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, and future business
decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In furtherance of
the foregoing, while we believe that our previously disclosed planned hotel roll-out is expected to commence during the fiscal quarter
ending March 31, 2022, we can give no assurance that in fact the roll-out will not be delayed further, or that the roll-out will occur
in the manner and scope we are contemplating or at all. As of the date of filing of this Quarterly Report on Form 10-Q, we have not received
any definitive purchase orders with respect to the hotel roll-out.
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, 2021, as well as the other information set forth herein.
OVERVIEW
Nightfood solves the nighttime snacking problem.
Research indicates that humans are biologically
hard-wired to load up on sweets and fats at night. Loading a surplus of fuel into the body before the long nightly fast is believed to
be an outdated survival mechanism from our hunter-gatherer days. Unfortunately, while modern consumers know this type of consumption isn’t
necessary for survival, willpower also weakens at night, so consumers are more likely to succumb to these cravings for excess “survival
calories”.
As a result, over 85% of adults report snacking
regularly between dinner and bed, resulting in an estimated 700 million nighttime snack occasions weekly, and an annual spend on night
snacks of over $50 billion. Because of our hard-wired evolutionary preferences for calorie-dense choices that increase the odds of short-term
survival, the most popular nighttime snacks are ice cream, cookies, chips, and candy. These are all understood to be generally unhealthy.
They can also impair sleep quality.
In recent years, billions of dollars of consumer
spend have shifted to better-for-you versions of consumers’ favorite snacks. But none of those products were specifically formulated
to nutritionally support better sleep. Nightfood snacks are not only formulated to be better-for-you, but they’re also formulated
by sleep experts and nutritionists to provide a better nutritional foundation for sleep
Almost half of all snacking takes place between
dinner and bed. Nutrition is an important part of sleep-hygiene, because what one eats at night impacts sleep. Recent industry surveys
indicated that most modern consumers have begun to seek functional benefits from their snacks, and most consumers would also prefer better
sleep.
As the pioneers of the nighttime snacking category,
Nightfood accepts the responsibility to educate consumers and build the awareness required to grow the nighttime segment of the snack
market. Along with that responsibility comes the opportunity to be the category king. We envision a future where nighttime specific,
sleep-friendly snacks comprise a multi-billion-dollar segment of the estimated $120 billion American snack market.
Management believes latent consumer demand exists
for better nighttime snacking options, and that a new consumer category, consisting of nighttime specific snacks, is set to 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 alluded to the opportunity that might exist in solving this problem
for the marketplace.
Nightfood has established a highly credentialed
Scientific Advisory Board consisting of sleep and nutrition experts to drive product formulation decisions and provide consumer confidence
in the 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 fifteen 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. Dr. Breus, known to millions as The Sleep Doctor™,
is believed to be the Nation’s most trusted authority on sleep. He regularly appears in the national media to educate and inform
consumers so they can sleep better and lead happier, healthier, more productive lives. In July, 2018, we completed our Scientific Advisory
Board with the addition of Lauren Broch, Ph.D, M.S. Dr. Broch is a sleep therapist and former Director of Education & Training at
the Sleep-Wake Disorders Center at Weill Cornell Medical College. Dr. Broch also has a master’s degree in human nutrition. This
combination allowed her to play an important role in the reformulation of our nutrition bars, the development of Nightfood ice cream,
and formulations of future Nightfood snacks currently in development. These experts work with Company management to ensure Nightfood products
deliver on their nighttime-appropriate, and sleep-friendly promises.
Management envisions the Nightfood brand ultimately
as a “platform brand”, meaning future offerings would not necessarily all remain within the ice cream or frozen food category.
Possibilities exist to expand the product line into additional snack formats that are popular with consumers at night, including things
like cookies, chips, and other formats.
Compared to regular ice cream, Nightfood is formulated
with more tryptophan, more vitamin B6, more calcium, magnesium, and zinc, more protein and more prebiotic fiber. Nightfood also contains
less fat, less sugar, and fewer calories than traditional ice cream, and is lactose free.
Each new Nightfood snack format would be expected
to deliver sleep-friendly snacking in a way that is most appropriate for that format. For example, Nightfood chips would not necessarily
contain significantly more tryptophan than other brands of chips but may be more sleep-friendly in other ways.
In February of 2019, it was announced that Nightfood
had won the 2019 Product of the Year Award in the ice cream category in a Kantar innovation survey of over 40,000 consumers. In June of
2019, it was announced that Nightfood won both the Best New Ice Cream and Best New Dairy Dessert awards at the World Dairy Innovation
Awards.
In November of 2021, Nightfood won the Real California
Milk Excelerator Dairy Innovation competition, with a top prize of $150,000 in marketing support. Executives and judges from the California
Milk Advisory Board and entities such as Hershey’s commended the unique problem the Nightfood brand addresses for consumers, and
the opportunities and strategic advantages afforded by widespread hotel distribution for a brand pioneering sleep-friendly nighttime snacking.
Nightfood has secured distribution in divisions
of some of the largest supermarket chains in the country and has received media coverage in outlets such as The Today Show, Oprah Magazine,
The Rachael Ray Show, Food Network Magazine, The Wall Street Journal, USA Today, The Washington Post, Fox Business News, and many more
media outlets.
RECENT EVENTS - DEVELOPMENT PLANS
Hotel Distribution
In pioneering the nascent nighttime snacking category,
Nightfood is in the process of executing a strategic pivot. We are temporarily shifting growth focus away from the crowded, expensive,
and highly competitive supermarket vertical while targeting brand, revenue, and category growth through national hotel distribution.
Management believes Nightfood is uniquely advantaged
over other snack brands in the potentially lucrative hospitality vertical due to an inherent and implied obligation that exists for hotels
to support better sleep for their guests.
Nightfood was invited to participate in a 2021
retail pilot test of Nightfood pints for sale in hotel lobby shops, initiated and conducted by one of the largest and most prestigious
global hotel brands. Since the test was first announced in early 2021, both the completion of the test and the initiation of the national
rollout have each encountered delays which we were informed were directly tied to COVID-19 as well as general challenges faced by the
hospitality industry regarding staffing and other related issues.
With that test having been declared a success
by the hotel brand, Nightfood ice cream pints are poised to be introduced into several major hotel chains during calendar 2022 and beyond.
On February 7, 2022, an updated timeline was presented to Management by the testing hotel brand reflecting a delay of a few weeks. As
of the time of this filing, initial purchase orders into national hotel distribution have not been received, but they are expected to
be received in the current quarter, ending March 31, 2022.
We view these most recent delays as immaterial.
While we would like to launch as quickly as possible, we do not believe there is a material impact on our future prospects whether the
hotel rollout were to start a few weeks earlier or later. In addition, sales conversations continue to advance with other hospitality
vertical decision makers, and management remains confident that the Nightfood brand footprint in hospitality will grow rapidly once initial
purchase orders are received, both in terms of number of points of distribution, and in terms of the number of Nightfood snack formats
being carried by hotels.
Management has identified over 40 hotel chains
totaling over 26,000 properties in the United States as distribution targets for Nightfood sleep-friendly snacks. It is estimated that
approximately 20,000 of these have freezers and sell ice cream. In September of 2021, the Company had stated the goal of having secured
distribution for Nightfood snacks in 7,500 hotels by July 31, 2022. Because of modifications to launch timelines by the expected initial
hotel brand, we have adjusted the timing of that target so that our goal is now to secure distribution in 7,500 hotel properties within
nine months of initial hotel introduction. It remains our goal to have Nightfood established as a de facto hotel industry standard, and
to have secured distribution in more than fifty percent of the more than 26,000 identified properties, by the second half of calendar
2023.
As we work to advance our distribution goals,
the Company recently signed an agreement with a major global hospitality industry group purchasing organization (“GPO”) that
services more than 11,000 hotel properties in the United States, across many of the leading global hotel brands. This agreement was executed
on February 19, 2022, and goes into effect on March 1, 2022. Nightfood Management is confident hotel purchase orders will soon be received.
However, this agreement is not a purchase order and does not guarantee purchase orders will be received.
We have also engaged iDEAL Hospitality Partners
Group to secure distribution partnerships with additional global hotel brands, oversee hospitality-related business development initiatives,
and provide sales and support during the national hotel rollout. With support from iDEAL, we are in discussions with multiple global hotel
brands, numerous hotel management companies, and some of the largest group purchasing organizations in the industry.
The unit economics of hotel distribution project
to be materially superior to the economics of operating in the supermarket space. Line items such as slotting fees, advertising, and price
promotions (both to consumers and the trade) make the supermarket vertical a much more expensive place to do business compared to hotels.
Based on the results from the 2021 test, we anticipate
that distribution of our ice cream pints in approximately 4,000 hotel locations would bring the company to profitability. Should we succeed
in securing hotel distribution for additional snack formats, we would expect an increase in hotel revenue per property, meaning fewer
properties would be needed to reach break-even.
To take maximum advantage of opportunity presented
by widespread hotel distribution, Nightfood is developing additional snack formats to supplement ice cream pints in that vertical. These
include single-serve ice cream sandwiches as well as snacks in other, non-frozen, formats.
We have already received confirmation of interest
from decision makers at a major hotel chain in testing and adding additional Nightfood snack formats currently under development. Securing
distribution for these additional snack formats in our hotel properties could help us reach our 2023 revenue target of $10 in revenue
per hotel per day.
In addition to projected profitability resulting
from a successful hotel roll-out, we believe that having such additional snack formats available in hotels creates a greater opportunity
for consumer visibility, awareness, and trial. Widespread hotel distribution across multiple snack formats projects to accelerate consumer
adoption of the nighttime snack category, driving awareness that what one eats at night can impact their sleep quality.
We intend to leverage national hotel distribution
to advance the narrative to consumers that what you eat, especially at night, can impact your sleep. We further believe that distribution
in leading global hotel chains will serve as an economic moat, providing a measure of insulation against competitors. At the same time,
the de facto endorsement from the world’s most trusted hotel brands would translate to credibility for our brand, helping to establish
and maintain Nightfood as the nighttime snacking “category king”.
Supermarket Distribution
We were recently notified that Nightfood pints
are being rotated out of distribution in Shaw’s and Walmart for 2022. In both cases, the category manager that shared our vision
and originally made the decisions to make Nightfood products available to their shoppers each left their positions before Nightfood became
available in their chains. We believe that, over time, our sales did not show enough growth for the new decision-makers to stick with
the product that they were not directly involved in bringing in. We are still receiving and fulfilling Walmart orders weekly consistent
with historical patterns; however, we expect these orders to stop in the short term. Jewel-Osco has confirmed Nightfood will remain in
the set for 2022. We continue to work closely with the category manager at Jewel-Osco who made the decision to add Nightfood over two
years ago to drive continued growth.
Management believes that revenue from ice
cream pint distribution in approximately 200-300 hotels would offset the lost revenue from our reduced supermarket distribution,
with lower expenses, reduced losses, and markedly higher contribution margin
During summer and fall of 2021, after we were informed of the national
hotel rollout, we did engage in distribution discussions with a several supermarket chains discussing distribution for 2022 and beyond.
We communicated to our target chains that it was our intent to establish a stronghold in the hotel vertical before seeking significant
new supermarket distribution for our ice cream pints.
SLOTTING FEES
Slotting fees are fees occasionally charged by retailers and distributors
to add a new product into their product assortment.
Accounting standards require exclusion on the income statement of Gross
Sales made to a customer to whom the Company is paying slotting fees and other expenses including promotions, rebates, and coupons. In
those situations, the Gross Sales number is reduced, dollar for dollar, by the sum of these fees. These fees do not appear on the income
statement as an expense. Rather, they are applied against Gross Sales, resulting in Net Revenue, as shown below. The netting of Gross
Sales against the total of these fees, 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.
Additional future supermarket distribution would likely result in additional
slotting fees either in 2022 or beyond. Retailer 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.
We do not believe our recent decreases in slotting expense should
be viewed as an indication of a trend. Rather, we believe it is simply a function of past slotting arrangements having been paid down
and paid off, along with minimal new slotting fees incurred during recent quarters. Investors should have the expectation that Nightfood,
like any growing food or beverage brand, will again incur slotting fees as we add new mainstream supermarket retail accounts in the future.
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.
SEASONALITY
As we make the pivot away from a focus on sales
of ice cream through traditional supermarket channels to a more hotel-focused snack company, we believe there’s a possibility that
some seasonality will be experienced in which sales could increase during peak travel seasons.
At these early stages, this is just a hypothesis,
and we expect to learn more about the possible impacts of seasonality on our business during the coming years.
CORONAVIRUS (COVID-19)
There is still potential uncertainty resulting
from the outbreak of the novel coronavirus (COVID-19) (the “Pandemic”), including those potentially related to measures to
reduce its spread, and the impact on the economy. Rates of unemployment, recession, inflation, and other possible unforeseen factors could
also have an impact.
From both public statements, and conversations
between Nightfood management and current and former executives from 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 ongoing declines in consumer sleep quality and increases in at-home nighttime snacking, both trends believed to be accelerated
by COVID.
The Company has experienced no material issues
with supply chain or logistics. Order processing function has been consistent with historical norms, and the Company’s manufacturers
have represented that their operations are continuing in the ordinary course.
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 the Company unable to
meet certain debts and expenses.
More directly, the Pandemic has impaired the Company’s
ability to execute certain in-store and out-of-store marketing initiatives within the normal course of supermarket business. For example,
since the inception of the Pandemic, the Company was unable to conduct in-store demonstrations and unable to participate in local pregnancy,
baby expos, and health expos that were originally intended to be part of our marketing mix.
Additionally, with more consumers shopping online,
both for delivery or at-store pickup, the opportunity for shoppers to learn about new brands at the supermarket shelf has been somewhat
diminished. Management is working to identify opportunities to build awareness and drive supermarket trial and growth under these new
circumstances, while simultaneously executing a strategic pivot to focus on hotel distribution for immediate growth.
We experienced some Pandemic-related delays to
our national hotel rollout. However, hotel sales testing conducted by a leading global hotel brand showed strong sales velocities in hotel
lobby shops. As the testing itself was conducted during the Pandemic, we are of the belief that strong sales can be expected as the rollout
is executed. We do not expect significant hotel shutdowns or reductions in hotel occupancy the likes of which were seen in the early and
middle part of 2020, unless the Pandemic again surges through new variants or for other reasons.
It is impossible to know what the future holds
with regard to the Pandemic, both for the Company and in the broader sense. Emergence of recent variants such as Delta and Omicron have
shown us that there remain many uncertainties regarding the 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 of the Company, and it is unable to predict the impact that the Pandemic
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 Pandemic and intends to make adjustments accordingly, if necessary.
RESULTS OF OPERATIONS FOR THE THREE MONTHS PERIODS ENDED DECEMBER
31, 2021 AND 2020.
For the three months ended December 31, 2021 and
2020 we had Gross Sales of $104,463 and $142,863 and Net Revenues (Net Revenues are defined as Gross Sales, less slotting fees, promotions,
rebates, coupons and sales discounts, and certain other revenue reductions) of $79,374 and $47,210 respectively and incurred a net operating
loss of $478,390 and $462,219 respectively.
| |
Three Months Ended December 31, | |
| |
2021 | | |
2020 | |
Gross product sales | |
$ | 104,463 | | |
$ | 142,863 | |
Less: | |
| | | |
| | |
Slotting fees | |
$ | - | | |
$ | (49,370 | ) |
Sales discounts, promotions, and other reductions | |
| (25,089 | ) | |
| (46,283 | ) |
Net Revenues | |
$ | 79,374 | | |
$ | 47,210 | |
The decrease in Gross Sales relative to the same
period in 2020 was largely attributable to the loss of one significant account, Harris Teeter, which represented 20% of our gross sales
in the three months ended December 31, 2021. During the three months ended December 31, 2021, no major new accounts were onboarded. Walmart
is currently our largest account, with Gross Sales of $37,409 for the three months ended December 31, 2021, and Shaw’s is currently
our second largest account, with Gross Sales of $23,010 for the three months ended December 31, 2021. We have been notified that Walmart
plans to discontinue offering Nightfood for sale in their stores; however, as of February 22, 2022, we are still receiving and fulfilling
Walmart orders weekly consistent with historical patterns. We have also been notified that our products will be rotated out of Shaw’s
locations in 2022. We expect that our Gross Sales attributable to supermarket sales will continue to decrease in at least the short term,
as we rotate out of Walmart and Shaw’s; however, we expect that our upcoming hotel roll-out to offset the loss of these sales. To
quantify, gross sales to these two accounts totaled $60,419 during the three months ended December 31, 2021. Based on the results of the
2021 hotel retail pilot test, our projections indicate that new distribution in approximately 200-300 hotel locations would bring an increase
in gross sales that would offset the decrease from this reduction in supermarket distribution. Furthermore, the hotel sales project to
be significantly more profitable on a per unit basis, as sales will be conducted at full wholesale pricing, and line items such as slotting,
advertising, and pricing promotions project to be greatly reduced or entirely eliminated.
For the three months ended December 31 2021 and
2020, Cost of Product Sold remained relatively consistent, at $88,105 from $110,465.
For the three months ended December 31 2021 and
2020, Selling, General, and Administrative expenses increased to $469,659 from $398,964. To fully capitalize on the hotel opportunity,
we have made certain investments in marketing consulting related to category development and design, as well as investing in the development
of additional snack formats to more rapidly scale revenue and consumer trial. These future-focused investments account for much of this
increase.
For the three months ended December 31 2021 and
2020, total operating expenses increased to $557,764 from $509,429. This is due largely to the increases in Selling General, and Administrative
expenses mentioned in the previous paragraph.
For the three months ended December 31 2021 and 2020,
total Other Expenses increased to $302,529 from $136,486. A large component of the other expenses category is expenses related to financing
events.
For the three months ended December 31 2021 and
2020 we incurred net losses of $780,919 and $598,705 respectively. This increase in net losses is due largely to increases in other expenses
related to our recent financing along with increases in storage, marketing consulting, legal fees, and research & development of new
products.
RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED DECEMBER
31, 2021 AND 2020.
For the six months ended December 31, 2021 and
2020 we had Gross Sales of $293,394 and $462,187 and Net Revenues of $193,827 and $174,193, respectively, and incurred operating losses
of $1,312,065 and $998,261 respectively.
| |
Six Months Ended December 31, | |
| |
2021 | | |
2020 | |
Gross product sales | |
$ | 293,394 | | |
$ | 462,187 | |
Less: | |
| | | |
| | |
Slotting fees | |
$ | - | | |
$ | (183,591 | ) |
Sales discounts, promotions, and other reductions | |
| (99,567 | ) | |
| (104,402 | ) |
Net Revenues | |
$ | 193,827 | | |
$ | 174,193 | |
The decrease in Gross Sales relative to the same
period in 2020 was largely attributable to the loss of one significant account, Harris Teeter, which represented 33% of our gross sales
in the six months ended December 31, 2021. During the six months ended December 31, 2021, no major new accounts were onboarded. Walmart
is currently our largest account, with Gross Sales of $76,534 for the six months ended December 31, 2021, and Shaw’s is currently
our second largest account, with Gross Sales of $54,210 for the six months ended December 31, 2021. We have been notified that Walmart
plans to discontinue offering Nightfood for sale in their stores; however, as of February 22, 2022, we are still receiving and fulfilling
Walmart orders weekly consistent with historical patterns. We have also been notified that our products will be rotated out of Shaw’s
locations in 2022. We expect that our Gross Sales attributable to supermarket sales will continue to decrease in at least the short term,
as we rotate out of Walmart and Shaw’s; however, we expect that our upcoming hotel roll-out to offset the loss of these sales. To
quantify, gross sales to these two accounts totaled $130,744 during the three months ended December 31, 2021. Our projections indicate
that new distribution in approximately 200-300 hotel locations would bring an increase in gross sales that would offset the decrease from
the reduction in supermarket distribution. Furthermore, the hotel sales project to be significantly more profitable on a per unit basis,
as sales will be conducted at full wholesale pricing, and line items such as slotting, advertising, and pricing promotions project to
be greatly reduced or entirely eliminated.
For the six months ended December 31 2021 and
2020, Cost of Product Sold decreased to $212,979 from $340,161. This is the result of lower gross sales as a result of a lost account,
which brings about lower broker fees, less freight, and other expenses related directly to the generation of sales.
For the six months ended December 31 2021 and
2020 Selling, General, and Administrative expenses increased to $1,292,913 from $832,293. To fully capitalize on the hotel opportunity,
we decided to make certain investments in marketing consulting related to category development and design, as well as investing in the
development of additional snack formats to more rapidly scale revenue and consumer trial. These future-focused investments account for
much of this increase.
For the six months ended December 31 2021 and
2020 total operating expenses increased to $1,505,892 from $1,172,454. This is due largely to increases in storage, paid advertising,
graphic design, marketing consulting, and research & development of new products.
For the six months ended December 31 2021 and
2020 total other expenses decreased to $302,529 from $544,267. This is due largely to having retired convertible securities and recording
the quarterly valuation fluctuations experienced that were reflected in our statements in the Other Expenses section. A large component
of the other expenses category is interest expense related to convertible promissory notes with variable conversion rates. During the
six-month period ended December 31, 2021, the Company had no outstanding convertible promissory notes with variable conversion rates.
For the six months ended December 31 2021 and
2020 we incurred net losses of $1,614,594 and $1,542,528 respectively.
Customers
During the six months ended December 31, 2021,
the Company had one customer account for 26% of the gross sales, which was Walmart. One other customer accounted for 18% of the gross
sales, which was Shaw’s, and two other customers each account for more than 10% of the gross sales. During the six months ended
December 31, 2020, the Company had one customer account for approximately 33% of the gross sales, one customer accounted for approximately
19% of gross sales, and one customer accounted for over 10% of gross sales.
During the three months ended December 31, 2021,
the Company had one customer account for 36% of the gross sales, which was Walmart. One other customer accounted for 22% of the gross
sales, which was Shaw’s. During the three months ended December 31, 2020, the Company had one customer account for approximately
25% of the gross sales. One other customer accounted for approximately 20% of gross sales, and two other customers accounted for
over 10% of gross sales.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2021, we had cash on hand of
$794,502, receivables of $60,679 and net inventory value of $425,331.
The Company believes it has sufficient cash on
hand to operate into the second half of Calendar 2022 at which time it will require additional funds for operating and growth capital.
Although internal projections include several realistic scenarios in which the Company could attain profitability in Calendar 2022,
we must account for the likelihood that our cash on hand will not be adequate to satisfy our long-term working capital needs.
We believe that our current capitalization structure,
combined with anticipated increases in distribution, revenues, and market capitalization, will enable us to successfully secure required
financing to continue our growth.
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 will again be 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 long-term.
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 for one year from the date the financials are
issued. 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.
Management has shifted short-term and mid-term growth focus to the hospitality vertical. By doing so, Management believes top-line
revenue growth can occur more quickly than in supermarkets. At the same time, we are projecting a much lower portion of our top line sales
going to line items such as slotting fees, consumer advertising, and trade promotion. The net margins on sales within the hotel space
project to be significantly better than sales in the traditional supermarket space, making for a potentially more cash-efficient operation,
and the possibility of attaining profitability at lower top-line sales numbers.
The discontinuance of distribution in Walmart
and Shaw’s projects to result in a decrease of approximately $20,000 in monthly gross sales. The elimination of these unprofitable
sales is expected to have the effect of reducing operating losses and improving operating margins should the hotel business grow as anticipated.
This is due to the elimination of significant expenses associated with supporting supermarket distribution such as advertising expenses,
trade promotions, and the corresponding reductions in cost of goods sold, freight, and other costs directly associated to the transactions
themselves. We do believe that, in the future, supermarket distribution can be both attractive and profitable at scale as greater awareness
is established both of the Nightfood brand, and of the impact of nutritional choices on sleep quality.
It was not Nightfood’s decision to discontinue
distribution in these accounts. However, we did request modifications and concessions from the retailers in order to make ongoing distribution
more attractive for our brand (for example, more integrated retailer promotion support and improvements to the mix of flavors offered
for sale). Ultimately, the decision to discontinue was made by the respective retailers.
As we have started to focus on more profitable
segments of distribution such as the hotel vertical, our projections indicate that distribution and sales of Nightfood ice cream pints
in approximately 200-300 new hotel locations would deliver an equivalent level of gross sales to that which we expect to lose through
the Walmart and Shaw’s phase-outs, approximately $20,000 per month. Furthermore, the hotel sales project to be significantly more
profitable on a per unit basis, as sales will be conducted at full wholesale pricing, and revenue reduction and expense line items such
as slotting, advertising, and pricing promotions project to be greatly reduced or entirely eliminated.
Since our inception, we have sustained operating
losses. During the six months ended December 31, 2021, we incurred a net loss of $1,614,594 compared to $1,542,528 for the six months
ended December 31, 2020.
During the six months ended December 31, 2021,
net cash used in operating activities was $1,440,431 compared to $617,879 for the six months ended December 31, 2020. The majority of
this increase is the result of accounting entries related to the treatment of debt, amortization, and derivative liabilities, along with
post-financing cash used to reduce Accounts Payable.
During the six months ended December 31, 2021,
net cash aggregating $1,193,008 was provided by financing activities, compared to $537,795 for the six months ended December 31, 2020.
This increase is due to the fact that in the six months ended December 31, 2021, we completed the sale of 485 shares of our Class B Preferred
Stock sold in September 2021 along with the closing in December of 2021 of two senior secured convertible notes, each with a face value
of $543,478. In the six months ended December 31, 2020, there were no sales of our Class B Preferred Stock.
From our inception in January 2010 through December
31, 2021, we have generated an accumulated deficit of approximately $27,170,122. This is not debt, and this is not an amount that needs
to be paid out at any point in the future. An accumulated deficit reflects a negative balance of retained earnings and an accumulation
of historical losses over time, related to both operations and financing activities. It is not unusual for growing companies to have significant
accumulated deficit (also known as negative retained earnings), even after turning profitable. Many large, fast growing, and successful
companies have accumulated deficits, such as Warby Parker, The Honest Company, Beyond Meat, Roblox, Robinhood, Sweetgreen, Oatly, Rivian,
Celsius Holdings, and Chobani, as well as Tesla (as recently as their 2020 fiscal year) . In our case, like many of these others, an accumulated
deficit is a function of losses sustained over time, along with the costs associated with raising operating capital.
Assuming we raise additional funds and continue
operations, we expect to incur additional operating losses during the next one 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 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.
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.