CIMG Inc 10-K for FY2023
CIMG Inc. (CIMG)
About this 10-K
CIMG Inc filed this 10-K on January 16, 2024, covering the fiscal year ended September 30, 2023 (FY2023).
Headline figures
Fiscal year ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.35M
- up 7.7% from $3.11M a year earlier
- Net loss
- $8.75M
- compared with a net loss of $11.8M a year earlier
- Diluted EPS
- -$11.95
- compared with -$21.32 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the fiscal year ended
or
Commission
File No.
(exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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| The
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| ☒ | Smaller reporting company | ||||
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registrant’s Common Stock was last sold as of March 31, 2023, the last business day of the most recently completed second fiscal
quarter), was approximately $
As of January 11, 2024, there were outstanding shares of the registrant’s Common Stock, $0.00001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains forward-looking statements, including, without limitation, in the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “target,” “seek,” “estimate,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. 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; | |
●
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the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
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| ● | 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.
Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A below, titled “Risk Factors,” and discussed elsewhere in this Report and in our other reports filed with the SEC. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law.
REFERENCES
As used in this Report: (i) the terms “we”, “us”, “our”, “NuZee” and the “Company” mean NuZee, Inc. and its subsidiaries, taken together; (ii) “SEC” refers to the Securities and Exchange Commission; (iii) “Securities Act” refers to the Securities Act of 1933, as amended; (iv) “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.
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PART I
ITEM 1. BUSINESS.
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 both single serve pour over coffee and coffee 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 serve 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 have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and coffee brew bag coffee products, which we believe offers consumers some of the best coffee available in a single serve application in the world. We have recently expanded our Coffee Blenders offerings to include a new Cold pressed latte product line that is available to purchase in Korea and online. We offer DRIPKIT pour over packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and co-pack for coffee roasters.
We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, drive growth, reduce manufacturing costs, expand our product portfolio, enter into new markets, and further penetrate the markets in which we currently operate. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.
What is single serve pour over coffee?
Single serve pour over coffee, or hand drip coffee, is a traditional and time-honored technique that pours hot water onto ground coffee with a prepacked coffee filter. Proponents of pour over coffee believe this method makes better coffee. Single serve pour over coffee uses the same brewing technique without a machine, with the coffee flowing straight into a cup using only hot water and the prepacked coffee filter.
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What is coffee brew bag coffee?
We introduced our coffee brew bag, or tea-bag style coffee, in 2019. The brewing method is similar to brewing tea; put the coffee brew bag in a cup, add hot water and let it sit for approximately five minutes. This coffee brewing method is relatively new to North America and we believe has gained attention from roasters and end consumers who desire eco-friendlier alternatives to coffee pods and other types of single serve coffee. Our coffee brew bags are intended to be industrially compostable, allowing consumers to deposit the used coffee brew bag in the curbside compostable bins where available.
What is bagged coffee?
Bagged coffee is roasted whole bean or ground coffee, generally sold in 12 ounce to five pound bags. We recently agreed to begin producing bagged coffee in a 12 ounce format for one of our largest customers. We will also begin producing bagged coffees in a 12 ounce and two pound format for Stone Brewing under a licensing relationship. Bagged coffees are used in homes, offices and restaurant/hospitality settings to brew multiple cups of coffee simultaneously.
What is the Stone Brewing License Relationship?
Recently, we entered into a five-year global licensing agreement with Stone Brewing. Stone Brewing is the nation’s seventh largest craft brewery with products sold in all 50 states and internationally. We intend to build a strong direct-to-consumer business by marketing the coffee line to craft beverage customers on a dedicated website www.stoneroasting.com. We also intend to distribute Stone Brewing specialty coffee products through a wholesale network of natural grocery, traditional grocery and convenience store channels as well as office coffee and hotel brokers and distributors. In order to assist in building out the wholesale network, we engaged C.A. Fortune, a consumer brands agency, to spearhead sales and marketing efforts.
Under the Stone Brewing License Relationship, we will produce a full line of specialty products including DRIPKIT, single-serve brew bags and 12 ounce bagged coffees. The full line of products will be distributed both direct-to-consumer and through the wholesale network. The products will adopt the branding and flavor characteristics of three of Stone’s most popular brands. We will also periodically introduce new flavors to provide consumers the opportunity to try additional options under the Stone Brewing Coffee brand.
Revolutionizing the single serve coffee market in North America
We believe the typical coffee consumer is increasingly focused on the environmental impact of the product, as well as the taste and quality of the ingredients. We anticipate that traditional pod-based, single serve coffee will face increasing pressure given their heavy reliance on the use of plastics. In our view, consumer preferences in North America have evolved over the last decade to substantially mirror those of Japanese consumers, who have traditionally focused on the taste, eco-footprint and quality of ingredients.
We believe that the saturation of coffee pods in the North American market, coupled with changing tastes, provides our single serve coffee products with a substantial market opportunity in North America. Accordingly, we believe there are opportunities for growth in the North American market for our single serve pour over and coffee brew bag products. Our single serve coffee products also have a number of advantages over other single serve coffee alternatives:
| ● | Our single serve coffee solutions are portable and do not require a machine for brewing. Therefore, the consumer investment required to enjoy our product is very minimal (as opposed to machine-based solutions). Single serve coffee products can easily travel and have a number of consume-later applications not available to machine-based solutions (camping, travel, office, etc.). | |
| ● | We believe our product offerings are more hygienic than other, machine-based single serve alternatives. For example, the use of a machine requires cleaning and maintenance. If not periodically cleaned or if spent pods are not removed timely, this can lead to poor taste and bacterial growth. | |
| ● | Our single serve coffee products allow consumers to brew only what they need, therefore allowing mindful, responsible consumption that can reduce food and water waste and leads to better coffee sustainability. |
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We seek to establish ourselves as the premier manufacturer of single serve coffee products for the North American market and to produce innovative coffee products that we believe will promote sustainability. We also seek to further expand our own brands of single serve coffee products for sale directly to end consumers in order to generate increased revenues and to help accelerate consumer adoption of these brewing formats. We believe that top tier brands that want to compete in the North American single serve coffee market will demand the highest levels of quality from their manufacturing partners. We further believe that we remain a commercial-scale leader in the single serve coffee market in North America as a result of our history of working with sophisticated packing equipment manufacturers, SQF Certification from the Safe Quality Food Institute, organic certification, our commitment to sustainability, operational knowledge and the co-packing arrangements we are continuing to develop with companies. As a result of our ongoing efforts, we feel we are well positioned to be a “go-to” coffee producer for companies offering single serve coffee products in the North American market.
We understand that as single serve pour over and coffee brew bag coffee products gain momentum in the North American market we will face increasing competition. However, (i) we have, and continue to develop, manufacturing expertise on increasingly complex and larger orders, (ii) we have experience dealing with companies of all sizes and their specific requirements (from small roasters to international companies) and (iii) we have SQF, organic and Kosher certification. We received SQF Certification from the Safe Quality Food Institute, which is a customary requirement to produce for large multi-national and international companies.
Our primary focus is the development of single serve coffee products in the North American market targeting the individual consumer for use at home and office or other settings that would benefit from single serve product offerings and positioning ourselves as the leading commercial-scale co-packer of single serve pour over and coffee brew bag coffee products. We also co-package other products, such as bagged coffees, that are complementary to our current single serve coffee product offerings and provide us with a deeper access to our customers.
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 our manufacturing facilities. We have also expanded our co-packing expertise and product offerings to coffee brew bag products, which we believe are gaining traction in the United States, as well as our DRIPKIT pour over products. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.
Capitalizing on the existing bagged coffee market
Recently, we agreed to begin producing bagged coffee products in a 12 ounce format for one of our largest customers. The customer has a developed market and distribution network for both bagged coffees and coffee brew bag products. Expanding our existing relationship with this customer allows us to increase our manufacturing volume and efficiency by focusing on larger production runs. The customer has indicated to us that it expects continued growth in the single serve products and the bagged coffee purchases from us. We are continuing to explore additional product manufacturing opportunities with this customer as well as other customers.
We also entered into a five-year global licensing agreement with Stone Brewing to produce a full line of specialty products including DRIPKIT, single-serve brew bags and 12 ounce bagged coffees. Entering the bagged coffee market allows us to leverage our marketing, production and inventory investments across a wide product line while continuing to build our single serve market.
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Our sources of revenue
Co-packing
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, our co-packing customers typically supply us with roasted, whole bean coffee that we package into single serve pour over and coffee brew bag coffee products according to their formulations and specifications. In addition, under our private label coffee development program, our team works directly with our co-packing customers in developing private labels of signature coffees. Under this program, our team of coffee experts works extensively with our co-packing customers to develop a coffee taste profile to their unique needs and then we source, roast (utilizing our third-party roasting or manufacturing partners), blend, pack (in either our traditional single serve pour over, DRIPKIT pour over or coffee brew bag coffee products), and package single serve coffee products to their exact specifications.
We currently focus on fostering co-packing arrangements with larger companies developing pour over and coffee brew bag coffee products, in addition to smaller scale, innovative companies that we believe are rapidly growing, as further described below. We believe that as our potential co-packing customers continue to realize that we have the experience co-packing for a variety of customer sizes, we will become the co-packer of choice. The standards required to co-pack for large international companies almost always meet or exceed the standards required to co-pack for any other customer. We also believe that as our co-packing customers’ competitors realize they have single serve pour over and coffee brew bag coffee solutions, they will be more motivated to develop their own such solutions and that will lead to increased co-packing opportunities for us.
In addition to larger companies, we package for smaller companies that we believe have significant growth potential. For example, we started packaging for a particular smaller company in 2017 and continue to do so today. This company started with smaller batch, single product offerings but over the years has meaningfully increased order sizes as well as the number of product offerings. We are continually looking for new and innovative companies with whom we may work and grow.
NuZee and DRIPKIT branded products
Although our primary focus is on the manufacture of single serve coffee products pursuant to co-packing arrangements with our co-packing clients, we have also developed high-quality NuZee branded single serve coffee products that, in addition to our DRIPKIT branded products, are sold directly to consumers. In addition to being available for direct sale to consumers, our NuZee and DRIPKIT branded products serve as samples that are provided to potential new co-packing customers to showcase our co-packing capabilities and production expertise.
Our NuZee branded products are from our perspective a ‘stepping-stone’ product for our co-packing customers that market high quality packaging and coffee. Sales of our NuZee branded products also help promote consumer adoption into the format and to educate coffee drinkers in the United States about this coffee format that is new to North America but widely known in East Asia.
In addition to our other NuZee branded products, our premium 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. We offer DRIPKIT pour over packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and co-pack for coffee roasters.
International operations
Korea
We established our Korean subsidiary in 2018. We are one of many producers of single serve pour over coffee products in Korea and do not have any exclusive rights for this region. Our strategy is to leverage our local relationships to secure large co-packing agreements for the markets in Korea, China and other Asian countries.
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Latin America
In January 2020, we entered into a Joint Venture Agreement (the “JV Agreement”) with Industrias Marino, S.A. de C.V., a company incorporated under the laws of Mexico (“El Marino”), to form a joint venture in Mexico between us and El Marino in Mexico (“NuZee Latin America”). NuZee Latin America is organized under the laws of Mexico. To date, the primary activities in NuZee Latin America were the contribution of two machines, and start up and initial marketing and sales activities. Its primary business operations are intended to consist of the manufacture of single serve coffee products for sale in Mexico, Central and South America. The sales activities generated thus far are minimal.
Our customers and products
Our co-packing customers primarily include large and small size coffee roasters and food service companies. We intend to continue to pursue such co-packing arrangements in the future. We believe this customer interest is primarily due to (i) the saturation of machine based single serve coffee alternatives, (ii) increase in consumer requirements for eco-friendly packaging and (iii) our superior taste compared to other single serve coffee alternatives.
We also sell our NuZee and DRIPKIT branded products directly to consumers. Currently, Amazon and our Coffee Blenders website are our only established domestic retail channels for direct sales to consumers of NuZee branded products, and our DRIPKIT products are sold through our Dripkit website.
We plan to sell Stone Brewing licensed products both direct-to-consumer through a variety of channels and through a wholesale network.
Raw Materials
Under our co-packing arrangements, our co-packing customers typically supply us with roasted, whole bean coffee that we then produce and package into single serve pour over and coffee brew bag coffee products according to their formulations and specifications. In addition, in connection with the production of our NuZee and DRIPKIT branded products and specialty coffees that we have developed for co-packing customers under our private label coffee development program, we source and purchase green coffee from multiple green coffee suppliers, and from multiple regions around the world. After being sourced by us, the green coffee is then shipped to our roasting or manufacturing partners where the coffee is roasted and then shipped to us for grinding, blending, packing, and packaging. Maintaining a steady supply of roasted coffee beans from our co-packing customers is essential to our co-packing arrangements, and securing an adequate supply of green coffee is essential to our ability to manufacture NuZee and DRIPKIT branded products and to support the development of private labels for our co-packing customers under our private label development program. We have arrangements based on purchase orders in place with suppliers and partners for all components required to provide our co-packing services and deliver our NuZee and DRIPKIT branded products.
Our principal packaging materials include filters, foils, cartons, and craft master cases. We conduct business with multiple vendors of packaging materials on a purchase order basis.
Operational capacity
We currently lease manufacturing facilities in Vista, California and Seoul, Korea to produce our single serve pour over, coffee brew bag products, DripKit products and bagged coffees. In addition, we partner with other manufacturers to roast and package our products.
As a result of our capital investments since 2015, including our acquisition of packing equipment from manufacturers whom we believe are the global leaders for supplying such machines, we presently have the annual capacity to produce up to 150 million single serve coffee products (pour over or coffee brew bags) at our two manufacturing facilities, which we believe is sufficient to meet our current and anticipated manufacturing requirements. In addition, in May 2022, we announced a new partnership pursuant to which a manufacturing partner in Knoxville, Tennessee has agreed to provide us with additional manufacturing, coffee roasting and co-packing capabilities, and facilitate distribution efforts to the Eastern United States. Further, in March 2023, we entered into a manufacturing agreement with a California-based coffee roaster to expand the Company’s footprint on the West Coast.
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Our executive office and administrative operations are now located in Vista and Carlsbad, California.
We own high-quality and sophisticated packing equipment developed by premier East Asian suppliers for pour over and coffee brew bag coffee production. We believe these manufacturers are the world leaders for supplying such machines. Nitrogen and air compression machinery is capable of handling expansion, which helps to minimize any ongoing related capital expenditures for such machinery as we expand.
In order to satisfy the demand for bagged coffee production for our largest customer as well as our new Stone Coffee brand product line, we will be investing in additional equipment to increase our capacity for bagged coffee production.
Distribution
For distribution of our single serve coffee products to our co-packing customers, we typically rely on the distribution networks of our co-packing customers, including freight companies and common carriers arranged by them. At the request of our co-packing customers, we may also utilize a freight broker for the distribution and delivery of our products according to our co-packing customers’ instructions. Our NuZee and DRIPKIT branded products as well as bagged coffee products are typically delivered by common carriers directly to each customer or by direct delivery in the case of our direct-to-consumer customers.
Competition
Prior to the success of coffee pods within the last two decades, coffee was primarily consumed at home and via traditional pot-based drip brewers and, to a lesser extent, instant coffee. Pot-based brewers are typically known for good quality coffee that produces multiple cups but are not well-suited for single serve alternatives. In recent years with the advent of coffee pods and increased coffee consumption outside the home, the North American market has been focused on speed and convenience. Coffee pods addressed the need for a single serve coffee solution that was viewed as superior to instant coffee. As coffee consumption has also moved outside the home in recent years, consumer preferences have also changed, leading to greater demand for higher quality coffee alternatives.
The beverage industry in general, and the coffee sector, is extremely competitive. The principal areas of competition include product, quality, convenience, price, packaging, development of new products and flavors, and marketing campaigns. Our Coffee Blenders, DRIPKIT and other NuZee branded products are competing directly with Green Mountain brands and other licensed brands, as well as third-parties in the single serve coffee category who have similar formats to our products. Green Mountain brands have enjoyed broad, well-established national distribution through well-funded advertising, and product awareness. Our Coffee Blenders, DRIPKIT and other NuZee branded products also compete generally with all hot liquid refreshments, including specialty coffees and teas. Companies and brands manufacturing these products generally have far greater financial, marketing, and distribution resources than we do.
Important factors that will affect our ability to compete successfully include functional delivery of our products and co-packing services, trade and consumer promotions, the development of new, unique functions in new and various packaging formats, attractive and unique promotions, branded product advertising, pricing, and the success of the distribution networks on which we rely.
We also compete to secure distributors who will agree to market our product over those of our competitors, provide stable and reliable distribution, and secure adequate shelf space in retail outlets and search placement in online stores.
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Our competitive strengths
We believe that the following strengths contribute to our success:
| ● | Favorable industry trends benefit us. With changing consumer preferences over the last decade that include a greater demand for higher quality coffee alternatives as well as greater flexibility and convenience, we believe we provide a unique alternative to non-single serve drip products currently on the market. For example, we believe our single serve coffee products, including our traditional single serve pour over coffee products, DRIPKIT pour over products and coffee brew bag products, provide a premium alternative to other single serve coffee alternatives. Recent consumer trends are moving towards premium alternatives to existing mainstream products (i.e., gourmet burgers, craft beers, specialty sodas, organic supermarkets, etc.). |
| ● | Significant production and operational experience in single serve coffee products. We have been producing single serve coffee products for over five years in increasing scale and complexity. We believe the process and equipment for producing single serve coffee products is complex, and a potential new entrant into our market would encounter a significant learning curve to reach our level of operational experience and expertise. |
| ● | Co-packing agreements with large companies. We currently focus on fostering co-packing arrangements with larger companies developing single serve coffee products. We believe that as our potential co-packing customers continue to realize that we have the experience co-packing for a variety of customer sizes, we will become the co-packer of choice. The standards required to co-pack for large international companies almost always meet or exceed the standards required to co-pack for any other customer. We also believe that as our co-packing customers’ competitors realize they have single serve pour over and tea-bag style coffee solutions, they will be more motivated to develop their own such solutions and that will lead to increased co-packing opportunities for us. |
| ● | Private Label Coffee and Co-Packing Private Label Programs. Under our Private Label Coffee Program, we offer our services primarily to non-coffee roaster customers pursuant to which our team works directly with them in developing private labels of signature coffees. Under this program, our team of coffee experts works extensively with our co-packing customers to develop a coffee taste profile to their unique needs and then we source, roast (utilizing our third party roasting or manufacturing partners), blend, pack (in either our traditional single serve pour over, DRIPKIT pour over or coffee brew bag coffee products), and package single serve coffee products to their exact specifications. Under our Co-Packing Private Label Program, coffee roasters that are incapable of packing single serve formats send us their coffee of choice, which we pack into our single serve formats on their behalf. |
| ● | SQF and other certifications. SQF Certification from the Safe Quality Food Institute can take up to a year and may require additional resources to obtain. Our existing SQF certification allows us to co-pack for large, diversified companies. These companies usually have very strict certification standards and will not outsource production to companies that do not meet the highest level of industry certifications. SQF certification requires us to meet very high quality and compliance standards for production and warehousing as well as chain of custody record keeping and supplier standards. We are also certified as organic and Kosher. In addition, we are committed to sustainability. Our single serve coffee products do not require a machine to prepare, and we use coffee brew bag filters intended to be industrially compostable, along with recyclable boxes. |
| ● | Our Korean subsidiary supports our U.S. operations. We have a manufacturing and sales office in Korea. Our strategy is to leverage our local relationships to secure large co-packing agreements for the markets in Korea, China and other Asian countries. We also source our manufacturing equipment and filters from East Asian companies. For example, our single serve coffee products are produced on packaging machines produced by leading manufacturers of packaging machines in Asia. We believe that having an office in Korea provides us with direct access to our key vendors that helps us to maintain such relationships as well as helps us operationally in our core U.S. market. |
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Our business strategy
We intend to achieve our mission and further grow our business by pursuing the following strategies:
| ● | Continually grow our base of large national or international co-packing customers. In furtherance of our goal to become the “go-to” commercial coffee producer and preeminent partner for coffee companies seeking to enter into and grow within the single serve coffee market in North America, we focus on entering into co-packing agreements with large international companies, including co-packing arrangements pursuant to our private label coffee development program. We also intend to continue to educate and advocate for the development of pour over coffee products within the broader single serve category. We believe that, as the U.S. market continues to gain awareness of our traditional single serve pour over, DRIPKIT pour over and coffee brew bag coffee products, we will continue to grow our base of large domestic or international co-packing customers. | |
| ● | Co-pack for smaller scale, innovative coffee customers that we believe are rapidly growing and capture their growth over time. In addition to co-packing for large domestic or international customers, we believe that select smaller scale, rapidly growing, innovative co-packing customers provide us with different opportunities versus larger customers. Large national roasters often look to these smaller scale customers for inspiration. We believe capturing these influential roasters would help us provide format visibility to the bigger roasters as well as influential consumers. | |
| ● | Efficiently grow our manufacturing footprint and capacity, including by leveraging partnerships, in response to anticipated demand for co-packing. We intend to leverage our previously announced partnerships in Knoxville, Tennessee and California to provide us with additional manufacturing, coffee roasting and co-packing capabilities, and facilitate distribution efforts. With these partnerships, we expect to offer a holistic coffee supply and manufacturing program to our existing and new customers, including coffee roasting and non-single serve coffee product co-packing in addition to our other single serve coffee formats. | |
| ● | Strategically grow and expand our international operations that align with our vision. We plan to strategically grow our current international operations as well as potentially expand internationally if this growth or expansion is strategic to our vision. We believe the Korean market, albeit competitive, still has significant growth potential as well as strong market acceptance for coffee and single serve pour overs. We have also formed a joint venture in Latin America. |
Risks Associated with Our Business and History of Losses
We have incurred net losses since we commenced operations as NuZee, Inc. in 2013, including net losses of $8.75 million and $11.8 million for the years ended September 30, 2023 and 2022, respectively. As of September 30, 2023, our accumulated deficit was approximately $73.4 million. We expect to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset existing expenses. In the United States, we expect to incur additional losses as a result of the costs associated with operating as an exchange-listed public company.
Recent Developments
Entry into the existing bagged coffee market
Recently, we agreed to begin producing bagged coffee products in a 12 ounce format for one of our largest customers. The customer has a developed market and distribution network for both products. Expanding our existing relationship with this customer allows us to increase our manufacturing volume and efficiency by focusing on larger production runs. The customer has indicated to us that it expects continued growth in the single serve products and the bagged coffee purchases from us to increase over single serve purchase amounts. We are continuing to explore additional product manufacturing opportunities with this customer as well as other customers.
We also entered into a five-year global licensing agreement with Stone Brewing to produce a full line of specialty products including DRIPKIT, single-serve brew bags and 12 ounce bagged coffees. Entering the bagged coffee market allows us to leverage our marketing, production and inventory investments across a wide product line while continuing to build our single serve market.
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Intellectual Property
Trademarks
We currently own the following United States trademarks: “Coffee Blenders”, “Twin Peaks”, “Active Cup”, “Relax Cup”, “Think Cup”, “Nude Cup”, “Pine Ranch Coffee”, and “Dripkit”. We are also in the process of obtaining rights to the “Dripkit and Design,” “NuZee”, “NuZee Coffee (Stylized)”, “NuZee Coffee and Design”, and “COLDPRESSO” trademarks. We intend to continue growing our trademark portfolio in the United States with other related slogans and brands as new products are launched.
We further intend to expand our brand protections outside of the United States in line with our prospective international growth. As of the date of this Report, we have the following registered trademarks:
| ● | Japan - “Coffee Blenders”; “Twin Peaks”; “Nuzee Coffee and Design”; “Active Cup”; “Nude Cup”; “Think Cup”; “Relax Cup”; “Lean Cup” | |
| ● | Korea - “Twin Peaks”; “It’s Coffee Reimagined”; “Think Cup”; “Lean Cup” | |
| ● | Canada – “NuZee Coffee and Design”; “NuZee”; “NuZee Coffee (Stylized)” | |
| ● | Mexico - “NuZee”, “NuZee Coffee (Stylized)”, “NuZee Coffee and Design”; “It’s Coffee Reimagined” |
We also have pending applications for “Dripkit (Words only)” and Design in Japan, Mexico, and Korea; and “Dripkit and Design” in Canada, Japan, and Korea.
Patents
We currently own the following patents relating to our DRIPKIT pour over product: (1) a U.S. design patent that protects the visual ornamental characteristics associated with the DRIPKIT pour over coffee apparatus design, which expires in November 2035; (2) a U.S. utility patent that covers utility patent features of the DRIPKIT portable drip apparatus, which expires in July 2038; and (3) one pending utility patent application that is a continuation patent application for pursuing broader/different utility patent features for the DRIPKIT portable drip apparatus, which is currently pending and awaiting examination. Patent rights (1) and (2) stem from the Acquisition of Dripkit in 2022.
We intend to aggressively protect, police and assert our intellectual property rights, including product designs, proprietary product research and concepts as well as our trademark portfolio. Although asserting our rights may result in a substantial cost to the Company, our management strongly believes that the protection of our intellectual property rights is a key component of our operating strategy.
Employees
As of September 30, 2023, we had a total of 18 employees in the United States and 15 employees in Korea, all of whom are full-time. In addition, at September 30, we employed 5 temporary employees in the United States, all of whom are involved in the packaging and shipping of products. None of our employees are represented by a labor organization or under any collective bargaining arrangements. We believe our relationships with our employees are good.
Our operations are overseen directly by management that engages our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration, product development, marketing, and research. We may expand our current management to retain other skilled directors, officers, and employees with experience relevant to our business focus. Our management’s relationships will provide the foundation through which we expect to grow our business in the future. We believe that the skill sets of our core management team will be a primary asset in the development of our brands and trademarks.
Governmental Regulation
Our Coffee Blenders, DRIPKIT and other NuZee branded products are marketed and sold as conventional food or beverages for regulatory purposes. Such products are regulated by the FDA. Ingredients in such products must be approved food additives or “Generally Regarded as Safe”. We intend to work with ingredient suppliers, manufacturers, and other trade partners that are compliant with the laws and regulation enforced by the FDA. We have not received, nor are we aware of, any inquiries or other regulatory action from the FDA or any other governmental agency regarding our products and we believe we are in full compliance with all FDA regulations.
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The advertising, distribution, labeling, production, safety, sale, and transportation in the United States of our products are subject to the Federal Food, Drug, and Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, competition laws, federal, state and local workplace health and safety laws, various federal, state and local environmental protection laws, and various other federal, state and local statutes and regulations. We believe we are compliant with all applicable laws and regulations. We have not received and are not aware of any inquiries or other legal or regulatory actions from any entity.
Corporate Information
We were incorporated in 2011 in Nevada as Havana Furnishings, Inc. NuZee Co. Ltd. was incorporated in 2011. NuZee Co. Ltd. merged into Havana Furnishings, Inc. in 2013, at which time we changed our name to NuZee, Inc. Our principal executive and administrative offices are located at 2865 Scott St. Suite 107, Vista, California 92081, and our telephone number is (760) 295-2408.
On December 9, 2022, at a Special Meeting of Stockholders, 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 the Company’s Articles of Incorporation, as amended (the “Articles”), which amends the Articles to add a Section 1A to effect a reverse stock split of the Company’s common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s discretion. On December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of Nevada (the “ 2022 Reverse Stock Split”).
On September 20, 2022, Nasdaq notified us that, for 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until March 20, 2023, to regain compliance with the Bid Price Rule. In order to regain compliance, the bid price of our common stock must close at a price of at least $1.00 per share for a minimum of 10 consecutive trading days. As of the date of this Report, we regained compliance with the Bid Price Rule. The 2022 Reverse Stock Split decreased the total number of shares of our common stock outstanding and proportionately increased the market price of our common stock above $1.00 per share. Therefore, the 2022 Reverse Stock Split was an effective means for us to regain compliance with the Bid Price Rule.
On January 17, 2023, the Company received a letter from the Staff notifying the Company that the Staff has determined that for the last 10 consecutive business days, from December 29, 2022 to January 13, 2023, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2).
In June 2020, our common stock commenced trading on the Nasdaq Capital Market under the symbol “NUZE.” Prior to that, our common stock was quoted on the OTCQB Marketplace under the same symbol.
We have two international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”), and NuZee Investment Co., Ltd. (“NuZee INV”). NuZee KR and NuZee INV are wholly owned subsidiaries of the Company. We also have a joint venture in Mexico, as further discussed above.
Available Information
Our annual and quarterly reports, along with all other reports and amendments filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our website at www.mynuzee.com as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our website and the information contained on, or that can be accessed through, the website will not be deemed to be incorporated by reference in, and are not considered part of, this Report. Our corporate governance policies, ethics code and board of directors’ committee charters are posted under the Investor Relations section of the website. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
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ITEM 1A. RISK FACTORS
Risk Factor Summary
The risk factors summarized below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our common stock to decline. These risks are discussed more fully in the section titled “Risk Factors.” Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, the following:
| 1. | We have a history of net losses. We expect to continue to incur net losses in the future and we may never generate sufficient revenue to achieve or sustain profitability. | |
| 2. | Our independent auditor’s report for the fiscal year ended September 30, 2023 includes an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern, and absent additional financing we may be unable to remain a going concern. | |
| 3. | We expect to need to obtain additional capital to fund our existing operations and, if we are unable to obtain such financing, we may be unable to continue to operate as a going concern. | |
| 4. | We have limited operating history, which may make it difficult to evaluate our current business and to forecast our future performance. | |
| 5. | Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations. | |
| 6. | A substantial portion of our sales are completed on a purchase order basis. Customers may issue fewer or smaller purchase orders than we expect under our co-packing or retail fulfillment arrangements or decide to delay or cancel orders, which could negatively impact our revenues. | |
| 7. | Sales to a limited number of customers represent a significant portion of our net sales. The loss of a key customer and efforts by our customers to improve their profitability could reduce sales of NuZee branded products and revenues generated from our co-packing services and adversely affect our financial performance. | |
| 8. | Continued innovation and the successful development and timely launch of new products and co-packing services are critical to our financial results and achievement of our growth strategy. | |
| 9. | Our future financial results are difficult to predict, and failure to meet market expectations for our financial performance or any publicly announced guidance may cause the price of our stock to decline. | |
| 10. | Increased competition, including as a result of industry consolidation, could hurt our businesses, and changes in the coffee, tea and beverage environment and retail landscape could impact our financial results. | |
| 11. | Our business, growth and profitability depend on the performance of third-parties and our relationship with them, including third-party coffee roasters and manufacturing partners. | |
| 12. | Interruption or increased costs of our supply chain and sales network, including a disruption in operations at any of our facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales. | |
| 13. | The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business. | |
| 14. | Because our management structure is not centralized, the management of our business operations may be more expensive and more difficult. | |
| 15. | Increases in the cost or decreases in the availability of high-quality coffee beans or other commodities could have an adverse impact on our business and financial results. Additionally, price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines. | |
| 16. | We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy. | |
| 17. | Any failure by us to accurately forecast customer demand for our products and co-packing services, or to quickly adjust to forecast changes, could adversely affect our business and financial results. | |
| 18. | We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and co-packing services, which would harm our competitive position. Additionally, we may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations. |
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| 19. | Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results. | |
| 20. | Our business operations could be disrupted due to miscommunications or translation errors. Additionally, our international sales and operations subject us to additional legal, regulatory, financial and other risks. | |
| 21. | Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products. | |
| 22. | The market price of our stock may be volatile, and you could lose all or part of your investment. | |
| 23. | Despite our listing on the Nasdaq Capital Market, there can be no assurance that an active trading market for our common stock will be sustained. | |
| 24. | The Nasdaq Capital Market may subsequently delist our securities if we fail to comply with ongoing listing standards. | |
| 25. | If we attempt to raise additional capital through an announced offering you may experience an immediate decline in the value of your investment. You will experience further dilution if we issue additional equity securities in future financing transactions. | |
| 26. | 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. | |
| 27. | We have broad discretion in the use of the net proceeds from stock offerings and may not use them effectively, which could affect our results of operations and cause our stock price to decline. | |
| 28. | We incur significant costs as a result of operating as a public company, and our management must devote substantial time to compliance initiatives as a result of the listing of our common stock on the Nasdaq Capital Market. | |
| 29. | We expect to incur significant costs and devote substantial management time to maintaining our disclosure controls and procedures and internal control over financial reporting, and regardless we may be unable to prevent or detect all errors or acts of fraud or to accurately and timely report our financial results or file our periodic reports in a timely manner. If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud. | |
| 30. | Anti-takeover provisions in our third amended and restated bylaws and Nevada law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our securities. | |
| 31. | We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any profits from an investment in our common stock will depend on whether the price of our common stock increases. | |
| 32. | Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us. | |
| 33. | Product safety and quality concerns could negatively affect our business. | |
| 34. | If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged. | |
| 35. | Currently pending, threatened or future litigation or governmental proceedings or inquiries could result in material adverse consequences, including judgments or settlements. | |
| 36. | Future acquisitions of and investments in new businesses could impact our business and financial condition. |
In addition to the other information set forth in this Report and other filings we have made and make in the future with the SEC, you should carefully consider the following risk factors and uncertainties, which could materially affect our business, financial condition or results of operations in future periods. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.
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Risks Related to Our Financial Condition and Capital Requirements
We have a history of net losses. We expect to continue to incur net losses in the future and we may never generate sufficient revenue to achieve or sustain profitability.
We have incurred net losses since our inception in 2013, including net losses of $8.75 million and $11.8 million for the years ended September 30, 2023, and 2022, respectively. As of September 30, 2023, our accumulated deficit was approximately $73.4 million. We expect to incur significant sales and marketing expenses, as well as costs associated with operating as an exchange-listed public company, prior to recording sufficient revenue from our operations to offset these expenses.
These losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity. Our ability to become and remain profitable will depend on our ability to generate significantly higher revenues from the sales of our single serve coffee products, co-packing services and bagged coffee production and packaging, which depends upon a number of factors, including but not limited to successful sales, manufacturing, marketing and distribution of our products and services.
Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then sustain profitability would have a material adverse effect on our business and financial condition.
Our independent auditor’s report for the fiscal year ended September 30, 2023 includes an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern, and absent additional financing we may be unable to remain a going concern.
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. The Report of Independent Registered Public Accounting Firm at the beginning of the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Report includes an explanatory paragraph about our ability to continue as a going concern.
Our Consolidated Financial Statements for the year ended September 30, 2023 were prepared on the basis of a going concern, which contemplates that we will be able to realize our assets and discharge liabilities in the normal course of business. Our ability to meet our liabilities and to continue as a going concern is dependent upon the availability of future funding. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
In addition, our current financial situation, and the presence of the explanatory paragraph about our ability to continue as a going concern, could also make it more difficult to raise the capital necessary to address our current needs and may materially adversely affect the price of our common stock.
We expect to need to obtain additional capital to fund our existing operations and, if we are unable to obtain such financing, we may be unable to continue to operate as a going concern.
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. This evaluation is based on relevant conditions and events that are currently known or reasonably foreseeable. A reduction in consumer demand for, or revenues from the sale of, our single serve coffee products, co-packing services and bagged coffee production and packaging could further constrain our cash resources.
We intend to seek to raise additional capital through public or private equity offerings. However, we may not be able raise such additional capital on favorable terms or at all. If we are unsuccessful in efforts to raise additional capital, based on our current 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.
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We may also consider raising additional capital in the future to expand our business, to pursue strategic investments or acquisitions, to take advantage of financing opportunities or for other reasons, including to:
| ● | fund development of our products and co-packing services; | |
| ● | acquire, license or invest in technologies or intellectual property relating to our existing products; | |
| ● | acquire or invest in complementary businesses or assets; and | |
| ● | finance capital expenditures and general and administrative expenses. |
Our present and future funding requirements will depend on many factors, including:
| ● | success of our current marketing efforts; | |
| ● | our revenue growth rate and ability to generate cash flows from sales of our products and co-packing services; | |
| ● | effects of competing technological and market developments; and | |
| ● | changes in regulatory oversight applicable to our products. |
The various alternatives for raising additional capital include short-term or long-term debt financings, equity offerings, collaborations or licensing arrangements and each one carries potential risks. If we raise funds by issuing equity securities, our stockholders will be further diluted. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations or our ability to issue additional equity securities or issue additional indebtedness. We may also be required under additional debt financing to grant security interests on our assets, including our intellectual property. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our intellectual property, or grant licenses on terms that are not favorable to us which could lower the economic value of those items to us.
The credit markets and the financial services industry have in the past experienced turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and intervention from the U.S. federal government. Furthermore, the capital markets and the financial services industry are currently and expected to continue to be unpredictable and volatile. These events typically make equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. If we cannot secure additional funding when needed, including due to changes in our business plan, a lower demand for our products or co-packing services or other risks described in this Report, we may have to delay, reduce the scope of or eliminate one or more sales and marketing initiatives and development programs, which would have a materially adverse effect on our business.
We have limited operating history, which may make it difficult to evaluate our current business and to forecast our future performance.
We have little operating history and are addressing an emerging market. As a result, our current and future business prospects are difficult to evaluate. All potential investors must consider our business prospects in light of the risks and difficulties we have encountered and will continue to encounter as a company operating in a rapidly evolving market. Some of these risks relate to our potential inability to:
| ● | effectively manage our business and proprietary information; | |
| ● | recruit and retain sales and marketing, technical and managerial personnel; | |
| ● | recruit and retain appropriate distributor relationships; | |
| ● | successfully develop and protect our intellectual property portfolio; | |
| ● | successfully provide high quality products and co-packing services as our business expands; and | |
| ● | successfully address other risks, as described in this Report or otherwise. |
If we do not address these risks successfully, it could have a material adverse effect on our business and financial condition.
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Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
The Tax Cuts and Jobs Act (the “TCJA”), enacted in 2017, limited the use of net operating loss carryforwards arising in periods beginning after 2017 to eighty-percent of taxable income in the period to which the losses are carried. The TCJA also extended the expiration period for net operating losses arising in periods after 2017 from 20 years to an unlimited period.
However, the taxable income limitation on the use of net operating loss carryforwards was eliminated by the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) for tax years beginning before January 1, 2021. We may not be able to utilize our existing net operating losses or any portion thereof in the current tax year or any available carryforward period.
In addition, Section 382 may limit the utilization of net operating loss carryforwards. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, and certain other tax attributes to offset future taxable income or reduce taxes. Our past issuances of stock and other changes in our stock ownership may have resulted in one or more ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. State NOL carryforwards may be similarly limited. Furthermore, transactions in our stock that have occurred in the past and could occur in the future may trigger another ownership change pursuant to Section 382. Because of the cost and complexity involved in the analysis of a Section 382 ownership change and the fact that we do not have any taxable income to offset, we have not undertaken a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Finally, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, even if we attain profitability, we may not be able to use a material portion of our NOLs, and this could reduce our earnings and potentially affect the valuation of our stock.
Risks Related to Our Business
A substantial portion of our sales are completed on a purchase order basis without any written agreements, including sales under our co-packing arrangements as well as purchase orders for NuZee branded products from nationally recognized retailers. Such co-packing customers or retailers may issue fewer or smaller purchase orders than we expect under our co-packing arrangements, which could negatively impact our revenues. In addition, although these purchase orders are generally not cancelable, such customers may decide to delay or cancel orders, which could also negatively impact our revenues.
Generally, under our co-packing arrangements as well as our fulfillment of purchase orders for the distribution of NuZee branded products through nationally recognized retailers, customers must issue purchase orders for our products and co-packing services. Although these purchase orders stipulate key terms including order quantity, product specifications, price, payment terms, packaging method and delivery instructions, our co-packing arrangements and our arrangements with nationally recognized retailers are typically not governed by any written agreement and have no ongoing minimum purchase requirements. Accordingly, we cannot predict or make any guarantee of the amount of any future orders from co-packing customers or national retailers. In addition, although orders covered by firm purchase orders are generally not cancelable, customers may decide to delay or cancel orders, and we may have difficulty enforcing the provisions of the purchase order. In the event that customers with whom we have co-packing or retail fulfillment arrangements issue fewer or smaller purchase orders than we expect, or we experience any delays or cancellations in orders (due to continued distress in the global economy for any reason, including supply chain disruptions, inflation, commodity price fluctuations, etc.), our revenues could decline substantially. Any such decline could result in us incurring additional net losses, increasing our accumulated deficit and needing to raise additional capital to fund our operations.
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Sales to a limited number of customers represent a significant portion of our net sales. The loss of a key customer, including by consolidation in the retail channel, and efforts by our customers to improve their profitability could reduce sales of NuZee branded products and sales from our co-packing services which would adversely affect our financial performance.
Sales to relatively few co-packing customers account for a significant percentage of our net sales, and our success depends in part on our ability to maintain good relationships with these and other key retail and grocery customers. Currently, Amazon and our Coffee Blenders website are our only established domestic retail channels for direct sales to consumers of NuZee branded products. However, we can provide no assurance that any of these customers or any of our other customers will continue to utilize our products or our co-packing services at current levels, or at all. We have arrangements with our co-packing customers primarily based on purchase orders which stipulate key terms including order quantity, product specifications, price, payment terms, packaging method and delivery instructions.
As a result, many of our key customers may cease purchasing our products or utilizing our co-packing services at any time without penalty and are free to purchase products from our competitors. There can be no assurance that our customers will continue to purchase our products or utilize our co-packing services in the same mix or quantities or on the same terms as they have in the past. The loss of one or more of our key customers, or cancellation of or reduction in the amount of purchases by our key customers, could have an adverse effect on our results of operations and financial condition.
In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer inventories to service consumers, these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.
Our industry is also being affected by the trend toward consolidation in the retail channel. Retailers have and will likely continue to seek lower prices from us and demand increased marketing or promotional expenditures. Large retailers also may be more likely to use their distribution networks to introduce and develop private label brands. Strategic partners may also choose to vertically integrate their brands’ manufacturing and distribution. Any of the foregoing could negatively affect sales of our products and co-packing services and our profitability.
Continued innovation and the successful development and timely launch of new products and co-packing services are critical to our financial results and achievement of our growth strategy.
Our primary focus is the development of single serve coffee products in the North American market targeting the individual consumer for use at home and office or other settings. Under our private label coffee development program, we intend to continue working with current and new customers in developing private labels of signature coffees and, in this regard, use our expertise to source, roast (utilizing our third-party roasting or manufacturing partners), blend, and package coffee to their exact specifications. We have also developed and sell NuZee and DRIPKIT branded products. Our growth strategy includes, among other things, further developing our NuZee and DRIPKIT branded product lines and growing our private label coffee development program to reach new co-packing customers, as well as increasing sales of our coffee brew bag and bagged coffee products. In the future, as part of our growth strategy, we may also consider co-packaging other products that are complementary to our current single serve coffee product offerings and provide us with a deeper access to our customers.
Our future success depends, largely, on our ability to implement these and our other growth strategies effectively. However, achievement of our growth strategy is dependent, among other things, on our ability to extend the product offerings of our existing brands and introduce innovative new products and co-packing services. Although we devote significant focus to the development of new products, including NuZee and DRIPKIT branded products, we may not be successful in developing innovative new products or our new products may not be commercially successful. We also may be unsuccessful in expanding our co-packaging services to other products that are complementary to our current single serve coffee product offerings. Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could be detrimental to our ability to successfully launch such new products and retain partners, in addition to potentially harming our reputation and customer loyalty. If we fail to implement our growth strategies or if we invest resources in growth strategies that ultimately prove unsuccessful, our sales and profitability may be negatively affected, which would materially and adversely affect our business, financial condition and results of operations. Our financial results and our ability to maintain or improve our competitive position will depend on our ability to effectively gauge the direction of our key marketplaces and successfully identify, develop, manufacture, market and sell new or improved products and co-packing services in these changing marketplaces.
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Our future financial results are difficult to predict, and failure to meet market expectations for our financial performance or any publicly announced guidance may cause the price of our stock to decline.
As we and our industry evolve, we expect to face new challenges with respect to our introduction of innovative products and the changing competitive landscape within the single serve category and the beverage industry. These challenges can occur at various stages, including design, supply chain and sales cycle. Any public forecasts regarding the expected performance of our business and future operating results are forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in our filings with the SEC and in our other public statements, and necessarily reflect current assumptions and judgments that may prove incorrect. As a result, there can be no assurance that our performance will be consistent with any public forecasts or that any variation from such forecasts will not be material and adverse. Failure to meet expectations, particularly with respect to operating margins, earnings per share, operating cash flows and net revenues may result in a decline and/or increased volatility in the price of our stock. In addition, broad price and volume fluctuations in the stock market as a whole, as well as general economic, business and political conditions, may adversely affect the price of our stock in ways that may be unrelated to our financial performance.
Our international sales and operations subject us to various additional legal, regulatory, financial and other risks.
We have a manufacturing and sales office in Seoul, Korea. We operate globally and are attempting to develop products and provide co-packing services in multiple countries. Consequently, we face complex legal and regulatory requirements in multiple jurisdictions, which may expose us to certain financial and other risks. International operations are subject to a variety of risks, including:
| ● | foreign currency exchange rate fluctuations; | |
| ● | greater difficulty in overseeing foreign operations; | |
| ● | logistical and communications challenges; | |
| ● | potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws; | |
| ● | burdens and costs of compliance with a variety of foreign laws; | |
| ● | political and economic instability; | |
| ● | foreign tax laws and potential increased costs associated with overlapping tax structures; | |
| ● | greater difficulty in protecting intellectual property; | |
| ● | the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our products; and | |
| ● | general social, economic and political conditions in these foreign markets. |
Increased competition, including as a result of industry consolidation, could hurt our businesses.
The beverage industry is intensely competitive and we compete with respect to product, quality, convenience, technology, innovation, and price. We face significant competition in each of our channels and marketplaces. We compete with major international beverage companies that operate in multiple geographic areas, many of which have greater financial and other resources than we do, as well as numerous companies that are primarily local in operation. Our NuZee and DRIPKIT branded products also compete against local or regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the global marketplace or in various local marketplaces or maintain or enhance our relationships with our partners and customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the food and beverage industry.
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Changes in the coffee, tea and beverage environment and retail landscape could impact our financial results.
The coffee, tea and beverage environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Our business, growth and profitability depend on the performance of third-parties and our relationship with them.
In connection with the manufacture of NuZee and DRIPKIT branded products and private labels for our co-packing customers under our private label development program, we rely on third-party roasters and manufacturing partners to roast green whole bean coffee according to our specifications before shipping to us for grinding, blending, packing and packaging. We also rely on our manufacturing partners to provide us with additional manufacturing, coffee roasting and co-packing capabilities, and facilitate distribution efforts throughout the United States. Our reliance on third-party roasters and manufacturing partners subjects us to additional risks, including the possible termination of the arrangement by a third-party roaster or manufacturing partner at a time that is costly or inconvenient for us. Our third-party roasters and manufacturing partners are independent entities subject to their own unique operational and financial risks that are out of our control. If any of these third-party roasters or manufacturing partners fail to perform as required, this could cause delays in our receipt of roasted whole-bean coffee that is necessary to manufacture our products and provide our co-packing services or otherwise adversely affect our business.
In addition, a significant portion of our distribution network, and correspondingly our success in distributing our single serve coffee products, depends on the performance of third-parties. Any non-performance or deficient performance by such parties may undermine our operations and profitability. For distribution of our single serve coffee products as well as our bagged coffee products to our co-packing customers, we typically rely on third party distribution networks, including freight companies and common carriers. At the request of our co-packing customers, we may also utilize a freight broker for the distribution and delivery of our products according to our co-packing customers’ instructions. The success of these distribution networks depends on the performance of brokers, distributors, common carriers and retailers, as well as our third-party manufacturing partners as it relates to distribution of certain of our products. There is a risk that a broker, distributor, common carrier or retailer may refuse to or cease to market or carry our product, or that any such entity or our third-party manufacturing partner may not adequately perform its functions within the network by, without limitation, failing to distribute our products.
Furthermore, such third-parties’ financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sale activities. We must also maintain good commercial relationships with third-party brokers, distributors and retailers so that they will promote and carry our product. Any adverse consequences resulting from the performance of third-parties or our relationship with them could undermine our operations and profitability.
Interruption or increased costs of our supply chain and sales network, including a disruption in operations at any of our facilities or our manufacturer partners’ facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
A disruption in operations at any of our facilities or any other disruption in our supply chain or increase in prices relating to service by our retailers, distributors, common carriers that ship goods within our distribution channels, or otherwise, whether as a result of shipping costs and delays, trade restrictions, casualty, natural disaster, weather, power loss, telecommunications failure, terrorism, labor shortages, contractual disputes, interruptions in port operations or highway arteries, pandemic, strikes, work stoppages, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business, adversely affect our relationship with our customers, and impact our financial condition or results of operations. In the fiscal years ended September 30, 2023 and September 30, 2022, we have experienced delays in the shipment to us of coffee and packaging materials for co-packing for a variety of reasons including seasonal availability, supply chain delays and supplier interruptions. To date, 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, but any such mitigation efforts may not be successful in the future.
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The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business.
Our success depends on the skills, experience and performance of key members of our senior management team. The individual and collective efforts of our senior management team will be important as we continue to expand our commercial activities and develop additional products. The loss or incapacity of existing members of our senior management team could have a material adverse effect on our business and financial condition if we experience difficulties in hiring qualified successors. Our employment agreements with our executive officers are “at will”, and the retention of our executive officers for any period of time cannot be guaranteed. We do not maintain “key person” insurance on any of our employees.
Due to the specialized nature of the business and our small size, we are highly dependent upon our ability to attract and retain qualified sales and marketing, technical and managerial personnel. The loss of the services of existing personnel, as well as the failure to recruit key sales, marketing, technical and managerial personnel in a timely manner would be detrimental to our development and could have a material adverse effect on our business and financial condition. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as sales and marketing, may require the addition of new management personnel, both domestic and international. All of our employees may terminate their employment at any time with short or no advance notice. We may have difficulties locating, recruiting or retaining qualified sales people. Recruiting and retention difficulties will limit our ability to support our development and sales programs and to build a commercially viable business.
The competition for talent is currently extremely high. In this competitive environment, our business could be adversely impacted by increases in labor costs, including wages and benefits, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets, and increased wages, and benefits and other costs. In addition, our wages and benefits programs, combined with the periodic challenges in the labor market, may be insufficient to attract and retain talent.
Because our management structure is not centralized, the management of our business operations may be more expensive and more difficult.
As part of our strategy to attract the most qualified individuals, we do not require the members of our management team to relocate to a particular geographic area. Accordingly, the members of our management team are geographically dispersed. This decentralized structure might cause additional expenses in the conduct of our business, and may also delay communication between members of our management team, lower the quality of our management decisions or decrease our ability to take action quickly.
Increases in the cost of high-quality coffee beans or other commodities or decreases in the availability of high quality coffee beans or other commodities could have an adverse impact on our business and financial results.
Under our co-packing arrangements, our co-packing customers typically supply us with roasted, whole bean coffee that we then produce and package into single serve pour over, DRIPKIT pour over and coffee brew bag coffee products according to their formulations and specifications. We also purchase green whole bean coffee from multiple green coffee suppliers to support the manufacture of our NuZee and DRIPKIT branded coffee products and the development of private labels under our private label development program, in which we work with co-packing customers in developing private labels of signature coffees by sourcing, blending, and packaging coffee to their exact specifications. After being sourced by us, the green whole bean coffee is then shipped to our roasting partners where the coffee is roasted and then shipped to us for grinding, blending and packaging.
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The price of coffee is subject to significant volatility, and may increase due to the factors described below. The high-quality coffee beans we and our co-packing customers seek tend to trade on a negotiated basis at a premium above the commodity trading price of coffee as quoted on the Intercontinental Exchange, also known as the “C” price of coffee. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality coffee and also impact our ability to enter into fixed-price purchase commitments. The supply and price of coffee we and our co-packing customers purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease (such as coffee rust) and pests, general increase in farm inputs and costs of production, armed conflict, labor actions, government actions and trade barriers or tariffs, inventory levels and political and economic conditions, as well as real or perceived supply shortages, an increase in green coffee purchased and sold on a negotiated basis rather than directly on commodity markets in response to higher production costs relative to “C” market prices, pandemics or other disease outbreaks, and the actions of certain organizations and associations that have historically attempted to influence prices of coffee through agreements establishing export quotas or by restricting coffee supplies. Recently, there has been increased volatility in the “C” market price, with prices at times increasing to five-year highs. The uncertainty over several factors, including the impact of weather patterns in coffee producing regions, and global supply chain constraints and shipping shortages, caused greater uncertainty in the markets. In addition, the political situation in many of the coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could also reduce supply and increase cost. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality coffee beans could have an adverse impact on our profitability, financial condition or results of operations.
Maintaining a steady supply of roasted coffee beans from our co-packing customers is essential to our co-packing arrangements, and securing an adequate supply of green whole bean coffee is essential to our ability to manufacture NuZee and DRIPKIT branded products and to support the development of private labels for our co-packing customers. We and certain of our co-packing customers rely upon relationships with key suppliers to source coffee. If any of these supply relationships deteriorate or we or our co-packing customers are unable to renegotiate contracts with suppliers (with similar or more favorable terms) or find alternative sources for supply, we or our co-packing customers may be unable to procure a sufficient quantity of high-quality coffee beans at acceptable prices or at all. If we or our co-packing customers are not able to purchase sufficient quantities of coffee due to any of the above factors or a worldwide or regional shortage, we may not be able to fulfill the demand for our products or may suffer reduced demand for our co-packing services, which could have an adverse impact on our business and financial results.
We expect to continue to experience inflationary pressure on our cost structure, and price increases may not be sufficient to offset cost increases or may result in sales volume declines.
Although inflation in the United States had been relatively low for many years, there was a significant increase in inflation beginning in the second half of 2021, which has continued into 2023. We expect for the foreseeable future to experience inflationary pressure on our cost structure. We may be able to pass some or all raw materials, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to mitigate these inflationary pressures, such as by increasing our selling prices or reducing product sizes sufficiently to offset increased raw material, energy or other input costs, including but not limited to packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
While we are currently a small company and, therefore, limited in our product development, marketing and sales activities, we anticipate continued growth in our business operations commensurate with the expansion of our sales and support operations and distribution network and the commercialization of our coffee products. Any future growth could impose significant added responsibilities on members of our existing management and create strain on our organizational, administrative, and operational infrastructure, including sales and marketing, quality control, and customer service. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures, which in the past have been determined to be inadequate. Our status as an exchange-listed public company will require us to increase our investment in financial accounting and reporting. If our current infrastructure is unable to handle our growth, we may need to expand our infrastructure, to identify and recruit new staff and to implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect our operations. Our future financial performance and our ability to expand and market our single serve coffee products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.
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Any failure by us to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.
There is inherent risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the single serve component of our business as well as the current and future needs of our customers. We set target levels for the manufacture of our coffee products and for the purchase of coffee in advance of customer orders based upon our forecasts of customer demand and those of our business partners. If our forecasts exceed demand, we could experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases, all of which could impact our financial performance. Alternatively, if demand exceeds our forecasts significantly beyond our current manufacturing capacity, we may not be able to satisfy customer demand, which could result in a loss of share if our competitors are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income.
We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position.
Our success depends in part upon our intellectual property rights. We rely primarily on trademark, trade secret laws, confidentiality procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures and services. Other persons could copy or otherwise obtain and use our intellectual properties without authorization or create intellectual properties similar to ours independently. We may also pursue the registration of our domain names, trademarks and service marks in other jurisdictions, including the United States. However, we cannot assure you that we will be able to protect our proprietary rights. Further, our competitors may be able to independently develop similar intellectual property, duplicate our products and services or design around any intellectual property rights we hold. Further, our intellectual property rights may be subject to termination or expirations. The loss of intellectual property protections or the inability to timely regain intellectual property protections could harm our business and ability to compete.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time subject to legal proceedings and claims relating to the intellectual property rights of others.
There may be third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently infringe. We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against us in the United States or any other jurisdiction. We also cannot be certain that our efforts will be effective in completely preventing the infringement of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.
Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results.
In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned and are taxed accordingly. Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future.
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Our business operations are conducted in multiple languages and could be disrupted due to miscommunications or translation errors.
The success of our business depends in part on our marketing efforts in the United States and various countries in East Asia and Latin America, each of which is conducted in the local language. Additionally, our operations often require that complex contracts, communications and technical information be accurately translated into foreign languages. Miscommunications or inaccurate foreign language translations could have a material adverse effect on our business operations and financial condition.
Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling (such as requiring labeling of products that contain genetically modified organisms) or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of certain of our products. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products. One such law, which is in effect in California and is known as Proposition 65, requires that a warning appear on any product sold in California that contains a substance that, in the view of the state, causes cancer or birth defects. The state maintains lists of these substances and periodically adds other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of the product in question exposes consumers to a daily quantity of a listed substance that is below a “safe harbor” threshold that may be established, is naturally occurring, is the result of necessary cooking, or is subject to another applicable exception. While currently substances created by and inherent in the processes of roasting coffee beans or brewing coffee have been determined by the State of California not to pose a significant risk, such chemicals could be added to the Proposition 65 lists in the future. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. The State of California or other parties, however, may take a contrary position. If we were required to add Proposition 65 warnings on the labels of one or more of our beverage products produced for sale in California, the resulting consumer reaction to the warnings and possible adverse publicity could negatively affect our sales both in California and in other marketplaces.
Risks Related to Ownership of our Common Stock
The market price of our stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock is likely to be highly volatile and subject to wide fluctuations in response to various factors, some of which we cannot control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Report, these factors include but are not limited to:
| ● | the success of, or developments in, competitive products, services or technologies; | |
| ● | regulatory actions with respect to our products and our competitors; | |
| ● | the level of success of our marketing strategy; | |
| ● | our ability to obtain top-grade packing equipment for coffee production; | |
| ● | announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments; | |
| ● | regulatory or legal developments in the United States and other countries; |
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| ● | recruitment or departure of key personnel; | |
| ● | expenses related to any of our development programs and our business in general; | |
| ● | actual or anticipated changes in financial estimates, development timelines or recommendations by securities analysts; | |
| ● | failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public; | |
| ● | variations in our financial results or those of companies that are perceived to be similar to us; | |
| ● | fluctuations in the valuation of companies perceived by investors to be comparable to us; | |
| ● | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; | |
| ● | our ability or failure to raise additional capital in equity or debt transactions; | |
| ● | costs associated with our sales and marketing initiatives; | |
| ● | costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products; | |
| ● | sales of our common stock by us, our insiders or our other stockholders; and | |
| ● | general economic, business, industry, market and political conditions, including prevailing interest rates and the rate of inflation. |
In addition, the stock market in general has in the past experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the relevant companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have a dramatic and material adverse impact on the market price of our common stock.
Despite our listing on the Nasdaq Capital Market, there can be no assurance that an active trading market for our common stock will be sustained.
In June 2020, our common stock commenced trading on the Nasdaq Capital Market under the symbol “NUZE.” Although our common stock is listed on the Nasdaq Capital Market, an active trading market for our shares may never be sustained. You may not be able to sell your shares quickly or at the market price if trading in shares of our securities is not active. Further, an inactive market may also impair our ability to raise capital by selling shares of our securities and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our securities as consideration, which could have a material adverse effect on our business, financial condition, and results of operations.
The Nasdaq Capital Market may subsequently delist our securities if we fail to comply with ongoing listing standards.
The Nasdaq Capital Market’s rules for listed companies requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock. In addition to specific listing and maintenance standards, the Nasdaq Capital Market has broad discretionary authority over the continued listing of securities, which it could exercise with respect to the listing of our common stock.
As a listed company, we are required to meet the continued listing requirements applicable to all Nasdaq Capital Market companies. On September 20, 2022, the Company received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that the Company was not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing (the “Bid Price Rule”). On December 28, 2022, the Company completed a 1-for-35 reverse stock split, which became effective on December 28, 2022. On January 17, 2023, the Company received notice that the Company had regained compliance with the Bid Price Rule. In addition to the Bid Price Rule previously described, Nasdaq Capital Market listing rules require us to maintain a minimum stockholders’ equity of $2.5 million under Nasdaq Listing Rule 5550(b)(1), a minimum market value of listed securities of $35 million under Nasdaq Listing Rule 5550(b)(2), or a minimum net income of $500,000 under Nasdaq Listing Rule 5550(b)(3). If we fail to meet one of those standards or any other Nasdaq Capital Market continued listing requirement, our common stock may be subject to delisting, as applied by Nasdaq in its discretion. We intend to take all commercially reasonable actions to maintain our Nasdaq Capital Market listing. If our common stock is delisted in the future, it is not likely that we will be able to list our common stock on another national securities exchange on a timely basis or at all and, as a result, we expect our securities would be quoted on an over-the-counter market; however, if this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, in the event of such delisting, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.
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If you purchase shares of common stock in our recent offering, you will experience immediate dilution in your investment. You will experience further dilution if we issue additional equity securities in future financing transactions.
Purchasers of shares of common stock in our recent offering paid a price per share that was less than the net tangible book value per share of our common stock. After giving effect to our receipt of approximately $1.011 million of estimated net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, from our sale of common stock in this offering at the public offering price of $3.00 per share, our pro forma net tangible book value as of June 30, 2023, as adjusted, would have been $5,055,945 or $4.19 per share. This amount represents an immediate decrease in net tangible book value of $0.98 per share of our common stock to existing stockholders and an immediate increase in net tangible book value of $1.19 per share of our common stock to new investors purchasing shares of common stock in the offering.
If we issue additional common stock, or securities convertible into or exchangeable or exercisable for common stock, our stockholders, including investors who purchased shares of common stock in the recent offering, may experience additional dilution, and any such issuances may result in downward pressure on the price of our common stock. We also cannot assure you that we will be able to sell shares or other securities in any future offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders.
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. 2023, 2019, and 2013 Stock Incentive Plans. 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 broad discretion in the use of the net proceeds from our recent offering and may not use them effectively, which could affect our results of operations and cause our stock price to decline.
Our management will have broad discretion in the application of the net proceeds from our recent offering. We intend to use the net proceeds from the offering to acquire complementary businesses, acquire or license products or technologies that are complementary to our own, although we have no current plans, commitments or agreements with respect to any such use of proceeds for acquisitions or licenses as of the date of this prospectus supplement, and for working capital, general corporate purposes and the expansion and growth of certain recently announced co-packing relationships, including Stone Brewing and other large customers. As a result, you will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of the offering. You will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from the offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
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Our principal stockholder and management, including our Chief Executive Officer in particular, own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of December 31, 2023, our executive officers and directors beneficially owned approximately 12.1% of our voting stock. Our Chief Executive Officer, President and Chairman of the Board individually beneficially owns approximately 10.1% of our voting stock. This concentration of control creates a number of risks. Our executive officers and directors, along with other holders of 5% or more of our capital stock and their respective affiliates, have the ability to exert significant influence over us through this ownership position. These stockholders may be able to exert significant influence over all matters requiring stockholder approval, including with respect to elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets or other major corporate transaction, and our stockholders may find it difficult to replace members of management should our stockholders disagree with the manner in which the Company is operated. Furthermore, this concentration of ownership may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders.
We incur significant costs as a result of operating as a public company, and our management must devote substantial time to compliance initiatives as a result of the listing of our common stock on the Nasdaq Capital Market.
As a listed company, we are required to meet the continued listing requirements applicable to all NASDAQ Capital Market companies. We expect our ongoing compliance with such rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These requirements may divert the attention of our management and personnel from other business concerns, and they could have a material adverse effect on our business, financial condition, and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot accurately predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as executive officers.
We expect to incur significant costs and devote substantial management time to maintaining our disclosure controls and procedures and internal control over financial reporting, and regardless we may be unable to prevent or detect all errors or acts of fraud or to accurately and timely report our financial results or file our periodic reports in a timely manner.
As a publicly traded company, our management is required to report annually on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
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Because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that the measures we have taken will be effective in mitigating or preventing significant deficiencies or material weaknesses in our internal control over financial reporting in the future.
If we fail to maintain effective internal control over financial reporting to meet the demands that are placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or to report them within the timeframes required by law or exchange regulations.
Additionally, we have engaged only a very limited number of accounting and finance personnel and we rely in part on outside consultants. We may need to incur additional expenses to hire additional personnel with public company financial reporting expertise to build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures. In the event we need to hire additional personnel with public company financial reporting expertise but we are unable to do so, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.
Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected or corrected on a timely basis.
If material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, then there exists a risk that our consolidated financial statements may contain material misstatements that are unknown to us at that time, and such misstatements could require us to restate our financial results. The existence of a material weakness in our internal control over financial reporting may result in current and potential stockholders losing confidence in our financial reporting, which could negatively impact the market price of our common stock.
In addition, the existence of any material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act and may consequently result in the SEC revoking the registration of our common stock, or the delisting of our common stock. Any of these events, if they were to occur, could have a material adverse effect on the market price of our common stock or on our business, financial condition and results of operations.
Anti-takeover provisions in our third amended and restated bylaws and Nevada law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our securities.
Our third amended and restated bylaws contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board. Our third amended and restated bylaws include provisions:
| ● | limiting the liability of, and providing indemnification to, our directors, including provisions that require the Company to advance payment for defending pending or threatened claims; | |
| ● | controlling the procedures for the conduct and scheduling of board and stockholder meetings; and | |
| ● | limiting the number of directors on our board and the filling of vacancies or newly created seats on the board to our Board then in office. |
In addition, we are subject to anti-takeover laws for Nevada corporations. These anti-takeover laws prevent Nevada corporations from engaging in a business combination with any shareholder, including all affiliates and associates of the shareholder, who is the beneficial owner of 10% or more of the corporation’s outstanding voting stock, for two years following the date that the shareholder first became the beneficial owner of 10% or more of the corporation’s voting stock, unless specified conditions are met. If those conditions are not met, then after the expiration of the two-year period the corporation may not engage in a business combination with such shareholder unless certain other conditions are met.
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These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. The existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any profits from an investment in our common stock will depend on whether the price of our common stock increases.
We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be our stockholders’ sole source of gain for the foreseeable future.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our third amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Nevada law. In addition, our third amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide for the following:
| ● | We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Nevada law. Nevada law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful. | |
| ● | We will also indemnify employees and agents in those circumstances where indemnification is permitted by applicable law. | |
| ● | We are required to advance expenses, as incurred, to any indemnitee in connection with defending a proceeding, except that such indemnitee shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification. | |
| ● | The rights conferred in our third amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. |
General Risk Factors
Product safety and quality concerns could negatively affect our business.
Our success depends in part on our ability to maintain consumer confidence in the safety and quality of all of our products. While we are committed to the safety and quality of our products, we may not achieve our product safety and quality standards. Product safety or quality issues, or mislabeling, actual or perceived, or allegations of product contamination or quality or safety issues, even when false or unfounded, could subject us to product liability and consumer claims, negative publicity, a loss of consumer confidence and trust, may require us from time to time to conduct costly recalls from some or all of the channels in which the affected product was distributed, could damage the goodwill associated with our brands, and may cause consumers to choose other products. Such issues could result in the destruction of product inventory and lost sales due to the unavailability of product for a period of time, which could cause our business to suffer and affect our results of operations.
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If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock has been, and may in the future be, volatile. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities litigation, including but not limited to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could have a material adverse effect on our business and financial condition.
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.
Our businesses involve the collection, storage and transmission of personal, financial or other information that is entrusted to us by our customers and employees. Our information systems also contain the Company’s proprietary and other confidential information related to our businesses. Despite the implementation of network security measures, our systems and those of third parties on which we rely may also be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; telecommunications or system failures; server or cloud provider breaches; computer viruses; physical or electronic break-ins; cyber-attacks; catastrophic events; or breaches due to employee error or malfeasance or other attempts to harm our systems. Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology networks and systems to more sophisticated and targeted measures, known as advanced persistent threats, directed at the Company, its products, its customers and/or its third-party service providers. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us deliver our website, may receive or store information provided by us or our users through our websites. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our online policies, or in the event of a breach of their networks, our users’ data may be improperly accessed, used or disclosed.
If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal or regulatory actions against us in connection with such incidents, which could result in orders or consent decrees forcing us to modify our business practices. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy policy, could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
Changes in regulatory standards could adversely affect our business.
Our business is subject to extensive domestic and international regulatory requirements regarding distribution, production, labeling and marketing. Changes to regulation of the beverage industry could include increased limitations on advertising and promotional activities or other non-tariff measures that could adversely impact our business. In addition, we face government regulations pertaining to the health and safety of our employees and our consumers as well as regulations addressing the impact of our business on the environment, domestically as well as internationally. Compliance with these health, safety and environmental regulations may require us to alter our manufacturing processes and our sourcing. Such actions could adversely impact our results of operations, cash flows and financial condition, and our inability to effectively and timely comply with such regulations could adversely impact our competitive position.
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Employment litigation and unfavorable publicity could negatively affect our future business.
Employees may, from time to time, bring lawsuits against us regarding injury, creation of a hostile work place, discrimination, wage and hour, sexual harassment and other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their sales. If we were to face any employment related claims, our business could be negatively affected.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
Currently pending, threatened or future litigation or governmental or regulatory proceedings or inquiries could result in material adverse consequences, including judgments or settlements.
We are, or may from time to time become, involved in lawsuits and other legal, governmental or regulatory proceedings or inquiries. See “Item 3. Legal Proceedings” included in this Annual Report for information regarding currently pending litigation that could have a material impact on the Company. Many of these matters raise complicated factual and legal issues and are subject to uncertainties and complexities, all of which make the matters costly to address. The timing of the final resolutions to any such lawsuits, inquiries, and other legal proceedings is uncertain.
Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our consolidated financial condition, results of operations and cash flows. Any judgment against us, the entry into any settlement agreement, or the imposition of any fine could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
Future acquisitions of and investments in new businesses could impact our business and financial condition.
From time to time, we may acquire or invest in businesses or partnerships that we believe could complement our business. The pursuit of such acquisitions or investments may divert the attention of management and cause us to incur various expenses, regardless of whether the acquisition or investment is ultimately completed. In addition, acquisitions and investments may not perform as expected and we may be unable to realize the expected benefits, synergies, or developments that we may initially anticipate. Further, if we are able to successfully identify and acquire additional businesses, we may not be able to successfully integrate the acquired personnel or operations, or effectively manage the combined business following the acquisition, any of which could harm our business and financial condition.
In addition, to the extent we finance any acquisition or investment in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with shares of our common stock, it could be dilutive to our current stockholders.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive office is located at 2865 Scott Street, Suite 107, Vista, California 92081 in our Vista facility. Previously, we leased an office in Richardson, Texas which served as the executive office at a cost of $1,510 per month, which lease expired as of November 30, 2023.
We currently lease manufacturing facilities in Vista, California and Seoul, Korea to produce our coffee products. Our manufacturing and executive office in Vista, California has a total monthly lease expense of approximately $11,000, plus common area expenses, and expires on March 31, 2025. Our manufacturing and sales office in Seoul, Korea has a monthly lease expense of $7,040, and expires on November 15, 2023. According to Korean lease regulations, the lease contract automatically renews for one year through implicit renewal. When implicit renewal occurs, it is considered as a new lease under the same conditions as the previous lease.
We presently have the annual capacity to produce up to 150 million single serve coffee products (pour over or coffee brew bags) at our two manufacturing facilities, which we believe is sufficient to meet our current and anticipated manufacturing requirements. We have analyzed our current facilities considering our anticipated requirements, and we expect to continue to optimize our manufacturing facilities to meet our future needs.
ITEM 3. 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.
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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. Discovery in the case is ongoing and no trial date has been set.
The Company believes it has basis to defend the claims in the Steeped Litigation, however, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in any defense or counterclaim.
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. We expect Ms. Curtin to initiate arbitration proceedings in January 2024. 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 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the Nasdaq Capital Market under the symbol “NUZE.” As of January 11, 2024, there were approximately 632 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
Dividends
We have not paid dividends on any of our classes of capital stock to date and do not anticipate paying any cash dividends on shares of our common stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to fund the development and growth of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our Board may deem relevant.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto included elsewhere in this Report. Except for historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Report and specifically under Item 1A of Part I of this Report, Risk Factors. For additional discussion, see “CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS” above.
Corporate Overview
Our Company
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 other coffee products including coffee brew bags, which is also referred to as tea-bag style coffee. 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 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. 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 both single serve pour over coffee and coffee 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 serve 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 have also developed and sell NuZee branded single serve coffee products of both single serve pour over and coffee brew bag coffee products, which we believe offers consumers some of the best coffee available in a single serve application.
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We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, drive growth, reduce manufacturing costs, expand our product portfolio, enter into new markets, and further penetrate the markets in which we currently operate. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.
Our sources of revenue
Co-packing
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, our co-packing customers typically supply us with roasted, whole bean coffee that we package into single serve pour over and coffee brew bag coffee products according to their formulations and specifications. In addition, under our private label coffee development program, our team works directly with our co-packing customers in developing private labels of signature coffees. Under this program, our team of coffee experts works extensively with our co-packing customers to develop a coffee taste profile to their unique needs and then we source, roast (utilizing our third-party roasting or manufacturing partners), blend, pack (in either our traditional single serve pour over, DRIPKIT pour over or coffee brew bag coffee products), and package single serve coffee products to their exact specifications.
We currently focus on fostering co-packing arrangements with larger companies developing pour over and coffee brew bag coffee products, in addition to smaller scale, innovative companies that we believe are rapidly growing, as further described below. We believe that as our potential co-packing customers continue to realize that we have the experience co-packing for a variety of customer sizes, we will become the co-packer of choice. The standards required to co-pack for large international companies almost always meet or exceed the standards required to co-pack for any other customer. We also believe that as our co-packing customers’ competitors realize they have single serve pour over and coffee brew bag coffee solutions, they will be more motivated to develop their own such solutions and that will lead to increased co-packing opportunities for us.
In addition to larger companies, we package for smaller companies that we believe have significant growth potential. We are continually looking for new and innovative companies with whom we may work and grow.
On September 26, 2023, NuZee announced an expanded relationship with one of its largest customers, received a forecast for shipments from the customer, and agreed to begin supplying additional products to the customer starting in the first and second quarters of fiscal year 2024. Revenues from this customer for the fiscal year 2023 totaled approximately $500,000.
NuZee and DRIPKIT branded products
Although our primary focus is on the manufacture of single serve coffee products pursuant to co-packing arrangements with our co-packing clients, we have also developed high-quality NuZee branded single serve coffee products that, in addition to our DRIPKIT branded products, are sold directly to consumers. In addition to being available for direct sale to consumers, our NuZee and DRIPKIT branded products serve as samples that are provided to potential new co-packing customers to showcase our co-packing capabilities and production expertise.
Our NuZee branded products, including Coffee Blenders and Twin Peaks, are from our perspective a ‘stepping-stone’ product for our co-packing customers that market high quality packaging and coffee. Sales of our NuZee branded products also help promote consumer adoption into the format and to educate coffee drinkers in the United States about this coffee format that is new to North America but widely known in East Asia.
In addition to our other NuZee branded products, our premium 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. We offer DRIPKIT pour over packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and co-pack for coffee roasters.
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Nasdaq Listing Deficiency; 2022 Reverse Stock Split
As previously reported, we received a notice from The Nasdaq Stock Market, LLC regarding our failure to satisfy the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”). As disclosed, we had 180 days from the date of the applicable notice to cure the deficiency. To cure this deficiency, on December 9, 2022, at a Special Meeting of Stockholders, 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 the Company’s Articles of Incorporation, as amended (the “Articles”), which amends the Articles to add a Section 1A to effect a reverse stock split of the Company’s common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s discretion. On December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of Nevada (the “ 2022 Reverse Stock Split”). On December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of Nevada.
On January 17, 2023, the Company received a letter from the Staff notifying the Company that the Staff has determined that for the last 10 consecutive business days, from December 29, 2022 to January 13, 2023, the closing bid price of the Company’s common stock had been at $1.00 per share or greater and that accordingly, the Company has regained compliance with Nasdaq Listing Rule 5550(a)(2).
Goodwill and Intangible Assets Impairment
As further described in “Note 2—Basis of Presentation And Summary of Significant Accounting Policies—Goodwill and intangible assets” to our Consolidated Financial Statements, we evaluate goodwill for impairment on an annual basis as of the last day of our fiscal fourth quarter, and whenever events or circumstances make it more likely than not that an impairment may have occurred. We test for goodwill impairment at the reporting unit level and consider the Company as a reporting unit for goodwill impairment testing. We determined the Company has one operating segment and two components, NuZee, Inc. and NuZee KR, which are combined into one reporting unit as they are considered to be economically similar. The impairment test involves comparing the fair value of the reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the goodwill. Since the Company is one reporting unit, the fair value of the Company equals market capitalization, thus net book value is compared to market capitalization to determine if there is any impairment.
As further described in “Note 7—Goodwill And Intangible Assets” to our Consolidated Financial Statements, during the year ended September 30, 2022, we recorded a non-cash impairment charge of $531,412 related to goodwill, which was included in impairment expense within operating expenses in our Consolidated Statements of Operations for the year ended September 30, 2022. The charge was as a result of our net book value being lower than our market capitalization. As of September 30, 2022, the goodwill balance net of the impairment loss was $0.
In addition, as further described in “Note 2—Basis of Presentation And Summary of Significant Accounting Policies—Goodwill and intangible assets” to our Consolidated Financial Statements, we test intangible assets annually for impairment, and when indications of potential impairment exist. We utilize the relief from royalty method to determine the fair value of the tradename. We estimate the fair value of acquired customer relationships using a weighted average of the income. The income approach applies a fair value methodology based on discounted cash flows. If the carrying value of an intangible asset exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
| 37 |
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
For the fiscal year ended September 30, 2023, net revenues attributable to our operations in North America totaled $1,757,968 compared to $2,443,863 of net revenues attributable to our operations in North America during the fiscal year ended September 30, 2022. Additionally, as of September 30, 2023, $184,763 of our property and equipment, net was attributable to our North American operations, compared to $378,546 attributable to our North American operations as of September 30, 2022.
For the fiscal year ended September 30, 2023, net revenues attributable to our operations in Asia totaled $1,590,863 compared to $665,299 of net revenues attributable to our operations in Asia during the fiscal year ended September 30, 2022. Additionally, as of September 30, 2023, $124,792 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, 2022.
Results of Operations
Comparison of Years ended September 30, 2023 and 2022
Revenue
Year ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Revenue | $ | 3,348,831 | $ | 3,109,162 | $ | 239,669 | 7.7 | % | ||||||||
For the year ended September 30, 2023, revenues increased by $239,669, or approximately 7.7%, compared with the year ended September 30, 2022. This increase was primarily related to higher co-packing revenues in Korea driven by existing and new customers partially offset by lower revenues in North America. The lower North America revenues were primarily a result of lower revenues to our largest customer in the year ended September 30, 2022.
Cost of sales and gross margin
Year ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Cost of sales | $ | 3,340,013 | $ | 3,219,575 | $ | 120,438 | 3.7 | % | ||||||||
| Gross profit (loss) | $ | 8,818 | $ | (110,413 | ) | $ | 119,231 | 108.0 | % | |||||||
| Gross margin % | 0.3 | % | (3.4 | )% | ||||||||||||
For the year ended September 30, 2023, our cost of sales totaled $3,340,013, as compared to cost of sales for the year ended September 30, 2022 of $3,219,575 , representing a 3.7% increase. This increase is primarily attributable to increased material and labor costs related to the increase in sales. For the year ended September 30, 2023, we had a total gross profit of $8,818 from sales of our products and co-packing services, compared to a total gross loss of ($110,413) for the year ended September 30, 2022. The gross margin rate was 0.3% for the year ended September 30, 2023 and (3.4%) for the year ended September 30, 2022. The marginal improvement was primarily attributable to increased efficiencies from higher overall revenues.
Operating Expenses
Year ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 8,880,435 | $ | 11,292,105 | $ | (2,411,670 | ) | (21.4) | % | |||||||
| 38 |
For the year ended September 30, 2023, our operating expenses totaled $8,880,435, compared to $11,292,105 for the year ended September 30, 2022, representing a decrease of $2,411,670 or 21.4%. This decrease is primarily attributable to a decrease of $2.4 million in stock-based compensation expense, lower impairment charges of approximately $675,000, lower payroll, marketing consulting, insurance and facilities costs of approximately $530,000 all of which was partially offset by increased legal expenses of $1.2 million.
Net Loss
Year ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | Dollars | % | |||||||||||||
| Net Loss | $ | 8,749,467 | $ | 11,797,712 | $ | (3,048,245 | ) | (25.8) | % | |||||||
For the year ended September 30, 2023, we generated net losses of $8,749,467 compared to $11,797,712 for the year ended September 30, 2022. This decrease in net loss is primarily attributable to a decrease in stock-based compensation expense, lower impairment charges and reduced payroll, marketing consulting, insurance and facilities costs partially offset by an increase in legal costs.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of September 30, 2023, we had an accumulated deficit of approximately $73.4 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 September 30, 2023, we had a cash balance of $1.37 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 fiscal year ended September 30, 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.
| 39 |
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 September 30, 2023 primarily include payments for operating and finance lease liabilities and principal and interest on loans. Our current and long-term obligations related to these items are outlined in the leases portion of “Note 2—Basis of Presentation and Summary of Significant Accounting Policies,” and “Note 3—Loans,” of the Notes to Consolidated Financial Statements within this Report. 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 September 30, 2023, we had payments for lease and loan obligations of approximately $409,230, of which $246,929 are payable within 12 months as of September 30, 2023. We had no purchase obligations as of September 30, 2023.
Summary of Cash Flows
Year Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash (used in) operating activities | $ | (6,926,279 | ) | $ | (7,462,121 | ) | ||
| Cash (used in) investing activities | $ | (16,241 | ) | $ | (604,834 | ) | ||
| Cash provided by (used in) financing activities | $ | (36,031 | ) | $ | 5,679,983 | |||
| Effect of foreign exchange on cash | $ | 36,599 | $ | (113,929 | ) | |||
| Net (decrease) in cash | $ | (6,941,952 | ) | $ | (2,500,901 | ) | ||
Operating Activities
We used $6,956,279 and $7,462,121 of cash in operating activities during the years ended September 30, 2023 and 2022, respectively, principally to fund our operating loss.
Investing Activities
We used $16,241 and $604,834 of cash in investing activities during the years ended September 30, 2023 and 2022, respectively. Cash used in the year ended September 30, 2023 was for the purchase of equipment. Cash used in the year ended September 30, 2022 was for the acquisition of DripKit as well as the purchase of equipment.
Financing Activities
Historically, we have funded our operations through the issuance of our equity securities.
Cash provided from financing activities decreased from $5,679,983 for the year ended September 30, 2022, to $(36,031) for the year ended September 30, 2023. The decrease is primarily attributable to funds raised in the year ended September 30, 2022 from the sale of our equity securities, as compared to no funds being raised in the year ended September 30, 2023. In the year ended September 30, 2023 financing activities consisted of repayments of loans and leases.
| 40 |
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.
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”). As discussed in “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” to the Consolidated Financial Statements, 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 the “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” to the Consolidated Financial Statements for a summary of our accounting policies.
Recent Accounting Pronouncements
Recent accounting pronouncements which may be applicable to us are described in “Note 2—Basis of Presentation and Summary of Significant Accounting Policies” to the Consolidated Financial Statements included as part of this Report.
ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and The Report of Independent Registered Public Accounting Firm required by this item are included in this Report on pages F-1 through F-28 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or financial disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
| a. | Evaluation on Disclosure 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.
| 41 |
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 Report (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 are effective, at the reasonable assurance level, to ensure 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 disclosure.
| b. | Management’s report on internal control over financial reporting |
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this Report based on the criteria for effective internal control described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO). Based on this assessment, our management has concluded the Company’s internal control over financial reporting was effective as of September 30, 2023.
As we are a non-accelerated filer, our independent registered public accounting firm is not required to issue an attestation report on our internal control over financial reporting.
Changes In Internal Control Over Financial Reporting
There are no changes in our internal control over financial reporting that occurred during the fiscal year ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
| 42 |
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2024 Annual Meeting of Stockholders. Within 120 days after the close of our fiscal year, we intend to file with the SEC the information required by this Item.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2024 Annual Meeting of Stockholders. Within 120 days after the close of our fiscal year, we intend to file with the SEC the information required by this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2024 Annual Meeting of Stockholders. Within 120 days after the close of our fiscal year, we intend to file with the SEC the information required by this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2024 Annual Meeting of Stockholders. Within 120 days after the close of our fiscal year, we intend to file with the SEC the information required by this Item.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2024 Annual Meeting of Stockholders. Within 120 days after the close of our fiscal year, we intend to file with the SEC the information required by this Item.
| 43 |
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this Report: | |
| (1) | The following consolidated financial statements of the Company are incorporated by reference in Part II, Item 8—See Index to Consolidated Financial Statements | |
| (2) | All financial statement schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the financial statements or the Notes thereto. | |
| (3) | See exhibits listed under Part (b) below. | |
| (b) | Exhibits: |
| 44 |
* Filed or furnished herewith.
† Indicates management contract or compensatory plan.
+ 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.
ITEM 16. FORM 10-K SUMMARY
None.
| 45 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on January 16, 2024.
| NuZee, Inc. | ||
| By: | /s/ Masateru Higashida | |
| Name: | Masateru Higashida | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer), Secretary, Treasurer, and Director | ||
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.
| Signature | Title | Date | ||
| /s/ Masateru Higashida | January 16, 2024 | |||
| Masateru Higashida | Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director | |||
| /s/ Randell Weaver | January 16, 2024 | |||
| Randell Weaver | President & Chief Operating Officer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Kevin J. Conner | January 16, 2024 | |||
| Kevin J. Conner | Director | |||
| /s/ J. Chris Jones | January 16, 2024 | |||
| J. Chris Jones | Director | |||
| /s/ Nobuki Kurita | January 16, 2024 | |||
| Nobuki Kurita | Director | |||
| /s/ David G. Robson | January 16, 2024 | |||
| David G. Robson | Director |
| 46 |
NUZEE, INC.
Index to Consolidated Financial Statements
Contents
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of NuZee, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NuZee, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2023 and 2022, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/
www.malonebailey.com
We have served as the Company’s auditor since 2013.
January 16, 2024
| F-2 |
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | September 30, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Right-of-use asset – operating lease | ||||||||
| Investment in unconsolidated affiliate | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current portion of long-term loan payable | ||||||||
| Current portion of lease liability - operating lease | ||||||||
| Current portion of lease liability - finance lease | ||||||||
| Deferred income | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Lease liability - operating lease, net of current portion | ||||||||
| Lease liability - finance lease, net of current portion | ||||||||
| Loan payable - long term, net of current portion | ||||||||
| Other noncurrent liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ equity: | ||||||||
| Common stock; shares authorized, $ par value; and shares issued and outstanding as of September 30, 2023 and 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, 2023 | Year Ended September 30, 2022 | |||||||
| Revenues, net | $ | |||||||
| Cost of sales | ||||||||
| Gross profit (loss) | ( | ) | ||||||
| Operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Loss from equity method investment | ( | ) | ( | ) | ||||
| 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 consolidated financial statements.
| F-4 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| NuZee, Inc. | ||||||||
| For the years ended September 30, 2023 and 2022 | 2023 | 2022 | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ( | ) | ||||||
| Total other comprehensive income (loss), net of tax | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common stock | Additional paid-in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2022 | $ | | $ | $ | ( | ) | $ | | $ | |||||||||||||||
| Forgiveness of stock issuance costs | - | |||||||||||||||||||||||
| Round-up shares issued in reverse split | ||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Restricted stock compensation | ||||||||||||||||||||||||
| Other comprehensive gain | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common stock | Additional paid-in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income | Total | |||||||||||||||||||
| Balance September 30, 2021 | $ | | $ | $ | ( | ) | $ | | $ | |||||||||||||||
| Exercise of warrants, net of issuance costs | ||||||||||||||||||||||||
| Common stock issued for cash, ATM offering, net of issuance costs | ||||||||||||||||||||||||
| Equity securities issued for cash, exempt offering, net of issuance costs | ||||||||||||||||||||||||
| Common stock issued for cash, registered offering, net of issuance costs | ||||||||||||||||||||||||
| Common stock issued for Dripkit acquisition | ||||||||||||||||||||||||
| Stock option expense | - | |||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Restricted stock award issuance | ||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance September 30, 2022 | ( | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 2023 | For the Year Ended September 30, 2022 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Noncash lease expense | ||||||||
| Loss on disposition of assets | ||||||||
| Stock option expense | ||||||||
| Restricted stock award compensation | ||||||||
| Issuance of common stock for services | ||||||||
| Bad debt expense | ||||||||
| Loss from equity method investment | ||||||||
| Goodwill and intangible asset impairment | ||||||||
| Write-off of deferred financing costs | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable, Accrued Expenses & Other Current Liabilities | ( | ) | ||||||
| Deferred income | ||||||||
| Lease liability - operating lease | ( | ) | ( | ) | ||||
| Other non-current liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Acquisition of Dripkit | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Repayment of loans | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock, ATM offering, net of issuance costs | ||||||||
| Proceeds from issuance of common stock, exercise of warrants, net of issuance costs | ||||||||
| Proceeds from issuance of equity securities, exempt offering, net of issuance costs | ||||||||
| Proceeds from issuance of common stock, registered offering, net of issuance costs | ||||||||
| Repayment of finance lease | ( | ) | ( | ) | ||||
| Cash paid for offering costs | ( | ) | ||||||
| Proceeds from issuance of common stock, exercise of stock 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 | $ | |||||||
| Noncash investing and financing activities: | ||||||||
| Common stock issued in acquisition of Dripkit | $ | |||||||
| Stock issuance costs accrued | $ | |||||||
| Forgiveness of stock issuance costs | $ | |||||||
Deferred Stock Offering cost accrued ROU assets and liabilities added during the period | $ | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
NuZee, Inc.
Notes to Consolidated Financial Statements
September 30, 2023
1. ORGANIZATION
NuZee, Inc. (the “Company”, “we”, “our”, “us’) was incorporated on November 9, 2011, in Nevada. The Company is a specialty coffee company and is a leading co-packer of single serve pour over coffee in the United States, coffee brew bags (also referred to as tea-bag style coffee), DRIPKIT pour over products and bagged whole bean and ground coffee. While the United States is the Company’s core market, it also has single serve pour over coffee manufacturing and sales operations in Korea and a joint venture in Latin America.
The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects and have been consistently applied in preparing the accompanying financial statements.
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 consolidates NuZee KR and NuZee INV in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition
for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting
entity, directly or indirectly, of over
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 $
| F-8 |
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 September 30, 2023 and September 30, 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 years ended September 30, 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.
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 September 30, 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.
Fair Value of Financial Instruments
Fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under generally accepted accounting principles provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
| F-9 |
Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
The carrying amounts of cash, accounts receivable, accounts payable, accrued liabilities and short-term debt approximate fair value because of the short-term nature of these instruments. The carrying amount of long-term debt approximates fair value because the debt is based on current rates at which the Company could borrow funds with similar remaining maturities. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the 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
For the years ended September 30, 2023 and 2022, the Company’s largest single source of revenue was from one major customer disclosed below.
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
For the year ended September 30, 2023:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | | % | |||||||||||
| Customer CN | % | % | ||||||||||||||
| Customer AD | % | |||||||||||||||
For the year ended September 30, 2022:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
| F-10 |
Leases
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 through March 31, 2025, which was scheduled to
expire on
Effective
December 1, 2022, we entered into a new operating lease for our principal executive office, which is located at 1350 East Arapaho Road,
Suite #230, Richardson, Texas 75081. We lease the Richardson office on an annual basis, at a cost of $
As
of September 30, 2023, the Company’s operating leases had a weighted average remaining lease term of
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
| ROU Asset – October 1, 2022 | $ | |||
| ROU Asset added during the period | ||||
| Amortization during the period | ( | ) | ||
| ROU Asset – September 30, 2023 | $ | |||
| Lease Liability – October 1, 2022 | $ | |||
| Lease Liability added during the period | ||||
| Amortization during the period | ( | ) | ||
| Lease Liability – September 30, 2023 | $ | |||
| Lease Liability – Short-Term | $ | |||
| Lease Liability – Long-Term | ||||
| Lease Liability – Total | $ |
The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of September 30, 2023.
Amounts due within 12 months of September 30,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| 2024 | ||||
| 2025 | ||||
| Total Minimum Lease Payments | ||||
| Less Effect of Discounting | ||||
| Present Value of Future Minimum Lease Payments | ||||
| Less Current Portion of Operating Lease Obligations | ||||
| Long-Term Operating Lease Obligations | $ |
| F-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 September 30, 2023 for the 12 months ended September 30:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| 2024 | $ | |||
| 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
expense included in Operating expense for the year ended September 30, 2023 and 2022 was $
During the year ended September 30, 2023, we had the following cash and non-cash activities associated with our leases:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
| Operating cash outflows from operating leases: | $ | |||
| Operating cash outflows from finance leases: | $ | |||
| 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 year ended September 30, 2023, we recognized sublease income of
$
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| 2024 | $ | |||
| Total Minimum Lease Payments to be Received | $ |
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 and loss amounted to $
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
| F-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 September 30, 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.
As of September 30, 2023 and September 30, 2022, the Company had no sales allowances for estimated chargebacks and returns, respectively. Revenue recognized is net of sales allowances.
| F-13 |
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, 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.
Advertising Expenses
The Company expenses advertising costs when incurred. Advertising expense for the years ended September 30, 2023 and 2022 is as follows:
SCHEDULE OF ADVERTISING EXPENSE
September 30, 2023 | September 30, 2022 | |||||||
| Advertising | $ | $ | ||||||
Other Expense
Other
expense of $
Prepaid expenses and other current assets
Prepaid expenses and other current assets for the years ended September 30, 2023 and 2022 is as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, 2023 | September 30, 2022 | |||||||
| 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 September 30, 2023 and 2022, the carrying value of inventory of $
SCHEDULE OF INVENTORY
September 30, 2023 | September 30, 2022 | |||||||
| Raw materials | $ | |||||||
| Finished goods | $ | |||||||
| Total | $ | $ | ||||||
| F-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
SCHEDULE OF PROPERTY AND EQUIPMENT
September 30. 2023 | September 30, 2022 | |||||||
| 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
Samples
The Company distributes samples of its products as a component of its marketing program. Costs for samples are expensed at the time the samples are produced and recorded under operating expenses in the consolidated statements of operations.
Long-Lived Assets
The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicated that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.
Goodwill and intangible assets
We evaluate goodwill for impairment on an annual basis as of the last day of our fiscal fourth quarter, and whenever events or circumstances make it more likely than not that an impairment may have occurred. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, client engagement, or sale or disposition. We monitor the existence of potential impairment indicators throughout the fiscal year. We test for goodwill impairment at the reporting unit level. We consider the Company as a reporting unit for goodwill impairment testing. We determined the Company has one operating segment and two components, NuZee, Inc. and NuZee KR, which are combined into one reporting unit as they are considered to be economically similar. The impairment test involves comparing the fair value of the reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value of the goodwill. Since the Company is one reporting unit, the fair value of the Company equals market capitalization, thus net book value is compared to market capitalization to determine if there is any impairment.
| F-15 |
During
the year ended September 30, 2022, we recorded a goodwill impairment loss of $
Intangible
assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line
basis over their economic or legal life, whichever is shorter. We have identifiable useful life intangible assets related to acquired
Dripkit tradename and customer relationships. We test these intangible assets annually for impairment, and when indications of potential
impairment exist. We utilize the relief from royalty method to determine the fair value of the tradename. Management uses considerable
judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. We estimate the fair
value of acquired customer relationships using a weighted average of the income. The income approach applies a fair value methodology
based on discounted cash flows. This analysis requires significant estimates and judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life
over which cash flows will occur, customer attrition, and determination of our weighted average cost of capital. If the carrying value
of an intangible asset exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying
value. Refer to Note 7: Goodwill and Intangible Assets for further details regarding the tradename and customer relationship impairment
charges recorded during the year ended September 30, 2023 and 2022. During the year ended September 30,2022, we recorded an impairment
loss of $
Income Taxes
In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The
Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes,
the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount
recognized in the financial statements is the largest benefit that has a
Related parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
| F-16 |
Stock-based Compensation
We account for share-based awards issued to employees in accordance with Accounting Standards Codification (ASC) 718, “Compensation-Stock Compensation”. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period, which is normally the vesting period. Share-based compensation to directors is treated in the same manner as share-based compensation to employees, regardless of whether the directors are also employees. In June 2018, the FASB issued ASU 2018-07 which simplifies several aspects of the accounting for non-employee transactions by stipulating that the existing accounting guidance for share-based payments to employees (accounted for under ASC Topic 718, “Compensation-Stock Compensation”) will also apply to non-employee share-based transactions (accounted for under ASC Topic 505, “Equity”). The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation was not material to the financial statements.
We determine the fair value of share-based payments using the Black Scholes option-pricing model for common stock options and warrants and the closing price of our common stock for common share issuances. We recognize forfeitures as they occurred.
Comprehensive income/loss
Comprehensive income/loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income/loss are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income/loss pertain to foreign currency translation adjustments.
Segment Information
ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. Management has determined that the Company operates in one business segment, which is the commercialization and development of functional beverages.
Recent Accounting Pronouncements
Changes to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof.
The Company reviewed all recently issued pronouncements in 2023, but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations.
3. 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 September 30, 2024 in the amount of $
| F-17 |
4. GEOGRAPHIC CONCENTRATIONS
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. In fiscal year 2023, the Company 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 our stockholders based in Japan; these functions are now supported by our personnel residing in the United States. Information about the Company’s geographic operations for the years ended September 30, 2023 and 2022 are as follows:
SCHEDULE OF GEOGRAPHICAL OPERATIONS
Year Ended September 30, | Year Ended September 30, | |||||||
| Net Revenue: | ||||||||
| North America | $ | $ | ||||||
| South Korea | ||||||||
| Net Revenue | $ | $ | ||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Property and equipment, net: | ||||||||
| North America | $ | $ | ||||||
| Japan | ||||||||
| South Korea | ||||||||
| Property and equipment, net | $ | $ | ||||||
5. RELATED PARTY TRANSACTIONS
During
the years ended September 30, 2023 and 2022, NuZee KR sold $
6. BUSINESS COMBINATIONS
As
described in Note 2, 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,
| F-18 |
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 $
During
the year ended September 30, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to
satisfy sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset
Purchase Agreement, the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows in the
quarter ended June 30, 2022: (i) $
On October 4, 2023, $
The
following table presents the allocation of the aggregate purchase price paid by the Company for the Acquisition of $
SCHEDULE OF ALLOCATION OF AGGREGATE PURCHASE PRICE
| Total purchase price | $ | |||
| Assets acquired: | ||||
| Inventory | $ | |||
| Property and equipment | ||||
| Identifiable intangible assets | ||||
| Total assets acquired | $ | |||
| Estimated fair value of net assets acquired | $ | |||
| Goodwill | $ |
Identified Intangibles 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 7-Goodwill and Intangible Assets for additional information on identified intangible assets and goodwill.
7. GOODWILL AND INTANGIBLE ASSETS
Impairments
Goodwill
During
the year ended September 30, 2022, we recorded a non-cash impairment charge of $
| F-19 |
Identifiable life intangible assets
During
the year ended September 30, 2022, we recorded non-cash impairment charges for the Dripkit tradename and acquired customer relationships
of $
As
of September 30, 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:
SCHEDULE OF AMORTIZATION EXPENSE
| Tradename Amortization | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Grand Total | $ | |||
8. ISSUANCE OF EQUITY SECURITIES
On December 28, 2021, the Company entered into an
Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC, as agent (the “Agent”),
pursuant to which the Company could offer and sell, from time to time, shares of 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 $
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 for aggregate net proceeds of $
On August 10, 2022, the Company completed an underwritten public offering
of shares of common stock, pursuant to an Underwriting Agreement dated as of August 7, 2022 and a prospectus supplement to the
Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531). The Company received aggregate net proceeds
of approximately $
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. The performance goals for Fiscal Year 2023 were not achieved and the Company recognized common stock compensation expense of $0 for the year ended September 30, 2023, related to these Restricted Shares.
| F-20 |
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. The restricted shares vested in full on the one-year anniversary of the grant date, March 17, 2023.
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 fiscal year ending September 30, 2022 and September 30, 2023, respectively.
Forfeiture of Restricted Shares
During the year ended September 30, 2023, restricted shares were forfeited because of the termination of employment or performance goals not achieved.
Common Stock issued for services
On January 6, 2023, the Company issued shares of common stock to a third-party unaffiliated professional services provider in exchange for certain consulting advice to be provided to the Company. The shares are valued using the closing stock price on the grant date and the Company recognized common stock compensation expense of $ for the year ended September 30, 2023, related to these common stock shares.
On June 20, 2023, the Company issued shares of common stock to a third-party unaffiliated professional services provider in exchange for certain consulting advice to be provided to the Company. The shares are valued using the closing stock price on the grant date and the Company recognized common stock compensation expense of $ for the year ended September 30, 2023, related to these common stock shares.
Exercise of options
During
the year ended September 30, 2022, shares were issued upon the exercise of stock
options, and the Company received $
Options
During the fiscal year ended September 30, 2023, the Company granted new stock options at an exercise price of $ to an employee. These options shall vest and become exercisable 1/3 on each anniversary of the grant date. The options will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
During the fiscal year ended September 30, 2022, the Company granted new stock options at an average exercise price of $ to employees. For employees, . During the fiscal year ended September 30, 2022, the Company issued a total of 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.
| F-21 |
The exercise price for the options issued in the year ended September 30, 2022 ranged from $ - $ per share. The options will expire from the grant date, unless terminated earlier as provided by the option agreements.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on the volatility of a peer group of companies for the years ended September 30, 2023 and 2022. For the year ended September 30, 2023 and 2022, the expected term of options granted was determined using the simplified method under SAB 107 which represents the mid-point between the vesting term and the contractual term. The risk-free rate is calculated using the U.S. Treasury yield curve and is based on the expected term of the option.
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS FOR FAIR VALUE MEASUREMENT OF OPTIONS GRANTED
| For employees | September 30, 2023 | September 30, 2022 | ||||||
| Risk-free interest rate | % | - | % | |||||
| Expected option life | ||||||||
| Expected volatility | % | - | % | |||||
| Expected dividend yield | % | % | ||||||
| Exercise price | $ | $ -$ | ||||||
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 $
During the year ended September 30, 2023, stock options were forfeited because of termination of employment, expiration of options and performance conditions not met.
SUMMARY OF STOCK OPTION ACTIVITY
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Granted | -- | |||||||||||||||
| Exercised | - | |||||||||||||||
| Expired | ( | ) | - | |||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
During the year ended September 30, 2022, the Company issued shares of common stock upon the exercise of outstanding stock options and stock options were forfeited because of termination of employment, expiration of options and performance conditions not met.
| F-22 |
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 September 30, 2022 | $ | |||||||||||||||
| Exercisable at September 30, 2022 | $ | $ | ||||||||||||||
SUMMARY OF UNVESTED SHARES
| |
|
Number of Nonvested Options |
|
|
Weighted Average Grant Date Fair Value |
|
||
| Nonvested options at September 30, 2021 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Nonvested options at September 30, 2022 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Nonvested options at September 30, 2023 | $ | |||||||
Warrants
| F-23 |
2022 Warrants
On
April 13, 2022, the Company sold
2022 Units, with each 2022 Unit consisting of (a) one share of our common stock and (b) one 2022 Warrant. Each 2022 Warrant entitles
the holder to purchase one share of our common stock at an exercise price of $
The following table summarizes warrant activity for the year ended September 30, 2023:
SCHEDULE OF WARRANT ACTIVITY
Number of Shares Issuable Upon Exercise of Warrants |
Weighted Average Exercise Price |
Weighted Average Remaining |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
The following table summarizes warrant activity for the year ended September 30, 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 September 30, 2022 | $ | |||||||||||||||
| Exercisable at September 30, 2022 | $ | $ | ||||||||||||||
In
the year ended September 30, 2022, we issued shares of common stock related to exercises of 2021 Warrants, including shares
of common stock issued upon exercise of
10. INCOME TAX
The
company recorded $
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The
Company will have tax losses available to be applied against future years’ income as result of the losses incurred. However,
due to the losses incurred in the period and expected future operating results, management determined that it is more likely than
not that the deferred tax asset resulting from the tax losses available for carry forward will not be realized through the reduction
of future income tax payments. Accordingly, a
| F-24 |
The
Company used statutory blended tax rates of
Deferred tax assets consisted of the following as of September 30, 2023 and 2022:
SCHEDULE OF DEFERRED TAX ASSETS
| 2023 | 2022 | |||||||
| Net Operating Losses | $ | |||||||
| Stock based compensation | ||||||||
| Fixed assets and intangible assets | ||||||||
| Total deferred tax assets | $ | |||||||
| Valuation Allowance | ( | ) | $ | ( | ) | |||
| Deferred tax assets net of valuation allowance | $ | |||||||
11. CONTINGENCIES
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. Discovery in the case is ongoing and no trial date has been set.
The Company believes it has basis to defend the claims in the Steeped Litigation, however, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in any defense or counterclaim.
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. We expect Ms. Curtin to initiate arbitration proceedings in January 2024. 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.
| F-25 |
12. 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
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
| F-26 |
Exhibit 10.20
Exhibit 10.21
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statements on Form S-3 (No. 333- 274818) and Form S-8 (No. 333-270724) of NuZee, Inc. (the “Company”) of our report dated January 16, 2024 with respect to the audited consolidated financial statements of the Company appearing in this Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
January 16, 2024
Exhibit 31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Masateru Higashida, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended September 30, 2023 of NuZee, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 16, 2024
| By: | /s/ Masateru Higashida | |
| Name: | Masateru Higashida | |
| Title: | Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director |
Exhibit 31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Randell Weaver, certify that:
1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended September 30, 2023 of NuZee, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: January 16, 2024
| By: | /s/ Randell Weaver | |
| Name: | Randell Weaver | |
| Title: | President & Chief Operating Officer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Masateru Higashida, the Chief Executive Officer, Secretary, Treasurer, and Director of NuZee, Inc. (the “Company”), hereby certify, that, to my knowledge:
1. The Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 16, 2024
| By: | /s/ Masateru Higashida | |
| Name: | Masateru Higashida | |
| Title: | Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director |
Exhibit 32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Randell Weaver, the President, Chief Operating Officer, and Chief Financial Officer of NuZee, Inc. (the “Company”), hereby certify, that, to my knowledge:
1. The Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 16, 2024
| By: | /s/ Randell Weaver | |
| Name: | Randell Weaver | |
| Title: | President & Chief Operating Officer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |