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, 2020, 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. In early 2019, the Company proactively secured trademark protection for the Nightfood brand in several
strategic international markets.
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. In recent years, CEO’s and other executives from major consumer goods conglomerates such as Nestle,
PepsiCo, Mondelez, and Kellogg’s have commented on consumer nighttime snack habits and the opportunity that exists in solving
this problem for the marketplace.
In addition to those high-profile public statements, significant
strategic interest in the nighttime and sleep-friendly nutrition space has been directly affirmed to Management in recent exploratory
discussions initiated by a certain global food and beverage conglomerate. Management anticipates that the multi-national food and
beverage companies will necessarily be drawn to the category Nightfood is pioneering because of the volume of nighttime snacking
that occurs globally, and the importance of quality sleep to consumers around the world. Growth within the category that Nightfood
is creating can bring competitive risk, but also the opportunity that comes with being the pioneer of a growing market segment
and the strategic value that the Nightfood brand could deliver to a global partner with significant resources.
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 could 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 nine 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. While Management has interest in such a development, it is likely such products will not be allowed under FDA guidelines
for several quarters.
Nightfood is currently available in over
750 supermarket locations, and Management is expecting a meaningful increase in points of distribution in early 2021. 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 expansion of the Nightfood brand.
Aggressive supermarket expansion could
result in additional “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 available assortment.
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 investment over the next one to three fiscal
years as the Nightfood brand moves towards its goal of national distribution.
Management had previously invested in
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
There is a significant amount of
seasonality in the ice cream industry, with summer months historically delivering the highest consumption. As an early-stage
and growing brand, it is unknown how seasonality will impact our brand at this time.
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. Indications
to date are that there are somewhat offsetting factors relating to the impact on our Company. Industry data shows that supermarket
sales remain up, with more people spending more time at home. Anecdotally and statistically, snacking activity is also up while
consumers are reporting a decrease in sleep quality and sleep satisfaction. 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 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. Research indicates that consumers are less likely to try new brands during economic recession and stress, returning to
value and legacy brands.
With consumers generally making fewer
shopping trips, while buying more on those occasions and reverting back to more familiar brands, certain brand-launch marketing
tactics, such as in-store displays and product sampling, are either impaired or impermissible. So, while overall night snacking
demand is up, and consumer need/desire for better sleep is also stronger, driving consumer trial and adoption has been more difficult
and expensive during these circumstances.
From both public statements, and recent
exploratory meetings conducted between Nightfood Management and certain global food and beverage conglomerates, it has been affirmed
to Management that there is increased strategic interest in the nighttime nutrition space as a potential high-growth opportunity, partially
due to recent declines in consumer sleep quality and increases in at-home nighttime snacking.
We have experienced no major issues with
supply chain or logistics. Order processing function has been normal to date, and our manufacturers have assured us that their
operations are “business as usual” as of the time of this filing.
While the virus temporarily disrupted
the category review schedules and sell-in process for certain supermarket decision-makers during the spring and early summer,
most major accounts seem to be back on schedule and are conducting business as usual with regard to review cycles. Meetings are
now conducted virtually, and product samples are shipped to decision-makers. While some retailers told us they were limiting new
item additions due to changes in consumer shopping behavior, others have confirmed that they view the increase in at-home entertainment
and night snacking as a plus for Nightfood products.
It is possible that the fallout from the
pandemic could make it more difficult in the future for the Company to access required growth capital, possibly rendering us unable
to meet certain debts and expenses.
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. It is difficult to know if the pandemic has materially impacted
the results of operations, and we are unable to predict the impact that COVID-19 will have on our 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 MONTH PERIOD ENDED
September 30, 2020 and
2019.
For the three months ended September 30, 2020 and 2019 we had
Net Revenues (Net Revenues are defined as Gross Sales, less Slotting Fees, Sales Discounts, and certain other revenue reductions)
of $126,983 and $46,497 respectively and incurred an operating loss of $536,043 and $294,777 respectively.
In the three months ended September 30,
2020, the Company recorded Gross Sales of $319,324, 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 following tables summarize Gross Sales
for the three months ended September 30, 2020 and 2019. Product sales are net
of slotting fees (a typically one-time fee charged by supermarkets in order to have the product placed on their shelves) and sales
discounts.
|
|
Three Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Gross product sales
|
|
$
|
319,324
|
|
|
$
|
210,383
|
|
Less:
|
|
|
|
|
|
|
|
|
Slotting fees
|
|
$
|
(134,222
|
)
|
|
$
|
(160,000
|
)
|
Sales discounts, promotions, and other reductions
|
|
|
(58,119
|
)
|
|
|
(3,886
|
)
|
Net Revenues
|
|
$
|
126,983
|
|
|
$
|
46,497
|
|
The Company had an increase in cost of
goods sold from $146,500 for the three months ending September 30, 2019 to $229,696 for the three months ending September 30, 2020
because we sold significantly more 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 198,270 for the three months ending September 30, 2019 to $185,289 for the three months ending September
30, 2020. This increase is due to the way certain marketing expenses were accounted for. Further,
as discussed on above footnote 3, due to the reclassification $396,250 expenses was reversed and set off with the advertising
costs incurred during 2019. 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 COVID-19 coronavirus pandemic, it does
not appear these distribution partnerships will be as beneficial to the Company as envisioned when entered. 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
increased from $101,834 for the three months ending September 30, 2019 to $118,167 for the three months ending September 30, 2020.
This category includes expenses such as web hosting, web services, freight, warehousing, shipping, product liability insurance,
investor relations and research & development of new products. Professional fees increased from $124,234 for the three months
ending September 30, 2019 to $168,668 for the three months ending September 30, 2020. $65,700 of the professional fees in the
current quarter are the result of accounting for 500,000 warrants issued to a Company consultant with a strike price of $.50.
For the three months ended September 30, 2019
we experienced an increase in Loss on extinguishment of debt upon notes conversion of $188,397 compared to $0 in the three months
ended September 30, 2020. For the three months ended September 30, 2019 compared to the three months ended September 30, 2020,
we also experienced changes in derivative liabilities from ($190,062) to ($207,524) and total interest expense from $218,803
to $407,783, of which $382,267 and $322,739 respectively were entries directly related to the amortization of debt discounts and
deferred financing fees related to loss on extinguishment of debt. For the three months ended September 30, 2020, the Company
recorded “other expenses” of $19,877 compared to $0 for the three months ended September 30, 2019. This was interest
expenses related to loss on extinguishment of debt.
Customers
During the three months ended September 30,
2020, the Company had one customer account for approximately 39% of the gross sales. One other customer accounted for approximately
21% of gross sales, and two other customers accounted for over 9% of gross sales. During the three months ended September 30, 2019,
one customer accounted for approximately 34% of the gross sales while two other customers accounted for over 10% of gross sales. As
the Company continues to grow its distribution base, it is anticipated that revenue distribution will become less concentrated.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2020, we had cash on hand
of $8,360, receivables of $65,053 and inventory value of $213,384.
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 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 September 30, 2020, we incurred a net loss of $943,824 compared to $513,580 for the three months ended September
30, 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 three months ended September 30, 2020, net cash used
in operating activities was $368,159 compared to net cash provided of $26,916 for the three months ended September 30, 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 three months ended September
30, 2020, net cash of $0 was used in investing activities, compared to $1,000,000 for the three months ended September 30, 2019.
During the three months ended September 30, 2020, net cash aggregating
$178,897 was provided by financing activities, compared to $1,050,000 for the three months ended September 30, 2019.
From our inception in January 2010 through
September 30, 2020, we have generated an accumulated deficit of approximately $18,574,946, compared to $17,631,122 from inception
through June 30, 2020. 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, such as when the Company records its
first quarter with revenue greater than $1,000,000. 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, 2020, 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 September 30, 2020.
OFF BALANCE SHEET ARRANGEMENTS
None.