CIMG Inc 10-K for FY2021
CIMG Inc. (CIMG)
About this 10-K
CIMG Inc filed this 10-K on December 22, 2021, covering the fiscal year ended September 30, 2021 (FY2021).
Headline figures
Fiscal year ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.93M
- up 37.3% from $1.4M a year earlier
- Net loss
- $18.55M
- compared with a net loss of $9.48M 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)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
(Address of principal executive offices)
Registrant’s
telephone number, including area code — (
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
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by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
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by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
| ☒ | Smaller reporting company | ||||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The
aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (based on the price at which the
registrant’s Common Stock was last sold as of March 31, 2021, the last business day of the most recently completed second fiscal
quarter), was approximately $
As of December 8, 2021, there were outstanding shares of the registrant’s Common Stock, $0.00001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s definitive Proxy Statement to be filed in connection with its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. The information in Part III hereof for the fiscal year ended September 30, 2021, will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
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 and provide our co-packing services; | |
| ● | the impact to our business from the COVID-19 global crisis, including any supply chain interruptions; | |
| ● | the evolving coffee preferences of coffee consumers in North America and Korea; | |
| ● | the size and growth of the markets for our products and co-packing services; | |
| ● | our ability to compete with companies producing similar products or providing similar co-packing services; | |
| ● | our expectation that our existing capital resources will be sufficient to fund our operations for at least the next 12 months; | |
| ● | our expectation regarding our future co-packing revenues, including in fiscal year 2022; | |
| ● | our ability to develop innovative new products and expand our co-packing services to other products that are complementary to our current single serve coffee product offerings; | |
| ● | our reliance on third-party roasters to roast coffee beans necessary to manufacture our products and allow us 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; | |
| ● | the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; | |
| ● | our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting; and | |
| ● | the outcome of pending, threatened or future litigation; | |
| ● | our financial performance. |
The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties.
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 company and, we believe, a leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of tea-bag style coffee. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.
We believe we are the only commercial-scale producer that has the dual capacity to pack both single serve pour over coffee and tea-bag style coffee within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve pour over and tea-bag style coffee markets in North America. We target existing high-margin companies and are paid per-package based on the number of single serve coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve coffee product our co-packing customers sell in the North American and Korean markets. While we financially benefit from the success of our co-packing customers through the sales of their respective single serve pour over and tea-bag style coffee products, we are also able to avoid the risks associated with owning and managing the product and its related inventory. We have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and tea-bag style coffee, which we believe offers consumers some of the best coffee available in a single serve application in the world.
We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
Single serve coffee products
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.
Tea-bag style coffee
We introduced our tea-bag style coffee, or coffee tea bags, in 2019. The brewing method is similar to brewing tea; put the coffee tea bag in a cup, add hot water and let it sit for approximately 5 minutes. This coffee brewing method is relatively new to North America and we believe has gained attention from roasters and end consumers who want eco-friendlier alternatives to coffee pods and other types of single serve coffee. Our coffee tea bags are industrially compostable, allowing consumers to deposit the used coffee tea bag in the food scrap and yard waste bin after brewing.
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 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.
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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. 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 waste and leads to better coffee sustainability. | |
| ● | Our single serve coffee products are brandable to the cup level, and, unlike machine-based drip systems, the branding remains visible throughout the process of preparing and consuming a cup. |
We seek to establish ourselves as the leading co-packer of single serve coffee products for the North American market, and 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, 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 co-packer of choice for companies offering single serve coffee products in the North American market.
We own sophisticated packing equipment developed by East Asian companies for pour over and tea-bag style coffee production. We believe these manufacturers are the world leaders for supplying such machines. We obtained these machines from a premier supplier of the type of high-quality packing equipment we use for our products, FUSO Industries Co. Ltd. (“FUSO”).
We understand that as single serve pour over and tea-bag style 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 and organic 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. Furthermore, we are now in the preliminary stage of obtaining Quality Management SQF Certification, which involves a comprehensive implementation of even more advanced safety and quality management systems. We are also certified as fair trade, organic, and Kosher.
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 tea-bag style coffee products. 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.
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Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time, we have developed expertise in the operation of our sophisticated packing equipment and the related production of our single serve pour over coffee products at both our Vista, California facility and at our production operations in Seoul, Korea. In addition, our manufacturing facility and corporate headquarters in Plano, Texas is now operational. We have also expanded our co-packing expertise to tea bag style coffee products, which we believe are gaining traction in the United States.
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 produce and package into single serve pour over and tea-bag style 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 partners), blend, pack (in either our single serve pour over or tea-bag style 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 tea-bag style 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.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for a particular smaller company in July 2017 and continue to do so today. This company started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new and innovative companies with whom we may work and grow.
As previously announced, we expect to manufacture certain Cuvée Coffee (“Cuvée”) single serve filter bag products that Cuvée plans to sell in a nationally recognized retail chain. Pursuant to our co-packing arrangement with Cuvée, we currently, and plan to continue to, manufacture single serve filter bag products according to their formulations and specifications on a purchase order basis. For a discussion of certain risks related to our co-packing arrangements, including our co-packing arrangement with Cuvée, see “Item 1A. Risk Factors” herein.
NuZee branded products
Although our primary focus is on the manufacture of single serve pour over coffee products pursuant to co-packing arrangements, we have also developed high-quality NuZee branded single serve coffee products that are sold directly to consumers. In addition to being available for direct sale to consumers, our NuZee branded products serve as samples that are provided to potential new co-packing customers to showcase our co-packing capabilities and production expertise. In this regard, our NuZee branded products are a ‘stepping-stone’ product for our co-packing customers that market high quality packaging and coffee. Sales of our NuZee branded products, including through Amazon, 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.
| ● | Coffee Blenders. Our Coffee Blenders line of products, including both single serve pour over coffee products and tea-bag style coffee, is our flagship, high-end product line that, in addition to showcasing our production expertise, also includes what we believe to be some of the best coffee available in a single serve application in the world. We sell Coffee Blenders products mainly online and to some specialty retailers. We also have a number of potential co-packing opportunities in which our customers would contract for us to replicate one or more of our Coffee Blenders products with their foil and packing, providing further evidence of the high-quality nature of this line and coffee. |
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| ● | Twin Peaks. We currently sell our Twin Peaks single serve pour over coffee exclusively via Amazon. This program commenced in 2019 and we expect that as Amazon and its customers become more familiar with single serve pour over coffee, we will increase our revenue for this product. | |
| ● | Pine Ranch. Pine Ranch is another line of our tea bag-style coffee that is available in two distinct roasts: a medium roast called “Smooth Blend” and a dark roast called “Bold Blend”. We introduced this product line in 2019. We offer it direct to consumers through Amazon. Pine Ranch is available in dispense boxes that are suitable for offices and retail stores. Pine Ranch is a product that we can showcase to potential co-packing customers as an alternative to the pour over format. |
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. 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 believe that, as the U.S. market continues to gain awareness of single serve pour over and tea-bag style coffee products, we will continue to grow our base of large domestic or international co-packing customers. | |
| ● | Co-pack for smaller scale, rapidly growing, innovative coffee customers 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. | |
| ● | Increase our production capacity in response to growing demand for co-packing. In 2019, we announced a new manufacturing facility and corporate headquarters in Plano, Texas. Our manufacturing facility in Plano, Texas is now operational, and we expect this facility to provide additional production capacity in anticipation of growing demand for our co-packing services. | |
| ● | 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 for manufacturing and sales in Latin America. As we look at other potential international manufacturing locations, we look for characteristics similar to the Korean, Latin American and U.S. markets. We plan to further leverage our international operations to support our customers’ expansion into the markets in which we operate. This includes assisting our U.S. customers launching their products in Japan, Korea and Mexico. |
Industry
According to the United States Department of Agriculture (“USDA”), global coffee consumption is forecast to reach 165.0 million bags in 2021/22 (a bag is equivalent to 60 kilograms), which was an increase of 1.8 million bags from the prior year. The United States is the single country with the highest projected consumption as part of this forecast.
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While consumers have been purchasing single-serve coffee machines to recreate the café style experience at home, there has been an increased focus on environmental sustainability and demand for eco-friendly products. The 2019 Retail and Sustainability Survey by CGS showed that more than two-thirds of respondents consider sustainability when making a purchase and are willing to pay more for sustainable products. Greenpeace USA considered coffee pods as “one of the best examples of unnecessary single-use plastics that are polluting our planet” and the big producers of pods have been seeking eco-friendly alternatives. Sustainability is expected to continue to be a big trend in the coffee pod market, especially as some cities and local governments consider bans on the use of single-use plastic pods (akin to bans on plastic straws and plastic bags) and as consumers become increasingly concerned about throwing used plastic pods in landfills, according to Food Dive.
We believe that many of the prevalent industry trends – the continued consumption and market growth, the prevalence of “at home” consumption, the popularity of single-serve coffee brewing, the increased focus on unique coffee experiences, and consumers’ shift to eco-friendly and sustainable alternatives – will be favorable to our business.
Customers and Sales
Our co-packing customers primarily include large and small size coffee roasters and suppliers. We intend to continue to pursue such co-packing arrangements in the future. We believe this interest is 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 quality compared to other single serve coffee alternatives.
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 key co-packing customers and other key retail and grocery customers.
Generally, under our co-packing arrangements, co-packing 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, including our co-packing arrangement with Cuvée, are typically not governed by any written agreement and have no minimum purchase requirements.
We also sell our NuZee branded products directly to consumers. Currently, Amazon and our www.coffeeblenders.com website are our only established domestic retail channels for direct sales to consumers of NuZee branded products. For additional information regarding our current customer base, see “Note 2. Basis of Presentation And Summary of Significant Accounting Policies—Major Customers” to our Consolidated Financial Statements.
Manufacturing
We lease manufacturing facilities in Vista, California, Plano, Texas, and Seoul, Korea, all of which are used to produce our single serve pour over or tea-bag style coffee products. These manufacturing facilities currently have the annual capacity to produce up to 300 million single serve coffee products (pour over or tea bag style). We have analyzed our current facilities considering our anticipated requirements, and we believe there is a need to optimize our manufacturing facilities to meet our future needs. We have entered into a new lease in Korea for a larger facility we are taking possession in January 2022 and are searching for a more optimal facility in the US.
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Machinery for production at our manufacturing facilities comes from some of the most respected vendors in the industry. Our single serve coffee products are produced on packaging machines produced by the leading Japanese manufacturer of packaging machines, FUSO. 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.
Raw Materials
Our primary raw material is green whole bean coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. 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 tea-bag style coffee products according to their formulations and specifications. In addition, in connection with the production of our NuZee 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 whole bean coffee from multiple green coffee suppliers, and from multiple regions around the world. 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, 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 whole bean coffee is essential to our ability to manufacture NuZee 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 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.
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. We also sell NuZee branded products directly to consumers through our website and on Amazon, which are typically delivered by common carriers directly to each customer.
Intellectual Property
We currently own the following United States trademarks: “NuZee”, “NuZee Coffee (Stylized)”, “NuZee Coffee and Design”, “Coffee Blenders” and “Twin Peaks.” We are also in the process of obtaining rights to the “It’s Coffee Reimagined” trademark. 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 had registered trademarks “Coffee Blenders” and “Twin Peaks” in Japan and registered trademarks “Twin Peaks” in Korea.
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.
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. Our Korean subsidiary increased its customer base in our 2021 fiscal year, and we believe that it will be able to continue to secure meaningful co-packing customers in our 2022 fiscal year.
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Latin America
On January 9, 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 and is in the early stages of business development. Its primary business operations are intended to consist of the manufacture of single serve pour over coffee products for sale in Mexico, Central and South America.
Japan
We maintain a presence in Japan with an administrative office that is minimally staffed that primarily assists with import and export of sales and materials between the US and Japan.
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, particularly from younger consumers such as millennials.
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 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 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.
Employees
As of September 30, 2021, we had a total of 20 employees in the United States, nine employees in Korea and one employee in Japan, all of whom are full-time. 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.
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Information about our Executive Officers
The following sets forth the names, ages and current positions of our executive officers as of December 22, 2021.
Masateru Higashida, age 50, has served as our Chief Executive Officer, Secretary, and Treasurer since October 2014, and as Chair of the Board since April 2013. In July 2020, Mr. Higashida was also re-appointed President of the Company. He previously also held the position of President from October 2014 until August 2017, and Chief Financial Officer from August 2014 until February 2019. Mr. Higashida previously founded multiple companies, including a Korea-based investment company and a Singapore-based investment company, and began his career in the financial industry in Nagoya, Japan.
Patrick Shearer, age 53, has served as our Chief Financial Officer since July 2021. He brings over 25 years of experience in accounting, finance, transactions, and management in a variety of industries including food and beverage. Mr. Shearer was employed by Deloitte from 1993 to 2020. Most recently at Deloitte, Mr. Shearer served as Partner, Risk and Financial Advisory Services from 2004 to 2020. During this time, he was responsible for advising corporate and private equity clients on matters including accounting, finance, mergers, acquisitions, divestitures, and capital markets in a variety of industries, including consumer, industrials, services, and technology. During his time at Deloitte, Mr. Shearer was based in the firm’s Los Angeles and San Francisco, California and Nagoya and Tokyo, Japan offices. Mr. Shearer has significant international experience having lived and worked in Japan and having completed numerous cross-border projects. Mr. Shearer earned a Bachelor of Arts degree in economics from the University of California, Los Angeles. He is a licensed certified public accountant in the State of California.
Tomoko Toyota, age 50, has served as our Chief Marketing Officer since May 2021. Ms. Toyota brings over two decades of marketing leadership experience developing global brand and business strategies, with more than 10 years in the coffee industry leading market expansion of specialty coffee products, including single serve pour over coffee. From 2018 to 2021, Ms. Toyota was in charge of brand strategy and integrated marketing as Integrated Marketing, Head of Spring at the Brooks Running Company. In this role, Ms. Toyota’s responsibilities included leading global brand strategy development for key initiatives and leading teams to develop integrated marketing campaigns. During her 13-year tenure at the Starbucks Coffee Company between 2005 and 2018, Ms. Toyota held several senior level positions including Director of Global Strategic Marketing and Innovation and Director of Starbucks Integrated Marketing and SBC. Ms. Toyota earned a Bachelor of Arts degree in Political Science from Keio Gijuku University.
Jose Ramirez, age 46, has served as our Chief Sales Officer and Chief Supply Chain Officer since May 2021. Prior to joining the Company, Mr. Ramirez worked for 12 years at Farmer Bros. Co. (“FBC”). Most recently, as the Vice President of Coffee Strategy and Sustainability for FBC, he was responsible for green coffee management, customer and vendor partnerships, and company sustainability initiatives. Mr. Ramirez has been very active in the coffee community for over 20 years, serving on several boards including the board of World Coffee Research.
Travis Gorney, age 41, has served as our Chief Innovation Officer and Vice President, Sales since May 2021. He previously served as our Chief Marketing Officer and Vice President from July 2020 to May 2021, President and Chief Operating Officer from September 2017 to July 2020, Senior VP of Sales and Marketing from January 2017 to August 2017 and VP of Sales and Supply Chain Management from February 2016 to January 2017. Mr. Gorney became a full-time employee of the Company in April 2013, following two years of consulting for Mr. Higashida on a project concerning bottled spring water from New Zealand as well as a line of certified organic beauty products. From 2008 through 2018, Mr. Gorney acted as President and CEO of Left Coast Threads, Inc., a company that operates retail clothing stores. Previously, in 2003, Mr. Gorney formed Point Blank Beverage, Inc. where, as President and CEO, he developed a premium energy drink by the name of Torque. Mr. Gorney began his career in the beverage industry as national sales manager for a start-up independent energy beverage company named Rollin X, LLC, where he worked from 2002 until 2004.
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Governmental Regulation
Our Coffee Blenders 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.
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.
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.
On October 28, 2019, we completed a l-for-3 reverse stock split, which became effective on November 12, 2019 (the “Reverse Split”). Unless we indicate otherwise, all share and per share information in this Report reflects the Reverse Split, and the accompanying financial statements and notes to the financial statements give effect to the Reverse Split.
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.
Our principal executive offices are located at 1401 Capital Avenue, Suite B, Plano, Texas 75074, and our telephone number is (760) 295-2408.
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 from the commercialization of our single serve coffee products or co-packing services to achieve or sustain profitability. | |
| 2. | We may not be able to raise additional capital to fund our existing operations, market our products and co-packing services and expand our operations. | |
| 3. | We have limited operating history, which may make it difficult to evaluate our current business and to forecast our future performance. | |
| 4. | Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations. | |
| 5. | The COVID-19 pandemic and the appearance of new variants continues to affect our business operations and financial condition, and our liquidity could also be negatively impacted. | |
| 6. | 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. | |
| 7. | 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. | |
| 8. | 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. | |
| 9. | 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. | |
| 10. | Our business, growth and profitability depend on the performance of third-parties and our relationship with them, including third-party coffee roasters. | |
| 11. | 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. | |
| 12. | 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. | |
| 13. | 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 arrangements or decide to delay or cancel orders, which could negatively impact our revenues. | |
| 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. The NASDAQ Capital Market may subsequently delist our common stock if we fail to comply with ongoing listing standards. | |
| 24. | Our stockholders will experience dilution if we issue additional equity securities in future financing transactions. | |
| 25. | A significant portion of our total outstanding shares of common stock are eligible to be sold into the market in the near future, which could cause the market price of our common stock to drop significantly. | |
| 26. | 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. | |
| 27. | 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. | |
| 28. | 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. | |
| 29. | Anti-takeover provisions in our articles of incorporation and second amended and restated bylaws 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. | |
| 30. | 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. | |
| 31. | 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. | |
| 32. | Product safety and quality concerns could negatively affect our business. | |
| 33. | 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. | |
| 34. | Currently pending, threatened or future litigation or governmental proceedings or inquiries could result in material adverse consequences, including judgments or settlements. | |
| 35. | 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.
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 from the commercialization of our single serve coffee products or co-packing services to achieve or sustain profitability.
We have incurred net losses since our inception in 2013, including net losses of $18.6 million and $9.5 million for the years ended September 30, 2021, and 2020, respectively. As of September 30, 2021, our accumulated deficit was approximately $52.8 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.
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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 and co-packing services, 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.
We may not be able to raise additional capital to fund our existing operations, market our products and expand our operations.
While we believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least 12 months, this evaluation is based on relevant conditions and events that are currently known or reasonably foreseeable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products and co-packing services could further constrain our cash resources.
If our available cash balances and anticipated cash flow from operations are lower than we anticipate, including due to changes in our business plan, a lower demand for our products and co-packing services or other risks described in this Report, we may seek to raise additional capital sooner than currently expected. However, we may not be able raise such additional capital on favorable terms or at all.
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. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. 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.
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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 due to the global impact of COVID-19. 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.
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.
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Risks Related to Our Business
The COVID-19 pandemic continues to affect our business operations and financial condition, and our liquidity could also be negatively impacted, particularly if the United States and East Asian economies remain unstable for a significant amount of time.
In December 2019, the novel coronavirus (“COVID-19”) originated in Wuhan, China. Since its discovery, COVID-19 has spread worldwide and caused significant disruption in the international and United States economies and financial markets. Federal, state and local government responses to COVID-19 and our responses to the outbreak have all disrupted and will continue to disrupt our business. In the United States, individuals are being required to practice social distancing, in many places have been or currently still are restricted from gathering in large groups, and in some cases have been placed on complete restriction from non-essential movements outside of their homes. Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus have arisen globally. The impact of the Delta and Omicron variants, or other variants that may emerge, cannot be predicted at this time, and could depend on numerous factors, including vaccination rates and the availability of vaccines in different parts of the world, the effectiveness of COVID-19 vaccines against variants, and the response by governmental bodies to reinstate restrictive measures.
The spread of COVID-19 and its variants and resulting business closings, layoffs, travel bans and restrictions and shelter-in-place or similar orders have resulted, and may result in the future, in substantial and widespread reduction in business activity and financial transactions, an increase in unemployment, reduced consumer spending, supply chain interruptions and overall economic and financial market instability, which may affect our ability to produce our products and provide our co-packing services, demand for our products and co-packing services, our revenues and our ability to collect outstanding receivables, as well as the ability of our customers to pay for goods delivered. Such federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the COVID-19 pandemic could ultimately have an adverse effect on our business, financial condition, results of operations and cash flows.
In the fiscal years ended September 30, 2020 and September 30, 2021, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or single serve coffee products, and we also believe that potential sales of our single serve coffee products to new or potential customers in the hospitality industry were adversely impacted. In addition, we have experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing from Asia. We do not believe, however, that these delays had a significant effect on our business or results of operations to date, and in some cases we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. As the COVID-19 pandemic is complex and rapidly changing, the full extent and duration of the impact of COVID-19 on our business and financial results is currently unknown and depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic and its impact on consumer spending, supply chains and overall economic and financial markets. If general economic conditions deteriorate or remain uncertain for an extended period of time, our liquidity may be harmed and the trading price of our common stock could decline significantly.
We have a corporate office in Japan and a manufacturing and sales office in Korea, and we source our manufacturing equipment and filters from East Asian companies. The continued spread of COVID-19 and the appearance of new variants and implementation of restrictive measures may adversely affect our operations in North America and Asia and our business generally, depending on the extent of its spread of the virus, the effect on international trade and commerce and on foreign and domestic travel generally of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, and other factors. If such circumstances continue to deteriorate, our production capabilities and demand for our products and co-packing services may decline, which would have an adverse effect on our results of operations and financial condition.
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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 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 www.coffeeblenders.com 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 purchase 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 our sales of NuZee branded products and our profitability.
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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. In addition to single serve pour over coffee products, we have also recently expanded our co-packing expertise to tea bag style coffee products. 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 partners), blend, and package coffee to their exact specifications. We have also developed and sell NuZee branded products. Our growth strategy includes, among other things, further developing our NuZee branded product lines and growing our private label coffee development program to reach new co-packing customers, as well as increasing sales of our recently introduced tea bag style coffee. 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 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.
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, price and volume fluctuations in the stock market as a whole may 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; |
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| ● | 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 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.
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 branded products and private labels for our co-packing customers under our private label development program, we rely on third-party roasters to roast green whole bean coffee according to our specifications before shipping to us for grinding, blending, packing and packaging. Our reliance on third-party roasters to roast coffee beans necessary to manufacture our products and allow us to fulfill every aspect of our co-packing services subjects us to additional risks, including the possible termination of the arrangement by a third-party roaster at a time that is costly or inconvenient for us. Our third-party roasters 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 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.
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 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. We also sell NuZee branded products directly to consumers through our website and on Amazon, which are typically delivered by common carriers directly to each customer. The success of these distribution networks depends on the performance of brokers, distributors, common carriers and retailers. 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 may not adequately perform its functions within the network by, without limitation, failing to distribute our products.
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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, 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, 2020 and September 30, 2021, as a result of responses to the COVID-19 pandemic, we have experienced delays in the shipment to us of coffee and packaging materials for co-packing. 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.
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, including Masateru Higashida, our Chief Executive Officer and President, Secretary and Treasurer, Patrick Shearer, our Chief Financial Officer, Jose Ramirez, our Chief Sales Officer & Chief Supply Chain Officer, and Tomoko Toyota, our Chief Marketing Officer. 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 costs related to the COVID-19 pandemic and its resurgence. In addition, our wages and benefits programs, combined with the challenging conditions due to the COVID-19 pandemic, may be insufficient to attract and retain talent.
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A substantial portion of our sales are completed on a purchase order basis without any written agreements, including sales under our co-packing arrangements with Cuvée and other co-packing customers. Such co-packing customers 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, 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 are typically not governed by any written agreement and have no minimum purchase requirements. 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 arrangements, including Cuvée, issue fewer or smaller purchase orders than we expect, or we experience any delays or cancellations in orders (due to current distress in the global economy caused by COVID-19, or otherwise), our revenues could decline substantially. Any such decline could result in us incurring net losses, increasing our accumulated deficit and needing to raise additional capital to fund our operations.
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 and tea-bag style 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 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.
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 (including the COVID-19 pandemic), 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. Specifically, severe frosts and drought in Brazil currently threaten to negatively impact crop yields for multiple harvests, which could reduce supply and increase cost. In addition, the political situation in many of the Arabica 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.
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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 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.
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines.
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 increase our selling prices or reduce 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 single serve coffee products. In fiscal year 2021, we expanded our sales and support operations by adding, among others, a new Chief Sales Officer & Chief Supply Chain Officer, a new Chief Marketing Officer, a new Vice President of Business Development, and a new Vice President of Sales, North and West Coast. As of September 30, 2021, we have 30 employees and we expect to continue hiring new employees and independent contractors to support our anticipated growth. 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.
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. We set target levels for the manufacture of our single serve 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.
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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 single serve coffee production, including from FUSO or any suitable alternative manufacturers; | |
| ● | 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; | |
| ● | 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; |
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| ● | 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, industry and market conditions. |
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 common stock if we fail to comply with ongoing listing standards.
The NASDAQ Capital Market’s rules for listed companies will require 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. If we fail to meet those standards, as applied by NASDAQ in its discretion, our common stock may be subject to delisting. We intend to take all commercially reasonable actions to maintain our NASDAQ 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.
Our stockholders will experience dilution if we issue additional equity securities in future financing transactions.
If we issue additional common stock, or securities convertible into or exchangeable or exercisable for common stock, our stockholders may experience additional dilution, and any such issuances may result in downward pressure on the price of our common stock. Further, investors purchasing shares or other securities in the future could have rights superior to existing stockholders.
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A significant portion of our total outstanding shares of common stock are eligible to be sold into the market in the near future, including pursuant to Rule 144, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We have also registered all shares of common stock that are reserved for issuance under the NuZee, Inc. 2019 Stock Incentive Plan and all shares of common stock currently reserved for issuance under the NuZee, Inc. 2013 Stock Incentive Plan. As a result, these shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in our filings with the SEC. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop. We believe that a significant portion of our total outstanding shares of common stock may be sold in the public market without restriction by non-affiliates pursuant to Rule 144.
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 8, 2021, our executive officers and directors beneficially owned approximately 34% of our voting stock. Our Chief Executive Officer, President and Chairman of the Board of Directors individually beneficially owns approximately 28% 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.
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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.
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 articles of incorporation and second amended and restated bylaws 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 articles of incorporation and second 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 corporate governance documents include provisions:
| ● | authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; |
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| ● | 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. |
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 articles of incorporation and second 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 articles of incorporation and second 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 articles of incorporation and second 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 may be volatile, and 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 or preferred stock, it could be dilutive to our current stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2. PROPERTIES
Our principal executive office is located at 1401 Capital Avenue, Suite B, Plano, Texas 75074. The Plano location also serves as a manufacturing facility. We lease the Plano facility on an annual basis, at a cost of $3,500 per month. We lease another manufacturing facility at 2865 Scott Street, Suites 105-107 Vista, California 92081. We lease the Vista manufacturing facility on an annual basis at a cost of $8,173 per month through January 31, 2022. Subsequent to September 30, 2021, the Company entered into a one-year extension of its leased facility in Vista, California. The lease has a monthly lease expense of $8,451, plus common area expenses, and expires on January 31, 2023. We have a manufacturing and sales office in Seoul, Korea, which is leased through June 2022 at a cost of $2,490 per month. The Company also entered into a lease agreement for a new manufacturing facility in Korea with a lease term of two years from the date of taking physical possession, which is anticipated in January of 2022. The Company is required to make a lease deposit of approximately $68,000 and the monthly lease expense is approximately $6,800. Our manufacturing facilities currently have the annual capacity to produce up to 300 million single serve coffee products (pour over or tea bag style). We have analyzed our current facilities considering our anticipated requirements, and we believe there is a need to optimize our manufacturing facilities to meet our future needs. We have entered into a new lease in Korea for a larger facility, as further discussed above, and are searching for a more optimal facility in the United States.
ITEM 3. LEGAL PROCEEDINGS
On November 23, 2021, Next Vision, Inc. (the “Consultant”) filed a complaint against the Company in the Superior Court of California, County of San Diego Central Division (Case No. 37-2021-00049557-CU-BC-CTL). The Complaint 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 of the Company’s common stock, as initially granted in 2018 (or, as adjusted to account for the Company’s reverse stock split effected on November 12, 2019, vested stock options to acquire 23,334 shares of the Company’s common stock) (the “Options”), which had previously been issued to the Consultant as compensation for consulting services provided in 2018, breached express and implied contractual obligations to the Consultant and resulted in the Company reporting an overstated amount of income on the IRS Form 1099-B that was issued to the Consultant for U.S. federal tax purposes. In addition, the Complaint alleges that the 23,334 Shares issued to the Consultant upon exercise of the Options improperly contained a six-month restriction on resale and that such restriction prevented the Consultant from selling the Shares at the desired time. The Complaint seeks equitable relief requiring the Company to issue an IRS Form 1099-NEC to reflect the correct amount of compensation. The Complaint also seeks compensatory damages, including to recover for alleged lost profits due to the alleged improper six-month restriction on resale for the Shares, as well as punitive damages, costs of suit, attorney’s fees and interest.
We believe the allegations set forth in the Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.
As previously disclosed, on June 27, 2019, Steeped, Inc. d/b/a Steeped Coffee (the “Plaintiff”) filed a complaint (the “Steeped Complaint”) against the Company in the United States District Court for the Northern District of California (the “District Court”), alleging that the Company’s promotion of certain coffee products and services during a trade show in 2019 constituted an infringement upon the Plaintiff’s registered trademark. The Steeped Complaint sought an injunction against the continued use of the Plaintiff’s trademarks, as well as actual and punitive damages. In May 2021, the Company entered into a settlement agreement with the Plaintiff, pursuant to which the Company denied the allegations in the Steeped Complaint, denied any liability arising therefrom, and agreed to pay $35,000 to resolve all claims asserted by the Plaintiff. As a result, a Joint Stipulation and Order for Dismissal was filed with the District Court on May 21, 2021, and the Order of the Court dismissing the case was entered on the same day.
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 December 8, 2021, there were approximately 278 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 of Directors 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 of Directors may deem relevant.
ITEM 6. [RESERVED]
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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 company and, we believe, a leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of tea-bag style coffee. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.
We believe we are the only commercial-scale producer that has the dual capacity to pack both single serve pour over coffee and tea-bag style coffee within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve pour over and tea-bag style coffee markets in North America. We target existing high-margin companies and are paid per-package based on the number of single serve coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve coffee product our co-packing customers sell in the North American and Korean markets. While we financially benefit from the success of our co-packing customers through the sales of their respective single serve pour over and tea-bag style coffee products, we are also able to avoid the risks associated with owning and managing the product and its related inventory. We have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and tea-bag style coffee, which we believe offers consumers some of the best coffee available in a single serve application in the world.
We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
For additional details regarding our business, see the discussion under Business in Item 1 of Part I of this Report, which is incorporated by reference into this Part II, Item 7 of this Report.
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 produce and package into single serve pour over and tea-bag style 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 partners), blend, pack (in either our single serve pour over or tea-bag style coffee products), and package single serve coffee products to their exact specifications.
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We currently focus on fostering co-packing arrangements with larger companies developing pour over and tea-bag style 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 a 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.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for a particular smaller company in July 2017 and continue to do so today. This company started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new and innovative companies with whom we may work and grow.
As previously announced, we expect to manufacture certain Cuvée Coffee (“Cuvée”) single serve filter bag products that Cuvée plans to sell in a nationally recognized retail chain. Pursuant to our co-packing arrangement with Cuvée, we currently, and plan to continue to, manufacture single serve filter bag products according to their formulations and specifications on a purchase order basis. For a discussion of certain risks related to our co-packing arrangements, including our co-packing arrangement with Cuvée, see “Item 1A. Risk Factors” herein.
NuZee branded products
Although our primary focus is on the manufacture of single serve pour over coffee products pursuant to co-packing arrangements, we have also developed high-quality NuZee branded single serve coffee products that are sold directly to consumers. In addition to being available for direct sale to consumers, our NuZee branded products serve as samples that are provided to potential new co-packing customers to showcase our co-packing capabilities and production expertise. In this regard, our NuZee branded products are a ‘stepping-stone’ product for our co-packing customers that market high quality packaging and coffee. Sales of our NuZee branded products, including through Amazon, 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.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the fiscal years ended September 30, 2021, and September 30, 2020, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or pour over coffee products, and we also believe that potential sales of our pour over coffee products to new or potential customers in the hospitality industry were adversely impacted. In addition, we have experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. We do not believe, however, that these delays had a significant effect on our business or results of operations to date, and in some cases we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. See Item 1A of Part I of this Report for further discussion of risk factors related to COVID-19.
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
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For the fiscal year ended September 30, 2021, net revenues attributable to our operations in North America totaled $1,441,274, compared to $1,025,151 of net revenues attributable to our operations in North America during the fiscal year ended September 30, 2020. Additionally, as of September 30, 2021, $535,966 of our Property and equipment, net was attributable to our North American operations, compared to $1,422,575 attributable to our North American operations as of September 30, 2020. In March 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the Company’s current business operations at that time. $93,375 of the impairment was related to the ROU asset and $747,016 was to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the year ended September 30, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited.
For the fiscal year ended September 30, 2021, net revenues attributable to our operations in Asia totaled $485,386 compared to $377,980 of net revenues attributable to our operations in Asia during the fiscal year ended September 30, 2020. Additionally, as of September 30, 2021, $156,058 of our Property and equipment, net was attributable to our Asian operations, compared to $245,773 attributable to our Asian operations as of September 30, 2020.
Results of Operations
Comparison of Years ended September 30, 2021 and 2020
Revenue
Year ended September 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Revenue | $ | 1,926,660 | $ | 1,403,131 | $ | 523,529 | 37 | % | ||||||||
For the year ended September 30, 2021, revenues increased by $523,529, or approximately 37%, compared with the year ended September 30, 2020. This increase was primarily related to increased co-packing revenues in North America and Korea partially offset by the impact from the sale of NuZee JP to EHCL on September 28, 2020, as the results for the year ended September 30, 2020 include revenues from NuZee JP while the results for the year ended September 30, 2021 do not.
The year-over-year growth in revenues described above was driven primarily by increased co-packing revenues. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations by adding, among others, a new Chief Sales Officer & Chief Supply Chain Officer, a new Chief Marketing Officer, a new Vice President of Business Development, and a new Vice President of Sales, North and West Coast, which has resulted in increased orders and increased co-packing opportunities for current and potential new co-packing customers. We expect this co-packing revenue growth trend to continue throughout fiscal year 2022 as a result of our expanded sales and marketing team, as well as from additional co-packing revenues that we expect to be generated from new or potential co-packing arrangements. We expect the revenue growth trend in fiscal year 2022 to be materially similar to our revenue growth in fiscal year 2021.
Cost of sales and gross margin
Year ended September 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Cost of sales | $ | 2,006,753 | $ | 1,642,084 | $ | 364,669 | 22 | % | ||||||||
| Gross loss | $ | (80,093 | ) | $ | (238,953 | ) | $ | 158,860 | (66 | )% | ||||||
| Gross margin % | (4 | )% | (17 | )% | ||||||||||||
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For the year ended September 30, 2021, we had a total gross loss of $80,093 from sales of our products, compared to a total gross loss of $238,953 for the year ended September 30, 2020. The gross margin rate was (4%) for the year ended September 30, 2021, and (17%) for the year ended September 30, 2020. This increase in margin was driven by greater scale in our manufacturing operations due to increased production during 2021 versus 2020. In the year ended September 30, 2020, the Company incurred increased costs as it continued to scale up its co-packing operations as well as a loss incurred on the close-out of certain inventory items for a particular customer.
Operating Expenses
Year ended September 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Operating Expenses | $ | 18,559,277 | $ | 9,094,132 | $ | 9,465,145 | 104 | % | ||||||||
For the year ended September 30, 2021, our Company’s operating expenses totaled $18,559,277, compared to $9,094,132 for the year ended September 30, 2020, representing a $9,465,145 increase. This increase is primarily attributable to an increase in stock compensation expense and employee compensation costs associated with greater staffing levels, professional services related to fund raising and website development costs which were expensed. In addition, as further described above (see “—Geographic Concentration”), in the year ended September 30, 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations.
Net Loss
Year ended September 30, | Change | |||||||||||||||
| 2021 | 2020 | Dollars | % | |||||||||||||
| Net Loss attributable to NuZee, Inc. | $ | 18,552,030 | $ | 9,477,091 | $ | 9,074,939 | 96 | % | ||||||||
For the year ended September 30, 2021, we generated net losses attributable to NuZee, Inc. of $18,552,030 versus $9,477,091 for the year ended September 30, 2020. This change is primarily attributable to an increase in stock compensation expense, employee costs, professional services and website development costs offset by an increase in our gross margin due to increased production.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of September 30, 2021, we had an accumulated deficit of approximately $52.8 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 as a result of the costs associated with operating as an exchange-listed public company in the future. 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 the 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, 2021, we had a cash balance of $10,815,954. We believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least 12 months from December 22, 2021. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.
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In the future, we expect to receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised at the election of the warrant holders, including the Warrants (as defined below) that were sold by us in March 2021 in an underwritten registered public offering. Subsequent to September 30, 2021, we issued 379,197 shares of common stock upon exercise of 379,197 Series A Warrants (as defined below) and issued 4,000 shares of common stock upon exercise of 8,000 Series B Warrants (as defined below). In connection with such exercises, in the first quarter of fiscal year 2022, we received aggregate gross proceeds of $1,729,787. For additional information regarding the Series A Warrants and Series B Warrants, see “—Summary of Cash Flows—Financing Activities” and Notes 6 and 7 to the Consolidated Financial Statements.
In the long-term, we expect we will need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. Our need to raise funds will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. Until we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
Our significant contractual cash requirements as of September 30, 2021 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 Form 10-K. 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, 2021, we had payments for lease and loan obligations of approximately $533,301, of which $222,382 are payable within 12 months as of September 30, 2021. We had no purchase obligations as of September 30, 2021.
Summary of Cash Flows
Year Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash used in operating activities | $ | (7,107,155 | ) | $ | (4,236,256 | ) | ||
| Cash used in investing activities | $ | (115,361 | ) | $ | (6,696 | ) | ||
| Cash provided by financing activities | $ | 13,632,263 | $ | 7,250,477 | ||||
| Effect of foreign exchange on cash | $ | 7,662 | $ | 64,980 | ||||
| Net increase in cash | $ | 6,417,409 | $ | 3,072,505 | ||||
Operating Activities
We used $7,107,155 and $4,236,256 cash in operating activities during the years ended September 30, 2021 and 2020, respectively, principally to fund our operating loss. The increase in cash used in operating activities of $2,870,899 was primarily attributable to an overall increase in operating expenses for the year ended September 30, 2021, as compared to the year ended September 30, 2020.
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Investing Activities
We used $115,361, versus used $6,696 of cash in investing activities during the years ended September 30, 2021 and 2020, respectively. The change in investing cash flow over this period was primarily due to no sales of equipment in 2021 as compared to 2020 in which we had proceeds from sales of equipment.
Financing Activities
Historically, we have funded our operations through the issuance of our common stock.
Cash provided from financing activities increased from $7,250,477 for the year ended September 30, 2020, to $13,632,263 for the year ended September 30, 2021.
During the fiscal year ended September 30, 2021, we sold (i) 72,955 shares of common stock to one investor in a registered public offering for aggregate net proceeds of $534,494 pursuant to a Common Stock Purchase Agreement dated as of October 26, 2020 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-248531) (the “Registration Statement”), and (ii) 256,338 shares of common stock at $9.14 per share for aggregate net proceeds of $2,149,486 pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. In addition, during the fiscal year ended September 30, 2021, we sold pursuant to an Underwriting Agreement dated as of March 19, 2021 and a prospectus supplement to the Registration Statement (i) 2,777,777 units (“Units”) in an underwritten registered public offering for aggregate net proceeds of $11,017,304 which includes the proceeds from the underwriter’s full exercise of their overallotment option with respect to the warrant component of the Units, with each Unit consisting of (a) one share of our common stock, (b) one Series A warrant (each, a “Series A Warrant” and collectively, the “Series A Warrants”) to purchase one share of our common stock with an initial exercise price of $4.50 per whole share, and (c) one Series B warrant (each, a “Series B Warrant” and collectively, the “Series B Warrants” and together with the Series A Warrants, the “Warrants”) to purchase one-half share of our common stock with an initial exercise price of $5.85 per whole share, and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter’s full exercise of their overallotment option with respect to such warrants. The Warrant holders are obligated to pay the exercise price in cash upon exercise of the Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the Warrants (in which case, the Warrants may only be exercised via a “cashless” exercise provision).
During the year ended September 30, 2020, we sold (i) 111,738 shares of common stock at a weighted average net price of $17.25 per share, for an aggregate net proceeds of $1,927,338 pursuant to private offerings of common stock, (ii) 805,000 shares of common stock at a price of $9.00 per share for aggregate net proceeds of $5,427,640, after deducting underwriting discounts and commissions and offering expenses payable by us (including $225,089 of offering expenses paid in the year ended September 30, 2019), pursuant to our underwritten public offering of common stock and the related underwriting agreement dated June 18, 2020.
Termination of ATM Agreement
On March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the “ATM Agreement”), with B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the “Agents”), pursuant to which we could from time to time offer and sell up to an aggregate of $50.0 million of shares of our common stock through the Agents in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act. We did not sell any shares of common stock under the ATM Agreement. The Company’s consolidated statement of cash flows for the year ended September 30, 2021 includes stock issuance expenses of $477,605 in connection with the terminated ATM Agreement.
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.
| 39 |
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 footnote of the Notes 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 of the Notes to the Consolidated Financial Statements for a summary of our accounting policies. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Revenue Recognition
We determine revenue recognition through the following steps in accordance with FASB Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers”, which we adopted as of October 1, 2018 on a modified retrospective basis:
| ● | identification of the contract, or contracts, with a customer; | |
| ● | identification of the performance obligations in the contract; | |
| ● | determination of the transaction price; | |
| ● | allocation of the transaction price to the performance obligations in the contract; and | |
| ● | recognition of revenue when, or as, we satisfy a performance obligation. |
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Cost of Sales
The Company records the cost of the materials used in creating the good as well as direct labor cost used to produce the good. The Company also includes write-offs for all past due and unsellable inventories as well as loss on inventory due to obsolescence in cost of sales.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is being measured using the weighted average cost method. We regularly review whether the realizable value of our inventory is lower than its book value. If our valuation shows that the realizable value is lower than book value, we take a charge to expense and directly reduce the value of the inventory.
The Company estimates its reserves for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. Indicators that could result in additional inventory write downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While management believes that the reserve for obsolete inventory is adequate, significant judgment is involved in determining the adequacy of this reserve.
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 is not material to the financial statements. We estimate 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 recognized forfeitures as they occurred.
Recent Accounting Pronouncements
Recent accounting pronouncements which may be applicable to us are described in Note 2 to the Consolidated Financial Statements included as part of this Report.
| 40 |
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-24 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.
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 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 controls over the financial reporting are effective.
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 have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2021 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.
| 41 |
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 2022 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 2022 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 2022 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 2022 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 2022 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.
| 42 |
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: | |
| 43 |
* Filed or furnished herewith.
† Indicates management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
| 44 |
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 December 22, 2021.
| NuZee, Inc. | ||
| By: | /s/ Masateru Higashida | |
| Name: | Masateru Higashida | |
| Title: | Chief Executive Officer and President | |
| (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 | December 22, 2021 | |||
| Masateru Higashida | Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director | |||
| /s/ Patrick Shearer | December 22, 2021 | |||
| Patrick Shearer | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Kevin J. Conner | December 22, 2021 | |||
| Kevin J. Conner | Director | |||
| /s/ Tracy Ging | December 22, 2021 | |||
| Tracy Ging | Director | |||
| /s/ J. Chris Jones | December 22, 2021 | |||
| J. Chris Jones | Director | |||
| /s/ Nobuki Kurita | December 22, 2021 | |||
| Nobuki Kurita | Director | |||
| /s/ David G. Robson | December 22, 2021 | |||
| David G. Robson | Director |
| 45 |
NUZEE, INC.
Index to Consolidated Financial Statements
Contents
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
NuZee, Inc.
Plano, Texas
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, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in 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, 2021 and 2020, 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.
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
Critical audit matters 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/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2013.
Houston, Texas
December 21, 2021
| F-2 |
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | September 30, 2020 | |||||||
| 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 | ||||||||
| Right-of-use asset - finance lease | - | |||||||
| Investment | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Current portion of long-term loan payable | ||||||||
| Current portion of lease liability - operating lease | ||||||||
| Current portion of lease liability - finance lease | ||||||||
| Accrued expenses | ||||||||
| Deferred income | ||||||||
| Other current liabilities | ||||||||
| 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, 2021 and 2020, 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, 2021 | Year Ended September 30, 2020 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross loss | ( | ) | ( | ) | ||||
| Operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Income (loss) from equity method investment | ( | ) | ||||||
| Other expense | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interest | - | ( | ) | |||||
| Net loss attributable to NuZee, Inc. | $ | ( | ) | $ | ( | ) | ||
| 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 INCOME (LOSS)
| For the year ended September 30, 2021 and 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| Noncontrolling | ||||||||||||||||||||||||
| NuZee, Inc. | Interest | Total | ||||||||||||||||||||||
| For the years ended September 30, 2021 and 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| 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
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common stock | paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| Shares | Amount | capital | deficit | income (loss) | Total | |||||||||||||||||||
| Balance September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Equity securities issued for cash | - | - | ||||||||||||||||||||||
| Common stock issued for compensation | - | - | ||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||
| Common stock issued for cash, shares | ||||||||||||||||||||||||
| Stock option expense | - | - | - | - | ||||||||||||||||||||
| Exercise of stock options | - | - | - | |||||||||||||||||||||
| Other comprehensive gain / (loss) | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common stock | paid-in | Accumulated | Noncontrolling | comprehensive | ||||||||||||||||||||||||
| Shares | Amount | Capital | deficit | interest | income (loss) | Total | ||||||||||||||||||||||
| Balance September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Common stock issued for cash | - | - | - | |||||||||||||||||||||||||
| Stock option expense | - | - | - | - | - | |||||||||||||||||||||||
| Exercise of stock options | - | - | - | - | ||||||||||||||||||||||||
| Other comprehensive gain / (loss) | - | - | - | - | ( | ) | ||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | - | ( | ) | ||||||||||||||||||
| Balance September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
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, 2021 | For the Year Ended September 30, 2020 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Depreciation and Amortization | ||||||||
| Noncash lease expense | ||||||||
| Loss on sale of assets | - | |||||||
| Stock option expense | ||||||||
| Common stock issued for compensation | - | |||||||
| Allowance for doubtful accounts | - | |||||||
| Property and equipment impairment | - | |||||||
| Inventory impairment | - | |||||||
| Gain on disposal of a subsidiary | - | ( | ) | |||||
| Loss on realization of AOCI upon disposal of a subsidiary | - | |||||||
| (Income) loss from equity method investment | ( | ) | ||||||
| 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 | ( | ) | ||||||
| Deferred income | ||||||||
| Lease liability - operating lease | ( | ) | ( | ) | ||||
| Accrued expense and other current liabilities | ( | ) | ||||||
| Other noncurrent liabilities | ||||||||
| Net cash used by operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Proceeds from sales of equipment | - | |||||||
| Proceeds from sale of a subsidiary | - | |||||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Proceeds from issuance of equity securities, net of issuance costs | ||||||||
| Payments of stock issuance costs | - | ( | ) | |||||
| Repayment of loans | ( | ) | ( | ) | ||||
| Repayment under finance lease | ( | ) | ( | ) | ||||
| Proceeds from the exercise of stock options | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign exchange on cash | ||||||||
| Net change in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Recognition of ROU asset and lease liability upon adoption of ASU 2016-02 | $ | $ | ||||||
| Recognition of ROU asset and lease liability during the period | $ | $ | ||||||
| Reclassification of common stock offering costs to additional paid-in capital | $ | $ | ||||||
| Finance lease of equipment to pay off accounts payable | $ | $ | ||||||
| Contribution of machines to NuZee Latin America | $ | $ | ||||||
| Stock issuance cost accrued | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-7 |
NuZee, Inc.
Notes to Consolidated Financial Statements
September 30, 2021
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, as well as a preeminent co-packer of tea-bag style coffee. The Company is a commercial-scale producer that has the dual capability to pack both single serve pour over coffee and tea-bag style coffee within the North American market. The Company looks to leverage its position as a co-packer at the forefront of the North American single serve pour over coffee and tea-bag style coffee markets to revolutionize the way single serve coffee is enjoyed in the United States. 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 also developed and sells NuZee branded single serve coffee products, including its flagship Coffee Blenders line of both single serve pour over coffee and tea-bag style coffee.
On
September 28, 2020, the Company entered into a Stock Transfer Agreement with Eguchi Holdings Co., Ltd. (“EHCL”), pursuant
to which the Company sold to EHCL for an aggregate sale price of approximately $
The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).
On
October 28, 2019, the Company completed a
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.
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, 2021 and September 30, 2020, the total number of common stock equivalents was and , respectively, and comprised of stock options and warrants. The Company incurred a net loss for the years ended September 30, 2021 and 2020, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.
| F-8 |
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 generated limited revenues from its principal operations, and there is no assurance of future revenues.
As
of September 30, 2021, 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.
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.
| F-9 |
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, 2021 and 2020, revenue was primarily from major customers disclosed below.
For the year ended September 30, 2021:
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
For the year ended September 30, 2020:
| Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | ||||||||||||
| Customer K | $ | % | $ | % | ||||||||||||
| Customer JP | $ | % | % | |||||||||||||
| Customer WP | $ | % | $ | % | ||||||||||||
Lease
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.
The Company does a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. The Company has one significant long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.
During our analysis of leases in the year ended September 30, 2020, we determined to renew the office and manufacturing space in Vista, California through January 31, 2022, which was previously scheduled to be vacated at June 30, 2020. Additionally, the Seoul, Korea office and manufacturing space lease was extended through June 2022 and an apartment lease was signed through June 2022. Accordingly, we have added ROU assets and lease liabilities related to those leases at June 30, 2020.
| F-10 |
The direct-leased property in Vista, California has a remaining lease term through January 2022. The leased property in Seoul, Korea has an option to extend beyond the stated termination date, but exercise of this option is not probable. The sub-leased property in Vista, California, is leased month-to-month and has been calculated as a ROU Asset co-terminus with the direct-leased property.
As of September 30, 2021, our operating leases had a weighted average remaining lease term of 2.3 years and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
| ROU Asset – October 1, 2020 | $ | |||
| Amortization during the period | ( | ) | ||
| ROU Asset – September 30, 2021 | $ | |||
| Lease Liability – October 1, 2020 | $ | |||
| Amortization during the period | ( | ) | ||
| Lease Liability – September 30, 2021 | $ | |||
| 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, 2021.
Amounts due within 12 months of September 30,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 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 | $ |
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 $
| F-11 |
The following summarizes ROU assets under finance leases at September 30, 2021:
SUMMARY OF ROU ASSETS UNDER FINANCE LEASES
| ROU asset-finance lease at October 1, 2020 | $ | |||
| Amortization | ( | ) | ||
| Impairment | ( | ) | ||
| ROU asset-finance lease at September 30, 2021 | $ |
During the year ended September 30, 2021, we recorded an impairment to fully write off the equipment as it was deemed no longer useful for our operations.
The table below summarizes future minimum finance lease payments at September 30, 2021 for the 12 months ended September 30:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total Minimum Lease Payments | ||||
| Amount representing interest | ( | ) | ||
| Present Value of Minimum Lease Payments | ||||
| Current Portion of Finance Lease Obligations | ||||
| Finance Lease Obligations, Less Current Portion | $ |
The
Company leases office space with terms ranging from month to month to
During the year ended September 30, 2021, 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, 2021, we recognized sublease income of
$
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| Total Minimum Lease Payments to be Received | $ |
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, its wholly owned subsidiaries and its former majority owned subsidiary (before it was sold as of September 28, 2020), which has a fiscal year end of September 30. 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, or over
| F-12 |
NuZee
KR and NuZee INV are wholly owned subsidiaries of the Company. NuZee JP was
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 loss (gain) amounted to ($
Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency
are included in the results of operations as incurred. Foreign currency transaction (gains) losses included in the consolidated statements
of operations totaled ($
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. (50%) and the Company (
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, 2021, the only activity in NLA was the contribution of two machines as described
above and other start up related activities. $
| F-13 |
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 of the 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 the wholesale customers, return policies varies 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, 2021 and September 30, 2020, the Company had
Cost Recognition
Cost of products sold is primarily comprised of direct materials consumed in the manufacturing of co-packing arrangements or the production of our own products for resale. Cost of products sold also includes directly related labors’ salaries and other overhead cost.
Selling, General and Administrative Expense
Selling,
general and administrative expense (SG&A) is primarily comprised of marketing expenses, research and development costs, administrative
and other indirect overhead costs, depreciation expense and other miscellaneous operating items. Personnel expenses, occupying a majority
portion of SG&A, were $
Advertising Expenses
The Company expenses advertising costs when incurred. Advertising expense for the years ended September 30, 2021 and 2020 is as follows:
SCHEDULE OF ADVERTISING EXPENSE
| September 30, 2021 | September 30, 2020 | |||||||
| Advertising | $ | $ | ||||||
Research and Development
Research
and development expenses are expensed in the consolidated statements of operations as incurred in accordance with FASB ASC 730, Research
and Development. For the years ended September 30, 2021 and 2020, respectively, research and development expenses amounted to $
| F-14 |
Prepaid expenses and other current assets
The Company prepaid expenses and other current assets for the years ended September 30, 2021 and 2020 is as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| September 30, 2021 | September 30, 2020 | |||||||
| 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, 2021 and 2020, the carrying value of inventory of $
SCHEDULE OF INVENTORY
| September 30, 2021 | September 30, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Less - Inventory reserve | - | - | ||||||
| Total | $ | $ | ||||||
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, 2021 | September 30, 2020 | |||||||
| 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
| F-15 |
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.
In March of 2021, the Company wrote off $
Intangible Assets
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. The Company had
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.
Other Current Liabilities
Other
current liabilities are primarily comprised of deposits and advances received from equity investors for certain legal opinions
that will be provided by the Company’s counsel which totaled $
| 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 is not material to the financial statements.
We estimate 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 recognized 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.
Non-controlling Interests
Non-controlling interests represent third-party ownership in the net assets of the Company’s consolidated subsidiary and are presented as a component of equity.
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 pronouncement in 2021, 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, we purchased a delivery van from Ford Motor Credit for $
| F-17 |
On
February 15, 2019 NuZee KR entered into equipment financing for production equipment with Shin Han Bank for $
The loan payments required for the next five years are as follows:
SCHEDULE OF LOAN PAYMENTS
| Ford Motor Credit | Shin Han Bank | Total | ||||||||||
| 2021 (October-December) | $ | $ | $ | |||||||||
| 2022 (January-September) | ||||||||||||
| Total Current Portion | ||||||||||||
| 2022 (October-December) | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| Total Long-Term Portion | ||||||||||||
| Grand Total | $ | $ | $ | |||||||||
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. The Company has investor relations operations in Japan as a majority of our shareholders are based in Japan.
In March of 2021, the Company wrote off $
Information about the Company’s geographic operations for years ended September 30, 2021 and 2020 are as follows:
SCHEDULE OF GEOGRAPHIC OPERATIONS
Year Ended September 30, 2021 | Year Ended September 30, 2020 | |||||||
| Net Revenue: | ||||||||
| North America | $ | $ | ||||||
| Japan | - | |||||||
| South Korea | ||||||||
| Net Revenue | $ | $ | ||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Property and equipment, net: | ||||||||
| North America | $ | $ | ||||||
| Japan | ||||||||
| South Korea | ||||||||
| Property and equipment, net | $ | $ | ||||||
| F-18 |
5. RELATED PARTY TRANSACTIONS
Sales
For
the year ended September 30, 2020, NuZee JP sold their products to EHCL, and the sales to them totaled approximately $
For
the years ended September 30, 2021 and September 30, 2020, respectively, the Company sold $
Rent
During September 2016,
During February 2015,
During
October 2016,
Amounts Due
As
of September 30, 2021 and 2020, the Company had amounts due to NCL of $
6. ISSUANCE OF EQUITY SECURITIES
During
the year ended September 30, 2020, the Company sold (i) shares of common stock at a weighted average net price of $ per
share, for an aggregate net proceeds of $
During
the year ended September 30, 2021, the Company sold (i) shares of common stock to Triton Funds LP in a registered public offering
for aggregate net proceeds of $
| F-19 |
On
March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the “ATM Agreement”), with
B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the “Agents”), pursuant
to which we could from time to time offer and sell up to an aggregate of $ million of shares of our common stock through the Agents
in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act. We did not sell any shares of common stock
under the ATM Agreement. The Company’s consolidated statement of cash flows for the year ended September 30, 2021 includes stock
issuance expenses of $
Preferred stock
The Company had million shares of preferred stock authorized but not issued as of September 30, 2021 and September 20, 2020.
Restricted Shares
On January 11, 2021, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors granted to Shanoop Kothari, who was serving at the time as both the Company’s Chief Financial Officer and Chief Operating Officer, in connection with the Committee’s determination of Mr. Kothari’s annual compensation, an award of restricted shares (the “Restricted Shares”) of the Company’s common stock under the NuZee, Inc. 2019 Stock Incentive Plan. The Restricted Shares vest as follows: (i) Restricted Shares vested immediately ; (ii) Restricted Shares vested on March 31, 2021; and (iii) Restricted Shares were originally scheduled to vest on March 31, 2022 but were accelerated to vest on Mr. Kothari’s separation date of August 16, 2021. The Company recognized related common stock compensation expense of $ for the year ended September 30, 2021.
Exercise of options
During
the year ended September 30, 2020, shares were issued upon the exercise of stock options. As part of this exercise, the Company
received $
Options
During June 2020, the Company issued options to a consultant with and exercise price of $ per share. During August 2020, the Company issued options to consultants for an average exercise price of $ per share.
During the fiscal year ended September 30, 2021, the Company issued options at an average exercise price of $, including issuing options to independent contractors, options to independent Board members and options to employees. For independent contractors, these options shall vest and become exercisable over a period of , with For employees, During the year ended September 30, 2021, 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.
The exercise price for the options issued in the current year ranged from $- $per share. The options will expire from the grant date, unless terminated earlier as provided by the option agreements.
| F-20 |
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 Company stock. The expected term of options granted was determined using either the contractual period or 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, 2021 | September 30, 2020 | ||||||
| Risk-free interest rate | – | % | None | |||||
| Expected option life | None | |||||||
| Expected volatility | – | % | None | |||||
| Expected dividend yield | % | None | ||||||
| Exercise price | $ | - $ | None | |||||
| For non-employees | September 30, 2021 | September 30, 2020 | ||||||
| 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 $
For the year ended September 30, 2021, options were forfeited. options forfeited because of the termination of employment and options forfeited because the performance conditions were 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, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at September 30, 2021 | $ | |||||||||||||||
| Exercisable at September 30, 2021 | $ | $ | ||||||||||||||
| F-21 |
The following table summarizes stock option activity for the year ended September 30, 2020.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at September 30, 2019 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Outstanding at September 30, 2020 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2020 | $ | $ | ||||||||||||||
SUMMARY OF UNVESTED SHARES
| Number of | Weighted Average Grant | |||||||
| Nonvested Options | Date Fair Value | |||||||
| Nonvested options at September 30, 2019 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ( | ) | ||||||
| Forfeited | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Nonvested options at September 30, 2020 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Vested | ( | ) | $ | |||||
| Nonvested options at September 30, 2021 | $ | |||||||
Warrants
On
June 23, 2020, as part of our agreement with Benchmark Company, LLC, the underwriter of the Company’s June 2020 registered public
offering of common stock, we issued
On
March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”)
of
Each
Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $
The Series A and Series B Warrant holders are obligated to pay the exercise price in cash upon exercise of the Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the Warrants (in which case, the Warrants may only be exercised via a “cashless” exercise provision).
| F-22 |
The following table summarizes warrant activity for the year ended September 30, 2021:
SCHEDULE OF WARRANT ACTIVITY
| Number of Shares Issuable | Weighted | Weighted Average Remaining | ||||||||||||||
| Upon | Average | Contractual | Aggregate | |||||||||||||
| Exercise of | Exercise | Life | Intrinsic | |||||||||||||
| Warrants | Price | (years) | Value | |||||||||||||
| Outstanding at September 30, 2020 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Outstanding at September 30, 2021 | $ | |||||||||||||||
| Exercisable at September 30, 2021 | $ | $ | ||||||||||||||
Subsequent to September 30, 2021, the Company issued shares of common stock upon the exercise of certain Series A Warrants and certain Series B Warrants (see Note 11 – Subsequent Events).
8. INCOME TAX
As
of September 30, 2021, and 2020, there were no differences between financial reporting and tax bases of assets and liabilities. 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
The
Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from
Deferred tax assets consisted of the following as of September 30, 2021 and 2020:
SCHEDULE OF DEFERRED TAX ASSETS
| 2021 | 2020 | |||||||
| Net Operating Losses | $ | $ | ||||||
| Valuation Allowance | $ | ( | ) | $ | ( | ) | ||
9. CONTINGENCIES
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-23 |
10. SALE OF NUZEE JP
On
September 28, 2020, the Company entered into a Stock Transfer Agreement with EHCL pursuant to which the Company sold to EHCL for an aggregate
sale price of approximately $
The
gain from the deconsolidation of NuZee JP was $
EHCL is controlled by Mr. Katsuyoshi Eguchi, who previously served as the chief executive officer of NuZee JP and is also the beneficial owner of more than five percent of the Company’s common stock.
11. SUBSEQUENT EVENTS
Exercises of Series A Warrants and Series B Warrants
Subsequent
to September 30, 2021, the Company issued shares of common stock upon exercise of Series A Warrants and issued
shares of common stock upon exercise of Series B Warrants. In connection with such exercises, the Company received aggregate gross
proceeds of $
Lease Extension in the United States and New Lease in Korea
Subsequent
to September 30, 2021, the Company entered into a one-year extension of its leased facility in Vista, California. The lease has a monthly
lease expense of $
| F-24 |