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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 May 12, 2022, 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 and provide our co-packing services; | |
| ● | the impact to our business from the COVID-19 global crisis, including any supply chain interruptions; | |
| ● | the evolving coffee preferences of coffee consumers in North America and Korea; | |
| ● | 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 expectation that our existing capital resources will be sufficient to fund our operations for at least the next 12 months; | |
| ● | our ability to successfully achieve the anticipated results of strategic transactions, including our acquisition of substantially all of the assets of Dripkit (as defined below); | |
| ● | our expectation regarding our future co-packing revenues; | |
| ● | our ability to develop innovative new products and expand our co-packing services to other products that are complementary to our current single serve coffee product offerings; | |
| ● | our reliance on third-party roasters to roast coffee beans necessary to manufacture our products and fulfill every aspect of our co-packing services; | |
| ● | regulatory developments in the U.S. and in non-U.S. countries; | |
| ● | our ability to retain key management, sales, and marketing personnel; | |
| ● | the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology; | |
| ● | the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; | |
| ● | 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 22, 2021, titled “Risk Factors” and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.
Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
| 3 |
Item 1. Financial Statements
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, 2022 | September 30, 2021 | |||||||
| 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 | ||||||||
| Goodwill | - | |||||||
| Intangible assets, net | - | |||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Current portion of long-term loan payable | ||||||||
| Current portion of lease liability - operating lease | ||||||||
| Current portion of lease liability - finance lease | ||||||||
| Accrued expenses | ||||||||
| Deferred income | ||||||||
| Other current liabilities | ||||||||
| Advances received on sale of equity securities | - | |||||||
| 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 March 31, 2022, and September 30, 2021, 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.
| 4 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Six Months Ended March 31, 2022 | Six Months Ended March 31, 2021 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from investment in unconsolidated affiliate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest 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.
| 5 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| NuZee, Inc. | ||||||||
| For the three months ended March 31 | 2022 | 2021 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ( | ) | ||||||
| Total other comprehensive (loss) income, net of tax | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| NuZee, Inc. | ||||||||
| For the six months ended March 31 | 2022 | 2021 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ||||||||
| Total other comprehensive income, net of tax | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
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, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Exercise of warrants | - | - | ||||||||||||||||||||||
| Stock option expense | - | - | - | - | ||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Warrant issuance costs | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Common stock issued for cash, ATM offering | - | - | - | |||||||||||||||||||||
| 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 | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Common stock | Additional paid-in | Accumulated | other comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Equity securities issued for cash | ||||||||||||||||||||||||
| Stock option expense | - | - | - | - | ||||||||||||||||||||
| Exercise of stock options | - | - | - | |||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| - | ||||||||||||||||||||||||
| Equity securities issued for cash | - | - | ||||||||||||||||||||||
| Restricted stock award issuance | ||||||||||||||||||||||||
| Stock option expense | - | - | - | - | ||||||||||||||||||||
| Other comprehensive gain | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||
| Balance March 31, 2021 | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | Six Months Ended | |||||||
| March 31, 2022 | March 31, 2021 | |||||||
| 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 | ||||||||
| Restricted stock award compensation | ||||||||
| Property and equipment impairment | - | |||||||
| Sales allowance | - | ( | ) | |||||
| Loss on disposition of asset | - | |||||||
| Write-off of deferred offering costs | - | |||||||
| 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 | ( | ) | ||||||
| Deferred income | ||||||||
| Lease liability – operating lease | ( | ) | ( | ) | ||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| 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 | ( | ) | ( | ) | ||||
| Stock issuance costs | - | ( | ) | |||||
| Proceeds from issuance of common stock, ATM offering | - | |||||||
| Proceeds from issuance of common stock, exercise of warrants, net of issuance costs | ||||||||
| Advances received on sale of equity securities | - | |||||||
| Net cash provided by 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 | $ | $ | ||||||
| Stock issuance costs accrued | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 8 |
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2022
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, 2021 as filed with the SEC on December 22, 2021. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the Annual Report on Form 10-K for the year ended September 30, 2021, have been omitted.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. We reclassified lease expenses associated with subleased property from operating expenses to other expenses totaling
$
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”).
| 9 |
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 $
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 March 31, 2022, and March 31, 2021, the total number of common stock equivalents was and , respectively, comprised of stock options and warrants as of March 31, 2022 and March 31, 2021. The Company incurred a net loss for the three and six months ended March 31, 2022, and 2021, respectively, and therefore basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.
Capital Resources
Since its inception, the Company has devoted substantially all 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 generated limited revenues from its principal operations, and there is no assurance of future revenues.
As
of March 31, 2022, the Company had cash of $
Major Customers
In the six months ended March 31, 2022 and 2021, revenue was primarily derived from major customers disclosed below.
Six months ended March 31, 2022:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
| Customer CU | $ | % | $ | % | ||||||||||||
Six months ended March 31, 2021:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
| 10 |
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.
During
our analysis of leases in the six months ended March 31, 2022,
As
of March 31, 2022, our operating leases had a weighted average remaining lease term of
| ROU Asset – October 1, 2021 | $ | |||
| ROU Asset added during the period | ||||
| Amortization during the period | ( | ) | ||
| ROU Asset –March 31, 2022 | $ | |||
| Lease Liability – October 1, 2021 | $ | |||
| Lease Liability added during the period | ||||
| Amortization during the period | ( | ) | ||
| Lease Liability – March 31, 2022 | $ | |||
| 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 March 31, 2022:
Amounts due within twelve months of March 31,
| 2023 | $ | |||
| 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 | $ |
| 11 |
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 $
During the year ended September 30, 2021, we recorded an impairment to fully write off the related equipment as it was deemed no longer useful for our operations.
The table below summarizes future minimum finance lease payments at March 31, 2022 for the twelve months ended March 31:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 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 | $ |
Rent
expense included in general and administrative expense for the six months ended March 31, 2022 and 2021 was $
Cash and non-cash activities associated with the leases for the six months ended March 31, 2022 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 six months ended March 31, 2022, we recognized sublease income of $
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ |
Advances Received on Sale of Equity Securities
As
of March 31, 2022, the Company recorded advances received from investors on sales of equity securities of $
| 12 |
Loans
On
April 1, 2019, we purchased a delivery van from Ford Motor Credit for $
On
February 15, 2019, NuZee KR entered into equipment financing for production equipment with Shin Han Bank for $
The remaining loan payments are as follows:
| Ford Motor Credit | ShinHan Bank | Total | ||||||||||
| 2022 (Apr 2022 - Sep 2022) | $ | |||||||||||
| 2023 (Oct 2022 - Mar 2023) | ||||||||||||
| Total Current Portion | $ | |||||||||||
| 2023 (Apr 2023 - Sep 2023) | $ | - | ||||||||||
| Total Long-Term Portion | $ | - | ||||||||||
| 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.
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 gain 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.
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 March 31, 2022 and September 30, 2021, the carrying value of inventory
was $
| 13 |
| March 31, 2022 | September 30, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Less – Inventory reserve | - | - | ||||||
| Total | $ | $ | ||||||
Joint Venture
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 March 31, 2022, the only activity in NLA was the contribution of two machines
as described above and other start up related activities. $
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company has a minimally staffed office in Japan that provides support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to our shareholders based in Japan. Information about the Company’s geographic operations for the six months ended March 31, 2022 and 2021 are as follows:
Geographic Concentration
| Six Months Ended | Six Months Ended | |||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Net Revenue: | ||||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| $ | $ | |||||||
| Property and equipment, net: | As of March 31, 2022 | As of September 30, 2021 | ||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| Japan | ||||||||
| $ | $ | |||||||
3. RELATED PARTY TRANSACTIONS
For
the six months ended March 31, 2022 and March 31, 2021, respectively, the Company had sales of $
| 14 |
4. BUSINESS COMBINATIONS
As
described in Note 1, on February 25, 2022, the Company acquired substantially all the assets and certain specified liabilities of Dripkit
pursuant to the Asset Purchase Agreement, dated as of February 21, 2022, by and among the Company, Dripkit, and Dripkit’s existing
investors who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement,
the aggregate purchase price paid by the Company for the Acquisition was $
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 $
The assets of Dripkit were acquired for purposes of supplementing our current product offerings and Dripkit will operate as a new Dripkit Coffee business division that is wholly-owned by NuZee, Inc.
The
following table presents the allocation of the aggregate purchase price paid by the Company for the Acquisition of $
| March 31, 2022 | ||||
| Total purchase price | $ | |||
| Assets acquired: | ||||
| Inventory | $ | |||
| Property and equipment | ||||
| Identifiable intangible assets | ||||
| Total assets acquired | $ | |||
| Estimated fair value of net assets acquired | $ | |||
| Goodwill | $ | |||
| 15 |
Identified Intangibles and Goodwill
The Company identified tradename and customer relationships intangible assets. The tradename and customer relationships intangible assets will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill recognized results from such factors as an assembled workforce and management’s industry know-how. See Note 5-Goodwill and Intangible Assets for additional information on identified intangible assets and goodwill.
The
six months ended March 31, 2022 includes the operations of Dripkit for the period from February 25, 2022, the date of acquisition, to
March 31, 2022. The consolidated statement of operations for the three and six months ended March 31, 2022 includes revenue of approximately
$
In
the six months ended March 31, 2022, the Company incurred $
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 six months ended March 31, 2022 and 2021, as if the Acquisition had occurred as of the beginning of the first period presented instead of on February 25, 2022.
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the Acquisition had been completed on October 1, 2021, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.
The proforma financial information for the Company and Dripkit is as follows:
Three and six months ended March 31, 2022:
For
the March 31, | For the six months ended March 31, | |||||||||||||||
| Description | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Net loss | $ | $ | $ | $ | ||||||||||||
For
purposes of the pro forma disclosures above, the primary adjustments for the three months and six months ended March 31, 2022 include
the elimination of transaction costs of approximately $
5. GOODWILL AND INTANGIBLE ASSETS
Changes in goodwill for the six months ended March 31, 2022, consists of the following:
| March 31, 2022 | ||||
| Balance at September 30, 2021 | $ | |||
| Dripkit acquisition | ||||
| Balance at March 31, 2022 | $ | |||
As of March 31, 2022, the Company’s intangible assets consisted of the following:
| Amortization Period (Years) | March 31, 2022 | |||||||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||||||
| Tradenames | $ | $ | $ | |||||||||||||
| Customer relationships | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | |||||||||||||
Amortization
expense was $
| 16 |
6. ISSUANCE OF EQUITY SECURITIES
Exercise of Warrants
In
the six months ended March 31, 2022, we issued shares of common stock related to exercises of 2021 Warrants (as defined below),
including shares of common stock issued upon exercise of
ATM Offering
On
December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group
LLC, as agent (the “Agent”), pursuant to which we may offer and sell, from time to time, shares of our common stock through
the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price
of up to $
Grant of Restricted Stock Awards to the Company’s Independent Board Members
On March 17, 2022, pursuant to the Company’s non-employee director compensation policy, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) granted restricted shares (the “Restricted Shares”) of the Company’s common stock to each of the Company’s five independent directors pursuant to the NuZee, Inc. 2013 Stock Incentive Plan, totaling Restricted Shares. The Restricted Shares are scheduled to vest in full on the one-year anniversary of the grant date, subject to each independent director’s continued service as a director of the Company. The Company recognized common stock compensation expense of $for the six months ended March 31, 2022 related to these Restricted Shares.
Options
During the six months ended March 31, 2022, the Company granted no new stock options, had of stock options that were forfeited because of the termination of employment, and issued shares upon the exercise of outstanding stock options.
| 17 |
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
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 September 30, 2021 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Nonvested options at March 31, 2022 | $ | |||||||
Warrants
On
June 23, 2020, as part of our agreement with Benchmark Company, LLC, the underwriter of the Company’s June 2020 registered public
offering of common stock, we issued
On
March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”)
of
Each
Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $
The Series A and Series B Warrant holders are obligated to pay the exercise price in cash upon exercise of the 2021 Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the 2021 Warrants (in which case, the 2021 Warrants may only be exercised via a “cashless” exercise provision).
| 18 |
The following table summarizes warrant activity for the six months ended March 31, 2022:
| Number of Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2021 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at March 31, 2022 | $ | |||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
In
the six months ended March 31, 2022, we issued shares of common stock related to exercises of 2021 Warrants, including
shares of common stock issued upon exercise of
8. SUBSEQUENT EVENTS
Exempt Offering Pursuant to Regulation S—Sales of Equity Securities
On
April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, the
Company sold units (the “2022 Units”), at a price of $ per 2022 Unit and an aggregate purchase price of approximately
$
Dripkit Acquisition—Distribution of Bulk Sales Holdback Amount Pursuant to Asset Purchase Agreement
On
May 2, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use
taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts
remaining after offsetting the cost of these sales and use taxes were distributed as follows: (i) $
Issuance of Options to New Employee
On April 1, 2022, the Company issued a total of nonqualified stock options to a new employee, including performance-based options, which represents the maximum number of performance-based options that may be earned if all performance milestones are achieved for the applicable performance periods, and time-based options. These options shall vest and become exercisable either (i) in the case of time-based options, as to 1/3 on each anniversary of the grant date, or (ii) in the case of performance-based options, based on the Company’s Dripkit Coffee business division’s achievement of certain performance milestones established by the Compensation Committee for each fiscal year in the fiscal years ending September 30, 2022, 2023, and 2024.
| 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 tea-bag style coffee. In addition to our portfolio of innovative single serve pour over and tea-bag style coffee products, we have recently expanded our product portfolio to offer a third type of single serve coffee format, DRIPKIT pour over products, as a result of our acquisition of substantially all of the assets of Dripkit, Inc., a Delaware corporation (“Dripkit”), as further described below. Our new, premium DRIPKIT pour over format features a large-size single serve pour over pack that sits on top of the cup and delivers what we believe to be a barista-quality coffee experience to coffee drinkers in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve 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 that has the dual capacity to pack both single serve pour over coffee and tea-bag style coffee within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve coffee market in North America. We target existing high-margin companies and 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 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 tea-bag style coffee, which we believe offers consumers some of the best coffee available in a single serve application in the world.
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, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time, we have developed expertise in the operation of our sophisticated packing equipment and the related production of our single serve pour over coffee products at both our Vista, California facility and at our production operations in Seoul, Korea. In addition, our manufacturing facility and corporate headquarters in Plano, Texas is also operational. We have also expanded our co-packing expertise to tea bag style coffee products, which we believe are gaining traction in the United States.
Dripkit Transaction
On February 25, 2022 (the “Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Dripkit (the “Acquisition”) pursuant to the Asset Purchase Agreement, dated as of February 21, 2022 (the “Asset Purchase Agreement”), by and among the Company, Dripkit, and Dripkit’s existing investors (the “Stock Recipients”) who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement.
On the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of 178,681 shares of the Company’s common stock. In addition, the Company repaid the entire outstanding principal amount of Dripkit’s Small Business Association Economic Injury Disaster Loan in the amount of $78,656.
| 20 |
For additional information regarding the Acquisition and the Asset Purchase Agreement, see Note 4—Business Combinations to the Unaudited Consolidated Financial Statements.
Dripkit will operate as a new Dripkit Coffee business division that is wholly owned by NuZee, Inc. On the Closing Date, the Company entered into an employment agreement for a term of two years with Ilana Kruger, the holder of approximately 71% of the capital stock of Dripkit, pursuant to which Ms. Kruger will serve as Chief Executive Officer of the new Dripkit Coffee business division.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the six months ended March 31, 2022, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or single serve coffee products, and we also believe that potential sales of our single serve coffee products to new or potential customers in the hospitality industry were adversely impacted. We have also experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. In addition, we incurred lost production time due to employee absences. We do not believe, however, that these delays and disruptions had a significant effect on our business or results of operations to date, and in some cases, we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
For the three months ended March 31, 2022, net revenues attributable to our operations in North America totaled $583,944 compared to $251,850 of net revenues attributable to our operations in North America for the three months ended March 31, 2021. For the six months ended March 31, 2022, net revenues attributable to our operations in North America totaled $1,401,285 compared to $658,338 of net revenues attributable to our operations in North America for the six months ended March 31, 2021. Additionally, as of March 31, 2022, $411,733 of our property and equipment, net was attributable to our North American operations, compared to $517,966 attributable to our North American operations as of September 30, 2021.
For the three months ended March 31, 2022, net revenues attributable to our operations in Asia totaled $131,129 compared to $162,214 of net revenues attributable to our operations in Asia during the three months ended March 31, 2021. For the six months ended March 31, 2022, net revenues attributable to our operations in Asia totaled $333,041 compared to $273,714 of net revenues attributable to our operations in Asia during the six months ended March 31, 2021. Additionally, as of March 31, 2022, $260,912 of our property and equipment, net was attributable to our Asian operations, compared to $156,058 attributable to our Asian operations as of September 30, 2021.
Results of Operations
Our results of operations for the three and six months ended March 31, 2022 includes the operations of Dripkit for the period from February 25, 2022, the date of the Acquisition, to March 31, 2022.
| 21 |
Comparison of three months ended March 31, 2022 and 2021:
Revenue
| Three months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Revenue | $ | 715,073 | $ | 414,064 | $ | 301,009 | 73 | % | ||||||||
For the three months ended March 31, 2022, our revenue increased by $301,009, or approximately 73%, compared with the three months ended March 31, 2021. This increase was primarily related to increased co-packing revenue to existing and new customers. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the three months ended March 31, 2022.
Cost of sales and gross margin
| Three months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Cost of sales | $ | 714,092 | $ | 423,113 | $ | 290,979 | 69 | % | ||||||||
| Gross profit (loss) | 981 | $ | (9,049 | ) | $ | 10,030 | (111 | )% | ||||||||
| Gross profit (loss) % | 0 | % | (2 | )% | ||||||||||||
For the three months ended March 31, 2022, we generated a total gross profit of $981 from sales of our products and co-packing services, compared to a total gross loss of ($9,049) for the three months ended March 31, 2021. The gross margin rate was 0% for the three months ended March 31, 2022, and (2)% for the three months ended March 31, 2021. This increase in gross profit was driven primarily by greater scale in our manufacturing operations due to increased production during the current quarter versus the same period in the prior year, combined with increased sales offset by increased materials and labor costs.
Operating Expenses
| Three months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 3,196,479 | $ | 6,077,548 | $ | (2,881,069 | ) | (47 | )% | |||||||
For the three months ended March 31, 2022, the Company’s operating expenses totaled $3,196,479 compared to $6,077,548 for the three months ended March 31, 2021, representing a 47% decrease. This decrease is primarily attributable to a decrease in stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs. Lease expenses associated with subleased property of $34,211 for the three months ended March 31, 2021 were reclassified from operating expenses to other expense.
Net Loss
| Three months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Net Loss | $ | 3,223,697 | $ | 6,085,608 | $ | (2,861,911 | ) | (47 | )% | |||||||
For the three months ended March 31, 2022, we generated a net loss of $3,223,697 versus $6,085,608 for the three months ended March 31, 2021. This decrease in net loss is primarily attributable to lower stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs.
| 22 |
Comparison of six months ended March 31, 2022 and 2021:
Revenue
| Six months ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Revenue | $ | 1,734,326 | $ | 932,051 | $ | 802,275 | 86 | % | ||||||||
For the six months ended March 31, 2022, our revenue increased by $802,275, or approximately 86% compared with the six months ended March 31, 2021. This increase was primarily related to increased co-packing revenue to existing and new customers. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the six months ended March 31, 2022.
Cost of sales and gross margin
| Six months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Cost of sales | $ | 1,717,974 | $ | 939,397 | $ | 778,577 | 83 | % | ||||||||
| Gross profit (loss) | 16,352 | $ | (7,346 | ) | $ | 23,698 | (323 | )% | ||||||||
| Gross profit (loss)% | 1 | % | (1 | )% | ||||||||||||
For the six months ended March 31, 2022, we generated a total gross profit of $16,352, from sales of our products and co-packing services, compared to a total gross loss of ($7,346) for the six months ended March 31, 2021. The gross margin rate was 1% for the six months ended March 31, 2022, and (1)% for the six months ended March 31, 2021. This increase in gross profit was driven primarily by greater scale in our manufacturing operations due to increased production during the current six month period versus the same period in the prior year, combined with increased sales offset by increased materials and labor costs.
Operating Expenses
| Six months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 6,007,668 | $ | 11,937,411 | $ | (5,929,743 | ) | (50 | )% | |||||||
For the six months ended March 31, 2022, the Company’s operating expenses totaled $6,007,668 compared to $11,937,411 for the six months ended March 31, 2021, representing a 50% decrease. This decrease is primarily attributable to a decrease in stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs. Lease expenses associated with subleased property of $78,174 for the six months ended March 31, 2021 were reclassified from operating expenses to other expense.
Net Loss
| Six months ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | % | |||||||||||||
| Net Loss | $ | 6,027,900 | $ | 11,981,680 | $ | (5,953,780 | ) | (50 | )% | |||||||
For the six months ended March 31, 2022, we generated a net loss of $6,027,900 versus $11,981,680 for the six months ended March 31, 2021. This decrease in net loss is primarily attributable to lower stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of March 31, 2022, we had an accumulated deficit of approximately $58.9 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 incur additional losses because of the costs associated with operating as an exchange-listed public company. We are unable to predict the extent of any future losses or when we will become profitable, if at all.
| 23 |
To date, we have funded our operations primarily with proceeds from registered public offerings and private placements of shares of our common stock. Our principal use of cash is to fund our operations, which includes the commercialization of our single serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.
As of March 31, 2022, we had a cash balance of $8,211,703. We believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least twelve months from May 5, 2022. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.
On December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC (“Maxim”), as agent (the “Agent”), pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3 (the “ATM Offering”). For additional information regarding the Equity Distribution Agreement, including the amount of net proceeds raised in the six months ended March 31, 2022, see “—Summary of Cash Flows—Financing Activities” and Note 6—Issuance of Equity Securities to the Unaudited Consolidated Financial Statements.
Subsequent to March 31, 2022, on April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, we sold 884,778 units (the “2022 Units”), at a price of $2.00 per 2022 Unit and an aggregate purchase price of approximately $1.77 million, with each 2022 Unit consisting of (a) one share of our common stock and (b) one warrant (the “2022 Warrants”) to purchase one whole share of our common stock with an initial exercise price of $2.00 per share. Holders may exercise their 2022 Warrants on a “cashless” basis pursuant to a formula set forth in the form of 2022 Warrant. For additional information regarding the 2022 Warrants, see Note 8—Subsequent Events to the Unaudited Consolidated Financial Statements.
In the future, we expect to seek to raise additional capital through public or private equity offerings, such as through sales of our common stock under the Equity Distribution Agreement. We also may receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised at the election of the warrant holders, including the Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and, collectively with the Series A Warrants, the “2021 Warrants”) that were sold by us in March 2021 in an underwritten registered public offering. For additional information regarding the 2021 Warrants, see Note 7—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.
In the long term, we expect we will need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. The timing and amount of funds that we will need to raise will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. 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.
Contractual Obligations
Our significant contractual cash requirements as of March 31, 2022, primarily include payments for operating and finance lease liabilities and principal and interest on loans. Additionally, we may incur purchase obligations in the 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 March 31, 2022, we had payments for lease and loan obligations of approximately $960,230, of which $399,009 are payable within 12 months as of March 31, 2022. We had no purchase obligations as of March 31, 2022
| 24 |
Summary of Cash Flows
| Six Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash used in operating activities | $ | (4,154,028 | ) | $ | (2,920,481 | ) | ||
| Cash used in investing activities | $ | (539,521 | ) | $ | (122,554 | ) | ||
| Cash provided by financing activities | $ | 2,063,705 | $ | 13,674,036 | ||||
| Effect of foreign exchange on cash | $ | 25,593 | $ | 5,480 | ||||
| Net change in cash | $ | (2,604,251 | ) | $ | 10,636,481 | |||
Operating Activities
We used $4,154,028 and $2,920,481 of cash in operating activities during the six months ended March 31, 2022, and 2021, respectively, principally to fund our operations.
Investing Activities
We used $539,521 and $122,554 of cash in investing activities during the six months ended March 31, 2022 and 2021, respectively. Cash used in the six months ended March 31, 2022 was for the acquisition of substantially all of the assets of Dripkit and the purchase of equipment. Cash used in the six months ended March 31, 2021 was for the purchase of equipment.
Financing Activities
Historically, we have funded our operations primarily through the issuance of our equity securities.
Cash provided by financing activities of $2,063,705 and $13,674,036 for the six months ended March 31, 2022 and 2021, respectively, is primarily related to proceeds received upon the exercise of outstanding 2021 Warrants by the 2021 Warrant holders, advances received on the sale of equity securities, and issuance of shares of our common stock under the Equity Distribution Agreement in the six months ended March 31, 2022, as further described below, and issuance of equity securities in the six months ended March 31, 2021.
In the six months ended March 31, 2022, we issued 384,447 shares of common stock related to exercises of 2021 Warrants, including 380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants and 4,000 shares of common stock issued upon exercise of 8,000 Series B Warrants. In connection with such exercises, in the six months ended March 31, 2022, we received aggregate net proceeds of $1,702,596. For additional information regarding the Series A Warrants and Series B Warrants, see Note 7—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.
ATM Offering
On December 28, 2021, we entered into the Equity Distribution Agreement with Maxim, as Agent, pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3. The offer and sale of shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-248531) initially filed by us with the SEC on September 1, 2020, and declared effective by the SEC on October 2, 2020, under the Securities Act. We are not obligated to make any sales of shares of our common stock under the Equity Distribution Agreement. In the six months ended March 31, 2022, we issued and sold 42,448 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $88,426.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Unaudited Consolidated Financial Statements for a summary of our accounting policies.
Except as described below, there were no significant and material changes in our critical accounting policies and use of estimates during the three and six months ended March 31, 2022, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, filed with the SEC on December 22, 2021.
Business Combinations
On February 25, 2022, we completed the acquisition of substantially all of the assets of Dripkit. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired at the acquisition date as well as the useful lives of those acquired intangible assets. Examples of critical estimates in valuing certain of the intangible assets and goodwill acquired include but are not limited to future (i) expected cash flows from acquired customer relationships and trademarks, (ii) attrition, (iii) revenues, (iv) royalty rate, (v) operating profit and (vi) discount rate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2022, we completed the acquisition of substantially all of the assets of Dripkit. We are currently in the process of evaluating the impact of this acquisition on our system of internal control over financial reporting. We are also developing plans to integrate Dripkit’s processes and controls into our current state processes. Except for this current evaluation of Dripkit into our overall internal control over financial reporting program, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II.
Item 1. Legal Proceedings
On November 23, 2021, Next Vision, Inc. (the “Consultant”) filed a complaint against the Company in the Superior Court of California, County of San Diego Central Division (Case No. 37-2021-00049557-CU-BC-CTL) (the “Complaint”). The Complaint alleges that the Company’s delay in issuing shares of the Company’s common stock (the “Shares”) to the Consultant after receiving due notice from the Consultant of its intent to exercise vested stock options to acquire 70,000 Shares, as initially granted in 2018 (or, as adjusted to account for the Company’s reverse stock split effected on November 12, 2019, vested stock options to acquire 23,334 Shares) (the “Options”), which had previously been issued to the Consultant as compensation for consulting services provided in 2018, breached express and implied contractual obligations to the Consultant and resulted in the Company reporting an overstated amount of income on the IRS Form 1099-B that was issued to the Consultant for U.S. federal tax purposes. In addition, the Complaint alleges that the 23,334 Shares issued to the Consultant upon exercise of the Options improperly contained a six-month restriction on resale and that such restriction prevented the Consultant from selling the Shares at the desired time. The Complaint seeks equitable relief requiring the Company to issue an IRS Form 1099-NEC to reflect the correct amount of compensation. The Complaint also seeks compensatory damages, including to recover for alleged lost profits due to the alleged improper six-month restriction on resale for the Shares, as well as punitive damages, costs of suit, attorney’s fees, and interest. On January 20, 2022, the Company filed its general denial and answer in which it raised affirmative defenses and disputed the claims contained in the Complaint.
We believe the allegations set forth in the Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.
From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
Except as set forth below, 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 22, 2021.
A significant portion of our total outstanding shares of common stock are eligible to be sold into the market in the near future, including pursuant to Rule 144, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We have also registered all shares of common stock that are reserved for issuance under the NuZee, Inc. 2019 Stock Incentive Plan and all shares of common stock currently reserved for issuance under the NuZee, Inc. 2013 Stock Incentive Plan. As a result, these shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in our filings with the SEC. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop. We believe that a significant portion of our total outstanding shares of common stock may be sold in the public market without restriction by non-affiliates pursuant to Rule 144.
We have also entered into the Equity Distribution Agreement with Maxim, as Agent, pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3. Sales of a substantial number of shares of common stock under the Equity Distribution Agreement, or the perception that those sales may occur, could cause the market price of our common stock to decline.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the quarter ended March 31, 2022, we issued the following securities that were not registered under the Securities Act:
| ● | On February 25, 2022, in connection with the completion of our acquisition of substantially all of the assets of Dripkit pursuant to the Asset Purchase Agreement, we issued an aggregate of 178,681 shares of our common stock to the Stock Recipients. For additional information, see Note 4—Business Combinations to the Unaudited Consolidated Financial Statements and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dripkit Transaction” herein. Each Stock Recipient was an accredited investor (as that term is defined in Regulation D under the Securities Act). | |
| ● | On February 8, 2022, we issued 14,000 shares of our common stock upon exercise of stock options previously issued to an advisor for certain legal services. In connection with such exercise, the Company received $12,600 in cash as payment of the aggregate exercise price. |
In issuing shares of our common stock in the transactions described above, the Company relied on the exemptions from the registration requirements of the Securities Act provided for in Regulation D and/or Section 4(a)(2) of the Securities Act.
Item 5. Other Information
Information Required by Item 407(c)(3) of Regulation S-K
As previously disclosed, on March 17, 2022, the Company’s Board of Directors (the “Board”) approved and adopted the Third Amended and Restated Bylaws of the Company (the “New Bylaws”). The following briefly describes provisions in the New Bylaws that made changes to the Company’s procedures by which stockholders may recommend nominees to the Board and submit stockholder proposals at annual meetings of stockholders:
1. Section 1.10(a) of the New Bylaws permits stockholders to submit proposals (including director nominations) at any annual meeting of stockholders if advance notice thereof has been timely delivered to, or mailed and received by, the secretary of the Company not less than 90 nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. However, if the annual meeting of stockholders is changed by more than 30 calendar days before or after such anniversary date, different timing provisions will apply as set forth in the New Bylaws.
2. Section 1.10(b) of the New Bylaws requires a stockholder’s notice of nomination of a person for election as a director to include, among other information, such stockholder’s name and address and the number and class of all shares beneficially owned by such stockholder, the name of the person to be nominated, the number and class of all shares of each class of stock of the Company beneficially owned by such person, and such person’s signed consent to serve as a director of the Company, if elected.
Pursuant to the New Bylaws, if a stockholder wishes to submit a proposal (including a director nomination) at the 2023 annual meeting of stockholders otherwise than for inclusion in next year’s proxy materials, a stockholder must do so not later than December 17, 2022, nor earlier than the close of business on November 17, 2022. However, if the date of our 2023 annual meeting of stockholders is not held between February 15, 2023 and April 16, 2023, to be timely, notice by the stockholder must be received not later than the 10th day following the day on which notice of the date of the 2023 annual meeting of stockholders was mailed or first publicly announced or disclosed, whichever occurs first.
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Item 6. Exhibits
† Indicates management contract or compensatory plan.
* Filed herewith.
** Furnished herewith.
*** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
+ Certain schedules to this agreement have been omitted pursuant to Item 601 of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
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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: | May 12, 2022 | NUZEE, INC. | ||
| By: | /s/ Masateru Higashida | |||
| Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director | ||||
| By: | /s/ Patrick Shearer | |||
| Patrick Shearer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
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