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”. 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 for its brand of Half-Baked snacks, currently under development. 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, including a US Patent Application
related to a proprietary ingredient it has developed for use in THC-infused edbiles.
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, available in two flavors (Cookies n’ Dreams, and Midnight Chocolate Crunch). Over
the last several months, the Company has also developed and introduced to market a line of eight flavors of Nightfood ice cream.
The Company has conducted sales meetings with numerous major supermarket and drug chains, and has secured significant retail distribution
for the ice cream. Product will begin appearing on shelves across the country in February of 2019.
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. 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 Eductation & Training at the Sleep-Wake Disorders Center at Weill Cornell Medical College. Uniquely, Dr. Broch
also has a master’s degree in human nutrition. This unique combination allowed her to play an important role in the reformulation
of our nutrition bars, and 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.
DEVELOPMENT PLANS
With its 8 flavors of Nightfood ice cream
rolling into retail in coming months, Nightfood has also been working to develop gluten-free versions of the Nightfood nutrition
bar. The Company expects the retail rollout of the ice cream to boost online sales of Nightfood bars, and expects to introduce
additional flavors of both the bars, and the ice cream during the course of calendar 2019.
Simultaneously, MJ Munchies is developing
snacks and edibles in the marijuana space, including a line of cookies in the state of California. The Company is currently involved
in licensing negotiations with several other parties, some of which could cause the Company to revise its immediate plans for
introductions of certain products.
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 THREE MONTH PERIOD ENDED
September 30, 2018 and September 30,
2017.
For the three months ended September 30,
2018 and September 30, 2017 we had revenues of $102,188 and $36,442 respectively and incurred an operating loss of $517,600 and
$979,774 respectively. The revenue increases were the result of a Company focus on direct to consumer sales through the 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 $26,026 for the three months ending September 30, 2017 to $40,658 for the three months ending September 30, 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 $41,824 for the three months ending September 30, 2017 to $103,440 for the three months ending September 30,
2018. Management notes that the advertising number of $103,440 for the quarter includes over $34,000 in graphic design expenses
related to the launch of Nightfood ice cream. SG&A increased from $44,056 for the three months ending September 30, 2017 to
$175,484 for the three months ending September 30, 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 decreased from $257,420 for the three months ending September 30, 2017 to $221,770 for
the three months ending September 30, 2018. For the three months ended September 30, 2018 compared to the three months ended September
30, 2017, we also experienced changes in derivative liabilities from $102,919 to ($564,864) and interest expense from $253,505
to $622,033. For the three months ended September 30, 2018, the Company recorded other expenses of $779 compared to $287,919 for
the three months ended September 30, 2017. This decrease is attributable to the fact that in the three months ended September 30,
2017, the Company had significant non-cash items recorded as expenses in conjunction with successfully consolidating all Company
debt with one investor, Eagle Equities, LLC. As a direct result of this successful consolidation, Management has been able to secure
ongoing operating capital to launch new initiatives such as the Half-Baked line of cannabis edibles, and Nightfood ice cream, while
minimizing dilution associated with the use of convertible notes from multiple lenders. Although no assurances can be given,
management believes that the positive results of these efforts will lead to more efficient sources of capital, and allow the Company
to grow operations and revenues in a meaningful way, ultimately increasing shareholder value.
Customers
For the three month period ending September
30, 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 September 30, 2018, we had cash
on hand of $27,561 and inventory value of $59,232.
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 three months ended September 30, 2018, we incurred a net loss of $517,600 compared to $979,774 for
the three months ended September 30, 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 three months ended September
30, 2018, net cash used in operating activities was $310,208 compared to $384,499 for the three months ended September 30, 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 three months ended September
30, 2018, net cash aggregating $289,328 was provided by financing activities, compared to $435,701 for the three months ended
September 30, 2017.
From our inception in January 2010 through
September 30, 2018, we have generated an accumulated deficit of approximately $9,138,313, compared to $8,620,714 from inception
through June 30, 2018. 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.
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. The Company has received several tranches of capital from
a friendly institutional investor, who has made a verbal commitment to continue to fund ongoing operations, as well as the development
and launch of new products and intellectual property for Nightfood and MJ Munchies.
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. On June 6, 2018, The Company and Folkson agreed to an extension of the agreement, which would run from July 1, 2018 through
June 30, 2019. The monthly compensation remained at $6,000 in monthly consulting fees. This new Agreement also contained additional
compensation in the form of bonuses which will be earned by Folkson when the Company reports its first quarter with revenues in
excess of $1,000,000. Folkson will earn an additional bonus when the Company reports its first quarter with revenues in excess
of $3,000,000. Upon the filing of the first quarter with revenues in excess of $1,000,000, Folkson shall earn 1,000,000 warrants
with a strike price of $.50. Upon the filing of the first quarter with revenues in excess of $3,000,000, Folkson shall earn 3,000,000
warrants with a strike price of $.50.
On October 12, 2018, Folkson opted to
exercise 400,000 common stock warrants at a strike price of $.30 per share. To exercise these warrants, Folkson used $120,000
in accrued NightFood consulting fees.
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, 2018, 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, 2018.
OFF BALANCE SHEET ARRANGEMENTS
None.