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 August 14, 2017, NuZee, Inc.11, 2023, the registrant had 33,350,538 shares of common stock outstanding.
| 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 three 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; |
| 3 |
| ● | 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)
| June 30, 2023 | September 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 3,280,425 | $ | 8,315,053 | ||||
| Accounts receivable, net | 216,515 | 345,258 | ||||||
| Inventories, net | 1,279,300 | 947,995 | ||||||
| Prepaid expenses and other current assets | 283,292 | 547,773 | ||||||
| Total current assets | 5,059,532 | 10,156,079 | ||||||
| Property and equipment, net | 360,010 | 525,075 | ||||||
| Other assets: | ||||||||
| Right-of-use asset - operating lease | 470,906 | 642,624 | ||||||
| Investment in unconsolidated affiliate | 164,284 | 169,634 | ||||||
| Intangible assets, net | 117,500 | 140,000 | ||||||
| Other assets | 83,730 | 77,962 | ||||||
| Total other assets | 836,420 | 1,030,220 | ||||||
| Total assets | $ | 6,255,962 | $ | 11,711,374 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 1,152,327 | $ | 820,200 | ||||
| Current portion of long-term loan payable | 4,759 | 7,947 | ||||||
| Current portion of lease liability - operating lease | 297,541 | 388,325 | ||||||
| Current portion of lease liability - finance lease | 30,610 | 24,518 | ||||||
| Deferred income | 348,641 | 319,707 | ||||||
| Other current liabilities | 45,160 | 39,241 | ||||||
| Total current liabilities | 1,879,038 | 1,599,938 | ||||||
| Non-current liabilities: | ||||||||
| Lease liability - operating lease, net of current portion | 163,204 | 267,786 | ||||||
| Lease liability - finance lease, net of current portion | 1,801 | 29,622 | ||||||
| Loan payable - long term, net of current portion | 2,001 | 4,745 | ||||||
| Other noncurrent liabilities | 47,223 | 66,484 | ||||||
| Total non-current liabilities | 214,229 | 368,637 | ||||||
| Total liabilities | 2,093,267 | 1,968,575 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock; shares authorized, $ par value; and shares issued and outstanding as of June 30, 2023, and September 30, 2022, respectively | 8 | 7 | ||||||
| Additional paid in capital | 74,824,442 | 74,281,418 | ||||||
| Accumulated deficit | (70,798,936 | ) | (64,622,520 | ) | ||||
| Accumulated other comprehensive income | 137,181 | 83,894 | ||||||
| Total stockholders’ equity | 4,162,695 | 9,742,799 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,255,962 | $ | 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 June 30, 2023 | Three Months Ended June 30, 2022 | Nine Months Ended June 30, 2023 | Nine Months Ended June 30, 2022 | |||||||||||||
| Revenues, net | $ | 648,607 | $ | 774,019 | $ | 2,566,121 | $ | 2,508,345 | ||||||||
| Cost of sales | 596,454 | 857,672 | 2,401,806 | 2,575,646 | ||||||||||||
| Gross profit (loss) | 52,153 | (83,653 | ) | 164,315 | (67,301 | ) | ||||||||||
| Operating expenses | 2,067,915 | 2,546,608 | 6,328,044 | 8,554,276 | ||||||||||||
| Loss from operations | (2,015,762 | ) | (2,630,261 | ) | (6,163,729 | ) | (8,621,577 | ) | ||||||||
| Loss from investment in unconsolidated affiliate | (1,853 | ) | (1,919 | ) | (5,350 | ) | (4,215 | ) | ||||||||
| Other income | 50,713 | 60,672 | 163,915 | 145,890 | ||||||||||||
| Other expense | (61,841 | ) | (60,361 | ) | (187,018 | ) | (174,889 | ) | ||||||||
| Interest income (expense), net | 3,406 | (2,023 | ) | 15,766 | (7,001 | ) | ||||||||||
| Net loss | $ | (2,025,337 | ) | $ | (2,633,892 | ) | $ | (6,176,416 | ) | $ | (8,661,792 | ) | ||||
| Basic and diluted loss per common share | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Basic and diluted weighted average number of common stock outstanding | ||||||||||||||||
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)
| For the three months ended June 30 | 2023 | 2022 | ||||||
| NuZee, Inc. | ||||||||
| For the three months ended June 30 | 2023 | 2022 | ||||||
| Net loss | $ | (2,025,337 | ) | $ | (2,633,892 | ) | ||
| Foreign currency translation | (19,331 | ) | (45,197 | ) | ||||
| Total other comprehensive loss, net of tax | (19,331 | ) | (45,197 | ) | ||||
| Comprehensive loss | $ | (2,044,668 | ) | $ | (2,679,089 | ) | ||
| For the nine months ended June 30 | 2023 | 2022 | ||||||
| NuZee, Inc. | ||||||||
| For the nine months ended June 30 | 2023 | 2022 | ||||||
| Net loss | $ | (6,176,416 | ) | $ | (8,661,792 | ) | ||
| Foreign currency translation | 53,287 | (19,604 | ) | |||||
| Total other comprehensive income (loss), net of tax | 53,287 | (19,604 | ) | |||||
| Comprehensive loss | $ | (6,123,129 | ) | $ | (8,681,396 | ) | ||
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 | ||||||||||||
| Common stock issued for services | 6,000 | - | 57,120 | - | - | 57,120 | ||||||||||||||||||
| Forgiveness of stock issuance costs | - | - | 25,000 | - | - | 25,000 | ||||||||||||||||||
| Stock option expense | - | - | (114,482 | ) | - | - | (114,482 | ) | ||||||||||||||||
| Restricted stock compensation | 78,151 | 1 | 51,939 | - | - | 51,940 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (42,965 | ) | (42,965 | ) | ||||||||||||||||
| Net loss | - | - | - | (1,967,873 | ) | - | (1,967,873 | ) | ||||||||||||||||
| Balance March 31, 2023 | 769,239 | $ | 8 | $ | 74,560,942 | $ | (68,773,599 | ) | $ | 156,512 | $ | 5,943,863 | ||||||||||||
| Common stock issued for services | 7,500 | - | 78,750 | - | - | 78,750 | ||||||||||||||||||
| Forgiveness of stock issuance costs | - | - | 15,000 | - | - | 15,000 | ||||||||||||||||||
| Stock option expense | - | - | 107,754 | - | - | 107,754 | ||||||||||||||||||
| Restricted stock compensation | - | - | 61,996 | - | 61,996 | |||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (19,331 | ) | (19,331 | ) | ||||||||||||||||
| Net loss | - | - | - | (2,025,337 | ) | - | (2,025,337 | ) | ||||||||||||||||
| Balance June 30, 2023 | 776,739 | $ | 8 | $ | 74,824,442 | $ | (70,798,936 | ) | $ | 137,181 | $ | 4,162,695 | ||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| 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 gain | - | - | - | - | 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 | ||||||||||||
| Warrant issuance costs | - | - | (18,422 | ) | - | - | (18,422 | ) | ||||||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | 1,213 | - | 88,426 | - | - | 88,426 | ||||||||||||||||||
| Common stock issued for Dripkit acquisition | 5,105 | - | 386,844 | - | - | 386,844 | ||||||||||||||||||
| Stock option expense | - | - | 935,447 | - | - | 935,447 | ||||||||||||||||||
| Exercise of stock options | 400 | - | 12,600 | - | - | 12,600 | ||||||||||||||||||
| Restricted stock award issuance | 3,369 | - | 9,590 | - | - | 9,590 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | (7,095 | ) | (7,095 | ) | ||||||||||||||||
| Net loss | - | - | - | (3,223,697 | ) | - | (3,223,697 | ) | ||||||||||||||||
| Balance March 31, 2022 | 530,225 | 5 | $ | 69,099,117 | $ | (58,852,708 | ) | $ | 223,416 | $ | 10,469,830 | |||||||||||||
| Balance | 530,225 | 5 | $ | 69,099,117 | $ | (58,852,708 | ) | $ | 223,416 | $ | 10,469,830 | |||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | 197 | - | $ | 6,830 | $ | - | $ | - | $ | 6,830 | ||||||||||||||
| Equity securities issued for cash, exempt offering, net of issuance costs | 25,279 | - | 1,649,736 | - | - | 1,649,736 | ||||||||||||||||||
| Common stock issued to settle Dripkit Bulk Sales Holdback Amount | 528 | - | 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 | 556,229 | $ | 5 | $ | 71,485,904 | $ | (61,486,600 | ) | $ | 178,219 | $ | 10,177,528 | ||||||||||||
| Balance | 556,229 | $ | 5 | $ | 71,485,904 | $ | (61,486,600 | ) | $ | 178,219 | $ | 10,177,528 | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 8 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (6,176,416 | ) | $ | (8,661,792 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 181,332 | 295,178 | ||||||
| Noncash lease expense | 171,718 | 213,539 | ||||||
| Stock option expense | 190,380 | 2,687,529 | ||||||
| Issuance of common stock for services | 135,870 | - | ||||||
| Restricted stock compensation | 176,775 | 71,916 | ||||||
| Bad debt expense | 109,302 | - | ||||||
| Loss on disposition of asset | 41,108 | 12,618 | ||||||
| Loss from investment in unconsolidated affiliate | 5,350 | 4,215 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 19,441 | (18,752 | ) | |||||
| Inventories | (331,305 | ) | (99,452 | ) | ||||
| Prepaid expenses and other current assets | 264,481 | (49,464 | ) | |||||
| Other assets | (5,768 | ) | (6,926 | ) | ||||
| Accounts payable, accrued expenses and other current liability | 378,046 | (93,223 | ) | |||||
| Deferred income | 28,934 | 162,495 | ||||||
| Lease liability – operating lease | (195,366 | ) | (210,194 | ) | ||||
| Other non-current liabilities | (19,261 | ) | 15,015 | |||||
| Net cash used in operating activities | (5,025,379 | ) | (5,677,298 | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | (34,875 | ) | (214,524 | ) | ||||
| Acquisition of Dripkit | - | (413,069 | ) | |||||
| Net cash used in investing activities | (34,875 | ) | (627,593 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock, exercise of options | - | 12,600 | ||||||
| Repayment of loans | (5,932 | ) | (41,671 | ) | ||||
| Repayment of finance lease | (21,729 | ) | (18,094 | ) | ||||
| Proceeds from issuance of common stock, ATM offering, net of issuance cost | - | 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 | ||||||
| Cash paid for offering costs | - | (368,783 | ) | |||||
| Net cash provided by (used in) financing activities | (27,661 | ) | 3,031,640 | |||||
| Effect of foreign exchange on cash | 53,287 | (19,604 | ) | |||||
| Net change in cash | (5,034,628 | ) | (3,292,855 | ) | ||||
| Cash, beginning of period | 8,315,053 | 10,815,954 | ||||||
| Cash, end of period | $ | 3,280,425 | $ | 7,523,099 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 3,760 | $ | 7,077 | ||||
| Cash paid for taxes | - | 800 | ||||||
| Non-cash transactions: | ||||||||
| ROU assets and liabilities added during the period | $ | - | $ | 558,371 | ||||
| Common stock issued in acquisition of Dripkit | - | 426,844 | ||||||
| Forgiveness of stock issuance costs | 40,000 | - | ||||||
| Stock issuance costs accrued | $ | - | $ | 273,762 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 9 |
(Unaudited)
June 30, 2017
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.
| 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.
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.
| 10 |
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, 2023, and June 30, 2022, the total number of common stock equivalents was and , respectively, comprised of stock options and warrants as of June 30, 2023 and June 30, 2022. The Company incurred a net loss for the three and nine months ended June 30, 2023, and 2022, 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 June 30, 2023, the Company had cash of $3,280,425 and working capital of $3,180,494. 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.
Major Customers
In the nine months ended June 30, 2023 and 2022, revenue was primarily derived from major customers disclosed below.
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
Nine months ended June 30, 2023:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer CL | $ | 391,232 | 15 | % | $ | 94,847 | 44 | % | ||||||||
| Customer CN | 426,748 | 17 | % | 22,064 | 10 | % | ||||||||||
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 | % | ||||||||
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.
| 11 |
In May 2022, the Company renewed the office and manufacturing space in Vista, California through March 31, 2025, which states,was scheduled to expire on January 31, 2023. 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 June 30, 2023.
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.
As of June 30, 2023, our operating leases had a weighted average remaining lease term of 1 year and a weighted-average discount rate of 5%. 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 | (171,718 | ) | ||
| ROU Asset – June 30, 2023 | $ | 470,906 | ||
| Lease Liability – October 1, 2022 | $ | 656,111 | ||
| Lease Liability added during the period | - | |||
| Amortization during the period | (195,366 | ) | ||
| Lease Liability – June 30, 2023 | $ | 460,745 | ||
| Lease Liability – Short-Term | $ | 297,541 | ||
| Lease Liability – Long-Term | 163,204 | |||
| Lease Liability – Total | $ | 460,745 |
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, 2023:
Amounts due within twelve months of June 30,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| 2024 | $ | 373,061 | ||
| 2025 | 100,712 | |||
| Total Minimum Lease Payments | 473,773 | |||
| Less Effect of Discounting | (13,028 | ) | ||
| Present Value of Future Minimum Lease Payments | 460,745 | |||
| Less Current Portion of Operating Lease Liabilities | 297,541 | |||
| Long-Term Operating Lease Liabilities | $ | 163,204 |
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 June 30, 2023, our finance lease had a remaining lease term of 0.9 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the nine months ended June 30, 2023, was $3,760.
| 12 |
The table below summarizes future minimum finance lease payments at June 30, 2023 for the twelve months ended June 30:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| 2024 | $ | 33,113 | ||
| 2025 | 2,759 | |||
| Total Minimum Lease Payments | 35,872 | |||
| Amount representing interest | (3,461 | ) | ||
| Present Value of Minimum Lease Payments | 32,411 | |||
| Current Portion of Finance Lease Obligations | 30,610 | |||
| Finance Lease Obligations, Less Current Portion | $ | 1,801 |
Lease expenses included in operating expense for the nine months ended June 30, 2023, and 2022 was $147,327 and $221,972, respectively. Lease expense, which represents sublease expense included in other expense for the nine months ended June 30, 2023 and 2022 was $140,559 and $157,267, respectively.
Cash and non-cash activities associated with the leases for the nine months ended June 30, 2023, are as follows:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
| Operating cash outflows from operating leases: | $ | 263,950 | ||
| Operating cash outflows from finance lease: | $ | 3,247 | ||
| Financing cash outflows from finance lease: | $ | 21,729 |
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 nine months ended June 30, 2023, we recognized sublease income of $133,443 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, 2023, for each of the twelve months ended June 30 are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| 2024 | $ | 129,835 | ||
| Total | $ | 129,835 |
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 June 30, 2023 and September 30, 2022 amounted to $6,760 and $12,692, respectively.
The remaining loan payments for each of anotherthe twelve months ended June 30:
SCHEDULE OF LOAN PAYMENTS
| Ford Motor Credit | ||||
| 2024 | $ | 4,759 | ||
| 2025 | 2,001 | |||
| Grand Total | $ | 6,760 | ||
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.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. The adoption of Topic 606 did not have a material impact on our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.
| 13 |
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 inrecorded to other comprehensive income and loss of $28,445amounted to $53,287 and $0$(19,604) for the nine months ended June 30, 20172023, and 2016,2022, 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 for nine months ended
Prepaid expenses and other current assets
Prepaid expenses and other current assets at June 30, 20172023 and losses totaled $2,918 for nine months endedSeptember 30, 2022, were as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| June 30, 2023 | September 30, 2022 | |||||||
| Prepaid expenses and other current assets | $ | 283,292 | $ | 547,773 | ||||
The prepaid expenses and other current assets balance of $283,292 as of 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, 20172023 and September 30, 2016, the Company concluded2022, the carrying value of inventory was $1,279,300 and $947,995, respectively. No inventory reserve is recognized during the inventorynine months ended June 30, 2023 and June 30, 2022.
SCHEDULE OF INVENTORY
| June 30, 2023 | September 30, 2022 | |||||||
| Raw materials | $ | 1,212,360 | $ | 887,632 | ||||
| Finished goods | 66,940 | 60,363 | ||||||
| Total | $ | 1,279,300 | $ | 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 Company (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 Mazatlán, 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 the joint board of directors of NLA. As of June 30, 2023, the only activities in NLA were the contribution of two machines, as described above, and start up and initial marketing and sales activities. $5,350 and $4,215 of losses were recognized under the equity method of accounting during the nine months ended June 30, 2023 and June 30, 2022, respectively.
| 14 |
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its Boardproducts 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 Directors. The reason for this acquisition is to extend our market sharesproduct and materials between the U.S. and Japan, as well as obtain more business opportunitiesinvestor relations support to its stockholders based in both USA 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 | |||
Geographic Concentration
SCHEDULE OF GEOGRAPHICAL OPERATIONS
| Nine Months Ended | Nine Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| Net Revenue: | ||||||||
| North America | $ | 1,295,338 | $ | 2,031,781 | ||||
| South Korea | 1,270,783 | 476,564 | ||||||
| Net Revenue | $ | 2,566,121 | $ | 2,508,345 | ||||
| Property and equipment, net: | As of June 30, 2023 | As of September 30, 2022 | ||||||
| North America | $ | 215,756 | $ | 378,546 | ||||
| South Korea | 143,449 | 144,865 | ||||||
| Japan | 805 | 1,664 | ||||||
| Property and equipment, net | $ | 360,010 | $ | 525,075 | ||||
3. BUSINESS COMBINATIONS
As described in Note 1, on February 25, 2022, the Company is providingacquired substantially all the following unaudited pro-formaassets and certain specified liabilities of Dripkit pursuant to present a summarythe Asset Purchase Agreement, dated as of February 21, 2022, by and among the combined results ofCompany, Dripkit, and Dripkit’s investors who executed joinders to the Company's consolidated operations with all acquisitions as if the acquisitions had been completedAsset Purchase Agreement as of the beginningClosing Date. Pursuant to the terms of the reporting period. Adjustments were madeAsset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, consisting of cash paid by the Company to eliminate any inter-company transactionsDripkit and the Company’s issuance to the Stock Recipients of shares of the Company’s common stock, 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 periods presented. There is no pro forma informationAsset 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 2017 as NuZee Japan Co., Ltd was acquired ata business combination.
Pursuant to the beginningterms of the period.
| 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 | ||||||
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 a secured convertible promissory note into the sumStock Recipients an aggregate of $600,000 to Masateru Higashida, the Company's major shareholder. Interest was calculated at the annual rate of zero percent (0%) for the period until April 2016. During March 2016, the Company and Masateru Higashida decided to extend the repayment date to March 31, 2017 so that the Company has more funds for production and marketing to fulfill customers' requirements, which is in the best interest of the Corporation and its shareholders. The annual rate of repayment is at an interest rate of one percent (1%) for the period until March 31, 2017. This promissory note will convert to 1,176,471 shares of NuZee, Inc common stock at $0.51 per share if Company is unable to pay back the note by then. During six months ended March 31, 2017, the Company accrued interest of $5,999.98 relating to this related party note.
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) shares of common stock atwere issued to the electionStock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.
| 15 |
Dripkit was acquired for purposes of supplementing our current product offerings. Dripkit operates as a Dripkit Coffee business division that is wholly-owned by NuZee, Inc.
The following table presents the allocation of the Lender (now ataggregate purchase price paid by the electionCompany for the Acquisition of Purchaser)$860,000, atplus 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 $0.51 per share, on or after March 31, 2017. On March 31, 2017, Kenichi Miura exercised his right$876,176, to convert the Amended Note to sharesassets acquired for the acquisition of the Corporation's common stock (the "Conversion"), at the price of $0.51 per share,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 accordanceconnection with the termsAcquisition. Any tradename and conditionscustomer relationship intangible assets will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill recognized resulted from such factors as an assembled workforce and management’s industry know-how. During the year ended September 30, 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 Convertibleyear ended September 30, 2022, we also recorded non-cash impairment charges for the Dripkit tradename and acquired customer relationships of $80,555 and $63,167, respectively. See Note Purchase Agreement, thus equating to a conversion4—Intangible Assets for additional information on our tradename intangible assets, which were the only intangible assets remaining as of $606,000 [i.e., $600,000 principal, plus $6,000 in accrued interest] to the equivalent 1,188,236 sharesJune 30, 2023.
The consolidated statement of the Corporation's common stock.
Unaudited Pro forma Financial Information
The following unaudited proforma financial information presents the combined results of operations of the Company accrued interest of $223. The Company paid back $55,000 of this short-term loan as of September 30, 2016 ,$20,000 of this short-term loan as of March 31, 2017 and $21,000 of this short-term loan duringgives effect to the Dripkit Acquisition for the three and nine months ended June 30, 2017. There has $4,000 short term loan balance left2022, as if the Acquisition had occurred on October 1, 2021 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.
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The following is the proforma financial information for the Company and Dripkit:
SCHEDULE OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
| Description | For the three months ended June 30, 2022 | For the nine months ended June 30, 2022 | ||||||
| Revenues | $ | 774,019 | $ | 2,585,802 | ||||
| Net loss | $ | 2,624,975 | $ | 8,491,254 | ||||
For purposes of the pro forma disclosures above, the primary adjustments for the three and nine months ended June 30, 2022 include the elimination of transaction costs of approximately $8,917 and $270,478.
4. INTANGIBLE ASSETS
As of June 30, 2023, the Company’s intangible assets consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| Amortization | June 30, 2023 | |||||||||||||||
| Period (Years) | Gross | Accumulated Amortization | Net | |||||||||||||
| Tradenames | 5 | $ | 140,000 | $ | 22,500 | $ | 117,500 | |||||||||
Amortization expense of intangible assets was $22,500 for the nine months ended June 30, 2023.
5. ISSUANCE OF EQUITY SECURITIES
Restricted Stock Awards
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. These awards are now fully vested. On March 22, 2023, 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. 2023 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 $ and $, respectively, for the nine months ended June 30, 2023 and 2022, related to these Restricted Shares. The Restricted Shares are valued using the closing stock price on the grant date and the Company is expensing these restricted share awards on a straight-line basis over the requisite service period.
On March 15, 2023, the Company granted performance-based restricted shares to executive officers, employees and consultants as part of the 2013 Stock Incentive Plan and the 2019 Stock Incentive Plan. The initial performance period for the Performance-Based Restricted Shares commenced October 1, 2022 and ends September 30, 2023.
% of the Performance-Based Restricted Shares will vest, if at all, in Fiscal Year 2023, based on the Company’s achievement of a specified amount of cash on hand, sales growth, increased gross margin, and reduced operating losses in Fiscal Year 2023, and the other % of the Performance-Based Restricted Shares will vest, if at all, in Fiscal Year 2024, based on performance metrics to be set by the Board in its sole and absolute discretion on or before December 31, 2023. Based on management’s estimate as of June 30, 2017.
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SCHEDULE OF RESTRICTED COMMON SHARES
| 2023 | 2022 | |||||||
| Number of shares outstanding at September 30, 2022 and 2021 | ||||||||
| Restricted shares granted | ||||||||
| Restricted shares forfeited | ) | |||||||
| Restricted shares vested | ) | |||||||
| Number of shares outstanding at June 30, 2023 and 2022 | ||||||||
During the nine months ended June 30, 2017,2023, restricted shares were forfeited because of the termination of employment.
Common stock issued for services
On January 6, 2023, the Company accrued interest of $105. The Company paid back $34,670 as of December 31, 2016, $41,000 as of March 31, 2017 and $69,330 as of June 30, 2017.
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 | $ | - | ||
On June 20, 2023, the company sold 145,510Company issued shares of common stock at $1.00 per share,to a third-party unaffiliated professional services provider in exchange for an aggregate purchasecertain consulting advice to be provided to the Company. The shares are valued using the closing stock price on the grant date and the Company recognized common stock compensation expense of $145,510.
Options
During the Amended Note tonine months ended June 30, 2023, the Company granted no new stock options, did not issue any shares upon the exercise of outstanding stock options, and had stock options that were forfeited and expired because of the Corporation's common stock (the "Conversion"), at the pricetermination of $0.51 per share, in accordance with the termsemployment and conditionsexpiration of the Convertible Note Purchase Agreement, thus equating to a conversion 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.options.
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| 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 | |||||||||||
SUMMARY OF STOCK OPTION ACTIVITY
Number of Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at October 1, 2022 | 113,650 | $ | 149.88 | $ | 1,207 | |||||||||||
| Forfeited and expired | (12,186 | ) | 118.02 | - | ||||||||||||
| Outstanding at June 30, 2023 | 101,464 | $ | 154.48 | $ | - | |||||||||||
| Exercisable at June 30, 2023 | 70,146 | $ | 174.03 | $ | - | |||||||||||
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$190,380 and $2,687,529 for the nine months ended June 30, 2017.2023 and June 30, 2022, respectively. Unamortized option expense as of June 30, 2017,2023, for all options outstanding amounted to approximately $32,190.$110,369. These costs are expected to be recognized over a weighted-averageweighted average period of 1.8 years.
SUMMARY OF UNVESTED SHARES
Nonvested options
Number of Nonvested Options | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options at October 1, 2022 | 50,009 | $ | 154.24 | |||||
| Granted | - | - | ||||||
| Forfeited | (8,883 | ) | 107.79 | |||||
| Vested | (9,808 | ) | 253.71 | |||||
| Nonvested options at June 30, 2023 | 31,318 | $ | 138.20 | |||||
Warrants
During the nine months ended June 30, 2023, the Company granted no new warrants to purchase shares of common stock and did not issue any shares upon the exercise of outstanding warrants to purchase shares of common stock.
The Company recognized stock option expenses of $33,736following table summarizes warrant activity for the nine months ended June 30, 2016.
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 June 30, 2023 | 152,398 | $ | 158.24 | - | ||||||||||||
| Exercisable at June 30, 2023 | 152,398 | $ | 158.24 | $ | - | |||||||||||
7. CONTINGENCY
Steeped Litigation
The Company has an accrual of $150,000 for litigation costs related to the status ofongoing Steeped complaint regarding infringement upon their registered trademark. This accrual is based on the Company's nonvested shares as of June 30, 2017, is presented below:
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 Cold pressed 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.
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.
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Geographic Concentration
Our operations are primarily split between two geographic areas: North America and available capital.
For the three months ended June 30, 2017,2023, net revenues attributable to our realized revenueoperations in North America totaled $268,262. Compared with$288,621 compared to $630,496 of net revenues attributable to our operations in North America for the same time periodthree months ended June 30, 2022. For the nine months ended June 30, 2023, net revenues attributable to our operations in 2016,North America totaled $1,295,338 compared to $2,031,781 of net revenues attributable to our revenue increased almost 2 times by sellingoperations in North America for the nine months ended June 30, 2022. Additionally, as of June 30, 2023, $215,756 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 June 30, 2017, we earned a total gross profit2023, net revenues attributable to our operations in Asia totaled $359,986 compared to $143,523 of $65,186 from sales ofnet revenues attributable to our products, which includes $59,180 from NuZee Japan. The gross profit earned during same period of 2016 was $63,723. The margin rate went down from 47% the same period last year to 24%operations in Asia for the three months ended June 30, 2016. This big decrease2022. For the nine months ended June 30, 2023, net revenues attributable to our operations in Asia totaled $1,270,783 compared to $476,564 of net revenues attributable to our operations in Asia for the nine months ended June 30, 2022. Additionally, as of June 30, 2023, $144,254 of our property and equipment, net was attributable to our Asia operations, compared to $146,529 attributable to our Asia operations as of September 30, 2022.
Results of Operations
On March 15, 2023, we entered into a five-year global licensing agreement with Stone Brewing to co-manufacture and distribute Stone Brewing specialist coffee products nationwide.
On June 20, 2023, we entered into an established long term relationship with Corberosa Premium Air-Roasted Coffee to produce and distribute its air roasted coffees using our brew bag format.
On March 16, 2023, we entered our first ever private label agreement with Wakefern Food Corp., the largest retailer-owned cooperative in the margin rate was mainly causedUnited States, to pack and ship single serve coffee brew-bag products.
On March 7, 2023, entered into a manufacturing agreement with a California-based coffee roaster, to expand our manufacturing footprint on the West Coast. In addition to manufacturing, we plan to begin testing the TiMELESS® technology, a new flexible film sealing technology that eliminates the need for one-way plastic degassing valves that are commonly used in the coffee industry at the West Coast manufacturing facility.
Our results of operations for the three and nine months ended June 30, 2023 are influenced by costthe aforementioned transactions and includes the operations of goods sold change. Compare with last year, NuZee,inc increased production in-house this yearDripkit. The acquisition of Dripkit did not contribute to the periods prior to its acquisition in our financial statements, which increasetherefore impacts comparisons to 2022 for our results of operations in the costdiscussion that follows.
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Comparison 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.
Revenue
| Three months ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Revenue | $ | 648,607 | $ | 774,019 | $ | (125,412 | ) | (16 | )% | |||||||
For the three months ended June 30, 2017,2023, our Company's operating expenses totaled $437,176 which almostrevenue decreased by $125,412, or approximately 16%, compared with 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.2022. This increasedecrease was primarily caused by increasing scalerelated to decreased revenue in the US, due to customers pushing out orders in to later months.
Cost 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.
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Cost of sales | $ | 596,454 | $ | 857,672 | $ | (216,218 | ) | (30 | )% | |||||||
| Gross profit (loss) | 52,153 | $ | (83,653 | ) | $ | 135,806 | (162 | )% | ||||||||
| Gross profit (loss) % | 8 | % | (11 | )% | ||||||||||||
For the three months ended June 30, 2017,2023, we generated net lossesa total gross profit of $367,009. This$52,153 from sales of our products and co-packing services, compared to a total gross 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, total net loss decreased $18,283 since$83,653 for the Company expensed less money on professional services. Compared with same period ended June 30, 2016, the overall net loss increased by $42,189 and operating expense increased by $38,788. Most of this increase is caused by the new NuZee Japan.
Operating Expenses
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 2,067,915 | $ | 2,546,608 | $ | (478,693 | ) | (19 | )% | |||||||
For the three months ended June 30, 2023, the Company’s operating expenses totaled $2,067,915 compared to $2,546,608 for the three months ended June 30, 2022, representing a 19% decrease. This decrease is primarily attributable to a decrease of $441,721 in stock-based compensation expense.
Net Loss
| Three months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Net Loss | $ | 2,025,337 | $ | 2,633,892 | $ | (608,555 | ) | (23 | )% | |||||||
For the three months ended June 30, 2023, we generated a net loss of $2,025,337 compared to a net loss of $2,633,892 for the three months ended June 30, 2022. This decrease in net loss is primarily attributable to lower stock-based compensation expense as discussed above.
Comparison of nine months ended June 30, 2023 and 2022:
Revenue
| Nine months ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Revenue | $ | 2,566,121 | $ | 2,508,345 | $ | 57,776 | 2 | % | ||||||||
| 22 |
For the nine months ended June 30, 2017, our realized revenue totaled $1,222,096. Compared with the same time period in 2016,2023, our revenue increased more than 5 times. Our realized total revenues include $742,081 from NuZee Japan.
Cost of the Asian market, which include but not limited to post officesales and hotels.
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Cost of sales | $ | 2,401,806 | $ | 2,575,646 | $ | (173,840 | ) | (7 | )% | |||||||
| Gross profit (loss) | 164,315 | $ | (67,301 | ) | $ | 231,616 | (344 | )% | ||||||||
| Gross profit (loss) % | 6 | % | (3 | )% | ||||||||||||
For the nine months ended June 30, 2017,2023, we earnedgenerated a total gross profit of $276,560$164,315 from sales of our products which includes $185,249 from NuZee Japan. Theand co-packing services, compared to a total gross profit earned during same periodloss of 2016 was $99,797. There are around 86% increase within one year. The margin rate went down from 43%$67,301 for the nine months ended June 30, 2016 to 23%2022. The gross margin rate was 6% for the nine months ended June 30. 2017. This30, 2023, and 3% for the nine months ended June 30, 2022. The increase is primarily attributable to decrease was primarily caused by increase ofin cost 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, utilitieslabor in South Korea along with decrease in production and other overhead cost.
Operating Expenses
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 6,328,044 | $ | 8,554,276 | $ | (2,226,232 | ) | (26 | )% | |||||||
For the nine months ended June 30, 2017, our Company's2023, the Company’s operating expenses totaled $1,359,384. Of those expenses, $310,680 were expenses from NuZee Japan. Expenses primarily came from sales and marketing, outside professional services, cost of employees and office expenses. We incurred $182,832 in expenses for marketing and sales$6,328,044 compared to expand our brand awareness both in the US and Asian markets.
Net Loss
| Nine months ended | ||||||||||||||||
| June 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Net Loss | $ | 6,176,416 | $ | 8,661,792 | $ | (2,485,376 | ) | (29 | )% | |||||||
For the nine months ended June 30, 2017, or2023, we realized a per sharenet loss of $0.03, based on 31,539,132 weighted-average shares outstanding. This loss was attributed$6,176,416 compared to $1,359,384 in operating expenses. Among them, NuZee Japan generated net losses of $87,801 and operating expenses of $310,680. This compares to thea net loss in the amount of $972,358 during$8,661,792 for the nine months ended June 30, 2016, or2022. This decrease in net loss is primarily attributable to a per share loss of $0.03, based on 30,582,013 weighted-average shares outstanding,decrease in stock-based compensation expense as discussed above.
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Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of June 30, 2023, we had an accumulated deficit of approximately $71 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. In the United States, we expect to realize additional losses due to lack of positive cash flow from operations including the substantial on-going regulatory costs associated with operating as an United States exchange-listed public company. We are unable to predict the extent of any future losses or when we will realize positive cash flow from operations, if at all.
To date, we have funded our operations primarily with proceeds from registered public offerings and private placements of shares of our common stock and other equity securities. Our principal use of cash is to fund our operations, which includes the commercialization of our single serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.
As of SeptemberJune 30, 2016,2023, we had a cash balance of $40,613$3,280,425. Considering our current cash resources and $151,609 asour current and expected levels of June 30, 2017; this increase was primarilyoperating expenses including the substantial on-going regulatory costs associated with being a United States exchange-listed public company, we believe that our cash and cash equivalents will be sufficient to fund our planned operations for at least three months from August 11, 2023, however, we 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 micro and macroeconomic and non-economic 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 June 30, 2023, 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 June 30, 2023, we had payments for lease and loan obligations of approximately $499,916 of which $332,910 are payable within 12 months as of June 30, 2023. We had no purchase obligations as of June 30, 2023.
Summary of Cash Flows
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash used in operating activities | $ | (5,025,379 | ) | $ | (5,677,298 | ) | ||
| Cash used in investing activities | $ | (34,875 | ) | $ | (627,593 | ) | ||
| Cash provided by (used in) financing activities | $ | (27,661 | ) | $ | 3,031,640 | |||
| Effect of foreign exchange on cash | $ | 53,287 | $ | (19,604 | ) | |||
| Net change in cash | $ | (5,034,628 | ) | $ | (3,292,855 | ) | ||
Operating Activities
We used $5,025,379 and $5,677,298 of cash in additionaloperating activities during the nine months ended June 30, 2023, and 2022, respectively, principally to fund our operations.
Investing Activities
We used $34,875 and $627,593 of cash in investing activities during the nine months ended June 30, 2023 and 2022, respectively. Cash used in current year, was for the purchase machinery and small office equipment for South Korea. Cash used in 2022 was mainly for the acquisition of Dripkit and for the purchase of equipment.
Financing Activities
Cash used in financing throughactivities of $27,661 for the salenine months ended June 30, 2023 was primarily related to repayments on loans and an equipment lease, and cash provided by financing activities of equity securities.$3,031,640 for the nine months ended June 30, 2022 was primarily related to proceeds received upon the exercise of outstanding 2021 Warrants by the 2021 Warrant holders and an issuance of shares of our common stock under an exempt offering.
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.
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, 2023, 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 June 30, 2023 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.
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, which has since been continued to December 1, 2023. A new legal counsel was substituted for the Company.
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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 Litigation”), alleging several causes of action related to the Company’s alleged breach of the Settlement Agreement. On March 29, 2023, the Company filed a demurrer and motion to strike, seeking to dismiss Plaintiff’s causes of action. On April 12, 2023, Plaintiff filed the First Amended Complaint, alleging breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, and fraud in the inducement of contract. 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 violating packaging materials and/or finished goods; a final judgment for all profits derived from the Company’s allegedly unlawful conduct, actual damages, damages to the Plaintiff’s reputation and goodwill among its customers and partners; and reasonable attorneys’ fees and costs. The Company believes it has basis to defend the claims, 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. A new legal counsel was substituted for the Company in April and the Company filed its Answer on May 15, 2023.
On May 15, 2023, the Company filed a complaint for Declaratory Judgment of Trademark Non-Infringement in the United States District Court for the Southern District of California alleging one cause of action under the Declaratory Judgment Act (“Declaratory Judgment Matter” or “Matter”). Also on May 15, 2023, the Company filed Petitions to Cancel in the Trademark Trial and Appeal Board of the U.S. Patent and Trademark Office arguing that that Steeped’s marks for “Steeped Coffee,” “Steeped Bag,” “Steeped Pack,” and “Steeped Cold Brew” are generic under Section 23(a) of the Lanham Act. On July 12, 2023, the Company filed its First Amended Complaint in the Matter, seeking a judicial determination and declaration that the Company’s use of the term “steep” or any variations thereof generically or descriptively does not infringe any purported trademark rights of Steeped, as well as reasonable attorney’s fees and costs. The Company believes it has basis to pursue these the claims, however, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in obtaining the declaration and attorneys’ fees and costs it seeks.
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 has responded to the complaint on behalf of the Company and Mr. Ramirez and is in the process of securing a stipulation to transfer the case to binding arbitration. 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.
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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
In the quarter ended June 30, 2023, we issued the following securities that were not registered under the Securities Act:
On July 14, 2017,January 6, 2023, we sold 210,000issued 6,000 shares of our common stock to three individual investors at a price of $0.51 per sharethird-party unaffiliated professional services provider in exchange for total proceeds of $107,100, which willcertain consulting advice to be used for general business operations.
On June 20, 2023, we issued 7,500 shares of 1933,our common stock to a third-party unaffiliated professional services provider in exchange for certain consulting advice to be provided to us. This issuance was made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act as amended.
None.
None.
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
* Filed herewith
† Indicates management contract or compensatory plan.
** 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.
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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/ Shana Bowman | |||
| Shana Bowman, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
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