UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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.
(exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The
|
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated Filer | ☐ |
| ☒ | 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
☐
As of August 11, 2023, the registrant had shares of common stock outstanding.
Table of Contents
| 2 |
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Such forward-looking statements reflect the views of NuZee, Inc. (“NuZee” or the “Company”) with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about the Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “expects”, “project,” “predict,” “believe,” “expect,” “anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements in this report may include, without limitation, statements regarding:
| ● | our plans to obtain funding for our operations, including funding necessary to develop, manufacture and commercialize our 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 |
Item 1. Financial Statements
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, 2023 | September 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Right-of-use asset - operating lease | ||||||||
| Investment in unconsolidated affiliate | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of long-term loan payable | ||||||||
| Current portion of lease liability - operating lease | ||||||||
| Current portion of lease liability - finance lease | ||||||||
| Deferred income | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Lease liability - operating lease, net of current portion | ||||||||
| Lease liability - finance lease, net of current portion | ||||||||
| Loan payable - long term, net of current portion | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock; shares authorized, $ par value; and shares issued and outstanding as of June 30, 2023, and September 30, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
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 | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from investment in unconsolidated affiliate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 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 statements.
| 6 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| NuZee, Inc. | ||||||||
| For the three months ended June 30 | 2023 | 2022 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ( | ) | ( | ) | ||||
| Total other comprehensive loss, net of tax | ( | ) | ( | ) | ||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| NuZee, Inc. | ||||||||
| For the nine months ended June 30 | 2023 | 2022 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ( | ) | ||||||
| Total other comprehensive income (loss), net of tax | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Restricted stock compensation | - | |||||||||||||||||||||||
| Round-up shares issued in reverse split | ||||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||
| Forgiveness of stock issuance costs | - | |||||||||||||||||||||||
| Stock option expense | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock compensation | ||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||
| Forgiveness of stock issuance costs | - | |||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Restricted stock compensation | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Exercise of warrants, net of issuance costs | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Other comprehensive gain | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Warrant issuance costs | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | ||||||||||||||||||||||||
| Common stock issued for Dripkit acquisition | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Restricted stock award issuance | ||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance March 31, 2022 | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | $ | $ | $ | $ | ||||||||||||||||||||
| Equity securities issued for cash, exempt offering, net of issuance costs | ||||||||||||||||||||||||
| Common stock issued to settle Dripkit Bulk Sales Holdback Amount | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Amortization of restricted stock award issued | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance June 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
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 | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Noncash lease expense | ||||||||
| Stock option expense | ||||||||
| Issuance of common stock for services | ||||||||
| Restricted stock compensation | ||||||||
| Bad debt expense | ||||||||
| Loss on disposition of asset | ||||||||
| Loss from investment in unconsolidated affiliate | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable, accrued expenses and other current liability | ( | ) | ||||||
| Deferred income | ||||||||
| Lease liability – operating lease | ( | ) | ( | ) | ||||
| Other non-current liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Acquisition of Dripkit | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of common stock, exercise of options | ||||||||
| Repayment of loans | ( | ) | ( | ) | ||||
| Repayment of finance lease | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock, ATM offering, net of issuance cost | ||||||||
| Proceeds from issuance of common stock, exercise of warrants, net of issuance costs | ||||||||
| Proceeds from issuance of equity securities, exempt offering, net of issuance costs | ||||||||
| Cash paid for offering costs | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of foreign exchange on cash | ( | ) | ||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | ||||||||
| Non-cash transactions: | ||||||||
| ROU assets and liabilities added during the period | $ | $ | ||||||
| Common stock issued in acquisition of Dripkit | ||||||||
| Forgiveness of stock issuance costs | ||||||||
| Stock issuance costs accrued | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 9 |
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2023
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 as filed with the 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 Report on Form 10-K for the year ended September 30, 2022, have been omitted.
Principles of Consolidation
The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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 $
2022 Reverse Stock Split
On
December 28, 2022, we completed a
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 inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, raising capital and 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 $
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.
Nine months ended June 30, 2023:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer CL | $ | % | $ | % | ||||||||||||
| Customer CN | % | % | ||||||||||||||
Nine months ended June 30, 2022:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
| Customer CU | % | % | ||||||||||||||
| Customer S | $ | % | $ | % | ||||||||||||
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 842. The Company has a long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.
| 11 |
In
May 2022, the Company renewed the office and manufacturing space in Vista, California through March 31, 2025, which was scheduled to
expire on
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 $
As
of June 30, 2023, our operating leases had a weighted average remaining lease term of
| ROU Asset – October 1, 2022 | $ | |||
| ROU Asset added during the period | ||||
| Amortization during the period | ( | ) | ||
| ROU Asset – June 30, 2023 | $ | |||
| Lease Liability – October 1, 2022 | $ | |||
| Lease Liability added during the period | ||||
| Amortization during the period | ( | ) | ||
| Lease Liability – June 30, 2023 | $ | |||
| Lease Liability – Short-Term | $ | |||
| Lease Liability – Long-Term | ||||
| Lease Liability – Total | $ |
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,
| 2024 | $ | |||
| 2025 | ||||
| Total Minimum Lease Payments | ||||
| Less Effect of Discounting | ( | ) | ||
| Present Value of Future Minimum Lease Payments | ||||
| Less Current Portion of Operating Lease Liabilities | ||||
| Long-Term Operating Lease Liabilities | $ |
On
October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain
packing equipment. The terms of this agreement require us to pay $
| 12 |
The table below summarizes future minimum finance lease payments at June 30, 2023 for the twelve months ended June 30:
| 2024 | $ | |||
| 2025 | ||||
| Total Minimum Lease Payments | ||||
| Amount representing interest | ( | ) | ||
| Present Value of Minimum Lease Payments | ||||
| Current Portion of Finance Lease Obligations | ||||
| Finance Lease Obligations, Less Current Portion | $ |
Lease
expenses included in operating expense for the nine months ended June 30, 2023, and 2022 was $
Cash and non-cash activities associated with the leases for the nine months ended June 30, 2023, are as follows:
| Operating cash outflows from operating leases: | $ | |||
| Operating cash outflows from finance lease: | $ | |||
| Financing cash outflows from finance lease: | $ |
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 $
| 2024 | $ | |||
| Total | $ |
Loans
On
April 1, 2019, we purchased a delivery van from Ford Motor Credit for $
The remaining loan payments for each of the twelve months ended June 30:
| Ford Motor Credit | ||||
| 2024 | $ | |||
| 2025 | ||||
| Grand Total | $ | |||
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 will 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 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’s foreign subsidiaries are measured using the foreign subsidiary’s
local currency as the functional currency. Revenues and expenses of each such subsidiary have been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet
date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity
unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments recorded
to other comprehensive income and loss amounted to $
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.
Prepaid expenses and other current assets
Prepaid expenses and other current assets at June 30, 2023 and September 30, 2022, were as follows:
| June 30, 2023 | September 30, 2022 | |||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
The
prepaid expenses and other current assets balance of $
Inventories
Inventory,
consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of
cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at
least quarterly and records a valuation allowance when appropriate. At June 30, 2023 and September 30, 2022, the carrying value of
inventory was $
| June 30, 2023 | September 30, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Equity Method Investment
On
January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (
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 our partner appoints the
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. $
| 14 |
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company previously had a minimally staffed office in Japan that provided support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to its stockholders based in Japan; these functions are now supported by the Company’s personnel residing in the United States. Information about the Company’s geographic operations for the nine months ended June 30, 2023, and 2022 are as follows:
Geographic Concentration
| Nine Months Ended | Nine Months Ended | |||||||
| June 30, 2023 | June 30, 2022 | |||||||
| Net Revenue: | ||||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| $ | $ | |||||||
| Property and equipment, net: | As of June 30, 2023 | As of September 30, 2022 | ||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| Japan | ||||||||
| $ | $ | |||||||
3. BUSINESS COMBINATIONS
As
described in Note 1, on February 25, 2022, the Company acquired substantially all the assets and certain specified liabilities of Dripkit
pursuant to the Asset Purchase Agreement, dated as of February 21, 2022, by and among the Company, Dripkit, and Dripkit’s investors
who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement,
the aggregate purchase price paid by the Company for the Acquisition was $
Pursuant
to the terms of the Asset Purchase Agreement, on the Closing Date,
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 $
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) $
| 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 aggregate purchase price paid by the Company for the Acquisition of $
| Total purchase price | $ | |||
| Assets acquired: | ||||
| Inventory | $ | |||
| Property and equipment | ||||
| Identifiable intangible assets | ||||
| Total assets acquired | $ | |||
| Estimated fair value of net assets acquired | $ | |||
| Goodwill | $ |
Identified Intangibles
The
Company identified tradename and customer relationships as intangible assets in connection with the Acquisition. Any tradename and customer
relationship intangible assets will be 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 $
The
consolidated statement of operations for the nine months ended June 30, 2023 includes revenues of $
Unaudited Pro forma Financial Information
The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the Dripkit Acquisition for the three and nine months ended June 30, 2022, 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.
| 16 |
The following is the proforma financial information for the Company and Dripkit:
| Description | For the three months ended June 30, 2022 | For the nine months ended June 30, 2022 | ||||||
| Revenues | $ | $ | ||||||
| Net loss | $ | $ | ||||||
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 $
4. INTANGIBLE ASSETS
As of June 30, 2023, the Company’s intangible assets consisted of the following:
| Amortization | June 30, 2023 | |||||||||||||||
| Period (Years) | Gross | Accumulated Amortization | Net | |||||||||||||
| Tradenames | $ | $ | $ | |||||||||||||
Amortization
expense of intangible assets was $
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, 2023, the performance goals for Fiscal Year 2023 won’t be achieved and the Company recognized common stock compensation expense of $ for the nine months ended June 30, 2023, related to these Restricted Shares.
| 17 |
| 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, 2023, restricted shares were forfeited because of the termination of employment.
Common stock issued for services
On January 6, 2023, the Company issued shares of common stock to a third-party unaffiliated professional services provider in exchange for certain 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 $ for the nine months ended June 30, 2023, related to these common stock shares.
On June 20, 2023, the Company issued shares of common stock to a third-party unaffiliated professional services provider in exchange for certain 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 $ for the nine months ended June 30, 2023, related to these common stock shares.
Options
During the nine 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 termination of employment and expiration of options.
| 18 |
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 | $ | $ | ||||||||||||||
| Forfeited and expired | ( | ) | ||||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||||||
The
Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock
option expense of $
Nonvested options
Number of Nonvested Options | Weighted Average Grant Date Fair Value | |||||||
| Nonvested options at October 1, 2022 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Nonvested options at June 30, 2023 | $ | |||||||
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 following table summarizes warrant activity for the nine months ended June 30, 2023:
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 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at June 30, 2023 | $ | |||||||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||||||
7. CONTINGENCY
Steeped Litigation
The
Company has an accrual of $
| 19 |
Item 2. Management’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 single serve pour over coffee in the United States, as well as a preeminent co-packer of coffee brew bags, which is also referred to as tea-bag style coffee. In addition to our single serve pour over and coffee brew bag coffee products, we have expanded our product portfolio to offer a third type of single serve coffee format, DRIPKIT pour over products, as a result of our acquisition of substantially all of the assets of Dripkit, Inc. (“Dripkit”). Our DRIPKIT pour over format features a large-size single serve pour over pack that sits on top of the cup and delivers in our view a barista-quality coffee experience to customers in the United States, Canada, and Mexico. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.
We believe we are the only commercial-scale producer 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 provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, drive growth, reduce manufacturing costs, expand our product portfolio, enter into new markets, and further penetrate the markets in which we currently operate. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.
2022 Reverse Stock Split
On December 9, 2022, our stockholders 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 Articles of Incorporation, 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 became 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 stockholder held immediately prior to the effectiveness of the Reverse Stock Split
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies, 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 other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.
| 20 |
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and South Korea.
For the three months ended June 30, 2023, net revenues attributable to our operations in North America totaled $288,621 compared to $630,496 of net revenues attributable to our operations in North America for the three months ended June 30, 2022. For the nine months ended June 30, 2023, net revenues attributable to our operations in North America totaled $1,295,338 compared to $2,031,781 of net revenues attributable to our operations in North America for the nine months ended June 30, 2022. Additionally, as of June 30, 2023, $215,756 of our property and equipment, net was attributable to our North American operations, compared to $378,546 attributable to our North American operations as of September 30, 2022.
For the three months ended June 30, 2023, net revenues attributable to our operations in Asia totaled $359,986 compared to $143,523 of net revenues attributable to our operations in Asia for the three months ended June 30, 2022. 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 United 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 the aforementioned transactions and includes the operations of Dripkit. The acquisition of Dripkit did not contribute to the periods prior to its acquisition in our financial statements, which therefore impacts comparisons to 2022 for our results of operations in the discussion that follows.
| 21 |
Comparison of three months ended June 30, 2023 and 2022
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, 2023, our revenue decreased by $125,412, or approximately 16%, compared with the three months ended June 30, 2022. This decrease was primarily related to decreased revenue in the US, due to customers pushing out orders in to later months.
Cost of sales and gross margin
| 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, 2023, we generated a total gross profit of $52,153 from sales of our products and co-packing services, compared to a total gross loss of $83,653 for the three months ended June 30, 2022. The gross margin rate was 8% for the three months ended June 30, 2023, and (11)% for the three months ended June 30, 2022. The increase is primarily attributable to a decrease in production salaries and temporary labor.
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, 2023, our revenue increased by $57,776, or approximately 2%, compared with the nine months ended June 30, 2022. This increase was primarily related to increased revenue in South Korea, driven by a new co-packing arrangement with a new customer in South Korea and increased orders from an existing significant customer in South Korea in the nine months ended June 30, 2023.
Cost of sales and gross margin
| 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, 2023, we generated a total gross profit of $164,315 from sales of our products and co-packing services, compared to a total gross loss of $67,301 for the nine months ended June 30, 2022. The gross margin rate was 6% for the nine months ended June 30, 2023, and 3% for the nine months ended June 30, 2022. The increase is primarily attributable to decrease in cost of labor in South Korea along with decrease in production and temporary labor in North America.
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, 2023, the Company’s operating expenses totaled $6,328,044 compared to $8,554,276 for the nine months ended June 30, 2022, representing a 26% decrease. This decrease is primarily attributable to a decrease of $2,256,420 in stock-based compensation expense.
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, 2023, we realized a net loss of $6,176,416 compared to a net loss of $8,661,792 for the nine months ended June 30, 2022. This decrease in net loss is primarily attributable to a decrease in stock-based compensation expense as discussed above.
| 23 |
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 June 30, 2023, we had a cash balance of $3,280,425. Considering our current cash resources and our current and expected levels of operating 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 sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many 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 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 upon exercise of the 2021 Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the 2021 Warrants (in which case, the 2021 Warrants may only be exercised via a “cashless” exercise provision). Each 2022 Warrant entitles the holder to purchase one share of our common stock at an exercise price of $69.98. The 2022 Warrant holders may exercise their 2022 Warrants on a “cashless” basis pursuant to a formula set forth in the form of 2022 Warrant.
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 timing and amount of funds that we will need to raise will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. Until we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
While we believe our plans to raise additional funds will alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, these plans are not entirely within our control and cannot be assessed as being probable of occurring at this time. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.
If we are unsuccessful in our efforts to raise additional capital, based on our current and expected levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months from August 11, 2023. These conditions raise substantial doubt about our ability to continue as a going concern.
| 24 |
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 ordinary course of business that are enforceable and legally binding and enter into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. As of June 30, 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 operating 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 activities of $27,661 for the nine months ended June 30, 2023 was primarily related to repayments on loans and an equipment lease, and cash provided by financing activities of $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.
| 25 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Interim Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and 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 over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
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.
| 26 |
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.
| 27 |
From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on December 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 23, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the quarter ended June 30, 2023, we issued the following securities that were not registered under the Securities Act:
On January 6, 2023, we issued 6,000 shares of 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 a transaction not involving a public offering and/or Regulation D under the Securities Act as sales to accredited investors.
On June 20, 2023, we issued 7,500 shares of 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 a transaction not involving a public offering and/or Regulation D under the Securities Act as sales to accredited investors.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
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.
Item 6. Exhibits
* Filed herewith.
† Indicates management contract or compensatory plan.
** Furnished herewith.
*** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
| 28 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: | August 11, 2023 | 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) |
| 29 |