NOTE 11: INCOME TAXES

The Company has not filed federal or state corporate income tax returns for any fiscal year beginning with the fiscal year ended June 30, 2008. As a result of recurring losses, the Company recorded no net current or deferred income tax provision or benefit for the years ended June 30, 2026 and 2025.

The $2,923,004 gain on extinguishment of debt is cancellation-of-indebtedness income unless excluded. Exclusion under Internal Revenue Code Section 108 is available only to the extent of insolvency (or another statutory exclusion), and any excluded amount reduces tax attributes, principally net operating loss carryforwards, under Section 108(b). The related-party equitization with Mr. Lucky may be treated as a contribution to capital under Section 108(e)(6) rather than as taxable cancellation-of indebtedness income. The rate reconciliation presents the gain as a non-taxable permanent item and does not reduce the disclosed net operating loss carryforward for attribute reduction, because the insolvency exclusion and the related attribute reduction have not been quantified. The gross deferred tax asset may therefore be overstated. The asset is fully reserved, so quantification would not change net deferred tax assets, income tax expense, or net income. Management has not recorded an uncertain-tax-position liability for this item.

Components of Income (Loss) Before Income Taxes and Income Tax Provision (Benefit)

The Company conducts all of its operations in the United States and has no operations in any foreign jurisdiction. Accordingly, all of the Company’s income (loss) before income taxes was attributable to domestic operations, consisting of income before income taxes of $856,102 for the year ended June 30, 2026 and a loss before income taxes of $1,341,979 for the year ended June 30, 2025, with no foreign component in either year. The components of the income tax provision (benefit), disaggregated between current and deferred and among federal, state, and foreign jurisdictions, are as follows:

No current federal or state income tax was provided in either year because the Company generated a taxable loss in each year (see “Reconciliation of Book Income (Loss) to Taxable Loss” below), and no foreign income tax was provided because the Company has no foreign operations. The deferred income tax benefit attributable to the increase in the Company’s net operating loss carryforwards was fully offset by a corresponding increase in the valuation allowance, resulting in no net deferred income tax provision or benefit in either year.

Reconciliation of Statutory Rate to Effective Rate

A reconciliation of income tax benefit computed at the federal statutory rate to the Company's income tax provision is as follows:

Percentages are expressed as a percentage of the Company’s income before income taxes of $856,102 for the year ended June 30, 2026 and loss before income taxes of $1,341,979 for the year ended June 30, 2025. Amounts shown as benefits are presented as positive figures. Amounts in the rate reconciliation are presented in whole dollars, and percentages are rounded to one decimal place so that each column sums to the effective rate; the fiscal 2026 percentage for the non-taxable change in fair value of derivative liabilities (6.66%) is presented as 6.6% and the fiscal 2025 percentage for the non-taxable gain on extinguishment (11.35%) is presented as 11.4% for that purpose. The fiscal 2025 true-up of the prior-year net operating loss estimate of $56,638 represents the difference between the $403,000 increase in the deferred tax asset for net operating loss carryforwards during fiscal 2025 (from $8,416,000 at June 30, 2024 to $8,819,000 at June 30, 2025) and the $346,362 tax effect of the fiscal 2025 taxable loss presented above; the true-up was fully offset by a corresponding increase in the valuation allowance and had no effect on the income tax provision.

The unusually large percentage impact of individual reconciling items in the year ended June 30, 2026 results from the pre-tax book income reported in that year being driven primarily by a large non-taxable gain, rather than by ordinary operating results, relative to the magnitude of the underlying book-to-tax differences. As described in Note 9, the Company recognized a gain on extinguishment of debt of $2,923,004 during fiscal 2026, which more than offset an operating loss of $1,364,165 and produced pre-tax book income of $856,102. Because that gain is not taxable, it is removed in determining taxable income, with the result that the Company continues to generate a taxable loss of $1,565,619 for the year despite reporting book income.

Reconciliation of Book Income (Loss) to Taxable Loss

Income Taxes Paid

Income taxes paid, net of refunds received, were $0 for each of the years ended June 30, 2026 and 2025; no income taxes were paid to any federal, state, or foreign jurisdiction in either year.

Deferred Tax Assets

Significant components of the Company's deferred tax assets are as follows:

The deferred tax asset related to net operating loss (“NOL”) carryforwards was calculated using the federal statutory rate of 21% applied to the Company’s estimated cumulative federal NOLs of approximately $43.56 million as of June 30, 2026 and approximately $42.0 million as of June 30, 2025. The increase in the valuation allowance during the year ended June 30, 2026 was $328,780.

As of June 30, 2026, the Company had estimated federal NOL carryforwards of approximately $43.56 million. NOLs generated in tax years beginning before January 1, 2018 expire in various years through fiscal 2037. NOLs generated in tax years beginning after December 31, 2017 may be carried forward indefinitely but are subject to the 80% of taxable income limitation under the Tax Cuts and Jobs Act.

Critical Uncertainties Affecting NOL Realization

The Company’s ability to utilize its NOL carryforwards is subject to significant uncertainty for the following reasons:

Unfiled Tax Returns — The Company has not filed federal or state income tax returns since fiscal 2008. The failure to file returns may result in the assessment of penalties and interest, potential disallowance or limitation of NOL carryforwards, and examination by taxing authorities for all open years. When historical returns are filed, they will remain subject to examination for at least three years after the filing date.

Section 382 Ownership Changes — Internal Revenue Code Section 382 limits the annual utilization of NOL carryforwards following an ownership change (generally a greater than 50% change in ownership over a three-year testing period). The Company has experienced multiple ownership changes in the past and may experience additional ownership changes in the future as a result of equity issuances. Any such ownership change could materially limit the Company’s ability to use its NOL carryforwards.

Full Valuation Allowance — Because of the Company’s history of losses, the absence of taxable income in recent years, the unfiled-return status, and the potential Section 382 limitations, management has concluded that it is more likely than not that the deferred tax assets will not be realized. Accordingly, a full valuation allowance has been recorded against all deferred tax assets.

The Company has no uncertain tax positions that require recognition of a liability under ASC 740-10. No accrual has been recorded for potential penalties or interest related to the unfiled returns because the amount of any such exposure cannot currently be reasonably estimated. Management intends to develop a plan to become current with its federal and state filing obligations; however, as of the date of these financial statements no definitive timeline has been established.

The Company remains subject to examination by the Internal Revenue Service and state taxing authorities for all tax years beginning with fiscal 2008 due to the non-filing of returns.