Enter Gato Grottoes. Go to the Item Shop and talk to Niccolo. Agree to help him.
Go to the Gato Grottoes Map and head to the Cave. Then go directly to the Waterfall. Niccolo will collect some stuff in this area. Leave this area by taking the Right Path. Go back into the Waterfall Area and stand on the log for about 30-60 seconds so that a Faerie appears. Talk to it. Niccolo will reward you with Lucre, a Bun and the Broken Doll AF.
Upon Completion: Return home, talk to Lil' Cactus, go downstairs (watch him write the Event on the leaf), and go back upstairs to save your game before continuing.