quarters.
ITEM 1A. RISK FACTORS
You should carefully consider the following
factors in evaluating our business, operations and financial condition. The occurrence of any the following risks could have a
material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
We have had limited operations and
require substantial additional funds to execute our business plan. We have had limited operations and have not yet established
significant traction in the marketplace. We generated revenue of $352,172 in the year ended June 30, 2019, and $196,742 in the
year ended June 30, 2018. Unless we are able to continue to leverage our status as a public company into effective fundraising
to fund our capital requirements, we will not be able to execute on our business plan and purchasers of our stock will be likely
to lose their investment.
Our independent registered public accounting
firm have expressed doubt about our ability to continue as a going concern. We received a report on our financial statements
for the years ended June 30, 2019 and June 30, 2018 from our independent registered public accounting firm that includes an explanatory
paragraph and a footnote stating that there is substantial doubt about our ability to continue as a going concern due to its losses
and negative net worth. Inclusion of a “going concern qualification” in the report of our independent accountants may
have a negative impact on our ability to obtain financing and may adversely impact our stock price in any market that may develop.
We remain uncertain of our proposed
products’ market acceptance. Although management firmly believes that snacks designed for evening consumption is a viable
niche market with a potential for attractive returns for investors, this belief is largely based on preliminary sales and marketing
data through platforms such as Amazon and Facebook, as well as industry awards, industry research, and consumer feedback. If management
is wrong in its belief and there is an insufficient market for our products, it is likely we will fail and investors will lose
their investment.
Our ability to hire additional personnel
is important to the continued growth of our business. Our continued success depends upon our ability to attract and retain
a group of motivated marketing and business support professionals. Our growth may be limited if we cannot recruit and retain a
sufficient number of people. We cannot guarantee that we will be able to hire and retain a sufficient number of qualified personnel.
We may face substantial competition.
Competition in all aspects of the functional food industry is intense. We will compete against both large conglomerates with
substantial resources and smaller companies, including new companies that might be formed with resources similar to our own. Competitors
may seek to duplicate the perceived benefits of our products in ways that do not infringe on any proprietary rights that we can
protect. As a result we could find that our entire marketing plan and business model is undercut or made irrelevant by actions
of other companies under which we have no control. We cannot promise that we can accomplish our marketing goals and as a result
may experience negative impact upon our operating results.
Our success depends to a large extent
upon the continued service of key managerial employees and our ability to attract and retain qualified personnel. Specifically,
we are highly dependent on the ability and experience of our key employee, Sean Folkson, our president and CEO. We have a consulting
agreement with Mr. Folkson. The loss of Mr. Folkson would present a significant setback for us and could impede the implementation
of our business plan. There is no assurance that we will be successful in acquiring and retaining qualified personnel to execute
our current plan of operations.
The ability of our officer to control
our business will limit minority shareholders’ ability to influence corporate affairs. As of the date of this report,
our president, Sean Folkson, owned 16,733,568 shares (directly and through trusts, including 2,680,000 million shares owned by
a trust controlled by Mr. Folkson’s wife. (Mr. Folkson disclaims beneficial ownership of these shares). In addition
to his ownership of the common stock, Mr. Folkson owns 1,000 shares of our Series A Preferred Stock (“A Stock”) which
votes with the common stock and has an aggregate of 100,000,000 votes. Accordingly, Mr. Folkson controls over 90% of the voting
power in the Company. Because of his stock ownership, Mr. Folkson will be in a position to continue to elect our board of directors,
decide all matters requiring stockholder approval and determine our policies. The interests of our president may differ from the
interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies,
selection of officers and directors and other business decisions. The minority shareholders would have no way of overriding decisions
made by our president. This level of control may also have an adverse impact on the market value of our shares because he may
institute or undertake transactions, policies or programs that result in losses, may not take any steps to increase our visibility
in the financial community and/ or may sell sufficient numbers of shares to significantly decrease our price per share.
If we do not receive additional financing
we will not be able to execute our planned expansion. Over the next 6-12 months, we believe we will require approximately
$1,500,000 - $2,500,000 in debt or equity financing to affect a planned expansion of our operations and roll out Nightfood ice
cream. Management believes that it will be able to raise the required funds, however this may not prove to be the case. As of
June 30, 2019, we had $1,748,000 in outstanding convertible promissory notes. We also have an Equity Credit Line in the amount
of $5,000,000, which we could access under certain circumstances. However the utilization of such forms of capital raising can
be extremely dilutive to our present shareholders. See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION – Liquidity.
We may be exposed to potential risks
resulting from new requirements under Section 404 of the Sarbanes-Oxley Act of 2002. Pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, we are required to include in our annual report our assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year. We have not yet completed our assessment of the effectiveness of our internal
control over financial reporting. We would incur additional expenses and diversion of management’s time as a result of performing
the system and process evaluation, testing and remediation required in order to comply with the management certification and auditor
attestation requirements.
We do not have a sufficient number
of employees and consultants to segregate responsibilities and are presently unable to afford increasing our staff or engaging
outside consultants or professionals to overcome our lack of employees, and this may impair our ability to effectively comply
with Section 404 of the Sarbanes-Oxley Act. We currently do not have any employees and rely on our CEO, Sean Folkson to perform
all executive functions. Accordingly, we cannot segregate duties to provide sufficient review of our financial activity. During
the course of our testing of our financial procedures, we may identify other deficiencies that we may not be able to remediate
in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition,
if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent
financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be
harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could
drop significantly. Our officers’ lack of experience in accounting and financial matters may make our efforts to comply
more difficult and cause us to hire consultants to assist him cutting into our resources.
Implications of Being an Emerging Growth
Company. As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging
growth company” as defined in the JOBS Act. For as long as a company is deemed to be an emerging growth company, it may
take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public
companies. These provisions include:
|
●
|
a
requirement to have only two years of audited financial statements and only two years
of related Management’s Discussion and Analysis included in an initial public offering
registration statement;
|
|
●
|
an
exemption to provide less than five years of selected financial data in an initial public
offering registration statement;
|
|
●
|
an
exemption from the auditor attestation requirement in the assessment of the emerging
growth company’s internal controls over financial reporting;
|
|
●
|
an
exemption from the adoption of new or revised financial accounting standards until they
would apply to private companies;
|
|
●
|
an
exemption from compliance with any new requirements adopted by the Public Company Accounting
Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s
report in which the auditor would be required to provide additional information about
the audit and the financial statements of the issuer; and
|
|
●
|
reduced
disclosure about the emerging growth company’s executive compensation arrangements.
|
An emerging growth company is also exempt
from Section 404(b) of Sarbanes Oxley which requires that the registered accounting firm shall, in the same report, attest to
and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting. Similarly,
as a Smaller Reporting Company we are exempt from Section 404(b) of the Sarbanes-Oxley Act and our independent registered public
accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting
until such time as we cease being a Smaller Reporting Company.
As an emerging growth company, we are
exempt from Section 14A (a) and (b) of the Securities Exchange Act of 1934 which require the shareholder approval of executive
compensation and golden parachutes.
Section 107 of the JOBS Act provides that
an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage
of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards.
We would cease to be an emerging growth company upon the earliest
of:
|
●
|
In
our fiscal year ended June 30, 2021,
|
|
●
|
the
first fiscal year after our annual gross revenues are $1 billion or more,
|
|
●
|
the
date on which we have, during the previous three-year period, issued more than $1 billion
in non-convertible debt securities, or
|
|
●
|
as
of the end of any fiscal year in which the market value of our common stock held by non-affiliates
exceeded $700 million as of the end of the second quarter of that fiscal year.
|
Risks Related to Our Common Stock
Commencing August 21, 2015 we began trading
under the Symbol NGTF on the OTC Markets. There had been very little trading activity of our stock for some time. In April of
2017, the Company listing moved to the OTCQB, and in August of 2017 an investor awareness campaign was initiated to communicate
news of recent company developments and milestones to a broader range of stock market investors. On October 23, 2017, we were
advised that our stock had been moved from the OTCQB to the OTCPink marketplace. The Company did not believe the change in OTC
Market tiers had any material positive or negative impact on Company operations or the stock price. However, in January, 2019,
we determined that it was in the interest of our shareholders to be on the OTCQB and were reinstated on February 11, 2019. Trading
volume has increased significantly in the last eighteen months, but there can be no assurances that it will be maintained. Our
stock is likely to continue to be subject to significant price fluctuations.
In addition, our common stock is unlikely
to be followed by any market analysts, and there may be few institutions acting as market makers for the common stock. Either
of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed
and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly.
Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and
liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors
referred to elsewhere in these Risk Factors, investor perception, and general economic and market conditions. No assurances can
be given that an orderly or liquid market will ever develop for the shares of our common stock. Because of the anticipated low
price of the securities, many brokerage firms may not be willing to effect transactions in these securities. Any purchasers of
our securities should be aware that any market that develops in our stock will likely be subject to the penny stock restrictions.”
Our board of directors is authorized
to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common
shares. We are authorized to issue up to 1,000,000 shares of preferred stock, $0.001 par value. On July 11, 2018, we filed
a Certificated of Designation for a class of preferred stock designated Class A Super Voting Preferred Stock (“A Stock”).
There are 10,000 shares of A Stock designated. Each share of such stock shall vote with the common stock and have 100,000 votes.
A Stock has no conversion, dividend or liquidation rights. Accordingly, the holders of A Stock will, by reason of their voting
power be able to control the affairs of the Registrant. The foregoing is only a summary of the certificate of designation for
the A Stock, which has been filed as an exhibit to our Current Report on Form 8-K filed July 17, 2018. We have issued 1,000 shares
of A Stock to Sean Folkson, giving him 100,000,000 votes in all matters requiring a vote of holders of our Common Stock and effective
voting control over our affairs. As of the date of this report, we have not issued any other shares of preferred stock and have
no plans to do so. Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as
the Board of Directors may fix and determine from time to time. Any such preferences may operate to the detriment of the rights
of the holders of the common stock being offered hereby.
Our articles of incorporation provide
for indemnification of officers and directors at our expense and limit their liability that may result in a major cost to us and
hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.
Our articles of incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to
which they become a party arising from their association with or activities on our behalf. This indemnification policy could result
in substantial expenditures by us, which we will be unable to recoup.
We have been advised that, in the opinion
of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against these types of
liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful
defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities
being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit
to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were
to occur is likely to be very costly and may result in us receiving negative publicity, either of these factors would likely materially
reduce the market and price for our shares, if such a market ever develops.
Any market that develops in shares
of our common stock will be subject to the penny stock restrictions that are likely to create a lack of liquidity and make trading
difficult or impossible. Until our shares of common stock qualify for inclusion in the NASDAQ system, if ever, the trading
of our securities, if any, will be in the over-the-counter market which is commonly referred to as the OTCBB as maintained by
OTCMarkets.com. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price
of our securities.
SEC Rule 15g-9 (as most recently amended
and effective on September 12, 2005) establishes the definition of a “penny stock,” for purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to a limited number of exceptions. It is likely that our shares will be considered to be penny stocks for the immediately
foreseeable future. This classification severely and adversely affects the market liquidity for our common stock. For any transaction
involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account
for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting
forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives
of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that
person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver,
prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which,
in highlight form, sets forth:
|
●
|
the
basis on which the broker or dealer made the suitability determination, and
|
|
●
|
that
the broker or dealer received a signed, written agreement from the investor prior to
the transaction.
|
Disclosure also has to be made about the
risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor
in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers
may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their
shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional
sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly
traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities.
Our shares in all probability will be subject to such penny stock rules for the foreseeable future and our shareholders will,
in all likelihood, find it difficult to sell their securities. Recently, several brokerage firms and clearing firms have adopted
special “house rules” which make it more difficult for their customers to hold or trade low priced stock and these
rules may make it difficult for our shareholders to sell their stock.
We do not intend to pay dividends on
our common stock. We have not paid any dividends on our common stock to date and there are no plans for paying dividends on
the common stock in the foreseeable future. We intend to retain earnings, if any, to provide funds for the implementation of our
business plan. We do not intend to declare or pay any dividends in the foreseeable future. Therefore, there can be no assurance
that holders of our common stock will receive any additional cash, stock or other dividends on their shares of our common stock
until we have funds which the Board of Directors determines can be allocated to dividends.
If a market develops for our shares,
sales of our shares relying upon rule 144 may depress prices in that market by a material amount. 16,733,568 of the outstanding
shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of
1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under
the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state
securities laws. Rule 144 provides in essence that a person who has held restricted securities for a prescribed period may, under
certain conditions, sell their shares as a result of revisions to Rule 144 which became effective on or about February 15, 2008,
there is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not
been an officer, director or control person for at least 90 consecutive days) after the restricted securities have been held by
the owner for a period of six months. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant
to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock
in any market that may develop.
Any trading market that may develop
may be restricted by virtue of state securities “Blue Sky” laws to the extent they prohibit trading absent compliance
with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states. Although trading
activity in our stock has increased recently, generally there is a limited public market for our common stock, and there can
be no assurance that an active and regular public market will develop in the foreseeable future. Transfer of our common stock
may also be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our common stock may not
be traded in such jurisdictions. Because our securities have not been registered for resale under the “Blue Sky” laws
of any state, the holders of such shares and persons who desire to purchase them in any trading market that might develop in the
future, should be aware that there may be significant state “Blue Sky” law restrictions upon the ability of investors
to sell the securities and of purchasers to purchase the securities. These restrictions prohibit the secondary trading of our
common stock. Accordingly, investors should consider the secondary market for our securities to be a limited one.
Recent issuances of convertible promissory
notes may have a negative impact on the trading prices of our common stock. Commencing in March 2017, we have entered into
$5,214,703 principal amount of promissory notes with various lenders since our inception of which $1,748,000 was outstanding as
of June 30, 2019. These notes are convertible six to twelve months after issuance into free trading shares of our common stock,
with certain limitations, at conversion prices below the then market price of our common stock. These notes have been converted
on a continual basis for approximately 24 months. It is possible such conversions and that future conversions of these notes have
and can have a negative effect on the market for our common stock and may cause dilution to our common stockholders.