Earnings Transcript for NGTF - Q2 Fiscal Year 2021

Stuart Smith: Welcome, listeners, shareholders and investors of NightFood Holdings, Inc., ticker symbol NGTF traded on the OTCQB. We thank you for joining us on this call today, this investor conference call where the company will be talking about its recent activities, including some big news, and we're going to talk about that announcement at the outset.

But before we get started, I'd like to give you the forward-looking statements. Now the entire forward-looking statement can be found in any press release for the company or their filings with the SEC. All you need is that ticker symbol again, OTCQB NGTF. :

This call may contain forward-looking statements as that term is defined in Section 27A of the United States Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. :

Statements covered in this call, which are not purely historical, are forward-looking statements and include any statements regarding beliefs, plans, expectations or intentions regarding the future, including, but not limited to, any products sold or cash flow from operations. And again, the entire forward-looking statement can be found in those filings with the Securities and Exchange Commission. :

But without further ado, let's welcome the CEO of the company back, Sean Folkson. Sean, how are you today? :

Sean Folkson: Great. Stuart, happy to be here, as always.

Stuart Smith: Well, happy to have you here, and today is a little different. Today, you've got a big announcement that we want to discuss as well. Can we get the highlights straight from you as the CEO before we jump into the rest of the call?

Sean Folkson: Sure. Absolutely. Before I forget, I do want to be sure upfront to thank the entire NightFood team, not only the members internally, Jenny Mitchell, our COO; and Jim Christensen, VP of Ice Cream Sales. But really, all of our vendors, manufacturing partners, brokers and salespeople. They've been working so hard during what's really been a very busy time for us, especially over the last couple of weeks, helping us get set up for great 2021.

So obviously, there's been a lot of news since our last call. We've unveiled our new packaging. We've secured and announced distribution with UNFI, which is the largest distributor of natural foods in the U.S. We've landed some additional independent supermarkets and planning for a second year in our major existing retailers. And of course, last week, we had a big announcement, which was that NightFood is rolling into Walmart starting in April. :

And I mentioned something last week in the Telegram group and anybody who's not -- who haven't participated in that, they can get the link, I guess, for many of our news releases and join that group. I'm pretty active in there. But I mentioned last week that the investors typically only get to see events unfold months after they happen. These public announcements, Walmart is a great example. :

We knew about Walmart really since the summer of last year, but it was -- it got to a 99% confidence level in October, and yet here we are not being able to announce it until the end of February. So that's just the way things go. :

But we've got an announcement here that we're able to make a little closer to real time, and this is news -- there's going to be a release going out in the morning before the market, but I wanted to make sure to announce it here on our investor call first. And that news is that we've successfully secured a retail test with one of the world's largest hotel companies. :

So one of the largest global hotel companies, they're testing NightFood in their lobby shops, the stores where they sell all the snacks and the drinks and the ice cream. And the test is with the goal of national rollout if the test is successful. :

Now just about every hotel these days has a little shop in the lobby. Most of them sell ice cream. And we have been making hotels, Stuart, I'm sure you remember, we -- I know talked about in our previous calls, was a major push for us pre-COVID. And of course, everything kind of froze there for a while. The hospitality industry and travel industry, in particular, got hit pretty hard. :

And things are kind of returning back to a normalcy, I guess, and I'm really excited today to announce that. We're already being sold in a handful of lobby shops in one of the world's largest hotel chains. It's a corporate level test. I want to point that out. :

So our previous hotel distribution was all done at the operator level. It was the independent local operator deciding to put NightFood in their freezers. But this is a corporate level test, and so what that means is we're in touch directly with headquarters. They are the ones making this decision to test NightFood. :

If they like the way the test goes, they can trigger distribution nationally coast to coast in not just the banner that it's testing in, but theoretically in all of their banners, and that's all done from a single point of contact. :

And so we've been told that if the test is successful, the likelihood is that we would be quickly rolled into all their locations and all the banners. :

And look, the hotel environment, we've sold a little bit in the hotel environment. The product has sold well in the past. That, coupled with the new packaging, which I think is really going to work well in the hotel environment, I'm expecting a successful test. :

So again, this is news that's going to be out in the morning, but I wanted to make sure to announce it here on our quarterly investor call before the news crosses in the morning. :

Stuart Smith: Well, very good exciting times, and thank you very much for sharing that with us, Sean. Keep an eye out for that, listeners and investors, of course, using that ticker symbol again, NGTF. It will hit the press wire tomorrow, as you just heard from Sean.

Sean, now let's get your comments regarding the 10-Q for the company. :

Sean Folkson: Sure. So I wanted to walk through a couple of things here about the most recent quarterly filings, walk through some of the numbers.

So for the 6 months ended 12/31, which is the first 2 quarters of our fiscal year, which is a June 30 fiscal year, for those 6 months, our gross sales were up 20% year-over-year, and net revenue was up 62%. So gross sales through the first 6 months are about $460,000 on just over 146,000 pints with net revenue of $174,000. :

And we announced on a recent investor presentation at the Emerging Growth Conference that we think we have a good shot, and we're anticipating breaking $1 million in gross sales for this fiscal year that ends June 30. :

Now of course, we can't really talk about revenue without talking about slotting. As of December 31, which again is halfway through our fiscal year, we had slotting of $183,591 for the fiscal year-to-date, which was down quite a bit from the previous year, where we had about $270,000 in the first 6 months of slotting. :

So looking forward for the balance of fiscal 2021, so between January 1 and June 30 of this year, we don't expect a whole lot of additional slotting to hit the books. In our filing, we mentioned that we expect slotting for this fiscal year to come in under $250,000 total, whereas last year, it was over just over $540,000. And again, this current year, while we said we expect it to be under $250,000, it could be closer to $230,000 or even a little bit below that. So very little slotting expense here this quarter. :

And next remember for anybody who's not familiar, slotting is when a retailer or distributor charges fees to a manufacturer for placement in their stores or placement in their warehouses sometimes. It's in the form of upfront cash. Sometimes, it's in the form of deductions from invoices or just refills of products in -- for the stores. :

And again, so we have very little of that going on currently. It's not a good thing or a bad thing necessarily. I just want to make sure everybody is aware. It's a cost of doing business. There's certainly regional and national accounts that we are targeting, where slotting expenses will be significant. And depending on when we land those accounts, we should expect to see slotting go up again likely in fiscal 2022. It's just the cost of doing business. I wanted to be sure to touch on that for everybody. :

Another note here. We scaled back last quarter on our advertising and promotional activity, as we were targeting a production date for our new product in late January. But we knew that there might be some variance in that. So we scaled back on advertising and promotion last quarter because we wanted to use up all the old inventory that we have, but not run out and be caught in an out-of-stock situation. :

So the result of that, plus the natural seasonality that comes in the ice cream business, was a lower quarter in terms of gross sales and net revenues. We sold approximately 46,000 pints in the quarter for gross sales of approximately $143,000, and then net revenue of approximately $47,000. :

And it looks like we did a pretty good job on our timing. We only had one flavor go out of stock. That was Cookies n’ Dreams, and that was for less than a week, and that backorder PO was already filled last week. :

So we're still in a tight inventory position with regard to the new product and the new packaging. And as a result, we haven't yet turned back up our promotional activity to anywhere near where it will be in the spring. :

There are out there some in-store price promotions that are currently running. A lot of times, those are things you have to commit to several quarters in advance. And it's our goal to only ship new product to any of our accounts from this point forward, that is the new product and the new packaging. :

For e-commerce, we will still be using the old packaging and the old product until we're through this squeeze on inventory. :

With Walmart, there's no mention of Walmart in the Q because that distribution was announced after, but they did catch us a bit off guard with regard to the quantities. It looks like they're going to be needing from us, and that's why we're continuing to hedge on inventory until we have 100% visibility on that, and we're able to get enough new product manufactured. :

In some flavors, it's going to be tight for really the next month or 2. We've already scheduled production for March, and production for April has also been scheduled. And now we're looking at our demands for May. :

So that covers the big hotel announcement and the financial items that I wanted to touch on from the Q. So with that, Stuart, let's open it up to some questions. :

Stuart Smith: Well, very good. Great questions. Once again, your investors always do a great job with that. And first, we're going to start with Adam. And his question is, how many Walmart stores are you going into? Is this like a small regional test or a national rollout?

Sean Folkson: So we still haven't received the final store list, but the scope of this launch is definitely not what I think anybody would ever classify as a regional test. In this business, I mean, everybody is always testing and learning together with our retail partners. That's just the nature of things, and so there is always testing going on.

But this is a full-on launch. We're rolling into a significant number of stores, a significant number of regions. Look, Walmart has 4,800 stores. We're not going into all those stores. I don't know how frequently they ever do that. But we're going into a significant number and not what I or I think anybody else would ever term to be a test. :

Stuart Smith: All right. Very good. Let's move on to another question. This one is from Joe, and he wants to know the time line for profitability. And he also wants an update about non-dairy.

Sean Folkson: Sure. So in our financial modeling, the profitability time lines vary. The big factors are obviously points of distribution, unit economics and, of course, unit velocity, which is how fast are the pint selling off the shelves.

And we've modeled many different scenarios based on these variables as well as a big variable is the hotel test. If the test well, does the chain put us in one banner? Does it put us in 2 banners? Does it put us in all their banners? And when that would happen, and then what are the velocities and the unit economics of that environment. :

So there's a lot of variables in the modeling. There are certain scenarios we've modeled that have us profitable in a 12-month or less than 12-month time frame. There's others that have it more like a 24-month time frame. :

And with regard to nondairy, I get asked this a lot, and I totally understand it. It's something we definitely want to do when the time is right. I know dairy free is a hot growth segment, and everybody is talking about it. But remember, it's really, really, really small as a percentage of the total ice cream market. :

Depending on the statistics you see, it's going to show up as less than 10% and, in most cases, under 5% of the total ice cream market. So it's growing very fast as a subcategory. It's already, to some extent, overcrowded, and there's going to be some shakeout. :

We want to dominate sleep-friendly nutrition. We're not looking to start to niche off of sleep-friendly nutrition at this moment. I do definitely think that we will launch plant-based as an extension at some point in the coming years. And I anticipate it would most likely, if you look at like the way Ben & Jerry’s or Halo Top have done it, it's an addition, it's an extension on their line. I think that's more of the model that we would follow not as a key focus like a So Delicious or an Oatly brand, where all of our offerings are nondairy. :

We had nondairy stuff and have nondairy stuff in development. The samples were amazing. I didn't think that nondairy ice cream, especially in a better-for-you format could be so good. We'll bring it to market when the time is right. :

Remember, even with the massive growth projections and the accelerating growth that's going on right now, most experts, plant-based does not project to be even 10% of the total ice cream market until probably 2025 to 2028, depending on the projections that you see. So it's growing fast, but it's still really, really tiny. :

Stuart Smith: All right. Thank you for that, Sean. Susan would like to have you provide an update on MJ Munchies and the CBD/marijuana side of edibles.

Sean Folkson: Sure. So the FDA has taken longer than most people expected on the CBD side of things regarding companies and brands being able to use CBD as a food additive. I think a lot of people might not be aware that, as of this time, using CBD in a conventional food or snack product, it's still specifically prohibited by the FDA. And they've gone out of their way a couple of times in the last 15 months to make a point of that.

As long as it's prohibited, we're not looking to bring any products to market in that space. We don't want to introduce any unnecessary risk into our operation. We've got too much going on. We're rolling into Walmart. We're hopefully going to be rolling into thousands of hotels here. We're not looking to muddy the waters here. :

There are opportunities that are legal immediately, either in the hemp space or THC-infused edibles in certain states where those are specifically legal. We're always evaluating the evolving situation. We're in talks on and off with potential partners. And I do think something is going to happen on that front, but I don't have a time line to share at this moment for anybody. :

Stuart Smith: All right. Very good. The next question comes from Harold and he says, "Now that we're in Walmart, will it be possible for us to uplist to the NASDAQ?"

Sean Folkson: Well, it's certainly going to help. I mean, look, we're exploring the path to an uplist. It's a process. It's something that's always been on our road map. And certainly, as we do expect substantial growth coming up and as we work towards that growth and towards profitability, uplisting remains a goal for us.

There's many advantages to being on a major exchange. And in the background, we're constantly working to position ourselves to meet those criteria. And hopefully, that's something we'll be able to accomplish here in the short-term future for everybody. :

Stuart Smith: All right. Very good. Bill wants to know, why do all social media accounts have the old packaging still? When will it switch over? And more important, when will the new packaging be on the shelf?

Sean Folkson: Yes, definitely. The second part is the more important part. I think earlier today, we switched over on the social media accounts to the new packaging.

The first production run with the new packaging was just completed and started to ship out to retailers last week. And we made the decision not to switch the social media, I guess, graphics and icons to the new branding too early because that's what we were advised by our social media team Sircle Media because that's not what is on shelf yet. And we certainly didn't want to put that up before we were even shipping. :

It could be weeks. Even though we shipped to an account last week, it could still be weeks. It could be 1 month, 1.5 months for certain flavors before the new packaging hits the shelves because the retailers already have inventory. So we didn't want to make that change too early, but you should start seeing the new pints on shelf really this month for certain flavors and certain retailers. :

And again, I think I mentioned earlier, we are working to not have to ship any more of the old packaging out. We need to make sure to have new packaging for Walmart. We need to have new packaging for the hotels. Again, we're going to need a little bit more product or maybe a lot more product for Walmart than we originally thought. And the most important thing is to get the new packaging on shelves. :

So anybody who's ordering online with e-commerce, I know that's one of our goals is to get the new product. We've added -- we've made some tweaks to the formulation to make the product shift better, stand up to the dry ice better, but those e-commerce people may have to wait as the most important situation is our retail supermarkets, Walmart and hotels. :

Stuart Smith: All right. Very good, Sean. This is our last question. It comes from Kyle and he's quoting you. He says, "Sean has referred to 2021 as a transformative year." Can you get into more detail about what you expect from 2021, Sean?

Sean Folkson: Yes. I used the word transformative because I feel like there's 2 kinds of growth. One is the incremental growth, which is what we've seen. Sales numbers are growing, more stores, more doors, more revenues, things like that. And that's doing the same things, doing them better, right, a little better and a little better.

And then there's bigger changes that can happen. And these changes, these bigger ones are not really incremental, but what I would call transformative. And it puts the company on a whole different path and in a different position going forward and really kind of change the stage that the company is in. :

Look, I made that statement before the Walmart announcement, but obviously long after I knew Walmart was coming. Landing an account like Walmart, that gives you an instant retail footprint from coast to coast, developing a secondary vertical like hotels that could facilitate rapid distribution into thousands of nontraditional outlets, potential partnerships with global CPG companies, these are the kinds of transformational events, some of which have already been secured, obviously, and some of which are at various stages of conversations. :

And these are the kind of things that really change how a company is viewed, change our access to capital, changes our ability to project the future and path to profitability. :

Another example operationally would be from being a product that has a pretty good sales velocity and improving that a little bit compared to having a product that starts to fly off the shelves to the point where retailers can't keep it on shelf anymore, which is something that happened with Halo Top a few years ago with their packaging redesign because that changes the whole conversation with the category managers of the other supermarkets that we're not in. :

So these are the kinds of opportunities we have this year. I know I named a few of them. I'm guessing there's 1 or 2 that I'm forgetting. But I believe we're going to see some of these things, and on top of Walmart which has already been secured, that come to fruition here in 2021. :

And then you go from being an upstart that's just grinding it out, trying to find your place in the world, and you transform into a company that's earned a spot at the table, that demands a place on shelves, in the hotels, in the supermarkets, in the freezers at home. And again, the future at that point becomes more clear. And it really changes the way everybody looks at you. :

So we've got a big year ahead in my eyes. Hopefully, everybody out there can understand and share my excitement over what's to come here in 2021. :

Stuart Smith: Well, Sean, as I said at the outset of that question, that was our last question. I want to thank you for your time here today, and I want to thank you on behalf of your shareholders and investors for answering their questions. Thanks for your time today, Sean.

Sean Folkson: Thank you so much, Stuart. I appreciate your help.

Stuart Smith: All right. For Sean Folkson, this is Stuart Smith saying thanks so much for tuning in, and don't stop sending in those questions. Keep NGTF high up on your radar and watch list.