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, 2017
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. 333-176684
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) |
1350 East Arapaho Road, Suite 101,
(Address of principal executive offices) (zip code)
(760)295-2408
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Trading symbol(s) | Name of each exchange on which registered | |||
| 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 ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes . 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“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company,” and "smaller reporting company"“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 February 7, 2023, the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
| 2 |
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Qreport 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. contains "forward-looking statements" that may state our management's plans,(“NuZee” or the “Company”) with respect to future events objectives, current expectations, estimates, forecasts, assumptions or projections about the company and its business. Any statement in this report that is not a statement of historical fact is afinancial performance. These forward-looking statement,statements are subject to certain uncertainties and in some cases, words such as "believes," "estimates," "projects," "expects," "intends," "may," "anticipates," "plans," "seeks," and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertaintiesother factors that could cause actual outcomes and 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 anticipated outcomesCompany. 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, or results. Theseany other matters, are forward-looking statements. When used in this report, forward-looking statements are not guaranteesgenerally 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 performance,events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and undue reliance should not be placed on thesetrends or operating results also constitute such forward-looking statements. It is important to note that our actual results could differ materially from what is expressed in our forward-looking statements due to the risk factors described in the section of our Form 10-K filed on December 29th, 2016 entitled "Risk Factors."
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 products, provide our co-packing services, and to continue as a going concern; | |
| ● | our expectation that our existing capital resources will be sufficient to fund our operations for the next nine months and our expectation to need additional capital to fund our planned operations beyond that; | |
| ● | the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; | |
| ● | our expectations regarding our ability to maintain compliance with the listing requirements of the Nasdaq Capital Market; | |
| ● | the impact to our business, including any supply chain interruptions, resulting from changes in general economic, business and political conditions, including changes in the financial markets and macroeconomic conditions resulting from a pandemic such as COVID-19 or otherwise; | |
| ● | the evolving coffee preferences of coffee consumers in North America and East Asia; | |
| ● | the size and growth of the markets for our products and co-packing services; | |
| ● | our ability to compete with companies producing similar products or providing similar co-packing services; | |
| ● | our ability to successfully achieve the anticipated results of strategic transactions; | |
| ● | our expectation regarding our future co-packing revenues; | |
| ● | our ability to develop or offer innovative new products and services, and expand our co-packing services to other products that are complementary to our current single serve coffee product offerings; |
| ● | our expectations regarding additional manufacturing, coffee roasting and co-packing capabilities to be provided through our manufacturing partner, as well as our manufacturing partner’s ability to successfully facilitate distribution efforts to the Eastern United States; | |
| ● | our reliance on third-party roasters or manufacturing partners to roast coffee beans necessary to manufacture our products and to 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; | |
| ● | our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting; | |
| ● | the outcome of pending, threatened or future litigation; and | |
| ● | 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 23, 2022, 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.
| 4 |
| NuZee, Inc. | ||||||||
| (UNAUDITED) | ||||||||
June 30, 2017 | September 30, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 151,609 | $ | 40,613 | ||||
| Accounts receivable, net | 102,445 | 57,711 | ||||||
| Inventories | 380,508 | 206,356 | ||||||
| Prepaid expenses and deposits | 148,104 | 65,726 | ||||||
| Total current assets | 782,666 | 370,406 | ||||||
| Equipment, net | 261,743 | 151,946 | ||||||
| Other assets: | ||||||||
| Goodwill | 52,424 | - | ||||||
| 52,424 | - | |||||||
| Total assets | $ | 1,096,833 | $ | 522,352 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 113,353 | $ | 189,317 | ||||
| Loan payable - short term - Related party | 201,561 | 145,377 | ||||||
| Current portion of long-term loan payable | 23,883 | - | ||||||
| Convertible Notes payable - Related party | - | 603,008 | ||||||
| Other current liabilities | 69,843 | 7,337 | ||||||
| Total current liabilities | 408,640 | 945,039 | ||||||
| Non-current liabilities: | ||||||||
| Loan payable - long term | $ | 165,934 | $ | - | ||||
| 165,934 | - | |||||||
| Stockholders' equity (deficit): | ||||||||
| Common stock; 100,000,000 shares authorized, $0.00001 par value; | ||||||||
| 34,368,509 and 31,154,951 shares issued | $ | 344 | $ | 311 | ||||
| Additional paid in capital | 8,869,523 | 6,909,523 | ||||||
| Accumulated deficit | (8,335,747 | ) | (7,263,412 | ) | ||||
| Less: treasury stock, at cost | ||||||||
| (1,182,573 shares held in treasury) | (45,379 | ) | (69,109 | ) | ||||
| Accumulated other comprehensive loss | (19,911 | ) | - | |||||
| Total NuZee, Inc. shareholders' equity (deficit) | 468,830 | (422,687 | ) | |||||
| Noncontrolling interest | 53,429 | - | ||||||
| Total stockholders' equity (deficit) | 522,259 | (422,687 | ) | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,096,833 | $ | 522,352 | ||||
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| December 31, 2022 | September 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 6,491,819 | $ | 8,315,053 | ||||
| Accounts receivable, net | 653,903 | 345,258 | ||||||
| Inventories, net | 1,089,901 | 947,995 | ||||||
| Prepaid expenses and other current assets | 376,264 | 547,773 | ||||||
| Total current assets | 8,611,887 | 10,156,079 | ||||||
| Property and equipment, net | 475,284 | 525,075 | ||||||
| Other assets: | ||||||||
| Right-of-use asset - operating lease | 569,521 | 642,624 | ||||||
| Investment in unconsolidated affiliate | 167,811 | 169,634 | ||||||
| Intangible assets, net | 132,500 | 140,000 | ||||||
| Other assets | 91,979 | 77,962 | ||||||
| Total other assets | 961,811 | 1,030,220 | ||||||
| Total assets | $ | 10,048,982 | $ | 11,711,374 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 462,655 | $ | 113,708 | ||||
| Current portion of long-term loan payable | 8,005 | 7,947 | ||||||
| Current portion of lease liability - operating lease | 392,714 | 388,325 | ||||||
| Current portion of lease liability - finance lease | 28,729 | 24,518 | ||||||
| Accrued expenses | 624,282 | 706,492 | ||||||
| Deferred income | 298,023 | 319,707 | ||||||
| Other current liabilities | 15,520 | 39,241 | ||||||
| Total current liabilities | 1,829,928 | 1,599,938 | ||||||
| Non-current liabilities: | ||||||||
| Lease liability - operating lease, net of current portion | 185,351 | 267,786 | ||||||
| Lease liability - finance lease, net of current portion | 18,522 | 29,622 | ||||||
| Loan payable - long term, net of current portion | 2,719 | 4,745 | ||||||
| Other noncurrent liabilities | 77,339 | 66,484 | ||||||
| Total non-current liabilities | 283,931 | 368,637 | ||||||
| Total liabilities | 2,113,859 | 1,968,575 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock; shares authorized, $ par value; and shares issued and outstanding as of December 31, 2022, and September 30, 2022, respectively | 7 | 7 | ||||||
| Additional paid in capital | 74,541,365 | 74,281,418 | ||||||
| Accumulated deficit | (66,805,726 | ) | (64,622,520 | ) | ||||
| Accumulated other comprehensive income | 199,477 | 83,894 | ||||||
| Total stockholders’ equity | 7,935,123 | 9,742,799 | ||||||
| Total liabilities and stockholders’ equity | $ | 10,048,982 | $ | 11,711,374 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
| NuZee, Inc. | ||||||||||||||||
| (UNAUDITED) | ||||||||||||||||
Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Nine Months Ended June 30, 2017 | Nine Months Ended June 30, 2016 | |||||||||||||
| Revenues | $ | 268,262 | $ | 136,268 | $ | 1,222,096 | $ | 231,682 | ||||||||
| Cost of sales | 203,076 | 72,545 | 945,536 | 131,885 | ||||||||||||
| Gross Profit | 65,186 | 63,723 | 276,560 | 99,797 | ||||||||||||
| Operating expenses | 437,176 | 398,388 | 1,359,384 | 1,079,426 | ||||||||||||
| Loss from operations | (371,990 | ) | (334,665 | ) | (1,082,824 | ) | (979,629 | ) | ||||||||
| Other income | 8,426 | 11,557 | 39,386 | 11,833 | ||||||||||||
| Equity in loss of unconsolidated affiliate | (2,108 | ) | - | (50,000 | ) | |||||||||||
| Other expense | (1,337 | ) | (1,712 | ) | (5,237 | ) | (4,562 | ) | ||||||||
| Net loss | (367,009 | ) | (324,820 | ) | (1,098,675 | ) | (972,358 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (11,492 | ) | - | (26,340 | ) | - | ||||||||||
| Net loss attributable to NuZee, Inc. | $ | (355,517 | ) | $ | (324,820 | ) | $ | (1,072,335 | ) | $ | (972,358 | ) | ||||
| Basic and diluted loss per common share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) | ||||
| Basic and diluted weighted average number of common stock outstanding | 32,744,196 | 30,656,401 | 31,539,132 | 30,582,013 | ||||||||||||
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31, 2022 | Three Months Ended December 31, 2021 | |||||||
| Revenues, net | $ | 1,136,348 | $ | 1,019,253 | ||||
| Cost of sales | 1,060,816 | 1,003,882 | ||||||
| Gross profit | 75,532 | 15,371 | ||||||
| Operating expenses | 2,277,200 | 2,811,189 | ||||||
| Loss from operations | (2,201,668 | ) | (2,795,818 | ) | ||||
| Loss from equity method investment | (1,823 | ) | (1,157 | ) | ||||
| Other income | 50,737 | 42,757 | ||||||
| Other expense | (35,790 | ) | (47,422 | ) | ||||
| Interest income (expense), net | 5,338 | (2,563 | ) | |||||
| Net loss | $ | (2,183,206 | ) | $ | (2,804,203 | ) | ||
| Basic and diluted loss per common share | $ | (3.23 | ) | $ | (5.45 | ) | ||
| Basic and diluted weighted average number of common stock outstanding | 676,422 | 514,794 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.
| 6 |
| NuZee, Inc. | ||||||||||||||||||||||||
| (UNAUDITED) | ||||||||||||||||||||||||
| Noncontrolling | ||||||||||||||||||||||||
| NuZee, Inc. | Interests | Total | ||||||||||||||||||||||
| For three months ended June 30, 2017 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
| Net loss | $ | (355,517 | ) | $ | (324,820 | ) | $ | (11,492 | ) | $ | 0 | $ | (367,009 | ) | $ | (324,820 | ) | |||||||
| Foreign currency translation | (300 | ) | - | (129 | ) | - | (429 | ) | - | |||||||||||||||
| Total other comprehensive loss, net of tax | (300 | ) | - | (129 | ) | - | (429 | ) | - | |||||||||||||||
| Comprehensive loss | $ | (355,817 | ) | $ | (324,820 | ) | $ | (11,621 | ) | $ | 0 | $ | (367,438 | ) | (324,820 | ) | ||||||||
| Noncontrolling | ||||||||||||||||||||||||
| NuZee, Inc. | Interests | Total | ||||||||||||||||||||||
| For nine months ended June 30, 2017 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
| Net loss | $ | (1,072,335 | ) | $ | (972,358 | ) | (26,340 | ) | $ | 0 | $ | (1,098,675 | ) | $ | (972,358 | ) | ||||||||
| Foreign currency translation | (19,911 | ) | - | (8,534 | ) | - | (28,445 | ) | - | |||||||||||||||
| Total other comprehensive loss, net of tax | (19,911 | ) | - | (8,534 | ) | - | (28,445 | ) | - | |||||||||||||||
| Comprehensive loss | $ | (1,092,246 | ) | $ | (972,358 | ) | (34,874 | ) | $ | 0 | $ | (1,127,120 | ) | (972,358 | ) | |||||||||
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| NuZee, Inc. | ||||||||
| For the three months ended December 31 | 2022 | 2021 | ||||||
| Net loss | $ | (2,183,206 | ) | $ | (2,804,203 | ) | ||
| Foreign currency translation | 115,583 | 32,688 | ||||||
| Total other comprehensive income, net of tax | 115,583 | 32,688 | ||||||
| Comprehensive loss | $ | (2,067,623 | ) | $ | (2,771,515 | ) | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 7 |
| NuZee, Inc. | ||||||||
| (UNAUDITED) | ||||||||
| Nine months Ended June 30, 2017 | Nine months Ended June 30, 2016 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (1,098,675 | ) | $ | (972,358 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used by operating activities: | ||||||||
| Depreciation and Amortization | 55,883 | 31,513 | ||||||
| Option expense | 23,470 | 33,736 | ||||||
| Interest expense | 2,890 | - | ||||||
| Inventory impairment | 4,112 | - | ||||||
| Equity in loss of unconsolidated affiliate | 50,000 | - | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 16,036 | 4,671 | ||||||
| Inventories | 59,693 | (11,920 | ) | |||||
| Prepaid expenses and deposits | (6,640 | ) | 8,594 | |||||
| Accounts payable | (160,000 | ) | (6,967 | ) | ||||
| Other current liabilities | (21,705 | ) | 1,453 | |||||
| Net cash used by operating activities | (1,074,936 | ) | (911,278 | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | (136,333 | ) | (2,854 | ) | ||||
| Acquisition of investment in unconsolidated affiliate | (50,000 | ) | - | |||||
| Net cash acquired from business acquisition | 201,676 | - | ||||||
| Net cash used by investing activities | 15,343 | (2,854 | ) | |||||
| Financing activities: | ||||||||
| Proceeds from issuance of Loan - short term - Related party | 479,385 | 100,000 | ||||||
| Repayment of loans - short term - Related party | (322,824 | ) | (55,000 | ) | ||||
| Proceeds from issuance of Loan - short term | 89,016 | - | ||||||
| Repayment of loans - short term | (26,046 | ) | - | |||||
| Proceeds from issuance of common stock | 680,510 | 777,001 | ||||||
| Proceeds from issuance of exercise of options | - | 1,500 | ||||||
| Proceeds from issuance of treasury stock | 315,318 | - | ||||||
| Net cash provided by financing activities | 1,215,359 | 823,501 | ||||||
| Effect of foreign exchange on cash and cash equivalents | (44,770 | ) | - | |||||
| Net change in cash | 110,996 | (90,631 | ) | |||||
| Cash, beginning of period | 40,613 | 107,678 | ||||||
| Cash, end of period | $ | 151,609 | $ | 17,047 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 2,063 | $ | - | ||||
| Cash paid for taxes | $ | 800 | $ | 800 | ||||
| Noncash investing and financing activities: | ||||||||
| Acquisition of NuZee JAPAN Co., Ltd through issuance of common shares | ||||||||
| Software purchased with installment agreement | $ | 14,807 | $ | - | ||||
| Conversion of note payable | $ | 606,000 | $ | - | ||||
| Conversion of note payable - Related party | $ | 100,000 | $ | - | ||||
NuZee, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2022 | 676,229 | $ | 7 | $ | 74,281,418 | $ | (64,622,520 | ) | $ | 83,894 | $ | 9,742,799 | ||||||||||||
| Stock option expense | - | - | 197,108 | - | - | 197,108 | ||||||||||||||||||
| Restricted stock compensation | - | - | 62,839 | - | - | 62,839 | ||||||||||||||||||
| Round-up shares issued in reverse split | 8,859 | - | - | - | - | - | ||||||||||||||||||
| Other comprehensive income | - | - | - | - | 115,583 | 115,583 | ||||||||||||||||||
| Net loss | - | - | - | (2,183,206 | ) | - | (2,183,206 | ) | ||||||||||||||||
| Balance December 31, 2022 | 685,088 | $ | 7 | $ | 74,541,365 | $ | (66,805,726 | ) | $ | 199,477 | $ | 7,935,123 | ||||||||||||
| Balance September 30, 2021 | 509,154 | $ | 5 | $ | 64,839,427 | $ | (52,824,808 | ) | $ | 197,823 | $ | 12,212,447 | ||||||||||||
| Exercise of warrants, net of issuance costs | 10,984 | - | 1,721,018 | - | - | 1,721,018 | ||||||||||||||||||
| Stock option expense | - | - | 1,124,187 | - | - | 1,124,187 | ||||||||||||||||||
| Other comprehensive income | - | - | - | - | 32,688 | 32,688 | ||||||||||||||||||
| Net loss | - | - | - | (2,804,203 | ) | - | (2,804,203 | ) | ||||||||||||||||
| Balance December 31, 2021 | 520,138 | $ | 5 | $ | 67,684,632 | $ | (55,629,011 | ) | $ | 230,511 | $ | 12,286,137 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 8 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | Three Months Ended | |||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (2,183,206 | ) | $ | (2,804,203 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 73,805 | 36,711 | ||||||
| Noncash lease expense | 73,103 | 36,822 | ||||||
| Stock option expense | 197,108 | 1,124,187 | ||||||
| Restricted stock compensation | 62,839 | - | ||||||
| Bad debt expense | 65,608 | - | ||||||
| Loss from equity method investment | 1,823 | 1,157 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (374,253 | ) | (240,063 | ) | ||||
| Inventories | (141,906 | ) | 189,266 | |||||
| Prepaid expenses and other current assets | 171,509 | 66,527 | ||||||
| Other assets | (14,017 | ) | 231 | |||||
| Accounts payable | 348,947 | 81,507 | ||||||
| Deferred income | (21,684 | ) | 151,397 | |||||
| Lease liability – operating lease | (78,046 | ) | (36,949 | ) | ||||
| Accrued expenses and other current liabilities | (105,931 | ) | (188,084 | ) | ||||
| Other non-current liabilities | 10,855 | 1,763 | ||||||
| Net cash used in operating activities | (1,913,446 | ) | (1,579,731 | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | (16,514 | ) | (3,009 | ) | ||||
| Net cash used in investing activities | (16,514 | ) | (3,009 | ) | ||||
| Financing activities: | ||||||||
| Repayment of loans | (1,968 | ) | (13,975 | ) | ||||
| Repayment of finance lease | (6,889 | ) | (5,841 | ) | ||||
| Proceeds from exercise of warrants, net of issuance costs | - | 1,721,018 | ||||||
| Net cash provided by (used in) financing activities | (8,857 | ) | 1,701,202 | |||||
| Effect of foreign exchange on cash | 115,583 | 32,688 | ||||||
| Net change in cash | (1,823,234 | ) | 151,150 | |||||
| Cash, beginning of period | 8,315,053 | 10,815,954 | ||||||
| Cash, end of period | $ | 6,491,819 | $ | 10,967,104 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,474 | $ | 2,808 | ||||
| Non-cash transactions: | ||||||||
| ROU assets and liabilities added during the period | $ | - | $ | 192,397 | ||||
| Deferred offering costs accrued | $ | - | $ | 257,234 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 9 |
(Unaudited)
December 31, 2022
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (the "Company"(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"(“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 reportCompany’s Annual Report on Form 10-K for the year ended September 30, 20162022 as filed with the SEC.SEC on December 23, 2022. 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, 2022, have been omitted.
Reclassification
Certain amounts in the prior period financial statements have been prepared in accordance with accounting principles generally accepted inreclassified to conform to the United States of America, which contemplates continuationpresentation of the Company as a going concern. The Company has had recurring losses, large accumulated deficit, is dependent on the shareholders to provide additional funding forcurrent period financial statements. We reclassified lease expenses associated with subleased property from operating expenses and has limited revenues. These items raise substantial doubts about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resourcesexpenses totaling $41,604 for the further development and marketing of the Company's products and business.
| Customer Name | Sales Amount | % of Total Revenue | ||||||
| Customer PO | $ | 613,550 | 50 | % | ||||
| Customer K | $ | 168,875 | 14 | % | ||||
| Customer Name | Sales Amount | % of Total Revenue | ||||||
| Customer A | $ | 161,824 | 60 | % | ||||
| Customer H | $ | 67,288 | 25 | % | ||||
| Customer Name | Sales Amount | % of Total Revenue | ||||||
| Customer PO | $ | 150,135 | 56 | % | ||||
| Customer Name | Sales Amount | % of Total Revenue | ||||||
| Customer A | $ | 89,665 | 66 | % | ||||
| Customer H | $ | 16,822 | 12 | % | ||||
| 2017 | $ | 2,283 | ||
| 2018 | 4,403 | |||
| 2019 | 4,403 | |||
| 2020 | 3,684 | |||
| Total Minimum Lease Payments | $ | 14,773 |
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 majorityits wholly owned subsidiary which has a fiscal year end of January 31.subsidiaries. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.
The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).
On February 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 $860,000, plus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the consolidation.
| 10 |
2022 Reverse Stock Split
On December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of Nevada (the “Reverse Stock Split”). Accordingly, each holder of common stock received one share of common stock for every 35 shares such stockholder held immediately prior to the effectiveness of the Reverse Stock Split.
All share and per share information included in these financial statements and notes thereto have been retroactively adjusted to give effect to the Reverse Stock Split.
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 December 31, 2022, and December 31, 2021, the total number of common stock equivalents was and , respectively, comprised of stock options and warrants as of December 31, 2022 and December 31, 2021. The Company incurred a net loss for the three months ended December 31, 2022, and 2021, respectively, and therefore basic and diluted earnings per share for these periods are the same because all potential common equivalent shares would be antidilutive.
Going Concern and Capital Resources
Since its subsidiaryinception, 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 the commercialization and manufacture of its single serve coffee products. The Company has grown revenues from its principal operations; however, there is no assurance of future revenue growth similar to historical levels.
As of December 31, 2022, the Company had cash of $6,491,819 and working capital of $6,781,959. The Company has not attained profitable operations since inception.
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. The Company has had limited revenues, recurring losses and an accumulated deficit. These items raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying unaudited interim consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence is dependent upon management’s ability to develop profitable operations and to raise additional capital for the further development and marketing of the Company’s products and business.
| 11 |
Major Customers
In the three months ended December 31, 2022 and 2021, revenue was primarily derived from major customers disclosed below.
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
Three months ended December 31, 2022:
Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer CL | $ | 331,211 | 29 | % | $ | 340,534 | 52 | % | ||||||||
Three months ended December 31, 2021:
Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | 310,551 | 30 | % | $ | 279,273 | 35 | % | ||||||||
| Customer CU | 199,936 | 20 | % | 137,566 | 17 | % | ||||||||||
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 performs a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 810,842. The Company has a long-term operating lease for office and specificallymanufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June 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 810-10-15-8842 to operating leases with a remaining lease term of 12 months or less.
In May 2022, the Company renewed the office and manufacturing space in Vista, California which states,was scheduled to expire on January 31, 2023, through March 31, 2025. The lease has a monthly base rent of $8,451, plus common area expenses. Along with the usual conditionextension, 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 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 December 31, 2022.
Effective December 1, 2022, we entered into a new operating lease for our principal executive office, which is located at 1350 East Arapaho Road, Suite #230, Richardson, Texas 75081. We lease the Richardson office on an annual basis, at a cost of $1,510 per month, through November 30, 2023.
| 12 |
As of December 31, 2022, our operating leases had a weighted average remaining lease term of 1.5 years and a weighted-average discount rate of 5.0%. Other information related to our operating leases is as follows:
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
| ROU Asset – October 1, 2022 | $ | 642,624 | ||
| ROU Asset added during the period | - | |||
| Amortization during the period | (73,103 | ) | ||
| ROU Asset – December 31, 2022 | $ | 569,521 | ||
| Lease Liability – October 1, 2022 | $ | 656,111 | ||
| Lease Liability added during the period | - | |||
| Amortization during the period | (78,046 | ) | ||
| Lease Liability – December 31, 2022 | $ | 578,065 | ||
| Lease Liability – Short-Term | $ | 392,714 | ||
| Lease Liability – Long-Term | 185,351 | |||
| Lease Liability – Total | $ | 578,065 |
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 December 31, 2022:
Amounts due within twelve months of December 31,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| 2023 | $ | 379,603 | ||
| 2024 | 217,301 | |||
| 2025 | 33,908 | |||
| Total Minimum Lease Payments | 630,812 | |||
| Less Effect of Discounting | (52,747 | ) | ||
| Present Value of Future Minimum Lease Payments | 578,065 | |||
| Less Current Portion of Operating Lease Liabilities | 392,714 | |||
| Long-Term Operating Lease Liabilities | $ | 185,351 |
On October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a controlling financial interest is ownershipsale lease back on certain packing equipment. The terms of a majority voting interest, and, therefore,this agreement require us to pay $2,987 per month through July 2024. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,500 for the purchase of this equipment. This transaction was accounted for as a general rule ownership by one reporting entity, directly or indirectly, or over 50%finance lease. As of December 31, 2022, our finance lease had a remaining lease term of 1.5 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the three months ended December 31, 2022 was $1,474.
The table below summarizes future minimum finance lease payments at December 31, 2022 for the twelve months ended December 31:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| 2023 | $ | 33,113 | ||
| 2024 | 19,315 | |||
| Total Minimum Lease Payments | 52,428 | |||
| Amount representing interest | (5,177 | ) | ||
| Present Value of Minimum Lease Payments | 47,251 | |||
| Current Portion of Finance Lease Obligations | 28,729 | |||
| Finance Lease Obligations, Less Current Portion | $ | 18,522 |
Lease expense included in Operating expense for the three months ended December 31, 2022 and 2021 was $91,119 and $48,921, respectively. Lease expense, which represents sublease expense included in Other expense for the three months ended December 31, 2022 and 2021 was $35,790 and $41,604, respectively.
Cash and non-cash activities associated with the leases for the three months ended December 31, 2022 are as follows:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
| Operating cash outflows from operating leases: | $ | 114,131 | ||
| Operating cash outflows from finance lease: | $ | 1,474 | ||
| Financing cash outflows from finance lease: | $ | 6,889 |
| 13 |
In September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020, under terms that are co-terminus with the original lease ending June 30, 2024. During the three months ended December 31, 2022, we recognized sublease income of $50,738 pursuant to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease as of December 31, 2022, for each of the twelve months ended December 31 are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| 2023 | $ | 127,926 | ||
| 2024 | 64,918 | |||
| Total | $ | 192,844 |
Loans
On April 1, 2019, we 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 2.9%. The loan is secured by the van. The outstanding voting sharesbalance on the loan at December 31, 2022 and September 30, 2022 amounted to $10,724 and $12,692, respectively.
The remaining loan payments for each of anotherthe twelve months ended December 31:
SCHEDULE OF LOAN PAYMENTS
Ford Motor Credit | ||||
| 2023 | $ | 8,005 | ||
| 2024 | 2,719 | |||
| Grand Total | $ | 10,724 | ||
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with 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 iswill recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a condition pointing toward consolidation.
Foreign Currency Translation
The financial position and results of operations of each of the Company'sCompany’s foreign subsidiaries are measured using the foreign subsidiary'ssubsidiary’s local currency as the functional currency. Revenues and expenses of each such subsidiariessubsidiary 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'stockholders’ equity unless there is a sale or complete liquidation of the underlying foreign investments.investment. Foreign currency translation adjustments resulted in loss of $28,445recorded to other comprehensive income amounted to $115,583 and $0$32,688 for ninethe three months ended June 30, 2017December 31, 2022 and 2016,2021, 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. Foreign currency transaction gains included in operations totaled $896
| 14 |
Prepaid expenses and other current assets
Prepaid expenses and other current assets at December 31, 2022 and September 30, 2022, were as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| December 31, 2022 | September 30, 2022 | |||||||
| Prepaid expenses and other current assets | $ | 376,264 | $ | 547,773 | ||||
The prepaid expenses and other current assets balance of $376,264 as of December 31, 2022 primarily consists of deposits on inventory purchases and facilities, prepaid insurance, and rent. The balance of $547,773 as of September 30, 2022 primarily consists of deposits on inventory and a retainer for nine months ended June 30, 2017 and losses totaled $2,918 for nine months ended June 30, 2016.
Inventories
Inventory, consisting principally of productsraw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or market 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, 2017December 31, 2022 and September 30, 2016, the Company concluded2022, the carrying value of inventory was $1,089,901and $947,995, respectively.
SCHEDULE OF INVENTORY
| December 31, 2022 | September 30, 2022 | |||||||
| Raw materials | $ | 1,086,761 | $ | 887,632 | ||||
| Finished goods | 3,140 | 60,363 | ||||||
| Less – Inventory reserve | - | - | ||||||
| Total | $ | 1,089,901 | $ | 947,995 | ||||
Equity Method Investment
On January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (50%) and the inventoryCompany (50%) forming NuZee LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of $380,508Mexico, with corporate domicile in Mazatlan, Mexico. As part of the capitalization of NLA, the Company contributed two co-packing machines to the joint venture. These machines had an aggregate carrying cost of $313,012. The Company received $110,000 in cash for this contribution and $206,356 respectively, the amounts reflectedrecorded an investment in NLA of $160,000 and a loss of $43,012 on the consolidated balance sheets are net of this adjustment.
| June 30, | September 30, | |||||||
| 2017 | 2016 | |||||||
| Raw Material | $ | 189,577 | $ | 124,035 | ||||
| Work in Process | 5,852 | 14,366 | ||||||
| Finished Goods | 185,079 | 67,955 | ||||||
| $ | 380,508 | $ | 206,356 | |||||
The Company accounts for NLA using the equity method of accounting since the management of day-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 outstanding common stock of NuZee JP. The Company's issued shares had an acquisition date fair value of $258,465. The remaining thirty percent (30%) of NuZee JP's issued and outstanding common stock is, and will be atour partner appoints the closing, owned by NuZee JP's current President and Chairman of its Boardthe joint board of Directors. The reason for this acquisition is to extend our market sharesdirectors of NLA. As of December 31, 2022, the only activities in NLA were the contribution of two machines, as well as obtain more business opportunities in both USAdescribed above, and Japan market. This transaction closed on October 3rd, 2016.
| Acquisition of NuZee Japan Co., Ltd. | ||||
| ASSETS ACQUIRED: | ||||
| CASH | $ | 201,676 | ||
| ACCOUNTS RECEIVABLE | 60,770 | |||
| INVENTORIES | 233,845 | |||
| OTHER CURRENT ASSETS | 75,738 | |||
| PROPERTY PLANT AND EQUIPMENT | 16,677 | |||
| GOODWILL | 52,424 | |||
| TOTAL ASSETS ACQUIRED | 641,130 | |||
| LESS LIABILITIES ASSUMED | ||||
| ACCOUNTS PAYABLE AND ACCRUED LIABILITIES | (153,440 | ) | ||
| LOAN PAYABLE | (140,922 | ) | ||
| TOTAL LIABILITIES ASSUMED | (294,362 | ) | ||
| LESS NONCONTROLLING INTEREST | (88,303 | ) | ||
| NET ASSETS ACQUIRED FROM NUZEE JP ACQUISITION | 258,465 | |||
| NuZee, Inc. | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
| (UNAUDITED) | ||||||||
| Three months ended | Nine months ended | |||||||
June 30, 2016 | June 30, 2016 | |||||||
| (Pro Forma) | (Pro Forma) | |||||||
| Revenues | $ | 840,875 | $ | 1,118,786 | ||||
| Cost of sales | 584,525 | 777,449 | ||||||
| Gross Profit | 256,350 | 341,337 | ||||||
| Operating expenses | 527,863 | 1,395,433 | ||||||
| Loss from operations | (271,513 | ) | (1,054,096 | ) | ||||
| Other income | 19,902 | 32,284 | ||||||
| Equity in loss of unconsolidated affiliate | - | - | ||||||
| Other expense | 15,164 | (7,823 | ) | |||||
| Net loss | (236,447 | ) | (1,029,635 | ) | ||||
| Net loss attributable to noncontrolling interest | - | - | ||||||
| Net loss attributable to NuZee, Inc. | $ | (236,447 | ) | $ | (1,029,635 | ) | ||
| Net loss per share, basic and fully diluted | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Weighted average of shares outstanding | 31,805,135 | 31,730,747 | ||||||
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 previously had a minimally staffed office in Japan that provided support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to its stockholders based in Japan; these functions are now supported by the Company’s personnel residing in the United States. Information about the Company’s geographic operations for the three months ended December 31, 2022 and 2021 are as follows:
| 15 |
Geographic Concentration
SCHEDULE OF GEOGRAPHICAL OPERATIONS
| Three Months Ended | Three Months Ended | |||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Net Revenue: | ||||||||
| North America | $ | 665,741 | $ | 817,341 | ||||
| South Korea | 470,607 | 201,912 | ||||||
| Net Revenue | $ | 1,136,348 | $ | 1,019,253 | ||||
| Property and equipment, net: | As of December 31, 2022 | As of September 30, 2022 | ||||||
| North America | $ | 303,835 | $ | 378,546 | ||||
| South Korea | 170,033 | 144,865 | ||||||
| Japan | 1,416 | 1,664 | ||||||
| Property and equipment, net | $ | 475,284 | $ | 525,075 | ||||
3. 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 June 30, 2017.
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 Masateru Higashidathe 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 5,105 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 year ended September 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: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) 528 shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.
| 16 |
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
The Company identified tradename and customer relationships as intangible assets in connection with the Acquisition. Any tradename and customer relationship intangible assets will be repaidamortized on or before June 14, 2018 ata straight-line basis over their respective estimated useful lives. The goodwill recognized resulted from such factors as an interest rate of one percent (1%).assembled workforce and management’s industry know-how. During the nine monthsyear ended JuneSeptember 30, 2017,2022, we recorded a non-cash impairment charge of $531,412 related to goodwill, resulting in a $0 goodwill balance as of September 30, 2022. During the Company accrued interestyear ended September 30, 2022, we also recorded non-cash impairment charges for the Dripkit tradename and acquired customer relationships of $105. The Company paid back $34,670$80,555 and $63,167, respectively. See Note 4—Intangible Assets for additional information on our tradename intangible assets, which were the only intangible assets remaining as of December 31, 2016, $41,000 as2022.
The consolidated statement of Marchoperations for the three months ended December 31, 20172022 includes revenues of $42,159, net loss of $101,806, and $69,330 asamortization expense of June 30, 2017.
Unaudited Pro forma Financial Information
The following unaudited proforma financial information presents the combined results of operations of the Company borrowedand gives effect to the sumDripkit Acquisition for the three months ended December 31, 2021, as if the Acquisition had occurred on October 1, 2021 instead of $18,384 short-term loan from NuZee Co., Ltdon 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 be repaid on or before December 14, 2017 at an interest rateproject the results of one percent (1%). Between February and March 2017,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.
| 17 |
The following is the proforma financial information for the Company borrowedand Dripkit:
SCHEDULE OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
| Description | 2021 | |||
For the three December 31, | ||||
| Description | 2021 | |||
| Revenues | $ | 1,039,258 | ||
| Net loss | $ | 2,840,383 | ||
For purposes of the sum of $ 14,440 short-term loan from NuZee Co., Ltd to be repaid on or before March 23, 2018 at an interest rate of one percent (1%). During June 2017,pro forma disclosures above, the Company borrowed 5,500,000 JPY ($47,361) and $150,000 short-term loan from NuZee Co., Ltd to be repaid on or before June 30, 2018 at an interest rate of one percent (1%). Duringprimary adjustments for the sixthree months ended MarchDecember 31, 2017,2021 include the Company accrued interestelimination of $57. transaction costs of $16,939.
4. INTANGIBLE ASSETS
As of June 30, 2017, Company paid backDecember 31, 2022, the principal amountCompany’s intangible assets consisted of $32,824 as well as the related accrued interestfollowing:
SCHEDULE OF INTANGIBLE ASSETS
| Amortization | December 31, 2022 | |||||||||||||||
| Period (Years) | Gross | Accumulated Amortization | Net | |||||||||||||
| Tradenames | 5 | $ | 140,000 | $ | 7,500 | $ | 132,500 | |||||||||
Amortization expense of intangible assets was $7,500 for the three months ended December 31, 2022.
5. ISSUANCE OF EQUITY SECURITIES
Restricted Stock Awards
On March 17, 2022, pursuant to NuZee,Co.,Ltd.
INVESTMENT IN AFFILIATE | ||||
| 2017 | ||||
| Beginning of period | $ | - | ||
| Additional investments in unconsolidated affiliate | $ | 50,000 | ||
| Distributions received | $ | - | ||
| Sale of investment in unconsolidated affiliate | $ | - | ||
| Equity in net income (loss) of unconsolidated affiliate | $ | (50,000 | ) | |
| End of period | $ | - | ||
Exercise of Warrants
In the three months ended December 31, 2021, the Company issued shares of common stock at $1.00 per share, for an aggregate purchase pricerelated to the exercise of $535,000.
Options
During the three months ended December 31, 2022, the Company granted new stock options, did not issue any shares upon the exercise of outstanding stock options, and conditionshad stock options that were forfeited because of the Convertible Note Purchase Agreement, thus equating to a conversiontermination of $606,000 [i.e., $600,000 principal, plus $6,000in accrued interest] to the equivalent 1,188,236 shares of the Corporation's common stock.employment and stock options that expired.
| 18 |
The following table summarizes stock option activity for the ninethree months ended of June 30, 2017:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | |||||||||||||||
| Number of | Exercise | Contractual | Aggregate | |||||||||||||
| Shares | Price | Life (years) | Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2016 | 573,000 | $ | 0.70 | |||||||||||||
| Granted | 84,000 | 0.49 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Outstanding at June 30, 2017 | 657,000 | $ | 0.67 | 9.0 | 25,925 | |||||||||||
| Exercisable at June 30, 2017 | 253,000 | $ | 0.46 | 9.0 | 25,925 | |||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at October 1, 2022 | 113,650 | $ | 149.88 | $ | 1,207 | |||||||||||
| Expired | (286 | ) | 109.55 | |||||||||||||
| Forfeited | (3,732 | ) | 114.37 | |||||||||||||
| Outstanding at December 31, 2022 | 109,632 | $ | 151.19 | $ | - | |||||||||||
| Exercisable at December 31, 2022 | 66,761 | $ | 171.55 | $ | - | |||||||||||
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 $23,470$197,108 and $1,124,187 for the ninethree months ended June 30, 2017.December 31, 2022 and December 31, 2021, respectively. Unamortized option expense as of June 30, 2017,December 31, 2022, for all options outstanding amounted to approximately $32,190.$655,073. These costs are expected to be recognized over a weighted-averageweighted average period of 1.8 years. The Company recognized stock option expenses of $33,736 for the nine months ended June 30, 2016.
A summary of the status of the Company'sCompany’s nonvested sharesoptions as of June 30, 2017,December 31, 2022, is presented below:
Nonvested options
Number of Nonvested Options | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options at October 1, 2022 | 50,009 | $ | 154.24 | |||||
| Granted | - | - | ||||||
| Forfeited | (3,732 | ) | 114.90 | |||||
| Vested | (3,406 | ) | 368.19 | |||||
| Nonvested options at December 31, 2022 | 42,871 | $ | 140.67 | |||||
Warrants
During July 2017,
The following table summarizes warrant activity for an aggregate purchase pricethe three months ended December 31, 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, 2022 | 152,398 | $ | 158.24 | $ | - | |||||||||||
| Issued | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding at December 31, 2022 | 152,398 | $ | 158.24 | - | ||||||||||||
| Exercisable at December 31, 2022 | 152,398 | $ | 158.24 | $ | - | |||||||||||
7. SUBSEQUENT EVENTS
Issuance of $66,300
On July 31, 2017,January 6, 2023, the Company issued 34,602 shares of common stock to a consultant asthird-party unaffiliated professional services provider in exchange for certain consulting advice to be provided in their consulting agreement.to the Company.
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Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a specialty coffee company and, we believe, a leading co-packer of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward- looking statements. These forward-looking statements are subject to certain risk s and uncertainties that could cause actual results to differ materially from our predictions.
We believe we are the only commercial-scale producer within the North American market that has the dual capacity to pack both single serve pour over coffee and coffee brew bag coffee. We intend to leverage our position to become the commercial coffee manufacturer of choice and aim to become the preeminent leader for coffee companies seeking to enter into and grow within the single serve coffee market in North America. We are paid per-package based on the number of single serve 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 coffee product our co-packing customers sell in the North American and Korean markets. While we financially benefit from the success of our co-packing customers through the sales of their respective single serve coffee products, we believe we are also able to avoid the risks associated with owning and managing the product and its related inventory.
We 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 coffee products, which we believe offers consumers some of the best coffee available in a single serve application in the world. We have recently expanded our Coffee Blenders offerings to include a new Coldpresso latte product line that is available to purchase in Korea and online. We offer DRIPKIT pour over packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and co-pack for coffee roasters.
We may also consider co-packaging other products that are complementary to our current product offerings and new customers to gain more distribution points.
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2022 Reverse Stock Split
On December 9, 2022, our sales and marketing team who have continuously contributedstockholders approved a proposal granting the board of directors of the Company (the “Board”) discretionary authority to file an amendment (the “Certificate of Amendment”) to our networkArticles of USIncorporation, as amended (the “Articles”), which amends the Articles to add a Section 1A to effect a reverse stock split of our common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s discretion. On December 21, 2022, the Board approved a 1-for-35 reverse stock split of our common stock (the “Reverse Stock Split”). The Certificate of Amendment was filed by the Company on December 28, 2022 and international channels asbecame effective upon acceptance of the Company’s filing of the Certificate of Amendment with the Secretary of State of Nevada. Accordingly, each holder of our common stock received one share of common stock for every 35 shares such seeding our product and maintaining relationships is a top priority. We have developed working relationships with key onlinestockholder held immediately prior to the effectiveness of the Reverse Stock Split.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national distributors who servehealth emergency has caused significant disruption in the international and United States economies, financial markets and supply chains. We do not believe, however, that these disruptions had a significant effect on our business or results of operations to date, and in some cases, we have been able to mitigate any adverse effects in part by sourcing coffee and single-serve pod consumers. We are also expanding our SKU line with cold brew and whole bean, ground coffee & tea products to meetother supplies from alternative suppliers in the wants and needs of all consumers. We plan to accelerate our traction by continuing to work with manufacturer representatives with food and beverage experience.
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and available capital.
For the three months ended June 30, 2017,December 31, 2022, net revenues attributable to our realized revenueoperations in North America totaled $268,262. Compared with$665,741 compared to $817,341 of net revenues attributable to our operations in North America for the same time period in 2016, our revenue increased almost 2 times by sellingthree months ended December 31, 2021. Additionally, as of December 31, 2022, $303,835 of our productsproperty and equipment, net was attributable to various retailers, wholesalers and distributors. Our realized total revenues include $169,540 from NuZee Japan, which is a subsidiary we acquired in October 2016. There are around $99,000 revenue decrease compare with the same period last year since two big orders last year from one customer did not reoccur this year although there are other new customers submitted orders.
For the three months ended JuneDecember 31, 2022, net revenues attributable to our operations in South Korea totaled $470,607 compared to $201,912 of net revenues attributable to our operations in South Korea during the three months ended December 31, 2021. Additionally, as of December 31, 2022, $170,033 of our property and equipment, net was attributable to our Korean operations, compared to $144,865 attributable to our Korean operations as of September 30, 2017,2022.
Results of Operations
On February 25, 2022, we earnedacquired substantially all of the assets and certain specified liabilities of Dripkit (the “Acquisition”). Our results of operations for the three months ended December 31, 2022 includes the operations of Dripkit. 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.
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Comparison of three months ended December 31, 2022 and 2021:
Revenue
| Three months ended December 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Revenue | $ | 1,136,348 | $ | 1,019,253 | $ | 117,095 | 11 | % | ||||||||
For the three months ended December 31, 2022, our revenue increased by $117,095, or approximately 11%, compared with the three months ended December 31, 2021. This increase was primarily related to increased revenue in South Korea, driven by a new co-packing arrangement with a new customer in South Korea and increased orders from an existing significant customer in South Korea in the three months ended December 31, 2022.
Cost of sales and gross margin
| Three months ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Cost of sales | $ | 1,060,816 | $ | 1,003,882 | $ | 56,934 | 6 | % | ||||||||
| Gross profit | 75,532 | $ | 15,371 | $ | 60,161 | 391 | % | |||||||||
| Gross profit % | 7 | % | 2 | % | ||||||||||||
For the three months ended December 31, 2022, we generated a total gross profit of $65,186$75,532 from sales of our products which includes $59,180 from NuZee Japan.and co-packing services, compared to a total gross profit of $15,371 for the three months ended December 31, 2021. The gross profit earned during same period of 2016 was $63,723. The margin rate went down from 47%was 7% for the three months ended December 31, 2022, and 2% for the three months ended December 31, 2021. This increase in gross profit was driven primarily by decreased material and labor costs. As discussed above, sales attributable to our operations in South Korea for the period ended December 31, 2022 increased as compared to the same period last year to 24%in 2021 and, as a result, in the three months ended June 30, 2016. This big decreaseDecember 31, 2022 we utilized more material and labor generated in South Korea where the margin rate was mainly caused by cost of goods sold change. Compare with last year, NuZee,inc increased production in-house this year which increase the cost of goods sold, especially including depreciation, utilities and other overhead cost. However, the margin rate raised 11% from the three months ended March 31, 2017 due to the efficient cost control.
Operating Expenses
| Three months ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 2,277,200 | $ | 2,811,189 | $ | (533,989 | ) | (19 | )% | |||||||
For the three months ended June 30, 2017, our Company'sDecember 31, 2022, the Company’s operating expenses totaled $437,176 which almost$2,277,200 compared to $2,811,189 for the same with same period last year. Of those expenses, $105,316 were from NuZee Japan, which accounts for one quarter of total expenses. Expenses primarily came from outside professional services, cost of employees and sales & marketing expenses. We incurred $102,651 in expenses for professional services which is mainly associated with legal and accounting services as well as other related costs associated with public company operation. There were total $160,441 payroll related expenses accrued during three months ended June 30, 2017, which increased from $100,311 the same period last year.December 31, 2021, representing a 19% decrease. This increase wasdecrease is primarily caused by increasing scaleattributable to a decrease of the company. Among the $84,633 sales and marketing expenses, almost 89% came from advertising of our products with new customers as well as attending tradeshows for exploring more business opportunities.
Net Loss
| Three months ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Net Loss | $ | 2,183,206 | $ | 2,804,203 | $ | (620,997 | ) | (22 | )% | |||||||
For the three months ended June 30, 2017,December 31, 2022, we generated net losses of $367,009. This loss was attributed to $437,176 in operating expenses. Among them, NuZee Japan generated net losses of $38,309 and operating expenses of $46,136. Compared with quarter ended March 31, 2017, totala net loss decreased $18,283 since the Company expensed less money on professional services. Compared with same period ended June 30, 2016, the overallof $2,183,206 compared to a net loss increased by $42,189 and operating expense increased by $38,788. Most of this increase is caused by$2,804,203 for the new NuZee Japan.
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Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of costDecember 31, 2022, we had an accumulated deficit of goods sold. Different from last year, most of productions are in-house this year which increase the cost of goods sold such as depreciation, utilitiesapproximately $67 million. We have not yet achieved profitability and other overhead cost.
To date, we have funded our operations primarily with proceeds from registered public offerings and postage for shipping out productsprivate placements of shares of our common stock and samplesother equity securities. Our principal use of cash is to customers during the nine month period. Total operating expenses for the nine months ended June 30, 2016 was $1,079,426,fund our operations, which includes $102,229 marketingthe commercialization of our single serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and sales related expenses, $283,812 professional service expense and $86,713 office expenses.
As of September 30, 2016,December 31, 2022, we had a cash balance of $40,613$6,491,819. Considering our current cash resources and $151,609 asour current and expected levels of June 30, 2017; this increase was primarilyoperating expenses, we believe that our cash and cash equivalents will be sufficient to fund our planned operations for at least nine months from February 13, 2023 but expect to need additional capital to fund our planned operations beyond that. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. A reduction in consumer demand for, or revenues from the smooth operationsale 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.
In the future, we may receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised for cash at the election of the Company.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 issued by us in March 2021 in an underwritten registered public offering and the 2022 warrants (the “2022 Warrants”) that were issued by us in an April 2022 offering pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. The 2021 Warrant holders are obligated to pay the exercise price ($157.46 in the case of the Series A Warrants and $204.69 in the case of the Series B Warrants) in cash amount is almostupon exercise of the same compared with last quarter.
We intend to seek to raise additional capital, including through public or private equity offerings, to support our operating activities for the next twelve months and beyond, and such funding may not be available to us on acceptable terms, or at all. The other partstiming and amount of current liabilities increased sincefunds that we received new short-term loans this quarter.
While we believe our plans to raise additional funds will alleviate the convertible notes as well as payment of more bills.
If we may be requiredare unsuccessful in our efforts to cease or curtailraise additional capital, based on our operations. Our financial statements do not include any adjustments that might result from the outcomecurrent and expected levels of this uncertainty.
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Contractual Obligations
Our significant contractual cash requirements as of December 31, 2022, primarily include payments for operating and finance lease liabilities and principal and interest on loans. Additionally, we may incur purchase obligations in the Company intendsordinary course of business that are enforceable and legally binding and enter into enforceable agreements to engagepurchase 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 December 31, 2022, we had payments for lease and loan obligations of approximately $636,040, of which $429,448 are payable within 12 months as of December 31, 2022. We had no purchase obligations as of December 31, 2022.
Summary of Cash Flows
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash used in operating activities | $ | (1,913,446 | ) | $ | (1,579,731 | ) | ||
| Cash used in investing activities | $ | (16,514 | ) | $ | (3,009 | ) | ||
| Cash provided by (used in) financing activities | $ | (8,857 | ) | $ | 1,701,202 | |||
| Effect of foreign exchange on cash | $ | 115,583 | $ | 32,688 | ||||
| Net change in cash | $ | (1,823,234 | ) | $ | 151,150 | |||
Operating Activities
We used $1,913,446 and $1,579,731 of cash in additionaloperating activities during the three months ended December 31, 2022, and 2021, respectively, principally to fund our operations.
Investing Activities
We used $16,514 and $3,009 of cash in investing activities during the three months ended December 31, 2022 and 2021, respectively. Cash used in both periods was for the purchase of equipment.
Financing Activities
Cash used in financing throughactivities of $8,857 for the salethree months ended December 31, 2022 was primarily related to repayments on loans and an equipment lease, and cash provided by financing activities of equity securities.$1,701,202 for the three months ended December 31, 2021 was primarily related to proceeds received upon the exercise of outstanding 2021 Warrants by the 2021 Warrant holders, as further described in “Note 5—Issuance of Equity Securities” 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.
There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended December 31, 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, 2022, filed with the SEC on December 23, 2022.
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We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Disclosure controls and procedures" as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the officer concluded that, as of the date of the evaluation, the Company's disclosure are controls and other procedures were not effectivethat are designed to provide reasonable assuranceensure that the information required to be disclosed in the Company'sour periodic filingsreports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of 1934the SEC, and that such information is accumulatedcollected and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the designparticipation of a control system must reflect the fact that there are resource constraints,our Chief Executive Officer and the benefits of controls must be considered relative to their costs. BecauseInterim Chief Financial Officer, carried out an evaluation of the inherent limitationseffectiveness of our “disclosure controls and procedures” (as defined in all control systems, noExchange 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 Interim Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls canand procedures were effective to provide absolutereasonable assurance that allinformation 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 Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control issues and instances of fraud, if any, within a companyover financial reporting during the quarter ended December 31, 2022 that have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errormaterially affected, or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effectiveare reasonably likely to materially affect, our internal control system, misstatements Due to error or fraud may occur and not be detected.over financial reporting.
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Item 1. Legal Proceedings
Next Vision Litigation
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 “Next Vision Complaint”). The Next Vision 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 reverse stock splits effected by the Company on each of November 12, 2019 and December 28, 2022, vested stock options to acquire 667 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 Next Vision Complaint alleges that the 667 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 Next Vision Complaint 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.
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 Next Vision Complaint. On November 29, 2022, the parties engaged in Court-ordered mediation but did not resolve the matter. The Court has set a trial date for August 11, 2023.
We believe the allegations set forth in the Next Vision 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.
Steeped, Inc. Litigation
As previously disclosed, on June 27, 2019, Steeped, Inc. d/b/a Steeped Coffee (the “Plaintiff”) filed a complaint (the “First Steeped Complaint”) against the Company in the United States District Court for the Northern District of California (the “District Court”), alleging that the Company’s promotion of certain coffee products and services during a trade show in 2019 constituted an infringement upon the Plaintiff’s registered trademark. In May 2021, the Company entered into a settlement agreement with the Plaintiff, pursuant to which the Company denied the allegations in the First Steeped Complaint, denied any liability arising therefrom, and agreed to pay $35,000 to resolve all claims asserted by the Plaintiff (the “Settlement Agreement”). As a result, a Joint Stipulation and Order for Dismissal was filed with the District Court on May 21, 2021, and the Order of the Court dismissing the case was entered on the same day. On January 27, 2023, the Plaintiff filed a new complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “New Steeped Complaint”). The New Steeped Complaint alleges causes of action for breach of contract and intentional interference with contractual relations related to the Company’s alleged breach of the Settlement Agreement. Plaintiff seeks a trial by jury and relief in the form of a permanent injunction for use of “Steep Coffee” or any confusingly similar variant of “STEEPED COFFEE”; the impoundment and destruction of allegedly infringing goods; a final judgment for all profits derived from the Company’s allegedly unlawful conduct, actual damages, treble damages for alleged willful infringement; damages to the Plaintiff’s reputation and goodwill; damages due to the Company’s alleged destabilization of the market and price erosion; and reasonable attorneys’ fees and costs. The Company has not yet been served or filed a responsive pleading. The Company believes the claims are defensible, and that the damages do not align with the asserted causes of action or are otherwise not sustainable. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in any defense or counterclaim.
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Curtin Litigation
On January 6, 2023, a former employee of the Company, Rosaline Curtin (“Ms. Curtin”), filed a complaint against the Company and another former employee of the Company, Jose Ramirez (“Mr. Ramirez”), in the Superior Court of California, County of San Diego (Case No. 37-2023-00000841-CU-WT-NC) (the “Curtin Complaint”). The Curtin Complaint alleges that Ms. Curtin was subject to harassment by her supervisor, Mr. Ramirez, and gender discrimination throughout her employment, that she reported this discrimination and harassment to the Company, and that the Company retaliated against her and wrongfully terminated her for whistleblowing and failed to prevent discrimination, harassment, and retaliation. The Curtin Complaint seeks compensatory damages, including loss of past, present and future earnings, and benefits, as well as punitive damages, penalties, attorney’s fees and costs and interest. The Company’s deadline to respond or remove the case to federal court is February 23, 2023. We believe the allegations set forth in the Curtin 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.
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 23, 2022, 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 29, 2016
None.
None.
None.
Item 5. Other Information
None.
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* Filed herewith
** Furnished herewith. Pursuant to Rule 406T of Regulation S-T,
*** The instance document does not appear in the Interactive Data Files on Exhibit 101 heretointeractive data file because its XBRL tags are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 ofembedded within the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
inline XBRL document.
| 28 |
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: | NUZEE, INC. | |||
| By: | /s/ Masateru Higashida | |||
| Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director | ||||
| By: | /s/ Shana Bowman | |||
| Shana Bowman, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
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