Summary of Significant Accounting Policies

12 Months Ended

Jun. 30, 2022

Summary of Significant Accounting Policies

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:

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Level 1 – quoted prices in active markets for identical assets or liabilities

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Level 2 – inputs other than quoted prices in level 1 that are observable either directly or indirectly.

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Level 3 – inputs based on prices or valuation techniques that are both unobservable and significant to the fair value markets.

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:


	Years Ended June 30,
	2022			2021
Numerator:
Net income (loss)	$	(1,320,550	)	$	—

Denominator:
Weighted-average basic shares outstanding		103,579,487			307,280,150

Basic and Diluted earnings per share	$	(0.01	)	$	—

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.

FRONTERA GROUP INC. 10-K