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
☐ No
As of April 26, 2024, 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 at least 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; |
| ● | 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 partners, as well as our manufacturing partners’ ability to successfully facilitate distribution efforts; |
| ● | our reliance on third-party roasters or manufacturing partners to roast coffee beans necessary to manufacture our products and to fulfill every aspect of our co-packing services; |
| ● | regulatory developments in the U.S. and in non-U.S. countries; |
| ● | our ability to retain key management, sales and marketing personnel; |
| ● | the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology; |
| ● | our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting; |
| ● | the outcome of pending, threatened or future litigation; |
| ● | our financial performance; and |
| ● | our use of the net proceeds from our recent offering. |
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 January 16, 2024, 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)
| December 31, 2023 | September 30, 2023 | |||||||
| 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 December 31, 2023, and September 30, 2023, 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 December 31, 2023 | Three Months Ended December 31, 2022 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Loss from equity method investment | ( | ) | ( | ) | ||||
| 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.
| 5 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| NuZee, Inc. | ||||||||
| For the three months ended December 31 | 2023 | 2022 | ||||||
| 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, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common Stock issued for cash | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Issued private placement | ||||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | Three Months Ended | |||||||
| December 31, 2023 | December 31, 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 | ||||||||
| Restricted stock compensation | ||||||||
| Bad debt expense | ||||||||
| Loss from equity method investment | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Repayment of loans | ( | ) | ( | ) | ||||
| Repayment of finance lease | ( | ) | ( | ) | ||||
| Proceeds from private placement | ||||||||
| Proceeds from equipment finance | ||||||||
| Proceeds from issuance of common stock, ATM offering, net of issuance cost | ||||||||
| Proceeds from exercise of options | ||||||||
| 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 | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 8 |
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 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, 2023 as filed with the SEC on January 16, 2024. 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, 2023, 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”).
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
Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of December 31, 2023 and December 31, 2022, the total number of common stock equivalents was and , respectively, and composed of stock options and warrants. The Company incurred a net loss for the three months ended December 31, 2023 and 2022, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.
| 9 |
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 December 31, 2023, the Company had cash of $
Use of Estimates
In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
The Company had
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash with high quality banking institutions. From time to time, the Company may or may not maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit.
Accounts Receivable
Trade
accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial
condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in
the receivable portfolio and current economic conditions. The Company had $
Major Customers
In the three months ended December 31, 2023 and 2022, revenue was primarily derived from major customers disclosed below.
Three months ended December 31, 2023:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer CL | $ | % | $ | % | ||||||||||||
| 10 |
Three months ended December 31, 2022:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer CL | $ | % | $ | % | ||||||||||||
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.
In
May 2022, the Company renewed the office and manufacturing space in Vista, California which was scheduled to expire on
As
of December 31, 2023, our operating leases had a weighted average remaining lease term of
| ROU Asset – October 1, 2023 | $ | |||
| ROU Asset added during the period | ||||
| Amortization during the period | ( | ) | ||
| ROU Asset – December 31, 2023 | $ | |||
| Lease Liability – October 1, 2023 | $ | |||
| Lease Liability added during the period | ||||
| Amortization during the period | ( | ) | ||
| Lease Liability – December 31, 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 December 31, 2023:
Amounts due within twelve months of December 31,
| 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 $
The table below summarizes future minimum finance lease payments at December 31, 2023 for the twelve months ended December 31:
| 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 three months ended December 31, 2023, and 2022 was $
Cash and non-cash activities associated with the leases for the three months ended December 31, 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 favorable terms that are
co-terminus with the original lease ending June 30, 2024. During the three months ended December 31, 2023, we recognized sublease income
of $
| 2024 | $ | |||
| Total | $ |
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 adjustment attributable
to NuZee, Inc. recorded to other comprehensive income 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.
| 12 |
Equity Method
Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method
of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several
factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally
a
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
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 as well as our partner appoints
the Chairman of the joint Board. As of December 31, 2023, the activity in NLA consisted of the contribution of two machines as described
above and other start up and initial sales and marketing related activities. $
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.
Return and Exchange Policy
The Company provides a 30-day money-back guarantee if a buyer is not satisfied with a product. All products are thoroughly inspected and securely packaged before they are shipped to ensure buyers receive the best possible product. If for any reason buyers are unsatisfied with the products, they can return them and the Company will exchange or refund the purchase minus any shipping charges. For wholesale customers, return policies vary based on their specific agreements with customers. Under chargebacks agreements with the customers, the Company agrees to reimburse the seller for a portion of the costs incurred by the seller to advertise and promote certain of the Company’s products. The Company estimates, accrues and recognizes such chargebacks. These amounts are included in the determination of net sales.
| 13 |
For
the three months ended December 31, 2023 and 2022, the Company had
Cost Recognition
Cost of products sold is primarily comprised of direct materials consumed in the manufacturing of co-packing arrangements or the production of our own products for resale. Cost of products sold also includes directly related labor salaries and other overhead cost including depreciation, temporary labor and shipping costs for shipment of raw materials to our facilities.
Selling, General and Administrative Expense
Selling, general and administrative expense (SG&A) is primarily comprised of personnel costs, sales and marketing expenses, depreciation and amortization, insurance expenses, legal and professional services fees, travel and office expenses, and facilities costs. In some situations, the Company covers shipping fees for delivering customer orders, and the shipping and handling expenses are recorded under operating expenses in the consolidated statements of operations.
Other Expense
Other
expense of $
Prepaid expenses and other current assets
Prepaid expenses and other current assets for the three months ended December 31, 2023 and September 30, 2023 is as follows:
| December 31, 2023 | September 30, 2023 | |||||||
| Prepaid expenses and other current assets | $ | $ | ||||||
The
Prepaid expenses and other current assets balance of $
Inventory
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 December 31, 2023 and September 30, 2023, the carrying value of inventory
of $
| December 31, 2023 | September 30, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | $ | |||||||
| Total | $ | $ | ||||||
| 14 |
Property and Equipment
Property
and equipment is stated at cost, net of accumulated depreciation. The Company generally depreciates property and equipment on a straight-line
basis over the estimated useful lives of the assets after the assets are placed in service except for NuZee KR which uses the declining
balance method. Office equipment is depreciated over a
| December 31, 2023 | September 30, 2023 | |||||||
| Machinery & Equipment | ||||||||
| Vehicles | ||||||||
| Leasehold Improvements | ||||||||
| Less - Accumulated Depreciation | ( | ) | ( | ) | ||||
| Net Property and Equipment | $ | $ | ||||||
The
Company is required to make deposits or prepayments and progress payments on equipment purchases before the Company receives possession
and title. As a result, the Company accounts for such payments as Other Assets until it has possession at which time the equipment is
recorded as Property and Equipment. There were
Loans
On
April 1, 2019, the Company purchased a delivery van from Ford Motor Credit for $
The
remainder of the loan is due in fiscal year ending December 31, 2024 in the amount of $
Other noncurrent liabilities
On
October 12, 2023, the Company entered into a finance agreement with a lender for the purchase of packaging equipment with future payments
of $
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company previously had a minimally staffed office in Japan that provided support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to its stockholders based in Japan; these functions are now supported by the Company’s personnel residing in the United States. Information about the Company’s geographic operations for the three months ended December 31, 2023, and 2022 are as follows:
Geographic Concentration
| Three Months Ended December 31, 2023 | Three Months Ended December 31, 2022 | |||||||
| Net Revenue: | ||||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| $ | $ | |||||||
| Property and equipment, net: | As of December 31, 2023 | As of September 30, 2023 | ||||||
| North America | $ | $ | ||||||
| Japan | ||||||||
| South Korea | ||||||||
| $ | $ | |||||||
| 15 |
3. INTANGIBLE ASSETS
Identifiable life intangible assets
As
of December 31, 2023, the Company’s intangible assets consisted of unamortized tradename asset of $
Amortization
expense was $
Amortization expense for the next four fiscal years is as follows:
| Tradename Amortization |
||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Grand Total | ||||
4. ISSUANCE OF EQUITY SECURITIES
Registered Offering
The Company offered in an underwritten public offering (the “Offering”), shares of common stock, par value $ per share (the “Common Stock”), at a price to the public of $ per share of Common Stock (the “Offering Price”). The Offering was made pursuant to a shelf registration statement filed with and declared effective by the Securities and Exchange Commission (the “SEC”) (Registration No. 333-274818), a base prospectus, dated October 5, 2023, included as part of the registration statement, and a prospectus supplement, dated October 17, 2023.
On
October 18, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC,
as the sole book-running manager and underwriter (the “Underwriter”), relating to the Offering. Pursuant to the Underwriting
Agreement, the Company granted the Underwriter a 45-day option to purchase up to additional shares of Common Stock at the Offering
Price, less underwriting discounts and commissions. The Company received approximately $
Private Placement
On
November 9, 2023, the Company issued in a private placement to an accredited investor (“Shareholder”) shares of Common
Stock, together with warrants to purchase a total of approximately
| 16 |
Restricted Shares
On August 11, 2023, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors granted to Randell Weaver, the Company’s newly appointed Chief Financial Officer, in connection with his employment agreement, an award of restricted shares (the “Restricted Shares”) of the Company’s common stock under the 2023 Stock Incentive Plan. These Restricted Shares vested as follows: (i) Restricted Shares shall vest upon the first anniversary of the commencement date; (ii) Restricted Shares shall vest upon the second anniversary of the commencement date; and (iii) Restricted Shares shall vest upon the third anniversary of the commencement date. The Company recognized common stock compensation expense of $ for the year ended September 30, 2023 related to these Restricted Shares.
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. of the Performance-Based Restricted Shares would 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.
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. 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 three months ended December 31, 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 stock option awards on a straight-line basis over the requisite service period.
On March 22, 2023, the Company granted Restricted Shares of the Company’s common stock to each of the Company’s five independent directors. 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 $ in the three months ending December 31, 2023 and 2022, respectively.
| 2023 | 2022 | |||||||
| Number of shares outstanding at September, 2023 and 2022 | ||||||||
| Restricted shares granted | ||||||||
| Restricted shares forfeited | ( | ) | ||||||
| Restricted shares vested | ||||||||
| Number of shares outstanding at December 31, 2023 and 2022 | ||||||||
During the three months ended December 31, 2023, restricted shares were forfeited because of the termination of employment or performance goals not achieved.
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Options
During the three months ended December 31, 2023, the Company granted no new stock options.
During the three months ended December 31, 2023, stock options were forfeited because of termination of employment, expiration of options and performance conditions not met.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Value | |||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Forfeited and expired | ( | ) | - | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at December 31, 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 September 30, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( | ) | ||||||
| Vested | ( | ) | ||||||
| Nonvested options at December 31, 2023 | $ | |||||||
Warrants
During the three months ended December 31, 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 three months ended December 31, 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, 2023 | $ | $ | ||||||||||||||
| Issued | - | - | ||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||||||
| Exercisable at December 31, 2023 | $ | $ | ||||||||||||||
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6. CONTINGENCY
Steeped, Inc. Litigation
On January 27, 2023, Steeped, Inc. d/b/a Steeped Coffee (“Steeped”) filed a complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “Steeped Litigation”). The Steeped Litigation relates to Steeped’s claim that the Company breached a 2021 settlement agreement that resolved Steeped’s 2019 trademark infringement case against the Company. The earlier case involved Steeped’s purported trademark protection for “steeped coffee” and related phrases.
Steeped’s operative complaint in the pending Steeped Litigation alleges 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. NuZee answered Steeped’s complaint with a general denial and asserted twenty-five affirmative defenses.
On
January 16, 2024, a mediation hearing was held. After the close of business, the mediator suggested a settlement amount of $
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 prevailed on December 22, 2023, prevailed on its motion to compel. Arbitration proceedings have been initiated, and the parties have agreed on an arbitrator. A date for the arbitration hearing has not yet been scheduled. We believe the allegations set forth in the Curtin Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.
From time to time, we may be subject to 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. Matters that are probable of unfavorable outcomes to us and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, our estimates of the outcomes of such matters and our experience in contesting, litigating and settling similar matters.
7. SUBSEQUENT EVENTS
New Operating Lease
Effective
January 1, 2024, we entered into a new lease in Carlsbad, California for additional office space. The lease term is
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Notice
On
January 23, 2024, the Company received a notice (the “Notice”) from the Listing Qualifications staff of The Nasdaq Stock
Market (“Nasdaq”) notifying the Company that the Company’s stockholders’ equity as reported in its Annual Report
on Form 10-K for the period ended September 30, 2023 (“Form 10-K”), did not satisfy the continued listing requirement under
Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market, which requires that a listed company’s stockholders’ equity
be at least $
Private Placement
On
January 30 2024, the Company issued in a private placement to an accredited investor shares of Common Stock, together with warrants
to purchase a total of approximately
On
April 30, 2024, the Company issued convertible notes to two investors in the amount of $
Financing Agreement
On
March 1, 2024 the Company entered into a financing agreement to sell future receipts in the amount of $
| 20 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a specialty coffee and technologies 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. Recently, we further expanded our product offerings to include bagged coffees for existing single-serve customers as well as a new licensing relationship with Stone Brewing which will include both bagged and single-serve format coffee products. We believe this expansion will allow us to increase manufacturing efficiency and better serve our customers and the market. 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 single-serve pour over and brew bag coffee. We intend to leverage our position to become the commercial coffee producer 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. With our single-serve pour over and brew bag coffee we are paid per-package based on the number of single-serve coffee products produced by us. With our bagged coffee products, we will be paid based on the number of completed bags delivered. Accordingly, we consider a portion of 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. Under the single-1serve model, our risk related to owning and managing inventory is limited. With our bagged coffees and the Stone Brewing licensing relationship, we will manage the production and related inventory which will involve increased risk levels.
We may also consider co-packaging other products that are complementary to our current product offerings and provide us with 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.
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
For the three months ended December 31, 2023, net revenues attributable to our operations in North America totaled $965,932 compared to $665,741 of net revenues attributable to our operations in North America during the three months ended December 31, 2022. Additionally, as of December 31, 2023, $464,112 of our property and equipment, net was attributable to our North American operations, compared to $184,763 attributable to our North American operations as of September 30, 2023.
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For the three months ended December 31, 2023, net revenues attributable to our operations in Asia totaled $388,054 compared to $470,607 of net revenues attributable to our operations in Asia during the three months ended December 31, 2022. Additionally, as of December 31, 2023, $120,007 of our property and equipment, net was attributable to our Asian operations, compared to $146,529 attributable to our Asian operations as of September 30, 2023.
Results of Operations
During the three months ended December 31, 2023, we began selling and shipping bagged coffee products for our largest customer in addition to the single-serve products we had been selling and shipping to them. Our results for this quarter were positively influenced by these shipments, many of which were initial pipeline fills for new distribution. We do not expect the quarterly revenues for the three months ended December 31, 2023 to be indicative of future quarters. It is too early to project the market acceptance of these products or the rates of reorder, if any, from our customer.
Our results of operations for the three months ended December 31, 2023 are influenced by the aforementioned transactions.
Comparison of three months ended December 31, 2023 and 2022
Revenue
| Three months ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Revenue | $ | 1,353,986 | $ | 1,136,348 | $ | 217,638 | 19 | % | ||||||||
For the three months ended December 31, 2023, our revenue increased by $217,638, or approximately 19%, compared with the three months ended December 31, 2022. This increase was primarily related to increased revenue in the US, due to volume of sales increase with our major customers.
Cost of sales and gross margin
| Three months ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Cost of sales | $ | 1,178,707 | $ | 1,060,816 | $ | 117,891 | 11 | % | ||||||||
| Gross profit (loss) | 175,279 | $ | 75,532 | $ | 99,747 | 132 | % | |||||||||
| Gross profit (loss) % | 13 | % | 7 | % | ||||||||||||
For the three months ended December 31, 2023, we generated a total gross profit of 175,279 from sales of our products and co-packing services, compared to a total gross profit of $75,532 for the three months ended December 31, 2022. The gross margin rate was 13% for the three months ended December 31, 2023, and 7% for the three months ended December 31, 2022. The increase is primarily attributable to a decrease in production salaries and temporary labor.
Operating Expenses
| Three months ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 2,318,234 | $ | 2,277,200 | $ | 41,034 | 2 | % | ||||||||
For the three months ended December 31, 2023, the Company’s operating expenses totaled $2,318,234 compared to $2,277,200 for the three months ended December 31, 2022, representing a 2% increase. This increase is primarily attributable to an increase of supply expense.
| 22 |
Net Loss
| Three months ended December 31, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Net Loss | $ | 2,148,611 | $ | 2,183,206 | $ | (34,595 | ) | -2 | % | |||||||
For the three months ended December 31, 2023, we generated a net loss of $2,148,611 compared to a net loss of $2,183,206 for the three months ended December 31, 2022. This decrease in net loss is primarily attributable to lower stock-based compensation expense.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of December 31, 2023, we had an accumulated deficit of approximately $76 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.
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 December 31, 2023, we had a cash balance of approximately $0.4 million. Considering our current cash resources and our current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least twelve months from January 12, 2024. 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 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 coffee products, may change as a result of many factors currently unknown to us.
During the three months ended December 31, 2023, we issued no shares of common stock related to exercises of 2021 Warrants (as defined below) and received no proceeds from the exercise of warrants.
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 sold by us in March 2021 in an underwritten registered public offering and the 2022 Warrants. The 2021 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). For additional information regarding the 2021 Warrants, see “Note 9—Stock Options and Warrants” to the Consolidated Financial Statements.
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 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.
| 23 |
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. These conditions raise substantial doubt about our ability to continue as a going concern.
Contractual Obligations
Our significant contractual cash requirements as of December 31, 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 December 31, 2023, we had payments for lease and loan obligations of approximately $ 400,859 of which $ 366,028 are payable within 12 months as of December 31, 2023. We had no purchase obligations as of December 31, 2023.
Summary of Cash Flows
| Three Months Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash used in operating activities | $ | (2,336,166 | ) | $ | (1,913,446 | ) | ||
| Cash used in investing activities | $ | (307,044 | ) | $ | (16,514 | ) | ||
| Cash provided by (used in) financing activities | $ | 1,659,855 | $ | (8,857 | ) | |||
| Effect of foreign exchange on cash | $ | 42,408 | $ | 115,583 | ||||
| Net change in cash | $ | (940,947 | ) | $ | (1,823,234 | ) | ||
Operating Activities
We used $2,336,166 and $1,913,446 of cash in operating activities during the three months ended December 31, 2023, and 2022, respectively, principally to fund our operations.
Investing Activities
We used $307,044 and $16,514 of cash in investing activities during the three months ended December 31, 2023 and 2022, respectively. Cash used in 2022 was principally for the purchase of equipment.
Financing Activities
Historically, we have funded our operations through the issuance of our equity securities.
Cash provided by financing activities of $1,659,855 for the three months ended December 31, 2023 was primarily related to the issuance of equity securities. Cash used in financing activities of $8,857 for the three months ended December 31, 2022 was primarily related to repayments on loans and leases.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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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.
There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended December 31, 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, 2023, filed with the SEC on January 16, 2024.
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 by our Company 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 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 December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 25 |
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 was continued to December 1, 2023. A new legal counsel was substituted for the Company.
On July 31, 2023, the parties entered into a settlement agreement and resolved the lawsuit. In exchange for a general release and dismissal of the lawsuit with prejudice, the Company paid the Consultant $5,000. The Plaintiff filed a Request for Dismissal on September 18, 2023, and on November 10, 2023, the case was dismissed.
Steeped, Inc. Litigation
As previously disclosed, on January 27, 2023, Steeped, Inc. d/b/a Steeped Coffee (“Steeped”) filed a complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “Steeped Litigation”). The Steeped Litigation relates to Steeped’s claim that the Company breached a 2021 settlement agreement that resolved Steeped’s 2019 trademark infringement case against the Company. The earlier case involved Steeped’s purported trademark protection for “steeped coffee” and related phrases.
Steeped’s operative complaint in the pending Steeped Litigation alleges 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. NuZee answered Steeped’s complaint with a general denial and asserted twenty-five affirmative defenses.
On January 16, 2024, a mediation hearing was held. After the close of business, the mediator suggested a settlement amount of $500,000 which both parties agreed to accept. While the amount was agreed to, a payment schedule was not agreed on. Negotiations between the parties to establish an acceptable payment schedule are ongoing. The settlement amount is accrued in the financial statements as of December 31, 2023 and is included in current liabilities
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Curtin Litigation
On January 6, 2023, a former employee of the Company, Rosaline Curtin (“Ms. Curtin”), filed a complaint against the Company and another former employee of the Company, Jose Ramirez (“Mr. Ramirez”), in the Superior Court of California, County of San Diego (Case No. 37-2023-00000841-CU-WT-NC) (the “Curtin Complaint”). The Curtin Complaint alleges that Ms. Curtin was subject to harassment by her supervisor, Mr. Ramirez, and gender discrimination throughout her employment, that she reported this discrimination and harassment to the Company, and that the Company retaliated against her and wrongfully terminated her for whistleblowing and failed to prevent discrimination, harassment, and retaliation. The Curtin Complaint seeks compensatory damages, including loss of past, present and future earnings, and benefits, as well as punitive damages, penalties, attorney’s fees and costs and interest. The Company has responded to the complaint on behalf of the Company and Mr. Ramirez and prevailed on December 22, 2023, prevailed on its motion to compel. Arbitration proceedings have been initiated, and the parties have agreed on an arbitrator. A date for the arbitration hearing has not yet been scheduled. We believe the allegations set forth in the Curtin Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.
From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
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 January 16, 2024, 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 January 16, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities sold during the period covered by this Quarterly Report that were not previously included in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
During
the three months ended December 31, 2023, no director or officer of the Company
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Item 6. Exhibits
* 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.
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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 6, 2024 | NUZEE, INC. | ||
| By: | /s/ Masateru Higashida | |||
Masateru Higashida, Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director | ||||
| By: | /s/ Randell Weaver | |||
Randell Weaver, President & Chief Operating Officer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||
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