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, 2019, 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. 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 the brand name Half-Baked as it relates to certain categories of snacks. 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. The Company intends to license
this IP to operators in the cannabis edibles space and other related spaces.
Nightfood, Inc. is a better-for-you snack
company focused on manufacturing and distributing snacks with sleep-friendly formulations and ingredients. The national roll-out
of Nightfood ice cream, the first Nightfood product with significant mainstream retail distribution, began in 2019. The Company
has since secured distribution in multiple regional supermarket chains, and divisions of national supermarket chains, including
divisions of Kroger (Harris Teeter), and divisions of Albertsons (Jewel-Osco, Shaw’s and Star Market).
Nightfood ice cream won the 2019 Product
of the Year award in the ice cream category in a Kantar survey of over 40,000 consumers. The brand also won Best New Ice Cream
at the 2019 World Dairy Innovation Awards.
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
the coming years. In addition, Nestle, one of the largest food and beverage companies in the world, has stated that it believes
there is consumer demand for healthier snacks for consumers to eat before bed.
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
meaningful percentage of that consumer spend will move from conventional snacks over to nighttime specific, sleep-friendly 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 prominent 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 added 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 development of Nightfood ice cream. These experts work with Company management to ensure Nightfood products deliver on their
nighttime-appropriate, and sleep-friendly promises.
In February 2020, Nightfood was named
the Official Ice Cream of the American Pregnancy Association. Compared to regular ice cream, Nightfood is higher in calcium, magnesium,
zinc, protein and fiber, and contains less sugar, fewer calories, and is lower glycemic. Ease of digestion and the impact of nighttime
heartburn were also considerations that went in to Nightfood’s formulations. Management believes the designation and recommendation
from the American Pregnancy Association will expose the brand to a large base of new consumers and drive a volume of new demand
that will support an effective national roll-out of the ice cream line.
DEVELOPMENT PLANS
Nightfood has eight ice cream flavors
in ongoing production, and an additional ten products have been developed or in late stages of development. Management has also
done preliminary research on CBD infused ice cream, current FDA guidelines do not permit CBD to be used as an additive in conventional
food, and Management does not believe such products will be allowed under FDA guidelines for several quarters.
Nightfood is currently available in approximately 700 supermarket
locations, up from under 200 at the same time in 2019. The Company has secured commitments from additional supermarket chains that
will be launching Nightfood in coming weeks. Management believes that current marketing initiatives and existing sales velocity
trends, along with securing the designation of being the Official Ice Cream of the American Pregnancy Association all bode well
for securing additional supermarket chain distribution during calendar 2020.
Aggressive supermarket expansion could result
in expensive “slotting fees”. Slotting fees are normal and customary in the consumer goods industry and are fees that
certain retailers and distributors charge to introduce a new product into their inventory.
In some cases, slotting fees, also called “new
item placement fees” or “new item placement allowances” can be nominal. In other situations, slotting fees for
certain retail and distribution partners could run hundreds of thousands of dollars. Slotting fees are not an auction for shelf
(or freezer) space. One brand does not outbid others to get on shelf. Different retailers have established different standard slotting,
and that is simply the cost of doing business with those specific partners.
Many large retailers do not charge slotting
fees, but most do. The Management of any emerging brand could choose not to do business with retailers or distributors who charge
slotting fees. Such a strategy, while possible, would greatly limit the distribution footprint a brand could establish. Investors
should have the expectation that slotting fees will continue to be a significant expense over the next one to three fiscal years
as the brand moves towards its goal of national distribution.
Management had previously been working on initiatives relating to
distribution and partnerships in the hotel and hospitality vertical. With COVID-19 and its impact on the travel habits of consumers,
these initiatives have been impaired and put on hold at this time.
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.
CORONAVIRUS (COVID-19)
The outbreak of the novel coronavirus (COVID-19),
including the measures to reduce its spread, and the impact on the economy, cannot fully be predicted. Initial indications are
that there are somewhat offsetting factors relating to the impact on our Company. Industry data shows that supermarket sales are
up, with more people spending more time at home. Anecdotally and statistically, snacking activity is also up. And, industry sales
data also shows ice cream as one of the categories experiencing the largest increase with year over year growth averaging over
30% through a series of five one-week periods between March 15 and April 12, 2020 according to IRI data.
The outbreak did delay the introduction
of Nightfood into our two newest supermarket chains, Albertsons Divisions Jewel-Osco and Shaw’s and Star Market. As of the
time of this filing, we have been notified that Nightfood has now been introduced in all 343 of those stores. Initial timing called
for introduction in all locations in late March and early April. While a significant portion of the introductions occurred on time,
management estimates 25-50% of the locations were delayed by several weeks. The Company also pushed back by 8 weeks a major in-store
marketing initiative in partnership with News America Corp. It was announced in February that Nightfood coupon machines would be
installed in approximately 700 major supermarket locations. That initiative was originally scheduled to begin in mid March. In
fact, Nightfood coupon machines were installed in a number of supermarkets in mid-March before News America informed Management
that the rollout would have to be delayed. At the time of this filing, the installation of coupon machines had begun again (on May
16, 2020).
We have experienced no issues with supply
chain or logistics. Order processing function has been perfectly normal to date, and our manufacturers have assured us that their
operations are “business as usual” as of the time of this filing.
The offsetting factors are the impact of
the virus on the overall economy. Greater unemployment, recession, and other possible unforeseen factors could also have an impact.
While the virus also disrupted the sell-in
process for certain supermarket decision-makers, we have confirmed that our largest and most important target accounts do intend
to conduct new product reviews and category resets on a regular schedule going forward. Furthermore, in early May, we received
placement confirmation from two new supermarket chains with whom dialogue began in late 2019.
It is conceivable that certain retailers
may delay or skip an upcoming review opportunity which could cause us to have to wait longer to secure distribution in certain
chains.
It is impossible to know what the future
holds with regard to the virus, both for our company and in the broader sense. There are many uncertainties regarding the current
coronavirus pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including
how it will impact its customers, vendors, and business partners. While the pandemic did not materially adversely affect the Company’s
financial results and business operations in the Company’s first fiscal quarter ended March 31, 2020, we are unable to predict
the impact that COVID-19 will have on its financial position and operating results due to numerous uncertainties. The Company expects
to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments accordingly, if necessary.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIOD
ENDED
March 31, 2020 and March 31, 2019.
For the three months ended March 31,
2020 and March 31, 2019 we had Net Revenues (Net Revenues are defined as Gross Sales, less Slotting Fees) of $119,475 and
$159,575 respectively and incurred an operating loss of $867,427 and $294,174 respectively. The decrease in reported revenues
does not reflect a reduction in Gross Sales from the previous period. In the three months ended March 31, 2020, the
Company recorded Gross Sales of $281,284, the highest quarterly gross sales in company history. Accounting
standards require exclusion on the income statement of Gross Sales made to a customer to whom the Company is paying slotting
fees (slotting fees are fees occasionally charged by retailers and distributors to add a new product into their product
assortment). In those situations, the Gross Sales number is reduced, dollar for dollar, by the slotting fees, until the total
cost of the slotting is covered. These slotting fees do not appear on the income statement as an expense. Rather,
Slotting Fees, along with Sales Discounts, are applied against Gross Sales, resulting in Net Revenue, as shown below. The
netting of Gross Sales against slotting and sales discounts, as described and shown below, results in the Net Revenue number
at the top of the income statement. This is not a reflection of the amount of product shipped to customers, but rather
a function of the way certain sales are accounted for when those sales are made to customers who are charging slotting
fees.
The Company had an increase in cost of goods sold from $74,443
for the three months ending March 31, 2019 to $157,265 for the three months ending March 31, 2020 because we sold more than twice
as much ice cream to our customers (supermarket chains and distributors) this quarter than the same quarter last year, when measured
in Gross Sales. Selling, general, and administrative expenses decreased from $127,775 for the three months ending March 31, 2019
to $92,423 for the three months ending March 31, 2020. This category includes expenses such as web hosting, web services, freight,
warehousing, shipping, product liability insurance, and research & development of new products. Professional fees decreased
from $146,254 for the three months ending March 31, 2019 to $99,727 for the three months ending March 31, 2020.
For the three months ended March 31, 2019 compared
to the three months ended March 31, 2020, we also experienced changes in derivative liabilities from $1,377,160 to ($256,468) and
interest expense from $539,431 to $480,123, of which $539,531 and $439,507 respectively were entries directly related to the amortization
of debt discounts and deferred financing fees. For the three months ended March 31, 2020, the Company recorded “other expenses”
of $321 compared to $0 for the three months ended March 31, 2019.
For the nine months ended March 31, 2020 and
March 31, 2019 we had Net Revenues (Gross Sales net of Slotting) of $227,257 and $296,434 respectively and incurred an operating
loss of $1,460,629 and $1,000,549 respectively. The decrease in reported revenues does not reflect a reduction in Gross Sales
from the previous period. In the nine months ended March 31, 2020, the Company recorded Gross Sales of $666,439, the highest
Gross Sales through nine months in company history. Accounting standards require exclusion on the income statement
of Gross Sales made to a customer to whom the Company is paying slotting fees (slotting fees are fees occasionally charged by
retailers and distributors to add a new product into their product assortment). In those situations, the Gross Sales number
is reduced, dollar for dollar, by the slotting fees, until the total cost of the slotting is covered. These slotting fees
do not appear on the income statement as an expense. Rather, Slotting Fees, along with Sales Discounts, are applied against
Gross Sales, resulting in Net Revenue, as shown below. The netting of Gross Sales against slotting and sales discounts, as described
and shown below, results in the Net Revenue number at the top of the income statement. This is not a reflection of the amount
of product shipped to customers, but rather a function of the way certain sales are accounted for when those sales are made to
customers who are charging slotting fees.
The following tables summarize Gross Sales
for the nine months ended March 31, 2020 and 2019 and three months ended March 31, 2020 and 2019. Product sales are net of slotting
fees (a onetime fee charged by supermarkets in order to have the product placed on their shelves) and sales discounts.
|
|
Nine Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Gross product sales
|
|
$
|
666,439
|
|
|
$
|
296,434
|
|
Less:
|
|
|
|
|
|
|
|
|
Slotting fees
|
|
$
|
(428,650
|
)
|
|
$
|
-
|
|
Sales discounts
|
|
|
(10,532
|
)
|
|
|
-
|
|
Net Revenues
|
|
$
|
227,257
|
|
|
$
|
296,434
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Gross product sales
|
|
$
|
281,284
|
|
|
$
|
159,575
|
|
Less:
|
|
|
|
|
|
|
|
|
Slotting fees
|
|
$
|
(156,944
|
)
|
|
$
|
-
|
|
Sales discounts
|
|
|
(4,865
|
)
|
|
|
-
|
|
Net Revenues
|
|
$
|
119,475
|
|
|
$
|
159,575
|
|
The Company had an increase in cost of
goods sold from $129,634 for the nine months ending March 31, 2019 to $352,240 for the nine months ending March 31, 2020 because
we sold more than twice as much ice cream to our customers (supermarket chains and distributors) this quarter than the same quarter
last year, when measured in Gross Sales. Our income statement shows an increase in “Advertising and Promotional” from
$285,700 for the nine months ending March 31, 2019 to $673,814 for the nine months ending March 31, 2020. The Company invested
approximately $396,047 in marketing and distribution partnerships it determined would benefit operations for 2020 and beyond.
Due to circumstances, including the global coronavirus pandemic, it does not appear these distribution partnerships will be as
beneficial to the Company as envisioned when entered. As a result, the Company is reporting a one-time impairment expense of $500,000
in the reporting quarter. In April, 2020, the Company successfully negotiated a Debt Incentive Agreement with a creditor to whom
it owed $731,118, most of which is in conjunction with this impaired asset. This Debt Incentive Agreement provides for the elimination
of the entire debt should the Company make payments in calendar 2020 totaling $166,224 in cash, and approximately 4,000 pints
of ice cream. Because this reduction in debt is conditional, the full $731.118 is currently included in the liabilities section
of our balance sheet. Should the Company make the payments and retire the debt during calendar 2020, the Company would realize
a Gain on Extinguishment of Debt of approximately $560,000
Selling, general, and administrative expenses
decreased from $432,095 for the nine months ending March 31, 2019 to $295,107 for the nine months ending March 31, 2020. This
category includes expenses such as web hosting, web services, freight, warehousing, shipping, product liability insurance, and
research & development of new products. Professional fees decreased from $449,554 for the nine months ending March 31, 2019
to $366,725 for the nine months ending March 31, 2020.
For the nine months ended March 31, 2019 compared to the nine
months ended March 31, 2020, we also experienced changes in derivative liabilities from $596,033 to ($612,093) and interest expense
from $1,585,235 to $1,353,895, of which $1,495,485 and $1,270,943 respectively were entries directly related to the amortization
of debt discounts and deferred financing fees. For the nine months ended March 31, 2020, the Company recorded “other expenses”
of $39,618 compared to $779 for the nine months ended March 31, 2019.
Customers
For the both the three and nine month periods ending March 31, 2020,
the majority of revenues resulted from wholesale sales of Nightfood ice cream to wholesale distributors and direct to supermarkets.
One customer accounted for approximately 44.7% of Gross Sales. As the Company has largely shifted 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 significantly
more concentrated than in past years when the majority of revenue was from direct to consumer sales.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2020, we had cash on hand of $110,101, receivables
of $50,924 and inventory value of $285,879.
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 to
be able to fund our projected growth over the next several quarters. We believe that our current capitalization structure, combined
with ongoing increases in revenues, will enable us to successfully secure required financing 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, as well as exploring other capitalization strategies.
Because the business is new and has limited
operating history and 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 March 31, 2020, we incurred a net loss of $1,091,527 compared to $2,210,586 for the three
months ended March 31, 2019. 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 nine months ended March 31,
2020, net cash used in operating activities was $1,328,708 compared to $1,051,923 for the nine months ended March 31, 2019. Much
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 nine months ended March 31,
2020, net cash aggregating $333,333 was used in investing activities, compared to $0 for the nine months ended March 31, 2020.
During the nine months ended March 31, 2020,
net cash aggregating $1,742,000 was provided by financing activities, compared to $1,040,929 for the nine months ended March 31,
2019.
From our inception in January 2010 through
March 31, 2020, we have generated an accumulated deficit of approximately $15,961,108, compared to $13,219,059 from inception through
June 30, 2019. Assuming we raise additional funds and continue operations, we expect to incur additional operating losses during
the next two to three 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.
We intend to rely on the sale of stock
in private placements, and the issuance of new 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 30 months. We expect this investor to
continue to fund ongoing operations
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, and accrued on a monthly basis through June of 2018.
In June of 2018, and again in June of
2019, the Company entered into updated consulting agreements with Folkson, which included a modified compensation structure. Each
new Consulting Agreement contained the identical cash compensation allowance of $6,000 monthly. In addition, Folkson would earn
Warrants with a strike price of $.50 or $1 when the Company hit certain revenue milestones. All Warrants earned under Folkson’s
current agreement would convert into restricted shares, shall carry a cashless provision, and must be exercised within 90 days
of the filing of the 10Q or 10K on which such revenues are reported.
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.
On February 4, 2019, the Company entered into
a “Lock-Up” Agreement with Folkson whereby Folkson agreed to not transfer, sell, or otherwise dispose of any shares
of his NGTF stock during the next twelve months. As part of this agreement, Folkson received warrants to acquire 400,000 shares
of NGTF common stock at an exercise price of $.30 per share. All warrants in this agreement carried a twelve month term and a cashless
provision, and were to expire if not exercised within the twelve month term. Folkson did not have rights to transfer, sell, or
otherwise dispose of these warrants at any time, as there were no transfer rights provided for in the Agreement. The warrants that
were part of the February 2019 Lock Up Agreement expired unexercised, as the share price was below $.30 at the end of the Agreement.
On January 20, 2020, Folkson and the Company entered into a new
Lock-Up Agreement which went into effect on February 4, 2020 and is in place for twelve months, with identical financial terms
to the February 4, 2019 Agreement.
The foregoing accounts for the entirety of compensation earned by
Folkson since inception.
On February 6, 2019, the Registrant entered
into a “Leak-Out” Agreement with Peter Leighton, former affiliate and owner of 4,000,000 shares, which will restrict
Leighton’s ability to sell, transfer, or otherwise dispose of his shares above a certain, mutually agreed-upon monthly threshold.
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 accounts, 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, 2019, 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 March 31, 2020.
OFF BALANCE SHEET ARRANGEMENTS
None.