NightFood Holdings, Inc. - Quarter Report: 2020 December (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended: December 31, 2020

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to____________

Commission File Number: 000-55406

Nightfood Holdings, Inc.

(Exact name of registrant as specified in its charter)

888-888-6444

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Exchange Act). Yes ☐  No ☒

Securities registered pursuant to Section 12(b) of the Act:

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. At February 19, 2021, the registrant had outstanding 74,513,514 shares of common stock.

Table of Contents

Nightfood Holdings, Inc.

Financial Statements

For the three and six months ended December 31, 2020 and 2019

Item 1. Financial Statements

Nightfood Holdings, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Nightfood Holdings, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Nightfood Holdings, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the three and six months ended December 31, 2020 and 2019

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

Nightfood Holdings, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Nightfood Holdings, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Intangible assets consist of the following at December 31, 2020 and June 30, 2020. The amount of the intangible assets represents fees and expenses in connection with the development and launch of platforms used to track conversions, optimize ads, and scale online customer growth through a hybrid distribution model.

During the quarter ending March 31, 2020, the Company determined it would be unable to generate sufficient traction from these digital assets. The Company made the decision to stop utilizing the assets.

Below is a reconciliation of the convertible notes payable as presented on the Company’s balance sheet as of December 31, 2020:

Amortization expense for the six months ended December 31, 2020 and 2019, totaled $576,787 and $831,436, respectively and Amortization expense for the three months ended December 31, 2020 and 2019, totaled $254,048 and $449,169 respectively.

As of December 31, 2020 and June 30, 2020, the unamortized portion of debt discount was $439,396 and $605,211, respectively.

Interest expense for the six months ended December 31, 2020 and 2019, totaled $195,530 and $42,336, respectively and interest expense for the three months ended December 31, 2020 and 2019, totaled $111,575 and $15,738, respectively.

As of December 31, 2020 and June 30, 2020, the accrued interest related to convertible notes was $247,942 and $192,625, respectively. 

Change in derivative liability for the six months ended December 31, 2020 and 2019, totaled $264,818 and $355,625, respectively and change in derivative liability for the three months ended December 31, 2020 and 2019, totaled $57,294 and $165,563, respectively. 

As of December 31, 2020 and June 30, 2020, the derivative liability related to convertible notes was $ 1,416,045 and $1,590,638, respectively. 

Management considers all of its derivative liabilities to be Level 3 liabilities. At December 31, 2020 and June 30, 2020, respectively the Company had outstanding derivative liabilities, including those from related parties of $1,416,045 and $1,590,638, respectively. 

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. 

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). As of the time of this filing, Management has received confirmation from all our major supermarket chains that the brand has been renewed for 2021. Certain chains may do periodic category reviews mid-year, but Management believes that our current sales velocity combined with marketing efforts to grow the brand will allow us to retain our shelf space in these chains so that we may continue to grow our consumer base and our revenues.

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 and negotiations initiated by a certain global food and beverage conglomerate which remain ongoing as of the time of this filing. Management anticipates that the multi-national food and beverage companies will necessarily be drawn to the category Nightfood is pioneering because of these facts:

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.

Company Management believes that a meaningful percentage of this $50 billion in 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.

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.

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” either in 2021 or beyond. 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.

Certain large retailers do not charge slotting fees, but most do. The Management of any emerging food or beverage brand could choose not to do business with retailers or distributors who charge slotting fees. Such a strategy, while possible, could greatly slow or restrict the distribution footprint a brand could establish.

Through the first two quarters of Fiscal 2021, slotting commitments have resulted in revenue reductions totalling $183,591. As of the time of this filing, over 60% of the way through our Fiscal 2021, Management projects slotting fees for the current Fiscal Year will deliver a total revenue reduction of less than $250,000. By comparison, slotting fees with in Fiscal 2020 resulted in total revenue reductions of $541,500. This significant decrease in slotting expense should not be viewed as an indication of a trend. Rather, it is simply a function of past slotting arrangements having been paid down and paid off, along with minimal new slotting fees anticipated during the current fiscal year. Investors should have the expectation that Nightfood, like any growing food or beverage brand, will continue to incur slotting fees as we move towards our goal of national distribution.

In addition to traditional retail such as supermarkets and big-box retailers, Management also believes significant opportunities exist in the hotel and hospitality vertical where ice cream is one of the top-selling categories in hotel lobby shops. With travelers wanting better sleep, Management believes hotels that sell ice cream would benefit by making Nightfood’s sleep-friendly ice cream part of their offering assortment. Before COVID, Management had been pursuing initiatives in the hotel space. While those were put on hold for most of calendar 2020, hotels have now reemerged as an important point of focus for the distribution of Nightfood 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

There is a significant amount of seasonality in the ice cream industry, with summer months historically delivering the highest consumption, and winter months delivering the lowest consumption.

In the last twelve weeks of calendar 2020 (the period from 10/3/20 through 12/26/20), the syndicated industry data which management has access to shows aggregate supermarket ice cream pint retail sales down 16.6% from the prior twelve week period. This decrease of 16.6% is across all brands including private label ice cream.

The three leading brands in the better-for-you ice cream space saw sales decrease over 30% on average during this period, with the best performer of those three showing a drop of 26% from period to period, another had a drop of just over 30%, and the third dropped 33.5% from one twelve-week period to the next. During these same periods, Nightfood showed a decrease of 32%, right in line with the leaders in the better-for-you ice cream space.

As an early-stage and growing brand, the full impact of seasonality on our ice cream might not be fully understood for several additional annual cycles, but early indications point to the existence of a material seasonality impact across the ice cream industry through grocery channels. Over time, should the Company successfully expand into more distribution verticals and into additional snack formats, it is possible that the impacts of seasonality could lessen.

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 understood and identified. 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 showed 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, and the impact that a down economic period can have on consumer behavior, including trial of new brands. Greater unemployment, recession, and other possible unforeseen factors are shown to have an impact. Research indicates that consumers are less likely to try new brands during economic recession and stress, returning to the legacy brands they’ve known for decades.

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 in-store product sampling tables, 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 ongoing exploratory meetings between Nightfood Management and experts 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 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.

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.

More directly, COVID has impaired Nightfood’s ability to execute certain in-store and out-of-store marketing initiatives. For example, since the inception of COVID, 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-shelf has been somewhat diminished. Management is working to identify opportunities to build awareness and drive trial under these new circumstances.

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 MONTHS PERIOD ENDED

December 31, 2020 and 2019.

For the three months ended December 31, 2020 and 2019 we had Gross Sales of $142,863 and $185,751 and Net Revenues (Net Revenues are defined as Gross Sales, less Slotting Fees, Sales Discounts, and certain other revenue reductions) of $47,210 and $61,285 respectively and incurred an operating loss of $462,219 and $798,425 respectively. The decrease in Gross Sales, which represents sales of approximately 46,500 pints, and Net Revenue is largely the result of a significant decrease in advertising and promotional dollars spent during the quarter.

The Company made the strategic decision to decrease advertising and promotional spend to preserve inventory while awaiting production of the modified Nightfood formulation in updated packaging. This production was originally targeted for January, but the start of production ended up being delayed until mid-February, and is nearing completion as of the time of this filing. By strategically preserving inventory, the Company was able to avoid damaging out-of-stock situations with key retailers despite the delay in production. While we did run out of our most popular flavor in early February, Cookies n’ Dreams, only one retailer was impacted and the backorder is expected to be filled less than 10 days after the original requested delivery date.

The decrease in Advertising and Promotion activity is reflected in the decrease in Selling, General, and Administrative expense of $245,605, from $644,659 in the three months ended December 31, 2019 compared to $398,964 in the three months ended December 31, 2020, and is also reflected in the decrease in operating loss for the current quarter of $336,206, from $798,425 in the three months ended December 31, 2019 compared to $462,219 in the three months ended December 31, 2020.

In the last twelve weeks of calendar 2020 (the period from 10/3/20 through 12/26/20), the syndicated industry data management has access to shows aggregate supermarket ice cream pint retail sales down 16.6% from the prior twelve-week period. This decrease of 16.6% is across all brands including private label ice cream.

The three leading brands in the better-for-you ice cream space saw sales decrease over 30% on average during this period, with the best performer of those three showing a drop of 26% from period to period, another had a drop of just over 30%, and the third dropped 33.5% from one twelve-week period to the next. During these same periods, Nightfood showed a decrease of 32%, right in line with the leaders in the better-for-you ice cream space.

As an early-stage and growing brand, the full impact of seasonality on our ice cream might not be fully understood for several additional annual cycles, but early indications point to the existence of a material seasonality impact across the ice cream industry through grocery channels. Over time, should the Company successfully expand into more distribution verticals and into additional snack formats, it is possible that the impacts of seasonality could lessen.

For the three months ended December 31, 2020 and 2019, Cost of Goods Sold increased to $110,465 from $48,475. A significant component of this increase was the write-off of $32,815 of packaging in inventory which featured the old Nightfood design and representing our old formulation. Management believes the new Nightfood recipes and package design will result in a material increase in consumer trial and repeat purchase and made the decision to accelerate the introduction of the new and improved product to market, rather than build additional inventory with the old design and formulations.

For the three months ended December 31, 2020 compared to the three months ended December 31, 2019, we also experienced changes in derivative liabilities to ($57,294) from ($165,563) and interest expense to $254,048 from $464,907. For the three months ended December 31, 2020, the Company recorded “other expenses” of $0 compared to $39,173 for the three months ended December 31, 2019.

RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED

December 31, 2020 and 2019.

For the six months ended December 31, 2020 and 2019 we had Gross Sales of $462,187 and $385,155 and Net Revenues (Net Revenues are defined as Gross Sales, less Slotting Fees, Sales Discounts, and certain other revenue reductions) of $174,193 and $107,782 respectively and incurred an operating loss of $998,261 and $1,093,202 respectively. The increase in Gross Sales and Net Revenue is largely the result of having product available in many more points of retail distribution this year than last. We had Selling, General, and Administrative expense of $832,293, from $672,676 for the six months ended December 31, 2020 and 2019, and operating losses of $998,261 and $1,093,202 for the six months ended December 31, 2020 and 2019 

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 six months ended December 31, 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.

The Company had cost of goods sold of $340,161 and $194,975 for the six months ended December 31, 2020 and 2019. This increase was largely due to significantly more product sold this year than last, along with the write-off of $32,815 of packaging in inventory which featured the old Nightfood design and representing our old formulation. Management believes the new Nightfood recipes and package design will result in a material increase in consumer trial and repeat purchase and made the decision to accelerate the introduction of the new and improved product to market, rather than build additional inventory with the old design and formulations.

Our income statement shows Selling, General, and Administrative expenses of $832,293 and $672,676 for the six months ended December 31, 2020 and 2019. This increase is due to the way certain marketing expenses were accounted for. Further, as discussed on footnote 3, due to reclassification, $458,639 in expenses were reversed and set off with the advertising costs incurred during 2019."The Company had 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. 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 $266,998 for the six months ending December 31, 2019 to $385,510 for the six months ending December 31, 2020.   $65,700 of the professional fees in the current six-month period are the result of accounting for 500,000 warrants issued to a Company consultant with a strike price of $.50.

For the six months ended December 31, 2019 we experienced an increase in Loss on extinguishment of debt upon notes conversion of $0 compared to $2,216 in the six months ended December 31, 2020. For the six months ended December 31, 2019 compared to the six months ended December 31, 2020, we also experienced changes in derivative liabilities from ($355,625) to ($264,818) and total interest expense from $873,772 to $772,317.  For the six months ended December 31, 2019, the Company recorded “other expenses” of $39,173 compared to $19,877 for the six months ended December 31, 2020. 

Customers

During the six months ended December 31, 2020, the Company had one customer account for approximately 33% of the gross sales. One other customer accounted for approximately 19% of gross sales, and one other customer accounted for over 10% of gross sales. During the six months ended December 31, 2019, one customer accounted for approximately 34% of the gross sales while two other customers accounted for over 10% of gross sales.

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. During the three months ended December 31, 2019, one customer accounted for approximately 34% of the gross sales while three other customers accounted for over 10% of gross sales. 

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2020, we had cash on hand of $117,538, receivables of $41,290 and inventory value of $166,041.

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 and distribution, 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 while other financing options are being evaluated and explored.

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 six months ended December 31, 2020, we incurred a net loss of $1,542,528 compared to $1,650,522 for the six months ended December 31, 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 six months ended December 31, 2020, net cash used in operating activities was $617,879 compared to $899,563 for the six months ended December 31, 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 six months ended December 31, 2020, net cash of $0 was used in investing activities, compared to $333,333 for the six months ended December 31, 2019.

During the six months ended December 31, 2020, net cash aggregating $537,795 was provided by financing activities, compared to $1,350,000 for the six months ended December 31, 2019.

From our inception in January 2010 through December 31, 2020, we have generated an accumulated deficit of approximately $19,173,651, 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 six 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. The Company has received several tranches of capital from a friendly institutional investor, who has been our primary source of capital for the last 41 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. The Agreement from June of 2019 ran through the end of December of 2020, at which time a new Agreement was executed between the parties. All terms were identical with the exception that additional milestones were added by which Folkson would earn $.50 warrants. These included a milestone of $500,000 in net revenue during calendar 2021 from nontraditional retail channels (such as hotels and college campuses), and a warrant bonus should Folkson successfully negotiation a product development or distribution partnership with a multi-national food & beverage conglomerate during the Term of the Agreement.

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.

On January 21, 2021, 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 six months ended December 31, 2020.

OFF BALANCE SHEET ARRANGEMENTS

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

No report required.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.

As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.

Changes in internal controls over financial reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are not engaged in any litigation at the present time, and management is unaware of any claims or complaints that could result in future litigation. Management will seek to minimize disputes with its customers but recognizes the inevitability of legal action in today’s business environment as an unfortunate price of conducting business.

ITEM 1A. RISK FACTORS.

Not required for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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