ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD
LOOKING STATEMENT INFORMATION
Certain
statements made in this Quarterly Report on Form 10-Q involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate
strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,”
“expect,” “forecast,” “may,” “should,” “plan,” “project,”
“will” and other words of similar meaning. The forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments
with respect to, among other things, future economic, competitive and market conditions, technological developments related to
business support services and outsourced business processes, and future business decisions, all of which are difficult or impossible
to predict accurately and many of which are beyond our control.
Although
we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report on Form 10-Q will
prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly
in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us
or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth under
the headings “Business” and “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017, as well as the other information set forth herein.
OVERVIEW
NightFood
Holdings runs two distinct operating companies, each serving a different market segment with different products.
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”.
To date, this subsidiary and its operations have had 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.
The Company also applied for, and was granted, trademark protection in the state of California for the name Half-Baked for snacks
containing THC. In addition, The Company acquired HalfBaked.com, and has secured other intellectual property in its portfolio,
including a US Patent Application related to a proprietary ingredient it has developed for use in THC-infused edibles.
NightFood,
Inc. is a snack company focused on manufacturing and distribution of Nightfood nighttime ice cream. With a national rollout currently
underway, product will begin appearing on shelves across the country in February of 2019.
On
February 7, 2019, it was announced that the Nightfood ice cream line was voted best new ice cream of 2019 in a survey of over
40,000 consumers. Global market research giant Kantar conducted the survey, and the result was that Nightfood won the prestigious
Product of the Year award. As announced in a recent news release, the benefits of this award include millions of dollars in publicity
through national and regional media outlets, enhanced consumer perception, and stronger consumer trial at retail.
Management
is confident consumer demand exists for better nighttime snacking options, and that they are pioneering a new consumer category
consisting of nighttime specific snacks. This confidence 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.
The
Nightfood Scientific Advisory Board is made up of leading sleep and nutrition experts, who help Nightfood deliver on its 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 Education & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. 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.
DEVELOPMENT
PLANS
With
its 8 flavors of Nightfood ice cream currently rolling into retail, Nightfood has already begun identifying new flavors for development,
and sourcing ingredients so that it may extend the line with more gluten free flavors, and eventually introduce dairy-free options
as well.
MJ Munchies recently signed a Letter of
Intent to enter into a licensing agreement with Global Consortium, Inc., a company currently in the business of manufacturing
and distributing marijuana-infused edible products. Under this proposed agreement, Global Consortium would be granted the rights
to manufacture and distribute products under Munchies’ Half-Baked™ mark. Global Consortium reported over $600,000
in sales in the quarter ending September 30, 2018 and reported selling over $2,000,000 in CBD products for 2018. Subsidiary
Infused Edibles has what is believed to be the broadest selection of infused product SKUs. As of the date of this filing,
the two Parties are working together to finalize and execute the licensing agreement.
INFLATION
Inflation
can be expected to have an impact on our operating costs. A prolonged period of inflation could cause a general economic downturn
and negatively impact our results. However, the effect of inflation has been minimal over the past three years.
SEASONALITY
Because
management expects rapid growth in terms of both distribution and sales velocity in the coming months and years, we do not believe
that our business will be seasonal to any material degree until full national penetration has been established.
RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTH PERIOD ENDED
December
31, 2018 and December 31, 2017.
For
the three months ended December 31, 2018 and December 31, 2017 we had revenues of $34,671 and $72,284 respectively and incurred
an operating loss of $454,411 and $1,238,738 respectively. The revenue decrease is the result of a Company shift away direct to
consumer sales of Nightfood bars through the NightFood.com website and Amazon, as we chose to reallocate resources for the national
rollout of Nightfood ice cream. A result of this decrease in sales is a decrease in cost of goods sold from $59,403 for the three
months ending December 31, 2017 to $14,533 for the three months ending December 31, 2018. The Company chose to decrease spending
on advertising and related expenses. While our income statement shows an increase in “Advertising and Promotional”
from $60,548 for the three months ending December 31, 2017 to $76,983 for the three months ending December 31, 2018, it’s
important to note that paid advertising and consumer promotional expense decreased from $52,513 for the three months ending December
31, 2017 to $24,417 for the three months ending December 31, 2018. Making up the majority of the $76,983 for this most recent
quarter was the design and production set up costs for the new ice cream packaging, which has tested exceptionally well with consumers,
and we believe will be a tremendous asset as we grow. SG&A decreased from $172,644 for the three months ending December 31,
2017 to $128,836 for the three months ending December 31, 2018, and this decrease was largely attributable to the reduction in
resources put towards direct to consumer sales of Nightfood bars in preparation for the national ice cream rollout.
For the six months ended December 31,
2018 and December 31, 2017 we had revenues of $136,859 and $108,726 respectively and incurred an operating loss of $972,011 and
$2,218,513 respectively. The revenue increase was the result of greater revenue from direct to consumer sales of Nightfood bars
through the NightFood.com website and Amazon, in Q1. Despite the increase in sales, Cost of Product Sold actually decreased from
$85,429 for the six months ended December 31, 2017 to $55,191 for the six months ended December 31, 2018 due to a shift in the
balance of sales between Nightfood.com and Amazon, and how expenses related to selling on Amazon were recorded. “Advertising
and Promotional” increased from $102,372 for the six months ending December 31, 2017 to $180,423, with much of this increase
accounted for by expenses related to the design and production set up costs for the new ice cream packaging, which has tested
exceptionally well with consumers, and we believe will be a tremendous asset as we grow. SG&A decreased from $315,984 for
the six months ending December 31, 2017 to $304,320 for the six months ending December 31, 2018.
Professional fees decreased from $215,542 for
the three months ending December 31, 2017 to $81,529 for the three months ending December 31, 2018. For the three months ended
December 31, 2018 compared to the three months ended December 31, 2017, we also experienced changes in derivative liabilities from
($216,263) to $147,546 and interest expense from $490,403 to $190,936. For the three months ended December 31, 2018, the Company
recorded other expenses of $0 compared to $463,146 for the three months ended December 31, 2017. This decrease is attributable
to the fact that there was no need to restructure or consolidate debt in the current quarter. As a direct result of the prior successful
consolidation, Management has been able to secure ongoing operating capital to launch new initiatives such as the Half-Baked line
of cannabis edibles, and Nightfood ice cream, while minimizing dilution associated with the use of convertible notes from multiple
lenders. Although no assurances can be given, management believes that the positive results of these efforts will lead to more
efficient sources of capital, and allow the Company to grow operations and revenues in a meaningful way, ultimately increasing
shareholder value.
Professional fees decreased from $472,782 for
the six months ending December 31, 2017 to $303,300 for the six months ending December 31, 2018. For the six months ended December
31, 2018 compared to the six months ended December 31, 2017, we also experienced changes in derivative liabilities from ($781,127)
to $250,465 and interest expense from $1,026,621 to $444,441. For the six months ended December 31, 2018, the Company recorded
other expenses of $779 compared to $651,778 for the six months ended December 31, 2017. This decrease is attributable to the fact
that there was no need to restructure or consolidate debt in the current fiscal year. As a direct result of the prior successful
consolidation, Management has been able to secure ongoing operating capital to launch new initiatives such as the Half-Baked line
of cannabis edibles, and Nightfood ice cream, while minimizing dilution associated with the use of convertible notes from multiple
lenders. Although no assurances can be given, management believes that the positive results of these efforts will lead to more
efficient sources of capital, and allow the Company to grow operations and revenues in a meaningful way, ultimately increasing
shareholder value.
Customers
For
the three month period ending December 31, 2018, the majority of revenues resulted from sales of NightFood direct to consumer
through the NightFood.com website and Amazon’s Fulfilled by Amazon program. As the Company continues to shift away from
direct-to-consumer e-commerce, and towards a wholesale approach for the national ice cream rollout, it is expected that future
revenues will be more concentrated.
LIQUIDITY
AND CAPITAL RESOURCES
As
of December 31, 2018, we had cash on hand of $81,487 and inventory value of $96,913.
The
Company has limited available cash resources and we do not believe our cash on hand will be adequate to satisfy our ongoing working
capital needs. The Company is continuing to raise capital through private placement of our common stock and through the use of
convertible notes to finance the Company’s operations, of which it can give no assurance of success. However, the Company
has a strong ongoing relationship with Eagle Equities and we expect Eagle to continue to fund our projected growth over the next
several quarters at terms that have become more favorable to the Company due to certain milestones management has achieved. We
believe that our current capitalization structure, combined with ongoing increases in revenues, will enable us to achieve successful
financings to continue our growth. In the short term, the Company plans to continue to take advantage of convertible notes as
a financing vehicle, as it allows for today’s operating capital to be either repaid, or converted to equity at future valuations,
which management views as beneficial to shareholders.
With
the recent excitement surrounding the national launch of Nightfood ice cream, Management has received overtures from more traditional
equity capital sources. However, Management does not believe accepting equity capital at current valuations is in the best interest
of shareholders, in light of the rapid growth in distribution and revenue that are expected in the coming months. Management has
made these investors aware that it does intend to accept equity funding at acceptable valuations at some future point, and will
use that capital to clear debt from the balance sheet, and fund ongoing expansion and growth.
Because
the business is new and has limited operating history and relatively few sales, no certainty of continuation can be stated. Management
has devoted a significant amount of time in the raising of capital from additional debt and equity financing. However, the Company’s
ability to continue as a going concern is dependent upon raising additional funds through debt and equity financing and generating
revenue. There are no assurances the Company will receive the necessary funding or generate revenue necessary to fund operations.
Even
if the Company is successful in raising additional funds, the Company cannot give any assurance that it will, in the future, be
able to achieve a level of profitability from the sale of its products to sustain its operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on recoverability and reclassification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Since
our inception, we have sustained operating losses. During the three months ended December 31, 2018, we incurred a net loss of
$454,411 compared to $1,238,738 for the three months ended December 31, 2017. Much of this loss is largely a function of the way
certain financing activities are recorded, and does not represent actual operating losses.
During the six months ended December 31,
2018, net cash used in operating activities was $619,882 compared to $856,917 for the six months ended December 31, 2017. The
majority of what shows as “net cash used in operating activities” is related to non-cash items associated with to
the ongoing capitalization of the Company during the reporting period.
During
the six months ended December 31, 2018, net cash aggregating $652,928 was provided by financing activities, compared to $854,914
for the three months ended December 31, 2017.
From
our inception in January 2010 through December 31, 2018, we have generated an accumulated deficit of approximately $9,592,725,
compared to $8,620,714 from inception through June 30, 2018. Assuming we raise additional funds and continue operations, we expect
to incur additional operating losses during the next one to two quarters and possibly thereafter. We plan to continue to pay or
satisfy existing obligation and commitments and finance our operations, as we have in the past, primarily through the sale of
our securities and other forms of external financing until such time that we are able to generate sufficient funds from the sale
of our products to finance our operations, of which we can give no assurance.
On
November 25, 2016, the company entered into a material definitive agreement. On that date, the company executed and delivered
a Plan of Reorganization Including Option to Acquire (the “Plan”) by and among the Registrant, Hook Group, LLC (“Hook”)
and Suffield Foods. LLC (“Suffield”). The Plan contemplates the Registrant acquiring an equity interest in and potentially
merging Hook and its subsidiary Suffield with and into a wholly owned subsidiary of the Registrant. As of the date of this filing,
the agreement has been formally terminated by the Registrant.
As of February 8, 2017, we entered into
two agreements with Black Forest, an Equity Purchase Agreement (the “EPA”) and a Registration Rights Agreement (the
“RRA”). The two agreements were filed as exhibits to the Registrant’s Current Report on Form 8-K dated February
8, 2017, and this Registration Statement was filed in order for us to fulfill our obligations under the RRA. The following summary
is qualified in its entirety by reference to such exhibits to our Form 8-K. On August 24, 2017, the Company issued its first and,
to date, only “put notice” to Black Forest and delivered Black Forest 264,085 shares of common stock in exchange for
$30,000.
We
intend to rely on the sale of stock in private placements, and the issuance of more debt, to fund our operations. If we are unable
to raise cash through the sale of our stock, we may be required to severely restrict our operations. The Company has received
several tranches of capital from a friendly institutional investor, who has been our primary source of capital for the last 17
months. We expect this investor to continue to fund ongoing operations, as well as the development and launch of new products
and intellectual property for Nightfood and MJ Munchies.
Effective
May 6, 2015, the Company entered into a consulting agreement with Sean Folkson. The agreement was retroactive to January 1st,
2015. In exchange for services provided to the Company by Folkson, the Company agreed to pay Folkson $6,000 monthly. This compensation
expense started accruing on January 1, 2015. On June 6, 2018, The Company and Folkson agreed to an extension of the agreement,
which would run from July 1, 2018 through June 30, 2019. The monthly compensation remained at $6,000 in monthly consulting fees.
This new Agreement also contained additional compensation in the form of bonuses which will be earned by Folkson when the Company
reports its first quarter with revenues in excess of $1,000,000. Folkson will earn an additional bonus when the Company reports
its first quarter with revenues in excess of $3,000,000. Upon the filing of the first quarter with revenues in excess of $1,000,000,
Folkson shall earn 1,000,000 warrants with a strike price of $.50. Upon the filing of the first quarter with revenues in excess
of $3,000,000, Folkson shall earn 3,000,000 warrants with a strike price of $.50.
On
October 12, 2018, Folkson opted to purchase 400,000 shares of common stock at $.30 per share, by exercising warrants. To make
this purchase, Folkson used $120,000 in accrued NightFood consulting fees.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated
financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation
of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis,
we evaluate past judgments and our estimates, including those related to allowance for doubtful, allowance for inventory write-downs
and write offs, deferred income taxes, provision for contractual obligations and our ability to continue as a going concern. We
base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Note
2 to the consolidated financial statements, presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018,
describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. There
were no significant changes in our critical accounting estimates during the three months ended December 31, 2018.
OFF
BALANCE SHEET ARRANGEMENTS
None.