HWKE Hawkeye Systems Inc (QB)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022

Note 1 - Summary of Significant Accounting Policies

Business Overview

Hawkeye Systems, Inc. (the “Company”), a Nevada corporation incorporated on May 15, 2018. We are a technology holding company, our previous focus was on pandemic management products and services. We are currently seeking other opportunities, while actively trying to liquidate mask inventory and wind-up existing deals. The Company looks to license and acquire technology that improves life and to work with partners to develop cutting edge, “smart” products for a variety of markets. From inception until the date of this filing our activities have primarily consisted of (i) the incorporation of our Company, (ii) the development of our business plan and the evaluation of strategic investment and business development strategies, (iii), recruiting and adding additional consultants and employees, and (iv) liquidating our stock of personal protective equipment (“PPE”) products through numerous sources.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial position; (b) the result of operations; and (c) cash flows, have been made in order to make the unaudited condensed consolidated financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K, for the year ended June 30, 2022, as filed with the SEC on December 14, 2022.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. Significant estimates in the accompanying financial statements include useful lives of property and equipment, fair value assumptions used for stock-based compensation, valuation of beneficial conversion feature on convertible notes and the valuation allowance on deferred tax assets.

Fair value measurements

When required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date. The Company has no assets or liabilities that are adjusted to fair value on a recurring basis.

Revenue recognition

As of December 31, 2022, and 2021, the Company has no revenue.

Cost of sales

As of December 31, 2022, and 2021, the Company has no Cost of Sales.

Basic and diluted earnings per share

Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of common shares outstanding during the period plus the effect of potentially dilutive common stock equivalents, including stock options, warrants to purchase the Company’s common stock, and convertible note payable with accrued interest. For the six months ended December 31, 2022 and 2021, potentially dilutive common stock equivalents not included in the calculation of diluted earnings per share because they were anti-dilutive are as follows:

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements issued and their potential effect on our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s unaudited condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, ASC Subtopic 470-20 “Debt-Debt with Conversion and Other Options” and ASC subtopic 815-40 “Hedging-Contracts in Entity’s Own Equity”. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting; and, (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this update are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

We early adopted this standard effective July 1, 2021 using the modified retrospective approach transition method. Therefore, the condensed financial statements for the six months ended December 31, 2022 are presented under the new standard, while the comparative period presented is not adjusted and continues to be reported in accordance with the Company’s historical accounting policy.

Note 2 - Going Concern

The Company’s unaudited condensed consolidated financial statements are prepared using GAAP, applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. During the six months ended December 31, 2022, the Company had a net loss of $481,388. As of December 31, 2022, the Company had an accumulated deficit of $11,363,564.

The Company has not established sufficient revenue to cover its operating costs and will require additional capital to continue its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about its ability to continue as a going concern.

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan to obtain such resources for the Company includes: sales of equity instruments; traditional financing, such as loans; and obtaining capital from management and significant stockholders sufficient to meet its minimum operating expenses. However, management cannot provide any assurance that the Company will be successful in accomplishing this plan.

There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. In addition, profitability will ultimately depend upon the level of revenues received from business operations. However, there is no assurance that the Company will attain profitability. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 3 – Restatement of Financial Statements for the Quarter End December 31, 2021

On July 17, 2020, the Company entered into a membership agreement with Eagle Equities LLC (“Eagle”) and Ikon Supplies (“Ikon”) to form a Nevada Limited Liability Company, HIE, LLC (“HIE”) for the purpose of procuring, funding the purchase of and sale of PPE (the “Membership Agreement”). Subject to the provision of the Agreement, the interest of any net profits would be shared in a ratio of 33.3% among each member. Upon the occurrence of any loss in some or all of the HIE’s capital, all members would be responsible to contribute capital to repay the loan, and additional contribution, with each party being responsible for 33.3% of the loss.

Restatement Effect on Financial Statements

The Company did not receive any updates of the fiscal year 2021 financial statements from HIE until October, 2022. For the fiscal year ended June 30, 2021, HIE had a loan balance of $2,122,963 secured by Eagle, of which the Company has recognized 1/3 amounting to $707,654 as a guarantee of loan payable to Eagle - JV partner, the same amount as investment in HIE, as stipulated in the Membership Agreement. In addition, HIE incurred an operating loss of $1,385,962, which resulted in the Company recording 1/3 of its loss of $461,987 under other expenses on the statement of income to offset the investment in HIE as under equity method in accordance with FASB ASC 323.

As of June 30, 2021, the balance of investment in HIE was $245,667 and the balance of loan payable to Eagle - JV partner was $707,654. Since there were no operating activities or financial movement between July 1, 2021 to December 31, 2021, the investment in HIE and the loan payable to Eagle - JV partner are the same as of June 30, 2021.

Effects on the previously issued year 2021 balance sheet referencing the restatement of asset, liability and equity are as follows:

Since there were no operating activities between July 01, 2021 to December 31, 2021, the previously issued December 31, 2021 Statement of Operations has not changed.

Note 4 – Joint Venture Investment in HIE LLC

On July 17, 2020, the Company entered into a membership agreement with Eagle Equities LLC (“Eagle”) and Ikon Supplies (“Ikon”) to form a Nevada Limited Liability Company, HIE, LLC (“HIE”) for the purpose of procuring, funding the purchase of and sale of PPE (the “Membership Agreement”). Subject to the provision of the Agreement, the interest of any net profits would be shared 33.3% among each member. If there is a loss in some or all of the capital, all members of HIE shall be responsible to contribute capital to repay the loan, and additional contribution, with each party being responsible for 33.3% of the loss.

The joint venture investment in HIE LLC is accounted for by the Company using the equity method in accordance with FASB ASC 323. There were no operating activities in HIE during the quarter ended December 31, 2022.

As of December 31, 2022, and 2021, the balances of investment in HIE were $0, and $245,667, respectively.

Note 5 – Inventory Financing Payable – related party

On February 19, 2021, Steve Hall, an investor who holds approximately 72% of the Company’s common stock advanced $1 million to the Company. The purpose of the advance was to purchase inventory to satisfy customer orders. The advance would be repaid upon cash being received from the end customer. In addition to the principal amount of the advance, the related party will be entitled to 1/3 of the gross profit earned on the transaction. The terms of the agreement are non-interest bearing. The investor is 100% at risk as this is a non-recourse funding vehicle. 

In June 2021 the Company cancelled the contemplated purchase of inventory and returned $500,000 to Mr. Hall. Mr. Hall has agreed to allow the Company to retain the balance to fund future purchases and general operating expenses.

On October 1, 2021, the Company and Steve Hall entered into an agreement to replace the inventory financing payable with a convertible note. Further discussion on Note 6 – Convertible Notes Payable – related party, convertible promissory note 6.3.

The balances of the convertible note as of December 31, 2022, and 2021 are $0 and $500,000, respectively.

Note 6 – Convertible Notes Payable – related party

Convertible Promissory Note 6.1

On April 6, 2020, the Company and Steve Hall, entered into a convertible promissory note agreement for the principal amount of $250,000, accruing simple interest at a rate of 10% per annum if repaid within 90 days, and 20% per annum if repaid thereafter. The convertible note was due on April 6, 2021. At the option of the noteholder, the note would convert, at any time, starting six months from the date of issuance through to the one-year anniversary of the date of issuance at a conversion price of $0.25 per share.

The Company recorded a discount on the convertible note due to a beneficial conversion feature of $51,594, which was being amortized over the term of the note.

In consideration for the loan of $250,000, the Company also granted to Mr. Hall 100,000 stock options exercisable at $0.25 for a two-year term. The options vested upon issuance of the note. The fair value of the options was $13,297 and was recognized as debt discount as a part of beneficial conversion feature in the year ended 30, 2020.

The outstanding principal amount, and the related interest were converted into common stock on September 01, 2021.

Convertible Promissory Note 6.2

On December 15, 2020, the Company and Steve Hall, entered into a convertible promissory note agreement for the principal amount of $250,000, accruing simple interest at a rate of 10% per annum, if repaid within 90 days, and 20% per annum if repaid thereafter. The convertible note was due on December 15, 2021. At the option of the noteholder, the note would convert at any time beginning six months after the date of issuance and ending on the date, which is one year from the date of issuance, at a conversion price of $0.25 per share.

The Company recorded a discount on the convertible note due to a beneficial conversion feature of $117,760, which is being amortized over the term of the note.

In consideration for the loan of $250,000, the Company also granted to Mr. Hall 100,000 stock options exercisable at $0.25 for a two-year term. The options vested upon issuance of the note. The fair value of the options was $46,380 and was recognized as debt discount as a part of beneficial conversion feature in the year ended June 30, 2021.

The outstanding principal amount, and the related interest were converted into common stock on September 01, 2021.

Adoption of ASU 2020-06 for Convertible Promissory Note 6.1, and Convertible Promissory Note 6.2

In connection with the adoption of ASU 2020-06, the Company reclassified the aggregate amount of $169,354, previously allocated to the conversion feature of the Convertible Promissory Note 6.1, and Convertible Promissory Note 6.2 of $51,594, and $117,760 from additional paid-in capital to convertible notes on our balance sheet as of September 1, 2021, respectively. The reclassification was recorded to combine the two legacy units of account into a single instrument classified as a liability. The Company also recognized an aggregate cumulative effect adjustment of $120,287 to the Convertible Promissory Note 6.1, and Convertible Promissory Note 6.2 of $51,594, and $68,693 to accumulated deficit on our balance sheet as of September 1, 2021, respectively. The cumulative effect adjustment was primarily driven by the derecognition of interest expense related to the accretion of the Debt Discount as required under the legacy accounting guidance. Under ASU 2020-06, we would no longer incur non-cash interest expense related to the accretion of the debt discount associated with the embedded conversion option.

Conversion of Convertible Promissory Note 6.1 and Convertible Promissory Note 6.2

On September 1, 2021, the Company had converted the convertible promissory note 6.1 and convertible promissory note 6.2 in the aggregate total of $500,000 and the related accrued interest of $94,344 into 16,666,667 shares of common stock with conversion value of $0.035661 per share. The entire amount of $594,344 has been converted into Common Stock on July 28, 2022. On November 2, 2021, the Company issued 160,000 shares of common stock for cashless exercise of the 200,000 stock options issued to Mr. Hall.

Exercise of the stock options on Convertible Promissory Note 6.1 and Convertible Promissory Note 6.2

On November 2, 2021, the Company issued 160,000 shares of common stock for the cashless exercise of the 200,000 stock options, mentioned in convertible promissory note 6.1 and convertible promissory note 6.2.

Convertible Promissory Note 6.3

On October 1, 2021, the inventory financing payable of $500,000 with Steve Hall as mentioned on Note 5 – Inventory Financing Payable – related party, has been exchanged for a convertible promissory note with annual simple interest rate of 12% for the first 90 days and annual simple interest rate of 20% thereafter, with a due date on September 30, 2022. At the option of holder, this note is convertible, at any time, into shares of common stock at a conversion price of $0.02 per share.

The note’s maturity date was extended to September 30, 2023.

As of December 31, 2022, the accrued interest under the note was $115,342, and the principal balance was $500,000.

Note 7 – Line of Credit – related party

On October 1, 2021, Steve Hall agreed to provide a line of credit of up to $1,000,000 to the Company with simple interest at a rate of 12% for the first 90 days, and simple interest at a rate of 20% per annum thereafter. The principal and interest payable shall be added to the principal amount of the agreement and payable pursuant to the same terms. The line of credit shall expire on October 1, 2022 unless renewed and/or extended by lender and borrower. Subsequently, the line of credit has been renewed and extended with same terms and an expiration date of October 1, 2023.

During the six months ended December 31, 2022, and 2021, in multiple transactions dates, the Company has withdrawn a total of $200,000, and 105,000, and has accrued interest of $11,280, and $962, respectively.

As of December 31, 2022, and 2021, the outstanding principal totaled $465,000, and 105,000 with accrued interest of $52,184, and $962, respectively.

Note 8 – Common stock payable

On May 23, 2022, the board of directors granted Richard Cutler, former director who had resigned in August 2022, 500,000 shares of restricted common stock valued at $20,000, with an exercise price of $0.04 per share. The shares were granted as consideration for services granted. All shares are restricted until an acquisition or reverse takeover of the Company.

As of December 31, 2022 and 2021, the Company reported common stock payable of $20,000 and $0, which represents 500,000, and 0 shares of common stock to be issued, respectively.

Note 9 – Common stock payable – related party

On May 23, 2022, the board of directors granted Chris Mulgrew, Chief Financial Officer, 250,000 shares of restricted common stock, valued at $10,000 with an exercise price of $0.04 per share. The shares were granted as consideration for services granted. All shares are restricted until an acquisition or reverse takeover of the Company.

As of December 31, 2022 and 2021, the Company reported common stock payable-related party of $10,000 and $20,000, which represents 250,000, and 1,108,000 shares of common stock to be issued, respectively.

Note 10 - Stockholders’ Equity

Common Stock

During the six months ended December 31, 2022, the Company had the following common stock transactions:

The composition of the Company’s warrants outstanding at December 31, 2022 are as follows:

At December 31, 2022, the intrinsic value of the 2,393,996 outstanding warrant was $0.

During the six months ended December 31, 2022, $5,159 was expensed to un-related parties, and $0 remains unamortized.

At December 31, 2022, the intrinsic value of the 4,256,000 outstanding options was $0.

Note 11 - Commitments and Contingencies 

On July 17, 2020, the Company entered into a Membership Agreement (See “Note 4 - Joint Venture Investment in HIE LLC ”). Under the terms and conditions of the Membership Agreement, in the event of a loss of capital of HIE, the Company shall contribute to repay 33.3% of the Origination Loan and Additional Contribution and of any losses of HIE.

In addition, the Company is obliged to repay 1/3 of the loan contributed by Eagle or 1/3 of the capital paid by Eagle according to the membership agreement. As of December 31, 2022, and 2021, the balances of loan payable to Eagle - JV partner totaled $442,251, and $707,654, respectively.

HIE had no operating activities for the six months ended December 31, 2022.