Earnings Transcript for NGTF - Q3 Fiscal Year 2021

Operator: Good afternoon. My name is Stuart Smith and I will be your operator today. At this time, I would like to welcome you all to NightFood’s Fiscal Third Quarter 2021 Financial Results Conference Call. All lines have now been placed on mute to prevent any background noise. Following the speaker's remarks, there will be a question-and-answer session. At this time, I would like to turn the call over to Tirth Patel. Tirth, please go ahead.

Tirth Patel: Thank you, and good afternoon, everyone. This is Tirth Patel with LHA Investor Relations. Welcome to NightFood’s fiscal third quarter 2021 financial results and business update conference call. As has been NightFood’s practice and as noted by the operator prepared remarks will be followed by a question-and-answer session. During this call, management will be making forward-looking statements regarding NightFood’s expectations and projections about future events. Generally, forward-looking statements can be identified by terminology such as expects, anticipates, believes or other similar expressions. These statements are based on current expectations and are subject to a number of risks and uncertainties, including those set forth in the company's periodic filings with the Securities and Exchange Commission. No forward-looking statements can be guaranteed, and actual results may differ materially from such statement. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means results could change at any time and the contemplated impact of COVID-19 on NightFood’s operations, financial results and outlook is a best estimate based on the information for today's discussion. I also caution that the content of this conference call is accurate only as of the date of this broadcast, May 26, 2021. NightFood undertakes no obligation to revise or update comments made during this call, except as required by law. With that said, I'd like to turn the call over to Sean Folkson, NightFood’s Chief Executive Officer. Sean?

Sean Folkson: Thank you so much, Tirth. Welcome to your first call with us. Tirth Patel is with LHA Investor Relations. That's our newly appointed Investor Relations advisor and the leader in Investor Relations for more than 30 years. And we mentioned previously that we view 2021 is a transformative and transformational year, part of that is bringing on an IR firm with all the progress that we've made, it’s time for us to increase awareness among both institutional and retail investors and help them understand the opportunity that we're creating and the upside involves. And so with that, I do want to touch on our major accomplishments of the last five months. To recap for everybody since the year started, NightFood has more than doubled our store count foot while recently announced Walmart distribution. We've eliminated 100% of the debt from our balance sheet including all convertible debt. We brought on our new Chief Financial Officer, Jerry Isaacson, who's a CPA with a tremendous amount of CEO level experience in ice cream logistics, procurement and management. And we are wrapping up a pilot retail test with of the leading global hotel brands. We launched our new packaging to all of our retail accounts and we do expect a lot more to come this year. Anybody invested in NightFood is invested in the brand, they're invested in the company and they're invested in the category and it’s the category of nighttime nutrition. And on the call a few months ago, we were talking about Pepsi launching a new drink to promote sleep and relaxation called Driftwell and I indicated that it was kind of an indication of interest that the big guys were really starting to pay attention to what we're doing. And now, just two months ago, Unilever, which is the world's largest ice cream company, they announced that they're launching a yearlong study looking at the association between the gut microbiome and sleep. And there's plenty of existing research that tells us that gut bacteria are very important and very involved in sleep quality and the production of serotonin and melatonin, the regulation of circadian rhythms. And Unilever was looking at ways that we can use diet and use nutrition to improve sleep and improve sleep quality. And again, this interest from the largest food companies now in the world are greatly substantiates the coming to the category, the category that our company pioneered, the company that – the category that our company continues to lead and it validates the big idea, which cause me to dedicate my life to this vision years ago. And we also – I also have explained the attention that we are getting from the media, retailers and from the investment community. And with all the day-to-day developments, the marketing campaigns and the scientific research and the growing health literacy, one thing remains constant and that is that this category is coming. You've heard me say it before the category has all the signals of being $1 billion category in the coming years. I know we've been at this for a couple years. It's still early. We're making great progress. We're making progress as the leader and pioneer, and ultimately, the king of the category in much the same way that Chobani is the king of Greek Yogurt. 5-Hour Energy is the king of energy shot. Again, in April, we announced coast-to-coast distribution with Walmart and now that rollout is complete with over 1000 Walmart stores across the country. We are on shelves for approximately five weeks now and we have a major marketing initiative launching in about two weeks that we're very excited about. In that hundreds of OBGYN offices in markets where we have heavy distribution, those offices will have NightFood promotional materials in their reception area, letting expecting moms to know about NightFood, know about our endorsement by the American Pregnancy Association and informing them that they can try NightFood from their local stores. Another major initiative we've gone on and most of you know about is our hotel test that was initiated in Q1. We believe it's going very well. The test started for the first few weeks with our original packaging and our new packaging, which had the initial production run at some point in February. Before that new packaging hit any supermarket shelves, the hotels will receive some for the retail test that is going on. And the feedback that we got was the sales increased when the new packaging was introduced, which, of course, is great for us to hear. Now that the new packaging is in almost all of our retail locations, we're very excited about anticipated consumer trial and repurchase rates and the impact that those will have our set out and revenue numbers as we move from 2021 further validating the category. So now I'd like to turn to our recent financial results for the quarter ended March 31, 2021. Remember, that's our third quarter since we're on June 30th fiscal year end. We had gross product sales of $181,172, net revenues were $96,762 and total operating expenses were $487,567. Through the nine months ended March 31st, net revenue was up 90% over last year at $271,000 approximately, while gross sales were down 3% at $643,000. And gross sales being down in the quarter and down by 3% year-to-date. That's primarily a function of the fact that in March 31st quarter last year, we onboarded two major Albertsons divisions. When a new store or chain as a product, they place large orders to stock their shelves and build their distribution pipeline. This year through the first nine months, we added distribution through smaller independent and UNFI, which is a large distributor of health and natural product, but there were no major changes brought on during this fiscal year prior to March 31st. There were no major changes brought on to Walmart, which was added in April. So those first Walmart orders are not showing up in the reported numbers yet, those first Walmart orders will count towards our upcoming filing, which would relate to our fiscal fourth quarter, which is the quarter that we're in right now. Now, as many of you noted, in the discussion groups, slotting expense is down drastically from last year. The year-to-date numbers were approximately $190,000 this year through nine months, compared to $428,000 through the nine months last year and for the last year for the full fiscal year, slotting expenses were $541,000 for the full year, this year we're projecting around $240,000 for slotting. As of the date of our filing last week, we had almost doubled our fiscal 2020 net revenue numbers already with approximately six weeks remaining in the fiscal year. So this fiscal year, which ends in a few weeks, this is going to be our biggest year, both in terms of gross sales and in terms of net revenue. Now, the big financial news from April is that we've cleaned up our balance sheet, we eliminated all of our debt and well over half of our payables and that happened in April with our $4.5 million financing round and some renegotiations. And from the interactions I've had personally with investors, I don't get the sense that the strength of our balance sheet now is really fully appreciated. Through these renegotiations, our largest debt holder exchanged all of their remaining debt for equity and that signals their confidence in our current positioning for future growth. I'm extremely proud of what we've been able to accomplish in the last few months. The company's in great shape. Going forward I will use that word transformational. Again, this is going to be a transformational year. And with that update, we can jump right into the question-and-answers.

A - Tirth Patel: Okay. Great. Thanks, Sean. The first question today comes from Lauren. He's actually got three. One, does the company see the need for additional funding, and if so, when and how? Also, he asks, please explain the lower revenue in the last fiscal quarter as it relates to sales of product in existing stores, pre-Walmart? And also, his third question is, can you share any initial results at Walmart?

Sean Folkson: Sure. So, on the first question about the additional funding. We're a growth stage company with a big vision. We're going to need capital and we're going to be opportunistic when it's in the best interest of the company and our shareholders. On the second question about revenues, the fact that gross sales or net revenues decline or increase from one period to another, that's not a sign that the product is moving faster or slower and retail is the function of when orders are placed by our wholesale customers. Because we still have a handful of wholesale customers that make up the majority of our revenue, the timing of their wholesale orders and the size of what they choose to order can skew our quarterly results, in other words, an order coming in a few days before the end of the quarter or an order coming in a few days after the start of the next quarter. Likewise, when new retail accounts come on Board, they need to order to fill their shelves and fill their pipeline. And those pipeline fill orders are typically much larger than the replenishment orders, especially the first replenishment orders would be. So last year’s March 31st numbers were enhanced by Shaw's and Jewel, those are two of the opposite suspicions I mentioned, ordering and delivering during that March 31st quarter. And then as it turns out, because of the pandemic, we didn't get on shelf in most of those stores until April and really made for most of them. So the numbers from quarter-to-quarter as we mature, they will likely tell more of a complete story. In terms of Walmart results, we're seeing strong growth through the first few weeks. But that's to be expected we are a new product. We expect that growth to accelerate when our two big initiatives launch in early June. But it's really too early to start drawing meaningful conclusions or getting ahead of ourselves.

Tirth Patel: Thanks, Sean. Our next question comes from Joe who asks, are you concerned about marketing to pregnant women during a time when birth rates are dropping sharply?

Sean Folkson: Yeah. Yeah. I think this is a case of over analysis. It's true that birth rates are lower than in recent years. I don't know, I think, it's about 7%. I don't know if I would use the words dropping sharply to describe that. But we expected a decrease in birth rates. I remember last year, a little more than a year ago, when the pandemic first hit, there were some people talking on social media, Daymond John from Shark Tank was one of them, that there was going to be a baby boom and then some experts came around well. We think actually the exact opposite is going to be true. If pregnancy is down by the projected 7%, I view that is really 100% immaterial to us. It would be different if we're an established company that really counted on the pregnancy market and we had a share of that market -- a significant share of that market to protect and we were set to lose 7% of sales because of low birth rates or something like that. But we do expect significant penetration into the pregnancy market in the coming years and it's starting from a basis close to zero. So whether there's 3.7 million births a year or 4 million or 4.2 million. For us, it's still a massive number of households for us to enter on the strength of the endorsement from the American Pregnancy Association as the officialized screaming. With our brand recognition growing rapidly in the pregnancy market, this kind of decrease in birth rate doesn't really present any meaningful resistance for us to capture an important piece of that consumer base.

Tirth Patel: Our next question comes from Tom, who asks why the NightFood packaging doesn't have protein content featured more prominently?

Sean Folkson: Well, we want to be known for one thing and that's sleep-friendly. Part of that is protein, part of that is fiber, right, part of that is on vitamins and minerals and enzymes and less sugar and less fat and fewer calories. And I think, if you take a look at the old and the new packaging for Halo Top, as an example, you'll see that on their original packaging, they had protein call outs, they had call outs relates to net carbs, calorie counts and other conflicting elements on that right on the front panel. And on their redesigned which is very smart, they focused on one thing and that was calorie count. So all they focused on. They mentioned protein, but it's down in the corner. Consumers got in a split second and the rest is history. We do mention protein content in multiple places, two different places on our pints. But we don't do it in a way and intentionally we don't do it in a way that would compete with -- compete for attention with our sleek friendly messenger.

Tirth Patel: Okay. Great. Thanks, Sean. Next, we have John, asking for an update on the hotel test.

Sean Folkson: Sure. Thanks. So I want to be clear, we don't know anything official yet. But it's my understanding that the test is going very well. The last update that I received about timing was that they'll be wrapping up soon and then analyzing. It is a test that they're doing on a handful of new and premium brands across a handful of categories, ice cream, other snacks, beverages, wines, et cetera. The timing has shifted on it a few times, but last time I heard it is winding down. They were testing things independently and then some things together. And while some items we were told were being tested only for one month segment, they want NightFood in there for the entire test. I know during one portion of the test, they had us in the freezer case alone in some of the properties. Now they're testing us alongside, pints from one of the national brands. So that's something that they're looking at differently. We haven't gotten much feedback or reporting. But the one thing we know and we feel great about is that, when we started to test, we were using the original packaging, I mentioned this earlier, and when they went to the new packaging, they said that they did see a significant increase in velocity and that was a very positive sign for us. And in fact, they just asked us to ship more product out which is delivering tomorrow. So the test is not over, but I do get the feeling that it's wrapping up soon.

Tirth Patel: Okay. Thanks, Sean. We've now got a question from Beth, who asks, if you have any plant-based or keto products in the works?

Sean Folkson: Yeah. Thanks. We are in the process of doing some development and formulation work. We just actually got some comments the other day from Chef Chris Santos on some of our samples. And we're always looking to improve the product line and we have some new ideas and ingredients that we're excited about being able to introduce in the summer or the fall. These are the evolutions to our existing recipes with new benefits or additional benefits in terms of sleep support, taste, texture, nutritional profile, that type of thing. At this point, I would say, we don't expect to enter the plant-based or keto space in the short-term. Our focus is very clearly on night snacking. There is a significant percentage of growth in dairy free and in keto. But I want to point out the actual size and scope of what we're dealing with, the global ice cream market is about $60 billion according to reports and projects in about five years to be close to $100 billion. Non-dairy currently makes up less than 1% of that according to the research that I've seen, not 50%, it's not 20%, not 10%, it's 1% and it projects to grow significantly as well over the next five years. And by significantly the projections are that it looks like it's going to get close to 2%. So I know that non-dairy is super hot and hip. There's tons of brands out there rushing to compete for that 1%, which is going to grow to 2%. And certainly, we were looking to do that as well. But upon further review, what we learned is our space is a needs to remain sleep-friendly. So for the other 98 to 99% of ice cream consumption, that's what we're focused on and we're going to focus on a sleep-friendly products. So the keto trend is the same thing. I think the absolute numbers are actually a little bit lower in terms of ice cream consumption, but it's the same concept. We don't want to go chasing into other niches, where we're not the leader, we're not the creator and we're not going to be the king. We've carved out our niche. It's in our name. It's in our products. It's in our DNA. It's sleep-friendly and it's proudly on the front of every pint. And if we do our job right, then maybe in a year or two, the CEO of Oatly and the CEO of whatever other dairy, non-dairy ice cream companies are out there or the CEOs of other snack food companies, they should start being asked when they're going to introduce their sleep-friendly product. But we do not anticipate going into other niches at this stage. Again, it might be more hip, because that's what a couple of percentage of the people want right now and it's getting a lot of media buzz. But again, we believe it's more important to help the other 90%, 95%, 99% of the people with their nighttime snacking through those sleep-friendly products. And that is our most direct path to shareholder value, right? It’s powerfully establishing ourselves as the king of nighttime nutrition, the king of the sleep-friendly nutrition category and we can't do that if we're going to chase into other niches that don't tie directly into helping people sleep better through nutrition.

Tirth Patel: Thanks, Sean. We've got one final question. Adam asks, how is NightFood building a competitive moat around his product category? Are you concerned that a big company like Unilever, with their new test could come in and steal the category from you?

Sean Folkson: That's just not the way these things tend to work. The larger players don't enter a market until there's a recognized significant consumer appetite. Just within the last week or two, Hershey's, which – they are a pretty big candy company, they acquired a company called Lily's Sweets, which is a low sugar candy company for around $400 million according to the reports that I've seen. A couple of months ago, Mondelez, which is the makers of Oreo cookies, right, they acquired Hu Chocolate for reported $340 million. So we've got Hershey's buying out other candy companies. We have got Mondelez buying out existing candy companies for hundreds of millions of dollars. It's not because they don't think that they could theoretically create a competitor in the space, it's because they don't want to launch and compete in new niches and have to try to chase every trend. They would rather sit and wait and acquire, acquisition is the preferred method of entering markets, Unilever, Nestle, General Mills, Kellogg's, all the global food conglomerates they run the same playbook. A famous example I use and some people may have heard me talk about this before is Hormel, they own SKIPPY peanut butter. A few years ago, they acquired a company called Justin's Nut Butters for about $300 million. And so, why not just stick with a natural version of SKIPPY’s instead. And that's just not how it works. That's not how they operate. The Unilever test, I can't underscore, it's a huge validation for us. I think it puts a lot of big eyeballs on us. We're excited for the results, because it pushed the whole category forward. But the study by Unilever and the interest from the other global players, it just shows that they're sniffing out the opportunity in sweet nutrition. But as the category pioneer and creator, we also have the inside track to being the category king. I don't think we're in imminent danger from one of the big guys trying to come in until the category develops a bit further and so the concept of the importance of better nighttime snacking is more ingrained into consumer consciousness. And by the time that happened, I believe we will have established ourselves as the undisputed leaders in the space and that's typically the way these things play out and that's why the big guys don't typically innovate.

Tirth Patel: Okay. Thanks, Sean. That was the last question. Any closing remarks?

Sean Folkson: Yeah. Sure. So, the theme is this, I encourage everybody to take the long view. This is still very early in the journey. I do expect things to continue to accelerate obviously we have accomplish so much this year. I encourage you not to overreact. We're going to have a bear quarter this quarter. Don't overreact when sales jump or when something goes up or down, right, have the bigger view, the bigger picture, the market we're launching into is massive. The global food and beverage giants are validating the space which is great for us, consumer trends are turning more towards sleep than ever and the company is growing and getting stronger and better position. We talked about 2021 being transformative, not even half over and we've accomplished so much. Walmart, the hotel test, the clean balance sheets or newly capitalized, and of course, there's more in the works. We're very excited about what 2021 holds for all of us and I thank you all for your time, your support and your participation.