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, 2019, 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 edibles. The Company intends to license this IP to
operators in the cannabis edibles space and other related spaces.
NightFood, Inc. is a snack company focused
on manufacturing and distribution of Nightfood nighttime ice cream. The Nightfood ice cream national rollout began in the early
part of calendar 2019. The Company secured distribution in multiple regional supermarket chains within four months of manufacturing
its first pint.
On February 7, 2019, it was announced
that the Nightfood ice cream line won the prestigious Product of the Year award. As announced in a subsequent news release, the
benefits of this award include publicity in national and regional media outlets, enhanced consumer perception, and the right to
use the Product of the Year logo on Nightfood packaging, which is understood to drive stronger consumer trial at retail.
Management is confident consumer demand
exists for better nighttime snacking options, and that they are pioneering a new consumer category consisting of nighttime specific
snacks. This confidence 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 addition, Nestle, one of the largest food and beverage companies in the world, has stated that it believes
there is consumer demand for healthier snacks for consumers to eat before bed.
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.
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 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 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
Nightfood has eight ice cream flavors
already in ongoing production, and an additional ten products have been developed or in late stages of development. These include
two custom celebrity flavors, four new ice cream flavors, and four non-dairy flavors. Management has done preliminary research
on CBD infused ice cream, current FDA guidelines do not permit CBD to be used as an additive in food, and Management does not
believe such products will be allowed under FDA guidelines for several quarters.
Nightfood is currently available in four
of the top-50 supermarket chains in the country: Meijer, Lowes Foods, Woodman’s and Harris Teeter. The Nightfood line has
recently been presented to over a dozen additional chains, and more presentations are upcoming as of the time of this filing.
Management has received indication from several significant chains that they intend to add Nightfood to their freezers in early
2020
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
Because management expects rapid growth
in terms of both distribution and sales velocity in the coming months and years, we do not believe that our business will be seasonal
to any material degree until full national penetration has been established.
RESULTS OF OPERATIONS FOR THE THREE
AND THREE MONTH PERIOD ENDED
September 30, 2019 and September 30,
2018.
For the three months ended September
30, 2019 and September 30, 2018 we had revenues of $206,497 and $102,188 respectively and incurred an operating loss of
$364,361 and $439,165 respectively. The revenue increase is the result of sales of Nightfood ice cream. A result of this
increase in sales is an increase in cost of goods sold from $40,658 for the three months ending September 30, 2018 to
$146,500 for the three months ending September 30, 2019. Our income statement shows an increase in “Advertising and
Promotional” from $103,440 for the three months ending September 30, 2018 to $198,270 for the three months ending
September 30, 2019. It’s important to note that $128,475 of the $198,270 was for marketing and distribution
partnerships and not what most would likely consider “advertising”. Paid advertising actually decreased from
$50,745 for the quarter ending September 30, 2018 to $33,448 for the quarter ending September 30, 2019. Selling, general, and
administrative expenses decreased from $175,484 for the three months ending September 30, 2018 to $101,854 for the three
months ending September 30, 2019. This category includes expenses such as web hosting, web services, freight, warehousing,
shipping, product liability insurance, and research & development of new products. Professional fees decreased from
$221,770 for the three months ending September 30, 2018 to $124,234 for the three months ending September 30, 2019.
For the three months ended September 30,
2018 compared to the three months ended September 30, 2019, we also experienced changes in derivative liabilities from ($564,864)
to ($190,062) and interest expense from $642,520 to $408,865, of which $636,218 and $382,267 respectively were entries directly
related to the amortization of debt discounts and deferred financing fees For the three months ended September 30, 2019, the Company
recorded “other expenses” of $0 compared to $779 for the three months ended September 30, 2018. This decrease is attributable
to the fact that there was no need to restructure or consolidate debt in the current quarter. As a direct result of the prior
successful consolidation, Management has been able to secure ongoing operating capital to launch 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 periods ending September 30, 2019, the majority of revenues resulted from wholesale
sales of NightFood ice cream to wholesale distributors and direct to supermarkets. As the Company has largely shifted away from
direct-to-consumer e-commerce, and towards a wholesale approach for the national ice cream rollout, it is expected that future
revenues will be significantly more concentrated than in the past when the majority of revenue was from direct to consumer sales.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2019, we had cash
on hand of $107,058, receivables of $181,053 and inventory value of $437,022.
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 Eagle to continue to fund our projected growth over the next several quarters as they have been
doing for well over two years. 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, which management views as beneficial to shareholders.
Because the business is new and 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, 2019, we incurred a net loss of $583,164 compared to $517,600 for
the three months ended September 30, 2018. 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, 2019, net cash used in operating activities was $973,084 compared to $310,208 for the three months ended September 30, 2018.
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, 2019, net cash aggregating $1,050,000 was provided by financing activities, compared to $289,328 for the three months ended
September 30, 2018.
From our inception in January 2010 through
September 30, 2019, we have generated an accumulated deficit of approximately $13,802,223, compared to $13,219,059 from inception
through June 30, 2019. 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.
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 was 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.
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 26 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. 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 has 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 carry a twelve month term and a cashless provision,
and will expire if not exercised within the twelve month term. Folkson may not transfer, sell, or otherwise dispose of these warrants
at any time, as there are no transfer rights provided for in the Agreement.
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, 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, 2019, 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, 2019.
OFF BALANCE SHEET ARRANGEMENTS
None.