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, 2016, as well as the other information set forth herein.
OVERVIEW
We
are a snack development, marketing and distribution company relying on our unique products, unique product positioning, and our
marketing expertise to develop and market nutritional/snack foods that are appropriate for evening snacking. Our first product
is the NightFood nutrition bar, currently available in two flavors (Cookies n’ Dreams, and Midnight Chocolate Crunch).
Management
believes consumer demand exists for better nighttime snacking options, and that a new consumer category consisting of nighttime
specific snacks will emerge in the coming years. This belief 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 $50B 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
Company is currently evaluating opportunities to offer snacks containing cannabidiol (also known as CBD). CBD is widely understood
and accepted to help promote better sleep and also reduce anxiety. The Company believes introducing CBD snacks could possibly
accelerate revenue growth and shorten the time to profitability.
A
NightFood Scientific Advisory Board was recently established. The first member of this advisory board is 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
September of 2017, the Company launched the new NightFood.com website. Designed and managed by NightFood E-commerce partner Common
Thread Collective, and run on the Shopify platform, the new site is both informational and transactional in nature. This site
is the centerpiece of the E-commerce launch the Company is conducting and will soon carry video content to support communication
of NightFood brand messaging and drive incremental transactions.
The
Company has reported record-breaking monthly direct-to-consumer revenues in three of the past 4 months, with the lone exception
being September as that was the month of the relaunch.
DEVELOPMENT
PLANS
The
company intends to evaluate opportunities to introduce other nighttime specific snack products in the snack formats already popular
with consumers such as cookies, chips, and ice cream.
We
believe the nutritional profile of any popular snack food can be evaluated and formulated for what we call “sleep-friendliness”,
and therefore optimized as a better nighttime snack option.
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
We
do not believe that our business will be seasonal to any material degree.
RESULTS
OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30, 2016.
For the three months ended September
30, 2017 and September 30, 2016 we had revenues of $36,442 and $2,464 respectively and incurred an operating loss of $
332,704 and $68,866 respectively. These increases were largely attributable to one-time consulting fees, as two long time
Company consultants were issued restricted shares subject to certain lock-up provisions valued at $135,000 during the three
month period, as well as expenses related to being a public company and investor relations
Inventory
As
of September 30, 2017, we had approximately $81,334 worth of product and packaging in inventory, compared to $95,865 worth of
product in inventory as of June 30, 2017.
Operating
Expenses
Operating expenses increased by $297,816 for the three month period ended September 30, 2017, from $71,330 for the three month period ended September 30,
2016. The increase was primarily due to an increase in consulting fees as two long time Company consultants were issued
restricted shares subject to certain lock-up provisions. At the time of issuance, the shares were valued at $.15 and $.24
respectively. In addition, the Company had an increase in expenditures related to investor relations and corporate
communications from previous quarters.
Customers
For
the three month period ending September 30, 2017, the majority of revenues resulted from sales of NightFood direct to consumer
through Amazon’s Fulfilled by Amazon program.
LIQUIDITY
AND CAPITAL RESOURCES
As
of September 30, 2017, we had cash on hand of $65,528 and inventory value of $81,334.
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, we believe
that our current capitalization structure, combined with the continued revenue increases, will enable us to achieve successful
financings to continue our growth. Because the business is new and has limited operating history and relatively few sales, no
certainty of continuation can be stated. Management is taking steps to raise additional funds to address its operating and financial
cash requirements to continue operations in the next twelve months. 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 September 30 2017, we incurred a net loss of $979,774 compared to
$74,167 for the three months ended September 30, 2016. This loss is largely a function of the way certain financing
activities are recorded, and does not represent actual operating losses.
During the three months ended September
30, 2017, net cash used in operating activities was $384,499 compared to $5,003 for the nine months ended September 30, 2016.
During the three months ended September
30, 2017, net cash aggregating $435,701 was provided by financing activities.
From our inception in January 2010 through
September 30, 2017, we have generated an accumulated deficit of approximately $4,360,995, compared to $3,381,221 from inception
through June 30, 2016. 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.
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 not formally been terminated by the parties, however, at this time, the consummation of this acquisition is
not likely.
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 is being 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. On October 23, 2017, we were
advised that our stock has been moved from the OTCQB to the OTCPink marketplace. We may not utilize the EPA facility during
the time quoted on the OTCPink. The Company does not believe the change in OTC Market tiers will have any material positive
or negative impact on Company operations. If, after 90 days, the Company determines that there is incremental value in being
listed on the OTCQB, it is possible that another tier change could occur at that time. Accordingly, future utilization of the
EPA is uncertain.
During calendar 2017, through the date of
this filing, the Company entered into convertible promissory notes with several lenders totaling approximately $1,100,000 Among
these notes were promissory notes totaling $120,000 with Black Forest which notes have been assigned to a third party that is
not affiliated with Black Forest. During the past several months, the Company has successfully consolidated most of its outstanding
notes with a single investor who,
although there is
no written commitment to do so, management believes will continue to provide funding for operations.
The
agreements with Black Forest required us to file a registration statement for the common stock underlying the EPA. Subject
to various limitations set forth in the EPA, Black Forest, after effectiveness of such registration statement, will be
required to purchase up to $5,000,000 worth of our common stock at a price equal to 85% of the market price as determined
under the EPA. The EPA provides for volume limitations on the amount of shares that Black Forest must purchase at any time
and provides that we will be paid for the common stock upon electronic delivery of the shares to Black Forest. To date we
have raised a net of $28,260.50 through the EPA. No assurance can be given as to the total amount we will raise through the
EPA.
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.
We
have entered into other notes as disclosed on our Current Reports on Form 8-K filed on September 20, 2017, and in our Annual Report
on Form 10K, filed on October 3, 2017.
Effective
May 6, 2015, the Company entered into a consulting agreement with Sean Folkson. The agreement is retroactive to January 1st, 2015.
In exchange for services provided to the Company by Folkson, the Company has agreed to pay Folkson $6,000 monthly. This compensation
expense started accruing on January 1, 2015, and will continue to accrue on a monthly basis until the company is in a position
to pay Folkson. As of the date of this filing, no payments have been made to Folkson against this accrual.
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, 2016,
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 nine months ended September 30, 2017.
OFF
BALANCE SHEET ARRANGEMENTS
None.