UNITED STATES
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 quarterly period ended June 30, 20212022
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 No. 001-39338
NUZEE, INC.
(exact name of registrant as specified in its charter)
| Nevada | 38-3849791 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
1 4011401 Capital Avenue, Suite B, Plano, TX, 75074
(Address of principal executive offices) (zip code)
(760(760)) 295-2408
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.00001 par value | NUZE | The NASDAQ Stock Market LLC |
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 requirements for the past 90 days. Yes ☒No☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a 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.
| Large accelerated filer | ☐ | Accelerated Filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
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 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 16, 2021,11, 2022, the registrant had shares of common stock outstanding.
Table of Contents
Table of Contents
| 2 |
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Such forward-looking statements reflect the views of NuZee, Inc. (“NuZee” or the “Company”) with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about the Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “expects”, “project,” “predict,” “believe,” “expect,” “anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements in this report may include, without limitation, statements regarding:
| ● | our plans to obtain funding for our operations, including funding necessary to develop, manufacture and commercialize our | ||
| ● | the impact to our business from the COVID-19 global | ||
| ● | the evolving coffee preferences of coffee consumers in North | ||
| ● | the size and growth of the markets for our products and co-packing services; | ||
| ● | our ability to compete with companies producing similar | ||
| ● | our expectation that our existing capital resources will be sufficient to fund our operations for at least the next 12 months; | ||
| ● | our ability to successfully achieve the anticipated results of strategic transactions, including our acquisition of substantially all of the assets of Dripkit (as defined below); | ||
| ● | our expectation regarding our future co-packing revenues; | ||
| ● | our ability to develop innovative new products and expand our co-packing services to other products that are complementary to our current single serve coffee product offerings; | ||
| ● | our reliance on third-party roasters to roast coffee beans necessary to manufacture our products and fulfill every aspect of our co-packing services; | ||
| ● | regulatory developments in the U.S. and in non-U.S. countries; | ||
| ● | our ability to retain key management, sales, and marketing personnel; | ||
| ● | the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology; | ||
| ● | the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; |
| 3 |
| ● | our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting; | |
| ● | ||
| ● | our financial performance. |
The forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in the section of our Annual Report on Form 10-K filed with the SEC on December 28, 202022, 2021, titled “Risk Factors” and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.
Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
Item 1. Financial Statements.Statements
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, 2021 | September 30, 2020 | June 30, 2022 | September 30, 2021 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 12,704,257 | $ | 4,398,545 | $ | 7,523,099 | $ | 10,815,954 | ||||||||
| Accounts receivable, net | 320,030 | 195,610 | 573,990 | 555,238 | ||||||||||||
| Inventories, net | 428,856 | 245,370 | 682,580 | 573,464 | ||||||||||||
| Prepaid expenses and other current assets | 321,651 | 645,375 | 1,174,297 | 482,288 | ||||||||||||
| Total current assets | 13,774,794 | 5,484,900 | 9,953,966 | 12,426,944 | ||||||||||||
| Property and equipment, net | 807,848 | 1,668,348 | 612,296 | 674,024 | ||||||||||||
| Other assets: | ||||||||||||||||
| Right-of-use asset - operating lease | 449,250 | 652,197 | 731,419 | 386,587 | ||||||||||||
| Right-of-use asset - finance lease | - | 105,825 | ||||||||||||||
| Investments | 179,238 | 183,314 | ||||||||||||||
| Investment | 171,210 | 175,425 | ||||||||||||||
| Goodwill | 531,412 | - | ||||||||||||||
| Intangible assets, net | 303,556 | - | ||||||||||||||
| Other assets | 81,921 | 80,559 | 86,748 | 79,822 | ||||||||||||
| Total other assets | 710,409 | 1,021,895 | 1,824,345 | 641,834 | ||||||||||||
| Total assets | $ | 15,293,051 | $ | 8,175,143 | $ | 12,390,607 | $ | 13,742,802 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 81,318 | $ | 49,778 | $ | 456,470 | $ | 342,790 | ||||||||
| Current portion of long-term loan payable | 57,920 | 56,072 | 7,890 | 43,618 | ||||||||||||
| Current portion of lease liability - operating lease | 162,674 | 263,678 | 180,939 | 150,931 | ||||||||||||
| Current portion of lease liability - finance lease | 26,964 | 21,598 | 30,610 | 27,833 | ||||||||||||
| Accrued expenses | 202,147 | 703,069 | 492,409 | 274,009 | ||||||||||||
| Deferred income | 95,032 | 34,000 | 338,317 | 175,822 | ||||||||||||
| Other current liabilities | 255,198 | 104,525 | 23,353 | 138,631 | ||||||||||||
| Total current liabilities | 881,253 | 1,232,720 | 1,529,988 | 1,153,634 | ||||||||||||
| Non-current liabilities: | ||||||||||||||||
| Lease liability - operating lease, net of current portion | 303,599 | 395,713 | 565,825 | 247,656 | ||||||||||||
| Lease liability - finance lease, net of current portion | 57,095 | 78,400 | 29,696 | 50,567 | ||||||||||||
| Loan payable - long term, net of current portion | 14,590 | 56,845 | 6,753 | 12,696 | ||||||||||||
| Other noncurrent liabilities | 22,435 | 21,707 | 80,817 | 65,802 | ||||||||||||
| Total noncurrent liabilities | 397,719 | 552,665 | ||||||||||||||
| Total non-current liabilities | 683,091 | 376,721 | ||||||||||||||
| Total liabilities | 1,278,972 | 1,785,385 | $ | 2,213,079 | $ | 1,530,355 | ||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common stock; shares authorized, $ par value; and shares issued | 178 | 146 | ||||||||||||||
| Common stock; shares authorized, $ par value; and shares issued and outstanding as of June 30, 2022, and September 30, 2021, respectively | $ | 194 | $ | 178 | ||||||||||||
| Additional paid in capital | 63,147,614 | 40,472,229 | 71,485,715 | 64,839,254 | ||||||||||||
| Accumulated deficit | (49,321,500 | ) | (34,272,778 | ) | (61,486,600 | ) | (52,824,808 | ) | ||||||||
| Accumulated other comprehensive income | 187,787 | 190,161 | 178,219 | 197,823 | ||||||||||||
| Total stockholders’ equity | 14,014,079 | 6,389,758 | 10,177,528 | 12,212,447 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 15,293,051 | $ | 8,175,143 | $ | 12,390,607 | $ | 13,742,802 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Nine Months Ended June 30, 2022 | Nine Months Ended June 30, 2021 | |||||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
| Revenues | $ | 510,032 | $ | 191,962 | $ | 1,442,083 | $ | 1,131,562 | ||||||||||||||||||||||||
| Revenues, net | $ | 774,019 | $ | 510,032 | $ | 2,508,345 | $ | 1,442,083 | ||||||||||||||||||||||||
| Cost of sales | 413,446 | 331,039 | 1,352,843 | 1,250,904 | 857,672 | 413,446 | 2,575,646 | 1,352,843 | ||||||||||||||||||||||||
| Gross Profit (Loss) | 96,586 | (139,077 | ) | 89,240 | (119,342 | ) | ||||||||||||||||||||||||||
| Gross profit (loss) | (83,653 | ) | 96,586 | (67,301 | ) | 89,240 | ||||||||||||||||||||||||||
| Operating expenses | 3,206,552 | 2,378,947 | 15,222,137 | 8,342,412 | 2,546,608 | 3,165,840 | 8,554,276 | 15,103,252 | ||||||||||||||||||||||||
| Loss from operations | (3,109,966 | ) | (2,518,024 | ) | (15,132,897 | ) | (8,461,754 | ) | (2,630,261 | ) | (3,069,254 | ) | (8,621,577 | ) | (15,014,012 | ) | ||||||||||||||||
| Loss from investment in uncosolidated affiliate | (102 | ) | - | (4,077 | ) | - | ||||||||||||||||||||||||||
| Loss from equity method investment | (1,919 | ) | (102 | ) | (4,215 | ) | (4,077 | ) | ||||||||||||||||||||||||
| Other income | 47,909 | 25,523 | 101,623 | 28,504 | 60,672 | 47,909 | 145,890 | 101,623 | ||||||||||||||||||||||||
| Other expense | (1,280 | ) | (42,113 | ) | (2,093 | ) | (44,712 | ) | (60,361 | ) | (41,992 | ) | (174,889 | ) | (120,978 | ) | ||||||||||||||||
| Interest expense | (3,603 | ) | (6,448 | ) | (11,278 | ) | (16,573 | ) | ||||||||||||||||||||||||
| Interest expense, net | (2,023 | ) | (3,603 | ) | (7,001 | ) | (11,278 | ) | ||||||||||||||||||||||||
| Net loss | (3,067,042 | ) | (2,541,062 | ) | (15,048,722 | ) | (8,494,535 | ) | $ | (2,633,892 | ) | $ | (3,067,042 | ) | $ | (8,661,792 | ) | $ | (15,048,722 | ) | ||||||||||||
| Net income (loss) attributable to noncontrolling interest | - | 1,356 | - | (40,634 | ) | |||||||||||||||||||||||||||
| Net loss attributable to NuZee, Inc. | $ | (3,067,042 | ) | $ | (2,542,418 | ) | $ | (15,048,722 | ) | $ | (8,453,901 | ) | ||||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.17 | ) | $ | (0.18 | ) | $ | (0.94 | ) | $ | (0.62 | ) | $ | (0.14 | ) | $ | (0.17 | ) | $ | (0.47 | ) | $ | (0.94 | ) | ||||||||
| Basic and diluted weighted average number of common stock outstanding | 17,820,390 | 13,782,950 | 15,938,931 | 13,724,590 | 19,332,753 | 17,820,390 | 18,475,396 | 15,938,931 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Noncontrolling | ||||||||||||||||||||||||
| NuZee, Inc. | Interests | Total | ||||||||||||||||||||||
| For the three months eneded June 30 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| Net income (loss) | $ | (3,067,042 | ) | $ | (2,542,418 | ) | $ | - | $ | 1,356 | $ | (3,067,042 | ) | $ | (2,541,062 | ) | ||||||||
| Foreign currency translation | (7,854 | ) | 10,209 | - | 530 | (7,854 | ) | 10,739 | ||||||||||||||||
| Total other comprehensive income (loss), net of tax | (7,854 | ) | 10,209 | - | 530 | (7,854 | ) | 10,739 | ||||||||||||||||
| Comprehensive income (loss) | $ | (3,074,896 | ) | $ | (2,532,209 | ) | $ | - | $ | 1,886 | $ | (3,074,896 | ) | $ | (2,530,323 | ) | ||||||||
| NuZee, Inc. | ||||||||
| For the three months ended June 30 | 2022 | 2021 | ||||||
| Net loss | $ | (2,633,892 | ) | $ | (3,067,042 | ) | ||
| Foreign currency translation | (45,197 | ) | (7,854 | ) | ||||
| Total other comprehensive loss, net of tax | (45,197 | ) | (7,854 | ) | ||||
| Comprehensive loss | $ | (2,679,089 | ) | $ | (3,074,896 | ) | ||
| Noncontrolling | ||||||||||||||||||||||||
| NuZee, Inc. | Interests | Total | ||||||||||||||||||||||
| For the nine months eneded June 30 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| Net loss | $ | (15,048,722 | ) | $ | (8,453,901 | ) | $ | - | $ | (40,634 | ) | $ | (15,048,722 | ) | $ | (8,494,535 | ) | |||||||
| Foreign currency translation | (2,374 | ) | (59,510 | ) | - | 81,368 | (2,374 | ) | 21,858 | |||||||||||||||
| Total other comprehensive income (loss), net of tax | (2,374 | ) | (59,510 | ) | - | 81,368 | (2,374 | ) | 21,858 | |||||||||||||||
| Comprehensive income (loss) | $ | (15,051,096 | ) | $ | (8,513,411 | ) | $ | - | $ | 40,734 | $ | (15,051,096 | ) | $ | (8,472,677 | ) | ||||||||
| NuZee, Inc. | ||||||||
| For the nine months ended June 30 | 2022 | 2021 | ||||||
| Net loss | $ | (8,661,792 | ) | $ | (15,048,722 | ) | ||
| Foreign currency translation | (19,604 | ) | (2,374 | ) | ||||
| Total other comprehensive loss, net of tax | (19,604 | ) | (2,374 | ) | ||||
| Total other comprehensive loss, net of tax | (19,604 | ) | (2,374 | ) | ||||
| Comprehensive loss | $ | (8,681,396 | ) | $ | (15,051,096 | ) | ||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
NuZee, , Inc.
Consolidated Statements of Stockholders’ EquityCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2020 | 14,570,105 | $ | 146 | $ | 40,472,229 | $ | (34,272,778 | ) | $ | 190,161 | $ | 6,389,758 | ||||||||||||
| Equity securities issued for cash | 324,959 | 3 | 2,683,977 | - | - | 2,683,980 | ||||||||||||||||||
| Common stock issued for compensation | ||||||||||||||||||||||||
| Common stock issued for compensation, shares | ||||||||||||||||||||||||
| Amortization of common stock issued for compensation | ||||||||||||||||||||||||
| Stock option expense | - | - | 4,507,298 | - | - | 4,507,298 | ||||||||||||||||||
| Exercise of stock options | 6,000 | - | 9,180 | - | - | 9,180 | ||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 1,656 | 1,656 | ||||||||||||||||||
| Net loss | - | - | - | (5,896,072 | ) | - | (5,896,072 | ) | ||||||||||||||||
| Balance December 31, 2020 | 14,901,064 | $ | 149 | $ | 47,672,684 | $ | (40,168,850 | ) | $ | 191,817 | $ | 7,695,800 | ||||||||||||
| Equity securities issued for cash | 2,782,111 | 28 | 11,017,276 | - | - | 11,017,304 | ||||||||||||||||||
| Common stock issued for compensation | 137,215 | 1 | 870,999 | - | - | 871,000 | ||||||||||||||||||
| Stock option expense | - | - | 1,989,006 | - | - | 1,989,006 | ||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 3,824 | 3,824 | ||||||||||||||||||
| Net loss | - | - | - | (6,085,608 | ) | - | (6,085,608 | ) | ||||||||||||||||
| Balance March 31, 2021 | 17,820,390 | $ | 178 | $ | 61,549,965 | $ | (46,254,458 | ) | $ | 195,641 | $ | 15,491,326 | ||||||||||||
| Amortization of common stock issued for compensation | - | - | 91,036 | - | - | 91,036 | ||||||||||||||||||
| Stock option expense | - | - | 1,506,613 | - | - | 1,506,613 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (7,854 | ) | (7,854 | ) | ||||||||||||||||
| Net loss | - | - | - | (3,067,042 | ) | - | (3,067,042 | ) | ||||||||||||||||
| Balance June 30, 2021 | 17,820,390 | $ | 178 | $ | 63,147,614 | $ | (49,321,500 | ) | $ | 187,787 | $ | 14,014,079 | ||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2021 | 17,820,390 | $ | 178 | $ | 64,839,254 | $ | (52,824,808 | ) | $ | 197,823 | $ | 12,212,447 | ||||||||||||
| Exercise of warrants, net of issuance costs | 384,447 | 4 | 1,721,014 | - | - | 1,721,018 | ||||||||||||||||||
| Stock option expense | - | - | 1,124,187 | - | - | 1,124,187 | ||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 32,688 | 32,688 | ||||||||||||||||||
| Net loss | - | - | - | (2,804,203 | ) | - | (2,804,203 | ) | ||||||||||||||||
| Balance December 31, 2021 | 18,204,837 | $ | 182 | $ | 67,684,455 | $ | (55,629,011 | ) | $ | 230,511 | $ | 12,286,137 | ||||||||||||
| Warrant issuance costs | - | - | (18,422 | ) | - | - | (18,422 | ) | ||||||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | 42,448 | - | 88,426 | - | - | 88,426 | ||||||||||||||||||
| Common stock issued for Dripkit acquisition | 178,681 | 2 | 386,842 | - | - | 386,844 | ||||||||||||||||||
| Stock option expense | - | - | 935,447 | - | - | 935,447 | ||||||||||||||||||
| Exercise of stock options | 14,000 | - | 12,600 | - | - | 12,600 | ||||||||||||||||||
| Restricted stock award issuance | 117,920 | 1 | 9,589 | - | - | 9,590 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (7,095 | ) | (7,095 | ) | ||||||||||||||||
| Net loss | - | - | - | (3,223,697 | ) | - | (3,223,697 | ) | ||||||||||||||||
| Balance March 31, 2022 | 18,557,886 | 185 | $ | 69,098,937 | $ | (58,852,708 | ) | $ | 223,416 | $ | 10,469,830 | |||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | 6,878 | - | $ | 6,830 | $ | - | $ | - | $ | 6,830 | ||||||||||||||
| Equity securities issued for cash, exempt offering, net of issuance costs | 884,778 | 9 | 1,649,727 | - | - | 1,649,736 | ||||||||||||||||||
| Common stock issued to settle Dripkit Bulk Sales Holdback Amount | 18,475 | - | 40,000 | - | - | 40,000 | ||||||||||||||||||
| Stock option expense | - | - | 627,895 | - | - | 627,895 | ||||||||||||||||||
| Amortization of restricted stock award issued | - | - | 62,326 | - | - | 62,326 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (45,197 | ) | (45,197 | ) | ||||||||||||||||
| Net loss | - | - | - | (2,633,892 | ) | - | (2,633,892 | ) | ||||||||||||||||
| Balance June 30, 2022 | 19,468,017 | $ | 194 | $ | 71,485,715 | $ | (61,486,600 | ) | $ | 178,219 | $ | 10,177,528 | ||||||||||||
NuZee , Inc.
| 8 |
| Accumulated | ||||||||||||||||||||||||
| Common stock | Additional paid-in | Accumulated | other comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2020 | 14,570,105 | $ | 146 | $ | 40,472,229 | $ | (34,272,778 | ) | $ | 190,161 | $ | 6,389,758 | ||||||||||||
| Equity securities issued for cash, net of issuance costs | 324,959 | 3 | 2,683,977 | - | - | 2,683,980 | ||||||||||||||||||
| Stock option expense | - | - | 4,507,298 | - | - | 4,507,298 | ||||||||||||||||||
| Exercise of stock options | 6,000 | - | 9,180 | - | - | 9,180 | ||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 1,656 | 1,656 | ||||||||||||||||||
| Net loss | - | - | - | (5,896,072 | ) | - | (5,896,072 | ) | ||||||||||||||||
| Balance December 31, 2020 | 14,901,064 | $ | 149 | $ | 47,672,684 | $ | (40,168,850 | ) | $ | 191,817 | $ | 7,695,800 | ||||||||||||
| - | ||||||||||||||||||||||||
| Equity securities issued for cash, net of issuance costs | 2,782,111 | 28 | 11,017,276 | - | - | 11,017,304 | ||||||||||||||||||
| Restricted stock award issuance | 137,215 | 1 | 870,999 | - | - | 871,000 | ||||||||||||||||||
| Stock option expense | - | - | 1,989,006 | - | - | 1,989,006 | ||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 3,824 | 3,824 | ||||||||||||||||||
| Net loss | - | - | - | (6,085,608 | ) | (6,085,608 | ) | |||||||||||||||||
| Balance March 31, 2021 | 17,820,390 | 178 | $ | 61,549,965 | $ | (46,254,458 | ) | $ | 195,641 | $ | 15,491,326 | |||||||||||||
| Amortization of restricted stock award issued | - | - | 91,036 | - | - | 91,036 | ||||||||||||||||||
| Stock option expense | - | - | 1,506,613 | - | - | 1,506,613 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (7,854 | ) | (7,854 | ) | ||||||||||||||||
| Net loss | - | - | - | (3,067,042 | ) | - | (3,067,042 | ) | ||||||||||||||||
| Balance June 30, 2021 | 17,820,390 | 178 | $ | 63,147,614 | $ | (49,321,500 | ) | $ | 187,787 | $ | 14,014,079 | |||||||||||||
Consolidated Statements of Stockholders’ Equity
(unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||||||
| Common stock | paid-in | Accumulated | Noncontrolling | comprehensive | ||||||||||||||||||||||||
| Shares | Amount | capital | deficit | interest | loss | Total | ||||||||||||||||||||||
| Balance September 30, 2019 | 13,617,366 | $ | 137 | $ | 28,898,344 | $ | (24,795,687 | ) | $ | 102,903 | $ | (90,635 | ) | $ | 4,115,062 | |||||||||||||
| Equity securities issued for cash | 111,738 | 1 | 1,994,522 | - | - | - | 1,994,523 | |||||||||||||||||||||
| Stock option expense | - | - | 2,220,861 | - | - | - | 2,220,861 | |||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 5,642 | 27,230 | 32,872 | |||||||||||||||||||||
| Net loss | - | - | - | (3,421,232 | ) | (11,021 | ) | - | (3,432,253 | ) | ||||||||||||||||||
| Balance December 31, 2019 | 13,729,104 | $ | 138 | $ | 33,113,727 | $ | (28,216,919 | ) | $ | 97,524 | $ | (63,405 | ) | $ | 4,931,065 | |||||||||||||
| Stock option expense | - | - | 962,490 | - | - | - | 962,490 | |||||||||||||||||||||
| Other comprehensive gain / (loss) | - | - | - | - | 75,196 | (96,949 | ) | (21,753 | ) | |||||||||||||||||||
| Net loss | - | - | - | (2,490,251 | ) | (30,969 | ) | - | (2,521,220 | ) | ||||||||||||||||||
| Balance March 31, 2020 | 13,729,104 | $ | 138 | $ | 34,076,217 | $ | (30,707,170 | ) | $ | 141,751 | $ | (160,354 | ) | $ | 3,350,582 | |||||||||||||
| Equity securities issued for cash | 700,000 | 7 | 4,648,167 | - | - | - | 4,648,174 | |||||||||||||||||||||
| Stock option expense | - | - | 1,322,147 | - | - | - | 1,322,147 | |||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | 530 | 10,209 | 10,739 | |||||||||||||||||||||
| Net income (loss) | - | - | - | (2,542,418 | ) | 1,356 | - | (2,541,062 | ) | |||||||||||||||||||
| Balance June 30, 2020 | 14,429,104 | $ | 145 | $ | 40,046,531 | $ | (33,249,588 | ) | $ | 143,637 | $ | (150,145 | ) | $ | 6,790,580 | |||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| June 30, 2022 | June 30, 2021 | |||||||||||||||
| Nine Months Ended | Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Operating activities: | ||||||||||||||||
| Net loss | $ | (15,048,722 | ) | $ | (8,494,535 | ) | $ | (8,661,792 | ) | $ | (15,048,722 | ) | ||||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||||||
| Depreciation and Amortization | 254,929 | 310,393 | ||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 295,178 | 254,929 | ||||||||||||||
| Noncash lease expense | 215,397 | 101,505 | 213,539 | 215,397 | ||||||||||||
| Stock option expense | 8,002,917 | 4,505,498 | 2,687,529 | 8,002,917 | ||||||||||||
| Restricted stock award issuance | 71,916 | 962,036 | ||||||||||||||
| Property and equipment impairment | 840,391 | - | - | 840,391 | ||||||||||||
| Inventory impairment | - | 74,944 | ||||||||||||||
| Common stock issued for compensation | 962,036 | - | ||||||||||||||
| Sales allowance | (11,562 | ) | 3,835 | - | (11,563 | ) | ||||||||||
| Loss on disposition of asset | 12,618 | - | ||||||||||||||
| Write-off of deferred offering costs | 477,605 | - | - | 477,605 | ||||||||||||
| Loss on sale of assets | - | 43,012 | ||||||||||||||
| Loss from investment in uncosolidated afffiliate | 4,076 | - | ||||||||||||||
| Loss from equity method investment | 4,215 | 4,077 | ||||||||||||||
| Change in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (112,858 | ) | 469,020 | (18,752 | ) | (112,858 | ) | |||||||||
| Accounts receivable - Related party | - | (118 | ) | |||||||||||||
| Inventories | (183,486 | ) | 151,067 | (99,452 | ) | (183,486 | ) | |||||||||
| Prepaid expense and other current assets | (141,018 | ) | (122,426 | ) | ||||||||||||
| Other current assets - Related party | - | 460 | ||||||||||||||
| Prepaid expenses and other current assets | (49,464 | ) | (141,018 | ) | ||||||||||||
| Other assets | (1,362 | ) | (41,767 | ) | (6,926 | ) | (1,362 | ) | ||||||||
| Accounts payable | 31,540 | (199,763 | ) | 112,917 | 31,540 | |||||||||||
| Deferred income | 162,495 | 61,032 | ||||||||||||||
| Lease liability – operating lease | (210,194 | ) | (193,118 | ) | ||||||||||||
| Accrued expenses and other current liabilities | (206,140 | ) | (363,112 | ) | ||||||||||||
| Other non-current liabilities | 728 | 7,144 | 15,015 | 728 | ||||||||||||
| Deferred revenue | 61,032 | - | ||||||||||||||
| Operating lease liabilities | (193,118 | ) | (83,063 | ) | ||||||||||||
| Other current liabilities | 150,673 | - | ||||||||||||||
| Other current liabilities - related party | - | (704 | ) | |||||||||||||
| Accrued expense and other current liabilities | (513,785 | ) | 271,784 | |||||||||||||
| Net cash used in operating activities | (5,204,587 | ) | (3,003,714 | ) | (5,677,298 | ) | (5,204,587 | ) | ||||||||
| �� | ||||||||||||||||
| Investing activities: | ||||||||||||||||
| Cash paid for purchase of fixed assets, net | (141,445 | ) | (16,306 | ) | ||||||||||||
| Proceeds from sales of equipment | - | 110,000 | ||||||||||||||
| Net cash provided by (used in) investing activities | (141,445 | ) | 93,694 | |||||||||||||
| Purchase of equipment | (214,524 | ) | (141,445 | ) | ||||||||||||
| Acquisition of Dripkit | (413,069 | ) | - | |||||||||||||
| Net cash used in investing activities | (627,593 | ) | (141,445 | ) | ||||||||||||
| Financing activities: | ||||||||||||||||
| Proceeds from exercise of options | 9,180 | - | ||||||||||||||
| Proceeds from issuance of common stock, exercise of options | 12,600 | 9,180 | ||||||||||||||
| Repayment of loans | (40,407 | ) | (75,816 | ) | (41,671 | ) | (40,407 | ) | ||||||||
| Repayment of finance lease | (15,939 | ) | (14,039 | ) | (18,094 | ) | (15,939 | ) | ||||||||
| Proceeds from issuance of common stock, ATM offering, net of issuance costs | 95,256 | - | ||||||||||||||
| Proceeds from issuance of common stock, exercise of warrants, net of issuance costs | 1,702,596 | - | ||||||||||||||
| Proceeds from issuance of equity securities, exempt offering, net of issuance costs | 1,649,736 | - | ||||||||||||||
| Proceeds from issuance of equity securities, net of issuance costs | 13,701,284 | 6,867,786 | - | 13,701,284 | ||||||||||||
| Cash paid for offering costs | (368,783) | - | ||||||||||||||
| Net cash provided by financing activities | 13,654,118 | 6,777,931 | 3,031,640 | 13,654,118 | ||||||||||||
| Effect of foreign exchange on cash and cash equivalents | (2,374 | ) | 21,858 | |||||||||||||
| Effect of foreign exchange on cash | (19,604 | ) | (2,374 | ) | ||||||||||||
| Net change in cash | 8,305,712 | 3,889,769 | (3,292,855 | ) | 8,305,712 | |||||||||||
| Cash, beginning of period | 4,398,545 | 1,326,040 | 10,815,954 | 4,398,545 | ||||||||||||
| Cash, end of period | $ | 12,704,257 | $ | 5,215,809 | $ | 7,523,099 | $ | 12,704,257 | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid for interest | $ | 11,278 | $ | 16,573 | $ | 7,077 | $ | 11,278 | ||||||||
| Cash paid for taxes | $ | 7,044 | $ | 800 | $ | 800 | $ | 7,044 | ||||||||
| Non-cash transactions | ||||||||||||||||
| Recognition of right-of-use asset and lease liability upon adoption of ASU 2016-02 | $ | - | $ | 517,263 | ||||||||||||
| Recognition of right-of-use asset and lease liability during the period | $ | - | $ | 217,674 | ||||||||||||
| Reclassification of common stock offering costs to additional paid in capital | $ | - | $ | 1,150,989 | ||||||||||||
| Finance lease of equipment to pay off accounts payable | $ | - | $ | 124,500 | ||||||||||||
| Contribution of machines to NuZee Latin America | $ | - | $ | 160,000 | ||||||||||||
| Non-cash transactions: | ||||||||||||||||
| ROU assets and liabilities added during the period | $ | 558,371 | $ | - | ||||||||||||
| Common stock issued in acquisition of Dripkit | $ | 426,844 | $ | - | ||||||||||||
| Stock issuance costs accrued | $ | 273,762 | $ | - | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 20212022
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 20202021 as filed with the SEC on December 28, 2020.22, 2021. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual reportAnnual Report on Form 10-K for the year ended September 30, 2021, have been omitted.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. We reclassified lease expenses associated with subleased property from Operating expenses to Other expenses totaling $118,885 for the nine months ended June 30, 2021 and $40,712 for the three months ended June 30, 2021. We also reclassified $18,000 of capitalized software costs included in Property and Equipment, net at September 30, 2021 to Prepaid expenses and other current assets. These reclassifications had no effect on the previously reported net loss.
Principles of Consolidation
The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and its former majority owned subsidiary (which was sold as of September 28, 2020, as described below), which has a fiscal year end of September 30.subsidiaries. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.
On September 28, 2020, the Company entered into a Stock Transfer Agreement with Eguchi Holdings Co., Ltd. (“EHCL”), pursuant to which the Company sold to EHCL for an aggregate sale price of approximately $34,000 all of its equity interests in its former majority-owned subsidiary, NuZee JAPAN Co., Ltd. (“NuZee JP”), representing 70% of the outstanding equity interests of NuZee JP.
The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).
Stock Split
On October 28, 2019, we completedFebruary 25, 2022 (the “Closing Date”), the Company acquired substantially all the assets and certain specified liabilities (the “Acquisition”) of Dripkit, Inc., a Delaware corporation (“Dripkit”), pursuant to the Asset Purchase Agreement, dated as of February 21, 2022 (the “Asset Purchase Agreement”), by and among the Company, Dripkit, and Dripkit’s existing investors (the “Stock Recipients”) who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $l-for-3 reverse stock split860,000, which became effectiveplus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement. Dripkit is engaged in the business of manufacturing and sales of a single serve pour over coffee format that has a large-size single serve pour over pack that sits on November 12, 2019. All sharetop of the cup. Dripkit operates as a new Dripkit Coffee business division that is wholly owned by NuZee, Inc. The Company analyzed the Acquisition under ASC 805 and per share informationconcluded that it should be accounted for as a business combination. The Acquisition has been included in thesethe Company’s financial statements and notes thereto give effect tofrom the reverse stock split.date of the Acquisition.
| 11 |
Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of June 30, 20212022, and June 30, 2020,2021, the total number of common stock equivalents was and , respectively, comprised of stock options and warrants as of June 30, 20212022 and entirely of stock options as of June 30, 2020.2021. The Company incurred a net loss for the three and nine months ended June 30, 20212022, and 2020,2021, respectively, and therefore basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.
Capital Resources
Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, raising capital, and raising capital.the commercialization and manufacture of its single serve coffee products. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.
As of June 30, 2021,2022, the Company had cash of $12,704,2577,523,099. However, the Company has not attained profitable operations since inception.
Major Customers
In the nine months ended June 30, 20212022 and 2020,2021, revenue was primarily derived from major customers disclosed below.
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
Nine months ended June 30, 2022:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | 660,997 | 26 | % | $ | 239,579 | 42 | % | ||||||||
| Customer CU | $ | 252,137 | 10 | % | $ | 52,564 | 9 | % | ||||||||
| Customer S | $ | 242,580 | 10 | % | $ | 62,590 | 11 | % | ||||||||
Nine months ended June 30, 2021:
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||||||||||||||
| Customer WP | $ | 456,247 | 32 | % | $ | 124,814 | 39 | % | $ | 456,247 | 32 | % | $ | 124,814 | 39 | % | ||||||||||||||||
Nine months ended June 30, 2020:
| C ustomer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer K | $ | 284,099 | 25 | % | $ | - | 0 | % | ||||||||
| Customer WP | $ | 259,925 | 23 | % | $ | 7,767 | 11 | % | ||||||||
| Customer J | $ | 188,574 | 17 | % | $ | 175 | 0 | % | ||||||||
Lease
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.
The Company doesperforms a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. The Company has one significanta long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June of 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.
| 12 |
The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning October 1, 2020, through the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases are as follows:
SCHEDULE OF ROU ASSETS AND LEASE LIABILITY
| October 1, 2020 | ||||
| ROU Asset | $ | 652,197 | ||
| Lease Liability | $ | 659,391 | ||
During the prior yearour analysis of leases in the nine months ended June 30, 2022, we determined to renew the office and manufacturing space in Vista, CA throughCalifornia which was scheduled to expire on January 31, 2022, which was previously scheduled to be vacated at June 30, 2020. Additionally,2023, through March 31, 2025. The lease has a monthly base rent of $8,451, plus common area expenses. Along with the Koreanextension, we leased an additional 1,796 square feet that has a monthly base rent of $2,514 through March 31, 2025. We extended our sub-leased property in Vista, California, through January 31, 2023. The lease has a monthly rent of $2,111 and has been calculated as a ROU Asset co-terminus with the direct-leased property. The Seoul, Korea office and manufacturing space lease was extended through June 2022 and there is an apartment lease was signedleased through June 2022. Additionally, the Company leased a new larger office and manufacturing space in Seoul, Korea beginning November 15, 2021, through November 15, 2023. The lease has a monthly expense of $7,040. Accordingly, we have added ROU assets and lease liabilities related to those leases at June 30, 2020.
The direct-leased property in Vista, California has a remaining lease term through January of 2022. The leased properties in both Korea and Vista, California have options to extend beyond the stated termination date, but exercise of these options are not probable. The sub-leased property in Vista, California, is leased month-to-month and has been calculated as a ROU Asset co-terminus with the direct-leased property.
In September 2020, we entered into an 18-month sublease effective October 1, 2020 reducing our space and term in Plano, Texas. Accordingly, this lease has been added to our right-of-use asset balance at September 30, 2020. This lease is for the Company’s principal executive office located at 1401 Capital Avenue, Suite B, Plano, Texas 75074.
Effective September 1, 2020, we converted our month-to-month sublease in Vista, California to a 17-month sublease ending January 31, 2022 which is co-terminus with our direct lease in Vista. The month-to-month sublease was recognized as a right-of-use asset in our June 30, 2020 analysis. The terms of the 17-month lease are similar to the terms used to value the right-of-use asset at June 30, 2020.
As of June 30, 2021,2022, our operating leases had a weighted average remaining lease term of 1.91.6 years and a weighted-average discount rate of 5%5.5%. Other information related to our operating leases is as follows:
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
| ROU Asset – October 1, 2020 | $ | 652,197 | ||
| Amortization during the period | (202,947 | ) | ||
| ROU Asset –June 30, 2021 | $ | 449,250 | ||
| Lease Liability – October 1, 2020 | $ | 659,391 | ||
| Amortization during the period | (193,118 | ) | ||
| Lease Liability – June 30, 2021 | $ | 466,273 |
| Lease Liability – Short-Term | $ | 162,674 | ||
| Lease Liability – Long-Term | 303,599 | |||
| Lease Liability – Total | $ | 466,273 |
| ROU Asset – October 1, 2021 | $ | 386,587 | ||
| ROU Asset added during the period | 558,371 | |||
| Amortization during the period | (213,539 | ) | ||
| ROU Asset – June 30, 2022 | $ | 731,419 | ||
| Lease Liability – October 1, 2021 | $ | 398,587 | ||
| Lease Liability added during the period | 558,371 | |||
| Amortization during the period | (210,194 | ) | ||
| Lease Liability – June 30, 2022 | $ | 746,764 | ||
| Lease Liability – Short-Term | $ | 180,939 | ||
| Lease Liability – Long-Term | 565,825 | |||
| Lease Liability – Total | $ | 746,764 |
The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of June 30, 2021:2022:
Amounts due within 12twelve months of June 30,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| 2022 | $ | 238,519 | ||||||
| 2023 | 126,091 | $ | 292,775 | |||||
| 2024 | 129,873 | 322,280 | ||||||
| 2025 | - | 186,759 | ||||||
| 2026 | - | |||||||
| Total Minimum Lease Payments | 494,483 | 801,814 | ||||||
| Less Effect of Discounting | (28,210 | ) | (55,050 | ) | ||||
| Present Value of Future Minimum Lease Payments | 466,273 | 746,764 | ||||||
| Less Current Portion of Operating Lease Obligations | (162,674 | ) | ||||||
| Long-Term Operating Lease Obligations | $ | 303,599 | ||||||
| Less Current Portion of Operating Lease Liabilities | 180,939 | |||||||
| Long-Term Operating Lease Liabilities | $ | 565,825 | ||||||
On October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment. The terms of this agreement require us to pay $2,987 per month for the next 60 months.through July 2024. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,540124,500 for the purchase of this equipment. This transaction was accounted for as a financingfinance lease. As of June 30, 2021,2022, our financingfinance lease had a remaining lease term of 31.9 years and a discount rate of 12.7512.75%%. The interest expense on finance lease liabilities for the nine months ended June 30, 20212022 was $8,8966,741.
The following summarizes ROU assets under finance leases at JuneDuring the year ended September 30, 2021:2021, we recorded an impairment to fully write off the related equipment as it was deemed no longer useful for our operations.
SUMMARY OF ROU ASSETS UNDER FINANCE LEASES
| ROU asset-finance lease at September 30, 2020 | $ | 105,825 | ||
| Impairment | (105,825 | ) | ||
| ROU asset-finance lease at June 30, 2021 | $ | - |
| 13 |
The table below summarizes future minimum finance lease payments at June 30, 20212022 for the 12twelve months ended June 30:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| 2022 | $ | 33,113 | $ | 33,113 | ||||
| 2023 | 33,113 | 33,113 | ||||||
| 2024 | 33,113 | 2,759 | ||||||
| 2025 | 2,759 | |||||||
| 2026 | - | |||||||
| Total Minimum Lease Payments | 102,098 | 68,985 | ||||||
| Amount representing interest | (18,039 | ) | (8,679 | ) | ||||
| Present Value of Minimum Lease Payments | 84,059 | 60,306 | ||||||
| Current Portion of Finance Lease Obligations | (26,965 | ) | 30,610 | |||||
| Finance Lease Obligations, Less Current Portion | $ | 57,094 | $ | 29,696 | ||||
The Company leases office space with terms ranging from month to month to 61 months. Rent expense included in general and administrativeOperating expense for the nine months ended June 30, 20212022 and 20202021 was $251,164221,972 and $251,207132,279, respectively. Rent expense included in Other expense for the nine months ended June 30, 2022 and 2021 was $157,267 and $118,885, respectively.
Cash and non cashnon-cash activities associated with the leases for the nine months ended June 30, 20212022 are as follows:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
| Operating cash outflows from operating leases: | $ | 215,046 | $ | 216,334 | ||||
| Operating cash outflows from finance lease: | $ | 8,896 | $ | 6,741 | ||||
| Financing cash outflows from finance lease: | $ | 15,939 | $ | 18,094 | ||||
In September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020, under favorable terms that are co-terminus with the original lease ending June 30, 2024. InDuring the nine months ended June 30, 2021,2022, we recognized sublease income of $59,439140,753 pursuant to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease as of June 30, 2021,2022, for each of the 12twelve months ended June 30:30 are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| 2022 | $ | 122,364 | ||
| 2023 | 126,017 | |||
| 2024 | 129,835 | |||
| 2025 | — | |||
| 2026 | — | |||
| Total | $ | 378,216 |
| 2023 | $ | 126,017 | ||
| 2024 | 129,835 | |||
| Total | $ | 255,852 |
Loans
On April 1, 2019, NuZeewe purchased a delivery van from Ford Motor Credit for $41,627. The Company paid $3,500 as a down payment and financed $38,127 for 60 months at a rate of 2.92.9%%. The loan is secured by the van. The outstanding balance on the loan at June 30, 20212022 and September 30, 2020,2021 amounted to $22,30414,643 and $27,91620,146, respectively.
The remaining loan payments are as follows:
SCHEDULE OF LOAN PAYMENTS
Ford Motor Credit | ||||
| 2022 (Jul 2022 - Sep 2022) | $ | 1,951 | ||
| 2023 (Oct 2022 - Jun 2023) | 5,939 | |||
| Total Current Portion | $ | 7,890 | ||
| 2023 (Jul 2023 - Sep 2023) | $ | 6,753 | ||
| Total Long-Term Portion | $ | 6,753 | ||
| Grand Total | $ | 14,643 | ||
On February 15, 2019, NuZee KR entered into equipment financing for production equipment with ShinHanShin Han Bank for $60,563. OnIn June 28, 2019, NuZee KR purchased additional equipment and increased the loan with ShinHanShin Han Bank by $86,518. The loan is secured by our production equipment at NuZee KR. The financing bearshad a term of 36 months at a rate of 4.334.33%% per annum.. Principal payments began in July of 2019. The outstanding balance on this loan at June 30, 20212022 and September 30, 2020,2021 amounted to $50,2060 and $85,00135,898, respectively. This loan was paid in full in this reporting period.
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The loan payments required for the next five remaining fiscal years are as follows:
SCHEDULE OF LOAN PAYMENTS
| Ford Motor Credit | ShinHan Bank | Total | ||||||||||
| 2021 (July – September 2021) | $ | 1,895 | $ | 12,551 | ||||||||
| 2022 (October 2021 – June 2022) | 5,819 | 37,655 | ||||||||||
| Total Current Portion | $ | 7,714 | $ | 50,206 | $ | 57,920 | ||||||
| 2022 (July – September 2022) | $ | 1,895 | $ | - | ||||||||
| 2023 | 7,947 | - | ||||||||||
| 2024 | 4,748 | - | ||||||||||
| 2025 | - | - | ||||||||||
| Total LT Portion | $ | 14,590 | $ | - | $ | 14,590 | ||||||
| Grand Total | $ | 22,304 | $ | 50,206 | $ | 72,510 | ||||||
Revenue Recognition
We determine revenue recognition through
In May 2014, the following steps in accordance with FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers”,Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principle is that an entity will recognize revenue at an amount that reflects the consideration to which wethe entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in the standard are applied in five steps: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. We adopted Topic 606 as of October 1, 2018, on a modified retrospective basis:
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.basis. The adoption of Topic 606 did not have a material impact on our consolidated financial statements.statements, including the presentation of revenues in our Consolidated Statements of Operations.
Foreign Currency Translation
The financial position and results of operations of each of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of each such subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments comprising accumulatedrecorded to other comprehensive income (loss)loss amounted to $$((2,374)19,604) and $$((59,510)2,374) for the nine months ended June 30, 20212022 and 2020,2021, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
InventoriesPrepaid expenses and other current assets
Prepaid expenses and other current assets at June 30, 2022 and September 30, 2021, were as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
June 30, 2022 | September 30, 2021 | |||||||
| Prepaid expenses and other current assets | $ | 1,174,297 | $ | 482,288 | ||||
The prepaid expenses and other current assets balance of $1,174,297 as of June 30, 2022 primarily consists of deferred financing costs related to our ATM offering of $368,783 and our underwritten public offering completed in August 2022 of $273,762 (see Note 8—Subsequent Events), prepaid insurance and deposits, and the balance of $482,288 as of September 30, 2021 primarily consists of prepaid insurance and a customer deposit.
Inventories
Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At June 30, 20212022 and September 30, 2020,2021, the carrying value of inventory ofwas $428,856682,580 and $245,370573,464 respectively, reflected on the consolidated balance sheets is net of this adjustment., respectively.
SCHEDULE OF INVENTORY
| June 30, 2021 | September 30, 2020 | June 30, 2022 | September 30, 2021 | |||||||||||||
| Raw materials | $ | 327,411 | $ | 176,231 | $ | 638,444 | $ | 552,621 | ||||||||
| Finished goods | 101,445 | 69,139 | 44,136 | 20,843 | ||||||||||||
| Less – Inventory reserve | - | - | - | - | ||||||||||||
| Total | $ | 428,856 | $ | 245,370 | $ | 682,580 | $ | 573,464 | ||||||||
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Joint Venture
On January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (5050%%) and NuZee, Inc. (50%the Company (50%) forming NuZee LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of Mexico, with corporate domicile in Mazatlan, Mexico. As part of the capitalization of NLA, NuZeethe Company contributed two co-packing machines to the joint venture. These machines had an aggregate carrying cost of $313,012. NuZeeThe Company received $110,000 in cash for this contribution and recorded an investment in NLA of $160,000 and a loss of $43,012 on the contribution of the machines to NLA.
The Company accounts for NLA using the equity method of accounting since the management of day to dayday-to-day operations at NLA ultimately lies with the Company’s joint venture partner as the operations of NLA are based in its partners facilities and our partner appoints the Chairman of the joint Board.board of directors of NLA. As of June 30, 2021,2022, the only activityactivities in NLA waswere the contribution of two machines, as described above, and other start up relatedand initial marketing and sales activities. $4,215 and $4,077 of a loss waslosses were recognized under the equity method of accounting during the nine months ended June 30, 2021.2022 and June 30, 2021, respectively.
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company has a minimally staffed office in Japan that provides support for import and export of product and materials between the U.S. and Japan, as well as investor relations operations in Japan as a majority ofsupport to our shareholders are based in Japan. In March of 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations. $105,825 of the impairment was related to the ROU asset and $734,566 was related to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the nine months June 30, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited. Information about the Company’s geographic operations for the nine months ended June 30, 2022 and 2021 are as follows:
Geographic Concentration
|
SCHEDULE OF GEOGRAPHIC OPERATIONS
| Nine Months Ended | Nine Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Net Revenue: | ||||||||||||||||
| North America | $ | 1,077,986 | $ | 756,000 | $ | 2,031,781 | $ | 1,077,986 | ||||||||
| Japan | - | 258,526 | ||||||||||||||
| South Korea | 364,097 | 117,036 | 476,564 | 364,097 | ||||||||||||
| Net Revenue | $ | 1,442,083 | $ | 1,131,562 | $ | 2,508,345 | $ | 1,442,083 | ||||||||
| Property and equipment, net: | As of June 30, 2021 | As of September 30, 2020 | As of June 30, 2022 | As of September 30, 2021 | ||||||||||||
| North America | $ | 573,631 | $ | 1,422,575 | $ | 400,842 | $ | 517,966 | ||||||||
| South Korea | 209,254 | 154,562 | ||||||||||||||
| Japan | 1,808 | 2,813 | 2,200 | 1,496 | ||||||||||||
| South Korea | 232,409 | 242,960 | ||||||||||||||
| Property and equipment, net | $ | 807,848 | $ | 1,668,348 | $ | 612,296 | $ | 674,024 | ||||||||
3. RELATED PARTY TRANSACTIONS
For the nine months ended June 30, 2022 and June 30, 2021, we soldrespectively, the Company had sales of $0 and $28,299 of materials to NLA.
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4. BUSINESS COMBINATIONS
As described in Note 1, on February 25, 2022, the Company acquired substantially all the assets and certain specified liabilities of Dripkit pursuant to the Asset Purchase Agreement, dated as of February 21, 2022, by and among the Company, Dripkit, and Dripkit’s existing investors who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities, including a $13,000 bridge loan and approximately $3,176 of payables, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement resulting in an acquisition accounting purchase price of $876,176. The Company analyzed the Acquisition under ASC 805 and concluded that it should be accounted for as a business combination.
Pursuant to the terms of the Asset Purchase Agreement, on the Closing Date, the cash portion of the purchase price was reduced by the following amounts: (a) $22,000, in satisfaction of a bridge loan made from the Company to Dripkit in February 2022 to provide Dripkit with operational financing prior to the Closing Date, (b) $35,500, as an indemnity holdback for the purpose of satisfying any indemnification claims made by the Company pursuant to the Asset Purchase Agreement, and (c) $40,000, as a cash bulk sales holdback (the “Cash Bulk Sales Holdback Amount”). In addition, on the Closing Date, the Company held back $40,000 worth of stock consideration as the Stock Bulk Sales Holdback Amount (together with the Cash Bulk Sales Holdback Amount, the “Bulk Sales Holdback Amount”).
On the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of shares of the Company’s common stock. The Company repaid the entire outstanding principal amount of Dripkit’s Small Business Association Economic Injury Disaster Loan in the amount of $78,656. In addition, the Company recorded a liability on its balance sheet in Accounts Payable of $115,500 related to potential future amounts due related to the Bulk Sales Holdback of $80,000 and the indemnity holdback of $35,500.
In the quarter ended June 30, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows in the quarter ended June 30, 2022: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.
Dripkit was acquired for purposes of supplementing our current product offerings. Dripkit operates as a new Dripkit Coffee business division that is wholly-owned by NuZee, Inc.
The following table presents the allocation of the aggregate purchase price paid by the Company for the Acquisition of $860,000, plus the assumption of certain assumed liabilities, including a $13,000 bridge loan and approximately $3,176 of payables, resulting in an acquisition accounting purchase price of $876,176, to the assets acquired for the acquisition of Dripkit:
SCHEDULE OF ALLOCATION OF AGGREGATE PURCHASE PRICE
| Total purchase price | $ | 876,176 | ||
| Assets acquired: | ||||
| Inventory | $ | 9,664 | ||
| Property and equipment | 5,100 | |||
| Identifiable intangible assets | 330,000 | |||
| Total assets acquired | $ | 344,764 | ||
| Estimated fair value of net assets acquired | $ | 344,764 | ||
| Goodwill | $ | 531,412 | ||
Identified Intangibles and Goodwill
The Company identified tradename and customer relationships intangible assets. The tradename and customer relationships intangible assets will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill recognized results from such factors as an assembled workforce and management’s industry know-how. See Note 5—Goodwill and Intangible Assets for additional information on identified intangible assets and goodwill.
The nine months ended June 30, 2022 includes the operating results of Dripkit for the period from February 25, 2022, the date of acquisition, to June 30, 2022. The consolidated statement of operations for the three and nine months ended June 30, 2022 includes revenue of approximately $30,164 and $32,645, respectively, net loss of approximately $109,249 and $122,370, respectively, and amortization expense, of approximately $19,833 and $26,444, respectively, contributed by Dripkit.
During the nine months ended June 30, 2021,2022, the Company sold (i) incurred $72,955270,478 of transaction costs related to the Acquisition which are included in Operating expenses.
Unaudited Pro forma Financial Information
The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the Dripkit Acquisition for the three and nine months ended June 30, 2022 and 2021, as if the Acquisition had occurred as of the beginning of the first period presented instead of on February 25, 2022.
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the Acquisition had been completed on October 1, 2021, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.
The proforma financial information for the Company and Dripkit is as follows:
SCHEDULE OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
For the June 30, | For the nine months ended June 30, | |||||||||||||||
| Description | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues | $ | 774,019 | $ | 631,744 | $ | 2,585,802 | $ | 1,787,270 | ||||||||
| Net loss | $ | 2,624,975 | $ | 3,101,583 | $ | 8,491,254 | $ | 15,234,435 | ||||||||
For purposes of the pro forma disclosures above, the primary adjustments for the three months and nine months ended June 30, 2022 include the elimination of transaction costs of approximately $8,917 and $270,478, respectively.
5. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the nine months ended June 30, 2022, consists of the following:
SCHEDULE OF CHANGES IN GOODWILL
| June 30, 2022 | ||||
| Balance at September 30, 2021 | $ | - | ||
| Dripkit acquisition | 531,412 | |||
| Balance at June 30, 2022 | $ | 531,412 | ||
As of June 30, 2022, the Company’s intangible assets consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| Amortization | June 30, 2022 | |||||||||||||||
Period (Years) | Gross | Accumulated Amortization | Net | |||||||||||||
| Tradenames | 5 | $ | 230,000 | $ | 15,333 | $ | 214,667 | |||||||||
| Customer relationships | 3 | 100,000 | 11,111 | 88,889 | ||||||||||||
| Balance at June 30, 2022 | $ | 330,000 | $ | 26,444 | $ | 303,556 | ||||||||||
Amortization expense was $26,444 for the nine months ended June 30, 2022.
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6. ISSUANCE OF EQUITY SECURITIES
Exercise of Warrants
In the nine months ended June 30, 2022, we issued shares of common stock related to Triton Funds LPexercises of 2021 Warrants (as defined below), including shares of common stock issued upon exercise of 380,447 Series A Warrants (as defined below) and shares of common stock issued upon exercise of 8,000 Series B Warrants (as defined below). In connection with such exercises, in a registered public offering forthe nine months ended June 30, 2022, we received aggregate net proceeds of $534,4941,702,596.
ATM Offering
On December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC, as agent (the “Agent”), pursuant to a Common Stock Purchase Agreement datedwhich we could offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of October 26, 2020 and a prospectus supplementup to $20,000,000, subject to any applicable limits when using Form S-3. Pursuant to the Company’s effectiveEquity Distribution Agreement, we paid the Agent a commission rate, in cash, equal to 3.0% of the aggregate gross proceeds from each sale of shares of our common stock under the Equity Distribution Agreement. The offer and sale of shares of our common stock were made pursuant to a shelf registration statement on Form S-3 (Registrationand the related prospectus (File No. 333-248531), initially filed by us with the SEC on September 1, 2020, and (ii)declared effective by the SEC on October 2, 2020, under the Securities Act. We were not obligated to make any sales of shares of our common stock under the Equity Distribution Agreement. 256,338In the nine months ended June 30, 2022, we issued and sold shares of our common stock at $ per share for aggregateunder the Equity Distribution Agreement, raising net proceeds of $2,149,48695,256. In connection with such sales, we paid compensation to the Agent in the amount of $. As further described in Note 8 – Subsequent Events, we terminated the Equity Distribution Agreement on August 5, 2022.
Grant of Restricted Stock Awards to the Company’s Independent Board Members
On March 17, 2022, pursuant to the Company’s non-employee director compensation policy, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) granted restricted shares (the “Restricted Shares”) of the Company’s common stock to each of the Company’s five independent directors pursuant to the NuZee, Inc. 2013 Stock Incentive Plan, totaling Restricted Shares. The Restricted Shares are scheduled to vest in full on the one-year anniversary of the grant date, subject to each independent director’s continued service as a director of the Company. The Company recognized common stock compensation expense of $ for the nine months ended June 30, 2022 related to these Restricted Shares.
April 2022 Exempt Offering
On April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. In addition, as further described below, during the nine months ended June 30, 2021,Act, the Company sold pursuant to an Underwriting Agreement dated as of March 19, 2021 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531) (i) During the nine months ended June 30, 2021, shares were issued upon the exercise of stock options. As part of this exercise, the Company received $9,180 in proceeds.share.
On March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the “ATM Agreement”), with B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the “Agents”), pursuant to which we could from time to time offer and sell up to an aggregate of $ million of shares of our common stock through the Agents in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act. We did not sell any shares of common stock under the ATM Agreement. The Company’s consolidated statement of cash flows for the nine months ended June 30, 2021 includes stock issuance expenses of $477,605 in connection with the terminated ATM Agreement.
Options
During the nine months ended June 30, 2021,2022, the Company granted new stock options, issued shares upon the exercise of outstanding stock options, to independent contractors,and had 1,369,938223,500 stock options to independent Board members and options to employees. For independent board members, these options shall vest and become exercisable over a period of , with For independent contractors, these options shall vest and become exercisable over a period of , with For employees, During the nine months ended June 30, 2021, the Company issued a total of Performance-Based Options, which represents the maximum number of Performance-Based Options that may be earned if all performance milestones are achieved for the applicable performance periods.employment.
| 19 |
The exercise price for the options ranged from $ - $ per share. The options will expire from the grant date, unless terminated earlier as provided by the option agreements.
The fair value of each option award granted in the nine months ended June 30, 2022 was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on the Company’s historical stock performance.volatility of a peer group of companies. The expected term of options granted was determined using the simplified method under SAB 107 which represents the mid-point between the vesting term and the contractual term. The risk-free rate is calculated using the U.S. Treasury yield curve and is based on the expected term of the option.
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS FOR FAIR VALUE MEASUREMENT OF OPTIONS GRANTED
For the nine months ended June 30, 2021, options were forfeited because of the termination of employment and conclusion of Board appointment. For the nine months ended June 30, 2021, shares were issued upon the exercise of stock options.
| June 30, 2022 | ||||
| Risk-free interest rate | % | |||
| Expected option life | ||||
| Expected volatility | % | |||
| Expected dividend yield | % | |||
| Exercise price | $ | |||
SUMMARY OF STOCK OPTION ACTIVITY
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | Number of Shares | Weighted Average Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||||||||||||||
| Outstanding at September 30, 2020 | 1,620,667 | $ | 5.74 | 7.3 | $ | 19,112,118 | ||||||||||||||||||||||||||
| Outstanding at September 30, 2021 | 4,511,691 | $ | 4.73 | $ | 452,206 | |||||||||||||||||||||||||||
| Granted | 2,154,938 | 5.87 | 100,000 | 2.16 | ||||||||||||||||||||||||||||
| Exercised | (6,000 | ) | 1.53 | (14,000 | ) | 0.90 | ||||||||||||||||||||||||||
| Expired | - | - | - | - | ||||||||||||||||||||||||||||
| Forfeited | (311,656 | ) | 12.39 | (223,500 | ) | 13.16 | ||||||||||||||||||||||||||
| Outstanding at June 30, 2021 | 3,457,949 | $ | 5.23 | 8.3 | $ | 1,363,638 | ||||||||||||||||||||||||||
| Exercisable at June 30, 2021 | 1,397,975 | $ | 6.01 | 7.7 | $ | 790,939 | ||||||||||||||||||||||||||
| Outstanding at June 30, 2022 | 4,374,191 | $ | 4.25 | $ | - | |||||||||||||||||||||||||||
| Exercisable at June 30, 2022 | 1,932,379 | $ | 4.92 | $ | - | |||||||||||||||||||||||||||
The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expensesexpense of $2,687,529 and $8,002,917 for the nine months ended June 30, 2021.2022 and June 30, 2021, respectively. Unamortized option expense as of June 30, 2021,2022, for all options outstanding amounted to $6,520,4271,808,520. These costs are expected to be recognized over a weighted-weighted average period of years. The Company recognized stock option expenses of $4,505,498 for the nine months ended June 30, 2020.
SUMMARY OF UNVESTED SHARES
Nonvested options
| Number of nonvested shares | Weighted average grant date fair value | Number of Nonvested Options | Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested shares at September 30, 2020 | 762,917 | $ | 10.60 | |||||||||||||
| Nonvested options at September 30, 2021 | 2,870,799 | $ | 5.02 | |||||||||||||
| Granted | 2,154,938 | 5.87 | 100,000 | 2.16 | ||||||||||||
| Forfeited | (158,328 | ) | 12.11 | (54,333 | ) | 4.43 | ||||||||||
| Vested | (699,554 | ) | 7.59 | (474,653 | ) | 5.90 | ||||||||||
| Nonvested shares at June 30, 2021 | 2,059,973 | 6.56 | ||||||||||||||
| Nonvested options at June 30, 2022 | 2,441,813 | $ | 4.74 | |||||||||||||
Warrants
On June 23, 2020, as part of our agreement with Benchmark Company, LLC, the underwriter of the Company’s June 2020 registered public offering of common stock, we issued 40,250 warrants (the “2020 Warrants”) to purchase our common stock at an exercise price of $9.00 a share. These warrants areThe 2020 Warrants became exercisable on December 23, 2020 and expire on June 18, 2025.2025.
On March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”) of (i) units (the “Units”“2021 Units”), at a price to the public of $4.50 per 2021 Unit, with each 2021 Unit consisting of (a) one share of our common stock, (b) one Series A Warrant, and (c) one Series B Warrant (together with the Series A Warrants, the “2021 Warrants”), and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter’s full exercise of their overallotment option with respect to such warrants.
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Each Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $4.50 per share. Each Series B Warrant entitles the registered holder thereof to purchase one-half of a share of our common stock at an exercise price of $5.85 per whole share. These warrantsThe 2021 Warrants have a term of 5 years.
The Series A and Series B Warrant holders are obligated to pay the exercise price in cash upon exercise of the 2021 Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the 2021 Warrants (in which case, the 2021 Warrants may only be exercised via a “cashless” exercise provision).
On April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, the Company sold 2022 Units, with each 2022 Unit consisting of (a) one share of our common stock and (b) one 2022 Warrant. Each 2022 Warrant entitles the holder to purchase one share of our common stock at an exercise price of $ per share. The 2022 Warrants have a term of 5 years. years. Holders may exercise their 2022 Warrants on a “cashless” basis pursuant to a formula set forth in the form of 2022 Warrant.
The following table summarizes warrant activity for the nine months ended June 30, 2021:2022:
SCHEDULE OF WARRANT ACTIVITY
| Number of Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2021 | 4,831,915 | $ | 4.98 | $ | - | |||||||||||
| Issued | 884,778 | 2.00 | ||||||||||||||
| Exercised | (384,447 | ) | 4.51 | |||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding at June 30, 2022 | 5,332,246 | $ | 4.52 | - | ||||||||||||
| Exercisable at June 30, 2022 | 5,332,246 | $ | 4.52 | $ | - | |||||||||||
In the nine months ended June 30, 2022, we issued shares of common stock related to exercises of 2021 Warrants, including shares of common stock issued upon exercise of 380,447 Series A Warrants and shares of common stock issued upon exercise of 8,000 Series B Warrants. In connection with such exercises, in the nine months ended June 30, 2022, we received aggregate net proceeds of $1,702,596.
| Number of Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2020 | 40,250 | $ | 9.00 | 4.7 | $ | 321,598 | ||||||||||
| Issued | 4,791,665 | 4.95 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding June 30, 2021 | 4,831,915 | $ | 4.98 | 4.7 | - | |||||||||||
| Exercisable at June 30, 2021 | 4,831,915 | $ | 4.98 | 4.7 | $ | - | ||||||||||
6.8. SUBSEQUENT EVENTS
Shanoop Kothari’s Resignation and SeveranceTermination of Equity Distribution Agreement
On June 22, 2021, Shanoop Kothari notified the Company of his resignation as Chief Financial Officer. Mr. Kothari’s resignation will be effective as of August 16, 2021 (the “Separation Date”).
In connection with Mr. Kothari’s resignation, the Company entered into a Severance Agreement and General Release with Mr. Kothari on July 2, 2021 (the “Severance Agreement”). Pursuant to the Severance Agreement, Mr. Kothari’s outstanding restricted shares of common stock were accelerated to vest on the Separation Date.
Appointment of Patrick Shearer as Chief Financial Officer and Issuance of Options
On July 2, 2021 (the “Commencement Date”),August 5, 2022, we terminated our Equity Distribution Agreement with the Company appointed Patrick ShearerAgent. See Note 6—Issuance of Equity Securities for additional information regarding the Equity Distribution Agreement. Prior to be its new Chief Financial Officer, effective immediately.
termination, we issued and sold
In addition, pursuant to Mr. Shearer’s employment agreement, the Company granted to Mr. Shearer on the Commencement Date an award of options to purchase shares of our common stock. Subject to Mr. Shearer’s continued employment,stock under the options vest as follows: (i) options shall vest upon the first anniversary of the Commencement Date; (ii) options shall vest upon the second anniversary of the Commencement Date; and (iii) options shall vest upon the third anniversary of the Commencement Date. The options have an exercise priceEquity Distribution Agreement, raising net proceeds of $3.12 per share and will expire from the grant date, unless terminated earlier as provided by the option agreements.
CEO Compensation
On July 2, 2021, the Compensation Committee approved a grant of nonqualified performance-based options (the “Options”) to Masateru Higashida, the Company’s President and Chief Executive Officer, to purchase shares of the Company’s common stock, which represents the maximum number of Options that may be earned if all performance milestones are achieved, as further described below. The Options have an exercise price of $ per share and will expire from the grant date, unless terminated earlier as provided by the option agreements. Also on July 2, 2021, the Compensation Committee awarded a deferred bonus of $75,000 payable to Mr. Higashida for his service to the Company in the prior fiscal year ended September 30, 2020.
Also on July 2, 2021, the Compensation Committee approved the parameters of the cash bonus for Mr. Higashida (the “Fiscal Year 2022 Cash Bonus”) for fiscal year 2022. Pursuant to Mr. Higashida’s Executive Employment Agreement dated as of August 15, 2017, the Compensation Committee established the relevant performance metrics and goals for determining the amount of the Fiscal Year 2022 Cash Bonus that Mr. Higashida would be entitled to receive, assuming achievement by the Company of the respective target and maximum performance levels under each metric established for fiscal year 2022. The Fiscal Year 2022 Cash Bonus, if any, payable to Mr. Higashida will be determined by the extent to which the Company achieves certain performance objectives relating to the Company’s net revenues and net cash provided by operating activities in fiscal year 2022, with a target Fiscal Year 2022 Cash Bonus opportunity of $105,000 and a maximum Fiscal Year 2022 Cash Bonus opportunity of $210,00095,256. In addition, on July 2, 2021, the Compensation Committee approved an increase in the annual base salary payable to Mr. Higashida from $180,000 to $300,000, effective as of May 23, 2021.
Issuance of Options to New EmployeesAugust 2022 Underwritten Public Offering
On July 29, 2021, the Company issued a totalAugust 10, 2022, we completed an underwritten public offering (the “Offering”) of optionsshares of our common stock, pursuant to new employees, including Performance-Based Options, which represents the maximum numberan Underwriting Agreement dated as of Performance-Based Options that may be earned if all performance milestones are achieved for the applicable performance periods,August 7, 2022 and time-based options. us.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Overview
We are a specialty coffee company and, we believe, thea leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of coffee brew bags, which is also referred to as tea-bag style coffee. In addition to our portfolio of innovative single serve pour over and coffee brew bag coffee products, we have recently expanded our product portfolio to offer a third type of single serve coffee format, DRIPKIT pour over products, as a result of our acquisition of substantially all of the assets of Dripkit, Inc. (“Dripkit”) in February 2022, as further described below. Our new, premium DRIPKIT pour over format features a large-size single serve pour over pack that sits on top of the cup and delivers in our view a barista-quality coffee experience to coffee drinkers in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve pour over coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.
We believe we are the only commercial-scale producer ofthat has the dual capacity to pack both single serve pour over coffee productsand coffee brew bag coffee within the North American market. We intend to leverage our position to bebecome the commercial coffee manufacturer of choice and aim to become the preeminent leader for majorcoffee companies seeking to enter into and grow within the single serve pour over coffee market in North America. We target existing, high-margin companies and are paid per-package based on the number of single serve pour over coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve pour over coffee product our co-packing customers sell in the North American market.and Korean markets. While we financially benefit from the success of our manufacturingco-packing customers through the sales of their respective single serve pour over coffee products, we believe we are also able to avoid the risks associated with owning and managing the product and its related inventory.
Our primary focus is the developmentWe have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and coffee brew bag, or tea-bag style, coffee, which we believe offers consumers some of the best coffee available in a single serve application in the North American market targeting the individual consumer for use at home and office or other settings that would benefit from single serveworld. We offer DRIPKIT pour over products,packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and positioning ourselves as the leading commercial-scale co-packer of single serve pour overco-pack for coffee products. roasters.
We may also consider co-packaging other products that are complementary to single serve pour over drip coffeeour current product offerings and provide us with a deeper access to our customers, such as tea bag coffee.customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, drive growth, reduce manufacturing costs, expand our product portfolio, enter into new markets, and further penetrate the markets in which we currently operate. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.
Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time, we have developed expertise in the operation of our sophisticated packing equipment and the related production of theour single serve pour over coffee products at our manufacturing facilities. We have also expanded our co-packing expertise to coffee brew bag coffee products, which we believe are gaining traction in the United States, as well as our DRIPKIT pour over products, which is our innovative new product at both ouroffering that we believe has significant growth potential.
Operational Capacity and Recent Developments
We currently lease manufacturing facilities in Vista, California facility and atSeoul, Korea to produce our production operations in Korea. We plan to carry over this expertise to our Plano, Texas manufacturing facility, which serves as our new single serve pour over co-packing hubor coffee brew bag coffee products. In November 2021, we entered into a new lease in Seoul, Korea for a larger office and corporate headquarters to capture the location’s logistical advantagesmanufacturing space. In addition, we have recently expanded our office and lower cost structure.manufacturing space in Vista, California by approximately 2,000 square feet and also extended our current lease through March 2025 and our sub-leased property through January 2023.
As a result of our capital investments since 2015, including our acquisition of packing equipment from manufacturers whom we believe are the global leaders for supplying such machines, we presently have the annual capacity to produce up to 150 million single serve coffee products (pour over or coffee brew bags) at our two manufacturing facilities, which we believe is sufficient to meet our current and anticipated manufacturing requirements. In November 2020,addition, in May 2022 we announced a strategicnew partnership with Farmer Brothers Co. (“FBC”) pursuant to which we may (but are not required to) place upa manufacturing partner in Knoxville, Tennessee has agreed to 50provide us with additional manufacturing, coffee roasting and co-packing machines in Farmer Brothers SQF-certified facility in Northlake, Texas. FBC intendscapabilities, and facilitate distribution efforts to use the co-packing machines forEastern United States. In connection with the exclusive purpose of manufacturing certainforegoing operational developments and following our strategic analysis of our products for us,current and anticipated facility requirements, we have determined to transition our customersmanufacturing operations away from the facility we previously operated in Plano, Texas. However, we intend to retain our executive office and certain of FBC’s customers. By pairing Farmer Brothers manufacturing and distribution capability with NuZee’s technical expertise and products with historic demandadministrative operations in Asia, the partnership is expected to accelerate the scale-up in the U.S. and efficient delivery of our products to coffee companies and branded businesses.Plano, Texas.
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Dripkit Transaction
On February 25, 2022 (the “Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Dripkit (the “Acquisition”) pursuant to the Asset Purchase Agreement, dated as of February 21, 2022 (the “Asset Purchase Agreement”), by and among the Company, Dripkit, and Dripkit’s existing investors (the “Stock Recipients”) who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement.
On the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of 178,681 shares of the Company’s common stock. In addition, the Company repaid the entire outstanding principal amount of Dripkit’s Small Business Association Economic Injury Disaster Loan in the amount of $78,656.
On May 2, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) 18,475 shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.
For additional information regarding the Acquisition and the Asset Purchase Agreement, see Note 4—Business Combinations to the Unaudited Consolidated Financial Statements.
Dripkit operates as a new Dripkit Coffee business division that is wholly owned by NuZee, Inc.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the nine months ended June 30, 2021,2022, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or pour oversingle serve coffee products, and we also believe that potential sales of our pour oversingle serve coffee products to new or potential customers in the hospitality industry were adversely impacted. In addition, weWe have also experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. In addition, we incurred lost production time due to employee absences. We do not believe, however, that these delays and disruptions had a significant effect on our business or results of operations to date.date, and in some cases, we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.
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Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
For the three months ended June 30, 2021,2022, net revenues attributable to our operations in North America totaled $419,648$630,496 compared to $119,313$419,648 of net revenues attributable to our operations in North America for the three months ended June 30, 2020.2021. For the nine months ended June 30, 2021,2022, net revenues attributable to our operations in North America totaled $1,077,986$2,031,781 compared to $756,000$1,077,986 of net revenues attributable to our operations in North America for the nine months ended June 30, 2020.2021. Additionally, as of June 30, 2021, $573,6312022, $400,842 of our Propertyproperty and equipment, net was attributable to our North American operations, compared to $1,422,575$517,966 attributable to our North American operations as of September 30, 2020. In March 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations. $105,825 of the impairment was related to the ROU asset and $734,566 was to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the nine months ended June 30, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited.
For the three months ended June 30, 2021,2022, net revenues attributable to our operations in Asia totaled $90,383$143,523 compared to $72,649$90,383 of net revenues attributable to our operations in Asia during the three months ended June 30, 2020.2021. For the nine months ended June 30, 2021,2022, net revenues attributable to our operations in Asia totaled $364,097$476,564 compared to $375,562$364,097 of net revenues attributable to our operations in Asia during the nine months ended June 30, 2020.2021. Additionally, as of June 30, 2021, $234,2172022, $211,454 of our Propertyproperty and equipment, net was attributable to our Asian operations, compared to $245,773$156,058 attributable to our Asian operations as of September 30, 2020.2021.
Results of Operations
Our results of operations for the three and nine months ended June 30, 2022 includes the operations of Dripkit for the period from February 25, 2022, the date of the Acquisition, to June 30, 2022. The Acquisition of Dripkit did not contribute to the periods prior to its acquisition in our financial statements, which therefore impacts comparisons to 2021 for our results of operations in the discussion that follows.
Comparison of three months ended June 30, 20212022 and 2020:2021:
Revenue
| Three months ended June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Revenue | $ | 510,032 | $ | 191,962 | $ | 318,070 | 166 | % | ||||||||
| Three months ended June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Revenue | $ | 774,019 | $ | 510,032 | $ | 263,987 | 52 | % | ||||||||
For the three months ended June 30, 2021,2022, our revenue increased by $318,070,$263,987, or approximately 166%52%, compared with the three months ended June 30, 2020.2021. This increase was primarily related to increased co-packing revenue partially offset byto existing and new customers. In the impact from the salethird and fourth quarters of NuZee JP to Eguchi Holdings Co., Ltd. (“EHCL”) on September 28, 2020, as the results forfiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the three months ended June 30, 2020 include revenues from NuZee JP while the results for the three months ended June 30, 2021 do not.2022.
Cost of sales and gross margin
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Cost of sales | $ | 413,446 | $ | 331,039 | $ | 82,407 | 25 | % | ||||||||
| Gross profit | 96,586 | ($ | 139,077 | ) | $ | 235,663 | 169 | % | ||||||||
| Gross profit % | 19 | % | (72 | )% | ||||||||||||
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Cost of sales | $ | 857,672 | $ | 413,446 | $ | 444,226 | 107 | % | ||||||||
| Gross profit (loss) | (83,653 | ) | $ | 96,586 | $ | (180,239 | ) | (187 | )% | |||||||
| Gross profit (loss) % | (11 | )% | 19 | % | ||||||||||||
For the three months ended June 30, 2021,2022, we incurredgenerated a total gross profitloss of $96,586,($83,653) from sales of our products and co-packing services, compared to a total gross lossprofit of ($139,077)$96,586 for the three months ended June 30, 2020.2021. The gross margin rate was (11%) for the three months ended June 30, 2022, and 19% for the three months ended June 30, 2021, and (72%) for the three months ended June 30, 2020.2021. This increasedecrease in margingross profit was driven primarily by increased efficiencies resulting from additional experience in co-packing during the current year periodmaterials and labor costs as compared to the same period in the prior year period. In the three months ended June 30, 2020, the Company incurred increased costs as it continued to scale up its co-packing operations.year.
Operating Expenses
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 3,206,552 | $ | 2,378,947 | $ | 827,605 | 35 | % | ||||||||
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 2,546,608 | $ | 3,165,840 | $ | (619,232 | ) | (20 | )% | |||||||
For the three months ended June 30, 2021,2022, the Company’s operating expenses totaled $3,206,552$2,546,608 compared to $2,378,947$3,165,840 for the three months ended June 30, 2020,2021, representing a 35% increase.20% decrease. This increasedecrease is primarily attributable to an increasea decrease in stock-based compensation expense, as well as increasedoffset by an increase in operating expenses associated with greater staffing levels.levels, marketing activities, and administrative costs.
Net Loss
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Net Loss attributable to NuZee, Inc. | $ | 3,067,042 | $ | 2,542,418 | $ | 524,624 | 21 | % | ||||||||
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Net Loss | $ | 2,633,892 | $ | 3,067,042 | $ | (433,150 | ) | (14 | )% | |||||||
For the three months ended June 30, 2021,2022, we generated a net loss attributable to NuZee, Inc. of $3,067,042$2,633,892 versus $2,542,418$3,067,042 for the three months ended June 30, 2020.2021. This increasedecrease in net lossesloss is primarily attributable to higher stocklower stock-based compensation expense, offset by an increase in cost of sales, and an increase in operating expenses.expenses associated with greater staffing levels, marketing activities, and administrative costs.
Comparison of nine months ended June 30, 20212022 and 2020:2021:
Revenue
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Revenue | $ | 1,442,083 | $ | 1,131,562 | $ | 310,521 | 27 | % | ||||||||
| Nine months ended June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Revenue | $ | 2,508,345 | $ | 1,442,083 | $ | 1,066,262 | 74 | % | ||||||||
For the nine months ended June 30, 2021,2022, our revenue increased by $310,521,$1,066,262, or approximately 27%,74% compared with the nine months ended June 30, 2020.2021. This increase was primarily related to increased co-packing revenues partially offset byrevenue to existing and new customers. In the impact from the salethird and fourth quarters of NuZee JP to EHCL on September 28, 2020, as the results forfiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the nine months ended June 30, 2020 include revenues from NuZee JP while the results for the nine months ended June 30, 2021 do not.2022.
Cost of sales and gross margin
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Cost of sales | $ | 1,352,843 | $ | 1,250,904 | $ | 101,939 | 8 | % | ||||||||
| Gross profit | $ | 89,240 | $ | (119,342 | ) | $ | 208,582 | 175 | % | |||||||
| Gross profit % | 6 | % | (11 | )% | ||||||||||||
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Cost of sales | $ | 2,575,646 | $ | 1,352,843 | $ | 1,222,803 | 90 | % | ||||||||
| Gross profit (loss) | (67,301 | ) | $ | 89,240 | $ | (156,541 | ) | (175 | )% | |||||||
| Gross profit (loss)% | (3 | )% | 6 | % | ||||||||||||
For the nine months ended June 30, 2021,2022, we incurredgenerated a total gross profitloss of $89,240,($67,301), from sales of our products and co-packing services, compared to a total gross lossprofit of ($119,342)$89,240 for the nine months ended June 30, 2020.2021. The gross margin rate was (3%) for the nine months ended June 30, 2022, and 6% for the nine months ended June 30, 2021, and (11%) for the nine months ended June 30, 2020.2021. This increasedecrease in margingross profit was driven primarily by increased efficiencies resulting from additional experience in co-packing during the current year periodmaterials and labor costs as compared to the same period in the prior year period. In the nine months ended June 30, 2020, the Company incurred increased costs as it continued to scale up its co-packing operations as well as a loss incurred on the close-out of certain inventory items for a particular customer.year.
Operating Expenses
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 15,222,137 | $ | 8,342,412 | $ | 6,879,725 | 82 | % | ||||||||
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 8,554,276 | $ | 15,103,252 | $ | (6,548,976 | ) | (43 | )% | |||||||
For the nine months ended June 30, 2021,2022, the Company’s operating expenses totaled $15,222,137$8,554,276 compared to $8,342,412$15,103,252 for the nine months ended June 30, 2020,2021, representing a 82% increase.43% decrease. This increasedecrease is primarily attributable to an increasea decrease in stock-based compensation expense as well as increasedand professional services costs, offset by an increase in operating expenses associated with greater staffing levels.levels, marketing activities and administrative costs.
Net Loss
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | %. | |||||||||||||
| Net Loss attributable to NuZee, Inc. | $ | 15,048,722 | $ | 8,453,901 | $ | 6,594,821 | 78 | % | ||||||||
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Net Loss | $ | 8,661,792 | $ | 15,048,722 | $ | (6,386,930 | ) | (42 | )% | |||||||
For the nine months ended June 30, 2021,2022, we generated a net loss attributable to NuZee, Inc. of $15,048,722$8,661,792 versus $8,453,901$15,048,722 for the nine months ended June 30, 2020.2021. This increasedecrease in net lossesloss is primarily attributable to higher stocklower stock-based compensation expense, impairment charges and professional services costs, offset by an increase in operating expenses.expenses associated with greater staffing levels, marketing activities and administrative costs.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of June 30, 2021,2022, we had an accumulated deficit of approximately $49$61.5 million. We have not yet achieved profitability and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. WeIn the United States, we expect to incur additional losses as a resultbecause of the costs associated with operating as an exchange-listed public company incompany. We are unable to predict the future. extent of any future losses or when we will become profitable, if at all.
To date, we have funded our operations primarily with proceeds from equity offerings.
registered public offerings and private placements of shares of our common stock. Our principal use of cash is to fund our operations, which includes the commercialization of our pour oversingle serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.
As of June 30, 2022, we had a cash balance of $7,523,099. We believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least twelve months from August 11, 2022. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.
On April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, we sold 884,778 units (the “2022 Units”), at a price of $2.00 per 2022 Unit for aggregate net proceeds of approximately $1.65 million, with each 2022 Unit consisting of (a) one share of our common stock and (b) one warrant (each, a “2022 Warrant” and collectively, the “2022 Warrants”) to purchase one whole share of our common stock with an initial exercise price of $2.00 per share. For additional information regarding the 2022 Warrants, see Note 7— Stock Options and Warrants to the Unaudited Consolidated Financial Statements.
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On August 5, 2022, we terminated our Equity Distribution Agreement, dated December 28, 2021 (the “Equity Distribution Agreement”), with Maxim Group LLC, as agent (the “Agent”), pursuant to which we could from time to time offer and sell up to an aggregate of $20.0 million of shares of our common stock, subject to any applicable limits when using Form S-3, through the Agent in “at-the-market-offerings” (the “ATM Program”), as defined in Rule 415 under the Securities Act. Prior to termination, we issued and sold 49,326 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $95,256. We terminated the Equity Distribution Agreement because we do not intend to raise additional capital through the ATM Program.
On August 10, 2022, we completed an underwritten public offering (the “Offering”) of 4,200,000 shares of our common stock, pursuant to an Underwriting Agreement dated as of August 7, 2022 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531). The aggregate gross proceeds from the Offering were approximately $3.4 million. We received proceeds of approximately $3.2 million, after deducting underwriting discounts and before deducting Offering costs payable by us.
In the future, we expect to seek to raise additional capital through public or private equity offerings. We also may receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised for cash at the election of the warrant holders, including the Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and, collectively with the Series A Warrants, the “2021 Warrants”) that were sold by us in March 2021 in an underwritten registered public offering and the 2022 Warrants. For additional information regarding the 2021 Warrants, see Note 7—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.
In the long term, we expect we will need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. The timing and amount of funds that we will need to raise will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. WeUntil we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
Contractual Obligations
Our significant contractual cash requirements as of June 30, 2022, primarily include payments for operating and finance lease liabilities and principal and interest on loans. Additionally, we may incur purchase obligations in the ordinary course of business that are enforceable and legally binding and enter into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. As of June 30, 2021,2022, we had a cash balancepayments for lease and loan obligations of $12,704,257.approximately $821,713, of which $219,439 are payable within 12 months as of June 30, 2022. We had no purchase obligations as of June 30, 2022.
Summary of Cash Flows
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||
| Cash used in operating activities | $ | (5,204,587 | ) | $ | (3,003,714 | ) | $ | (5,677,298 | ) | $ | (5,204,587 | ) | ||||
| Cash provided by (used in) investing activities | $ | (141,445 | ) | $ | 93,694 | |||||||||||
| Cash used in investing activities | $ | (627,593 | ) | $ | (141,445 | ) | ||||||||||
| Cash provided by financing activities | $ | 13,654,118 | $ | 6,777,931 | $ | 3,031,640 | $ | 13,654,118 | ) | |||||||
| Effect of foreign exchange on cash | $ | (2,374 | ) | $ | 21,858 | $ | (19,604 | ) | $ | (2,374 | ) | |||||
| Net increase in cash | $ | 8,305,712 | $ | 3,889,769 | ||||||||||||
| Net change in cash | $ | (3,292,855 | ) | $ | 8,305,712 | |||||||||||
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Operating Activities
We used $5,204,587$5,677,298 and $3,003,714$5,204,587 of cash in operating activities during the nine months ended June 30, 20212022, and 2020,2021, respectively, principally to fund our operating loss. This increase was primarily attributable to the increase in operating expenses associated with greater staffing levels and professional services expenses over the current fiscal year period.operations.
Investing Activities
We used $627,593 and $141,445 of cash versus provided $93,694 of cash in investing activities during the nine months ended June 30, 20212022 and 2020,2021, respectively. Cash used in the current periodnine months ended June 30, 2022 was to fundfor the acquisition of substantially all of the assets of Dripkit and the purchase of equipment versusequipment. Cash used in the prior periodnine months ended June 30, 2021 was for the cash provided was principally from the salespurchase of equipment.
Financing Activities
Historically, we have funded our operations primarily through the issuance of our common stock.equity securities.
Cash provided by financing activities increased toof $3,031,640 and $13,654,118 for the nine months ended June 30, 2022 and 2021, respectively, is primarily related to proceeds received upon the exercise of outstanding 2021 Warrants by the 2021 Warrant holders, as further described below, the sale of equity securities from $6,777,931 forour exempt offering in April 2022, and the issuance of shares of our common stock under the Equity Distribution Agreement in the nine months ended June 30, 2020. The increase in cash provided by financing activities is primarily related to the increase in proceeds from the2022, and issuance of equity securities.securities in the nine months ended June 30, 2021.
Exercise of Warrants
In the nine months ended June 30, 2022, we issued 384,447 shares of common stock related to exercises of 2021 Warrants, including 380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants and 4,000 shares of common stock issued upon exercise of 8,000 Series B Warrants. In connection with such exercises, in the nine months ended June 30, 2022, we received aggregate net proceeds of $1,702,596. For additional information regarding the Series A Warrants and Series B Warrants, see Note 7—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Unaudited Consolidated Financial Statements for a summary of our accounting policies.
Except as described below, there were no significant and material changes in our critical accounting policies and use of estimates during the three and nine months ended June 30, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on December 22, 2021.
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Business Combinations
On February 25, 2022, we completed the acquisition of substantially all of the assets of Dripkit. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill acquired include but are not limited to future (i) expected cash flows from acquired customer relationships and trademarks, (ii) attrition, (iii) revenues, (iv) royalty rate, (v) operating profit and (vi) discount rate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There
On February 25, 2022, we completed the acquisition of substantially all of the assets of Dripkit. We are in the process of integrating Dripkit’s processes and controls into our current state processes. Except for this integration of Dripkit into our overall internal control over financial reporting program, there were no changes in our internal control over financial reporting during the three-month periodquarter ended June 30, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
Item 1. Legal Proceedings
As previously disclosed, on November 23, 2021, Next Vision, Inc. (the “Consultant”) filed a complaint against the Company in the Superior Court of California, County of San Diego Central Division (Case No. 37-2021-00049557-CU-BC-CTL) (the “Complaint”). The Complaint alleges that the Company’s delay in issuing shares of the Company’s common stock (the “Shares”) to the Consultant after receiving due notice from the Consultant of its intent to exercise vested stock options to acquire 70,000 Shares, as initially granted in 2018 (or, as adjusted to account for the Company’s reverse stock split effected on November 12, 2019, vested stock options to acquire 23,334 Shares) (the “Options”), which had previously been issued to the Consultant as compensation for consulting services provided in 2018, breached express and implied contractual obligations to the Consultant and resulted in the Company reporting an overstated amount of income on the IRS Form 1099-B that was issued to the Consultant for U.S. federal tax purposes. In addition, the Complaint alleges that the 23,334 Shares issued to the Consultant upon exercise of the Options improperly contained a six-month restriction on resale and that such restriction prevented the Consultant from selling the Shares at the desired time. The Complaint seeks equitable relief requiring the Company to issue an IRS Form 1099-NEC to reflect the correct amount of compensation. The Complaint also seeks compensatory damages, including to recover for alleged lost profits due to the alleged improper six-month restriction on resale for the Shares, as well as punitive damages, costs of suit, attorney’s fees, and interest.
As previously disclosed, on January 20, 2022, the Company filed its general denial and answer in which it raised affirmative defenses and disputed the claims contained in the Complaint.
On July 1, 2022, the Court set a trial date for August 11, 2023 and ordered the Company and the Consultant to mediate prior to October 28, 2022.
We believe the allegations set forth in the Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.
From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on December 22, 2021, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on December 28, 2020.22, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.In the quarter ended June 30, 2022, we issued the following securities that were not registered under the Securities Act:
| ● | Pursuant to the terms of the Asset Purchase Agreement, 18,475 shares of common stock were issued to the Stock Recipients on April 25, 2022 in connection with the Stock Bulk Sales Holdback Amount. See Note 4—Business Combinations for additional information regarding the Stock Bulk Sales Holdback Amount and the Asset Purchase Agreement. Each Stock Recipient was an accredited investor (as that term is defined in Regulation D under the Securities Act). |
In issuing shares of our common stock in the transactions described above, the Company relied on the exemptions from the registration requirements of the Securities Act provided for in Regulation D and/or Section 4(a)(2) of the Securities Act.
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Item 6. Exhibits
(1) A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 601(b)(10)(iii) of Regulation S-K
* Filed herewith.
** Furnished herewith.
*** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
+ Certain schedules to this agreement have been omitted pursuant to Item 601 of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: | August | NUZEE, INC. | ||
| By: | /s/ Masateru Higashida | |||
| Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director | ||||
| By: | /s/ Patrick Shearer | |||
| Patrick Shearer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||