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”. This subsidiary was created during
the three months ended March 31, 2018 and its operations have 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. MJ Munchies also acquired HalfBaked.com.
In April, 2018, MJ Munchies entered into an initial brand licensing agreement for the Half-Baked mark with a licensed manufacturer
of THC-infused edibles in the State of California under which, the licensee will manufacture and distribute Half-Baked branded
THC-infused cookies in California. Management views this as the first major step towards creating a nationally licensed brand of
edibles in the marijuana space.
NightFood, Inc. is a snack company focused
on manufacturing and distribution of nutritional/snack foods that are appropriate for evening snacking. NightFood’s 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 $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.
A NightFood Scientific Advisory
Board was recently established. 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. These two experts work with Company management to ensure Nightfood products deliver on
their nighttime-appropriate, and sleep-friendly promises. This includes ongoing evaluation and evolution of the existing line
of Nightfood bars, as well as the current development of Nightfood ice cream, and other future products the Company
may develop.
With a website and video assets created
by Common Thread Collective, and ongoing marketing and growth being managed by The Getner Group, NightFood has recently reported
significant growth in direct-to-consumer sales through the NightFood.com website and Amazon.
DEVELOPMENT PLANS
The NightFood brand continues to focus
on online revenue growth at this time. NightFood intends to launch gluten-free versions of NightFood nutrition bars during 2018.
It is also expected that additional flavors will be launched in a similar timeframe. Towards the end of calendar 2018, with new
flavors available, and what is expected to be a substantial and growing revenue base, the Company intends to begin revisiting a
retail rollout for NightFood bars.
The Company is also working towards the
launch of NightFood ice cream in the latter half of 2018. A major regional ice cream distributor is prepared to bring the NightFood
ice cream line to market, provided the product meets certain taste and nutritional standards, which management is confident it
will.
MJ Munchies continues to advance the Half-Baked
snack line through product R&D and its various industry relationships. Developments are occurring rapidly, as the Company recently
announced it had completed U.S. Trademark application for the brand name Half-Baked as it relates to various packaged snacks and
baked goods. In addition, the Company acquired HalfBaked.com in February of 2018. On April 20, 2018, the Company entered into its
first licensing agreement, whereby the Half-Baked trademark was licensed to a manufacturer of THC-infused edibles in the state
of California. The Company intends to license the Half-Baked brand nationwide, on a state-by-state basis as existing marijuana
regulations allow. Management believes this trademark and domain will prove to be very valuable in the coming months and years,
as the market for all things related to cannabis and marijuana continues to develop and mature.
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
AND NINE MONTH PERIOD ENDED
March 31, 2018 and March 31, 2017.
For the three months ended March 31, 2018
and March 31, 2017 we had revenues of $27,732 and $13,098 respectively and incurred an operating loss of $654,485 and $258,183
respectively. The revenue increases were the result of a Company focus on direct to consumer sales through the new NightFood.com
website and having NightFood products listed on Amazon. A result of this increase in sales is an increase on cost of goods sold
from $4,987 for the three months ending March 31, 2017 to $16,378 for the three months ending March 31, 2018. As part of the direct-to-consumer
initiative, the Company chose to increase spending on advertising and related expenses, resulting in an increase from $6,944 for
the three months ending March 31, 2017 to $30,459 for the three months ending March 31, 2018. SG&A increased from $61,630 for
the three months ending March 31, 2017 to $125,561 for the three months ending March 31, 2018, and this increase was largely attributable
to the management and scaling of our direct-to-consumer business, along with an increase in investor relations activities.
Revenues of $27,732 for the three months ended
March 31, 2018 were significantly lower than $72,284 in revenues for the quarter ending December 31, 2017. This is due to the fact
that the Company was without sellable inventory for the majority of this reporting quarter. New inventory ordered in early November
of 2017 was manufactured and delivered to the warehouse in early March, 2018, at which time the Company was able to resume regular
sales to consumers.
This five month lead time is not customary
in the industry, and the Company had never experienced such extended lead times on any of its prior production runs, all with the
same manufacturer. Management is currently in active discussions with nutrition bar manufacturers that guarantee shorter
lead times, can provide certified gluten-free product, and allow for smaller minimum order quantities, which would make it easier
for the Company to accomplish its goal of expanding the Nightfood product line.
Professional
fees increased from $197,720 for the three months ending March 31, 2017 to $509,819 for the three months ending March 31, 2018,
with much of this increase resulting from expenses relating to capital raises to fund operations and successful refinancing of
preexisting Company debt, as well as the booking of shares used to compensate consultants at a much higher share price than the
previous year, due to significantly higher market prices. For the three months ended March 31, 2018 compared to the three months
ended March 31, 2017, we also experienced changes in derivative liabilities from $0 to (-$100,104) and interest expense from
$4,922 to $351,919. For the three months ended March 31, 2018, the Company recorded other expenses of $416,608 compared to $0 for
the three months ended March 31, 2017. These other expenses consist of non-cash items primarily of $627,235 in amortization of
debt discount and deferred financing fees. These are all a direct result of the Company tapping into available sources of capital
to begin on the path of significant revenue growth and investor awareness. Although no assurances can be given, management believes
that the positive results of these efforts will lead to more efficient sources of capital in the form of more favorable terms from
existing investors, and allow the Company to grow the NightFood brand and revenues in a meaningful way, ultimately increasing shareholder
value.
For the nine months ended March 31, 2018
and March 31, 2017 we had revenues of $136,458 and $23,605 respectively and incurred an operating loss of $1,522,326 and $411,383
respectively. The revenue increases were the result of a Company focus on direct to consumer sales through the new NightFood.com
website and having NightFood products listed on Amazon. A result of this increase in sales is an increase on cost of goods sold
from $20,233 for the nine months ending March 31, 2017 to $101,807 for the nine months ending March 31, 2018. As part of the direct-to-consumer
initiative, the Company chose to increase spending on advertising and related expenses, resulting in an increase from $8,002 for
the nine months ending March 31, 2017 to $132,831 for the nine months ending March 31, 2018. SG&A increased from $79,661 for
the nine months ending March 31, 2017 to $441,545 for the nine months ending March 31, 2018, and this increase was largely attributable
to the management and scaling of our direct-to-consumer business, along with an increase in investor relations activities. Professional
fees increased from $327,092 for the nine months ending March 31, 2017 to $982,601 for the nine months ending March 31, 2018,
with much of this increase resulting from expenses relating to capital raises to fund operations and successful refinancing of
preexisting Company debt, as well as the booking of shares used to compensate consultants at a much higher share price than the
previous year, due to significantly higher market prices. For the nine months ended March 31, 2018 compared to the nine months
ended March 31, 2017, we also experienced increases in derivative liabilities from $0 to $150,361 and interest expense from
$4,922 to $790,831. For the nine months ended March 31, 2018, the Company recorded other expenses of $1,279,013 compared to $0 for
the nine months ended March 31, 2017. These other expenses consist of non-cash items primarily of $1,240,832 in amortization of
debt discount and deferred financing fees. These are all a direct result of the Company tapping into available sources of capital
to begin on the path of significant revenue growth and investor awareness. Although no assurances can be given, management believes
that the positive results of these efforts will lead to more efficient sources of capital in the form of more favorable terms
from existing investors, and allow the Company to grow the NightFood brand and revenues in a meaningful way, ultimately increasing
shareholder value.
Customers
For the three month period ending March
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 a result, no individual customer accounted for any significant percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2018, we had cash on hand
of $8,298 and inventory value of $125,851.
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 received verbal commitment from
Eagle Equities that Eagle will 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. The Company
plans to continue to take advantage of convertible notes as a financing vehicle, as it allows for todays operating capital to be
either repaid, or converted to equity at future valuations, which management views as beneficial to shareholders. 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 nine months ended March 31, 2018, we incurred a net loss of $3,752,048 compared to $422,334 for the
nine months ended March 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 nine months ended March 31,
2018, net cash used in operating activities was $1,537,248 compared to $180,602 for the nine months ended March 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 nine months ended March 31,
2018, net cash aggregating $1,531,220 was provided by financing activities. Much of this financing activity related to a restructuring
of pre-existing debts, and consolidation of the majority of debt with a single investor at a lower interest rate and similar conversion
terms.
From our inception in January 2010 through
March 31, 2018, we have generated an accumulated deficit of approximately $7,133,269, compared to $3,381,221 from inception through
June 30, 2017. 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 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, the Company determines that there is incremental
value in being listed on the OTCQB, it is possible that another tier change could occur in the future. Accordingly, future utilization
of the EPA is uncertain.
During fiscal 2018, through the date of
this filing, the Company entered into convertible promissory notes with several lenders totaling approximately $1,741,000 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, has verbally committed to continue to provide
ongoing funding for brand growth and new product introductions.
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, each
of which has been disclosed on our Current Reports on Form 8-K, 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, six 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, 2017, 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 March 31, 2018.
OFF BALANCE SHEET ARRANGEMENTS
None.