NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December
31, 2021
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as
the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”),
and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the year ended September 30, 2021 as filed with the SEC on December 22, 2021. In the opinion of management,
all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative
of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements as reported in the Annual Report on Form 10-K for the year ended September 30, 2021 have
been omitted.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. These reclassifications had no effect on the previously reported net loss.
Principles
of Consolidation
The
Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, balances and transactions have
been eliminated upon consolidation.
The
Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee
INV”).
Earnings
per Share
Basic
earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting
period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants and other commitments
to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings
of the Company. As of December 31, 2021 and December 31, 2020, the total number of common stock equivalents was 8,766,493 and 2,314,053,
respectively, comprised of stock options and warrants as of December 31, 2021 and December 30, 2020. The Company incurred a net loss
for the three months ended December 31, 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.
Capital
Resources
Since
its inception, the Company has devoted substantially all its efforts to business planning, research and development, recruiting management
and technical staff, acquiring operating assets, raising capital, and the commercialization and manufacture of its single serve coffee
products. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.
As
of December 31, 2021, the Company had cash of $10,967,104. However, the Company has not attained profitable operations since inception.
Major
Customers
In
the three months ended December 31, 2021 and 2020, revenue was primarily derived from major customers disclosed below.
Three
months ended December 31, 2021:
SCHEDULE
OF REVENUE BY MAJOR CUSTOMERS
Customer Name
|
|
Sales Amount
|
|
|
% of Total Revenue
|
|
|
Accounts Receivable
Amount
|
|
|
% of Total Accounts Receivable
|
|
Customer WP
|
|
$
|
310,551
|
|
|
|
30
|
%
|
|
$
|
279,273
|
|
|
|
35
|
%
|
Customer CU
|
|
$
|
199,936
|
|
|
|
20
|
%
|
|
$
|
137,566
|
|
|
|
17
|
%
|
Three
months ended December 31, 2020:
Customer Name
|
|
Sales Amount
|
|
|
% of Total Revenue
|
|
|
Accounts Receivable
Amount
|
|
|
% of Total Accounts Receivable
|
|
Customer WP
|
|
$
|
156,299
|
|
|
|
30
|
%
|
|
$
|
94,066
|
|
|
|
43
|
%
|
Customer RSM
|
|
$
|
66,811
|
|
|
|
13
|
%
|
|
$
|
-
|
|
|
|
0
|
%
|
Customer GR
|
|
$
|
65,536
|
|
|
|
13
|
%
|
|
$
|
65,352
|
|
|
|
30
|
%
|
Lease
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities
on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different
types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.
The
Company performs a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842.
The Company has 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 three months ended December 31, 2021, we determined to renew the office and manufacturing space in Vista,
California which was originally scheduled to expire on January 31, 2022, for an additional year through January 31, 2023. The lease has
a monthly lease expense of $8,451, plus common area expenses. We extended our sub-leased property in Vista, California, through January
31, 2023, which has been calculated as a ROU Asset co-terminus with the direct-leased property. The Seoul, Korea office and manufacturing
space lease was extended through June 2022 and there is an apartment leased through June 2022. Additionally, the Company leased a new
larger office and manufacturing space in Seoul, Korea beginning November 15, 2021, through November 15, 2023. The lease has a monthly
expense of $7,040. Accordingly, we have added ROU assets and lease liabilities related to those leases at December 31, 2021.
As
of December 31, 2021, our operating leases had a weighted average remaining lease term of 1.7 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
|
|
|
1
|
|
ROU Asset – October 1, 2021
|
|
$
|
386,587
|
|
ROU Asset added during the period
|
|
|
192,397
|
|
Amortization during the period
|
|
|
(36,822
|
)
|
ROU Asset –December 31, 2021
|
|
$
|
542,162
|
|
Lease Liability – October 1, 2021
|
|
$
|
398,587
|
|
Lease Liability added during the period
|
|
|
192,397
|
|
Amortization during the period
|
|
|
(36,949
|
)
|
Lease Liability – December 31, 2021
|
|
$
|
554,035
|
|
Lease Liability – Short-Term
|
|
$
|
205,098
|
|
Lease Liability – Long-Term
|
|
|
348,937
|
|
Lease Liability – Total
|
|
$
|
554,035
|
|
The
table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years
to the lease liabilities recorded on the Consolidated Balance Sheet as of December 31, 2021:
Amounts
due within 12 months of December 31,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
|
|
|
2021
|
|
2022
|
|
$
|
335,586
|
|
2023
|
|
|
220,913
|
|
2024
|
|
|
64,936
|
|
2025
|
|
|
-
|
|
2026
|
|
|
-
|
|
Total Minimum Lease Payments
|
|
|
621,435
|
|
Less Effect of Discounting
|
|
|
(67,400
|
)
|
Present Value of Future Minimum Lease Payments
|
|
|
554,035
|
|
Less Current Portion of Operating Lease Obligations
|
|
|
205,098
|
|
Long-Term Operating Lease Obligations
|
|
$
|
348,937
|
|
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 $2,987
per month through July 2024. As part of this
agreement, Alliance Funding Group provided our equipment supplier with $124,500
for the purchase of this equipment. This transaction
was accounted for as a financing lease. As of December 31, 2021, our financing lease had a remaining lease term of 2.5
years and a discount rate of 12.75%.
The interest expense on finance lease liabilities for the three months ended December 31, 2021 was $2,437.
During
the year ended September 30, 2021, we recorded an impairment to fully write off the related equipment as it was deemed no longer useful
for our operations.
The
table below summarizes future minimum finance lease payments at December 31, 2021 for the 12 months ended December 31:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
|
|
|
2021
|
|
2022
|
|
$
|
33,113
|
|
2023
|
|
|
33,113
|
|
2024
|
|
|
19,316
|
|
2025
|
|
|
-
|
|
2026
|
|
|
-
|
|
Total Minimum Lease Payments
|
|
|
85,542
|
|
Amount representing interest
|
|
|
(12,983
|
)
|
Present Value of Minimum Lease Payments
|
|
|
72,559
|
|
Current Portion of Finance Lease Obligations
|
|
|
28,729
|
|
Finance Lease Obligations, Less Current Portion
|
|
$
|
43,830
|
|
Rent
expense included in general and administrative expense for the three months ended December 31, 2021 and 2020 was $90,525 and $93,750,
respectively.
Cash
and non-cash activities associated with the leases for the three months ended December 31, 2021 are as follows:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
Operating cash outflows from operating leases:
|
|
$
|
36,949
|
|
Operating cash outflows from finance lease:
|
|
$
|
2,437
|
|
Financing cash outflows from finance lease:
|
|
$
|
5,841
|
|
In
September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020, under favorable terms that
are co-terminus with the original lease ending June 30, 2024. During the three months ended December 31, 2021, we recognized sublease
income of $42,757 pursuant to the sublease included in Other income on our financial statements. Future minimum lease payments to be
received under that sublease as of December 31, 2021, for each of the twelve months ended December 31 are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
|
|
|
2021
|
|
2022
|
|
$
|
124,190
|
|
2023
|
|
|
127,926
|
|
2024
|
|
|
64,918
|
|
2025
|
|
|
-
|
|
2026
|
|
|
-
|
|
Total
|
|
$
|
317,034
|
|
Loans
On
April 1, 2019, we purchased a delivery van from Ford Motor Credit for $41,627.
The Company paid $3,500
as a down payment and financed $38,127
for 60
months at a rate of 2.9%.
The loan is secured by the van. The outstanding balance on the loan at December 31, 2021 and September 30, 2021 amounted to $18,506
and $20,416,
respectively.
On
February 15, 2019, NuZee KR entered into equipment financing for production equipment with Shin Han Bank for $60,563.
In June 2019, NuZee KR purchased additional equipment and increased the loan with Shin Han Bank by $86,518.
The financing has a term of 36
months at a rate of 4.33%.
Principal payments began in July 2019. The outstanding balance on this loan at December 31, 2021 and September 30, 2021 amounted
to $23,833
and $35,898,
respectively.
The
remaining loan payments are as follows:
SCHEDULE OF LOAN PAYMENTS
|
|
Ford Motor Credit
|
|
|
ShinHan Bank
|
|
|
Total
|
|
2022 (Jan 2022 - Sep 2022)
|
|
$
|
5,812
|
|
|
$
|
13,248
|
|
|
$
|
19,060
|
|
2023 (Oct 2022 - Dec 2022)
|
|
|
1,965
|
|
|
|
10,585
|
|
|
|
12,550
|
|
Total Current Portion
|
|
$
|
7,777
|
|
|
$
|
23,833
|
|
|
$
|
31,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 (Jan 2023 - Sep 2023)
|
|
$
|
8,005
|
|
|
|
-
|
|
|
$
|
8,005
|
|
2024
|
|
|
2,724
|
|
|
|
-
|
|
|
|
2,724
|
|
Total Long-Term Portion
|
|
$
|
10,729
|
|
|
$
|
-
|
|
|
$
|
10,729
|
|
Grand Total
|
|
$
|
18,506
|
|
|
$
|
23,833
|
|
|
$
|
42,339
|
|
Revenue
Recognition
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic
606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s
core principle is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be
entitled in exchange for transferring goods or services to a customer. The principles in the standard are applied in five steps: 1) Identify
the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate
the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance
obligation. We adopted Topic 606 as of October 1, 2018, on a modified retrospective basis. The adoption of Topic 606 did not have a material
impact on our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.
Foreign
Currency Translation
The
financial position and results of operations of each of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s
local currency as the functional currency. Revenues and expenses of each such subsidiary have been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet
date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity
unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments recorded
to other comprehensive gain amounted to $32,688 and $1,656 for the three months ended December 31, 2021 and 2020, respectively.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency
are included in the results of operations as incurred.
Inventories
Inventory,
consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost
or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least
quarterly and records a valuation allowance when appropriate. At December 31, 2021 and September 30, 2021, the carrying value of inventory
was $384,198 and $573,464, respectively.
SCHEDULE OF INVENTORY
|
|
December 31, 2021
|
|
|
September 30, 2021
|
|
Raw materials
|
|
$
|
366,639
|
|
|
$
|
552,621
|
|
Finished goods
|
|
|
17,559
|
|
|
|
20,843
|
|
Less – Inventory reserve
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
384,198
|
|
|
$
|
573,464
|
|
Joint
Venture
On
January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (50%) and the Company (50%) forming NuZee
LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of Mexico, with corporate domicile in Mazatlan, Mexico. As part
of the capitalization of NLA, the Company contributed two co-packing machines to the joint venture. These machines had an aggregate carrying
cost of $313,012. The Company received $110,000 in cash for this contribution and recorded an investment in NLA of $160,000 and a loss
of $43,012 on the contribution of the machines to NLA.
The
Company accounts for NLA using the equity method of accounting since the management of day-to-day operations at NLA ultimately lies with
the Company’s joint venture partner as the operations of NLA are based in its partners facilities and our partner appoints the
Chairman of the joint board of directors of NLA. As of December 31, 2021, the only activity in NLA was the contribution of two machines
as described above and other start up related activities. $1,157 of a loss and $2,056 of a loss was recognized under the equity method
of accounting during the three months ended December 31, 2021, and December 31, 2020 respectively.
2.
GEOGRAPHIC CONCENTRATION
The
Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company
is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly
in North America and Korea. The Company has a minimally staffed office in Japan that provides support for import and export of product
and materials between the U.S. and Japan, as well as investor relations support to our shareholders based in Japan. Information about
the Company’s geographic operations for the three months ended December 31, 2021 and 2020 are as follows:
Geographic
Concentrations
SCHEDULE OF GEOGRAPHIC OPERATIONS
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
December 31, 2021
|
|
|
December 30, 2020
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
817,341
|
|
|
$
|
406,488
|
|
South Korea
|
|
|
201,912
|
|
|
|
111,499
|
|
Net Revenue
|
|
$
|
1,019,253
|
|
|
$
|
517,987
|
|
Property and equipment, net:
|
|
As of
December 31, 2021
|
|
|
As of
September 30, 2021
|
|
North America
|
|
$
|
462,389
|
|
|
$
|
517,966
|
|
South Korea
|
|
|
176,810
|
|
|
|
154,562
|
|
Japan
|
|
|
1,123
|
|
|
|
1,496
|
|
Property and equipment,
net
|
|
$
|
640,322
|
|
|
$
|
674,024
|
|
3.
RELATED PARTY TRANSACTIONS
For
the three months ended December 31, 2021 and December 31, 2020, respectively, the Company had sales of $0 and $15,998 of materials to
NLA.
4.
ISSUANCE OF EQUITY SECURITIES
Exercise of Warrants
In the three months ended December 31,
2021, we issued 384,447
shares of common stock related to exercises of warrants, including 380,447
shares of common stock issued upon exercise of 380,447
Series A Warrants and 4,000
shares of common stock issued upon exercise of 8,000
Series B Warrants. In connection with such exercises, in the three months ended December 31, 2021, we received aggregate net
proceeds of $1,721,018.
ATM
Offering
On
December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group
LLC, as agent (the “Agent”), pursuant to which we may offer and sell, from time to time, shares of our common stock through
the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price
of up to $20,000,000, subject to any applicable limits when using Form S-3 (the “ATM Offering”). Pursuant to the Equity Distribution
Agreement, we will pay the Agent a commission rate, in cash, equal to 3.0% of the aggregate gross proceeds from each sale of shares of
our common stock under the Equity Distribution Agreement. The offer and sale of shares of our common stock will be made pursuant to a
shelf registration statement on Form S-3 and the related prospectus (File No. 333-248531) initially filed by us with the SEC on September
1, 2020, and declared effective by the SEC on October 2, 2020, under the Securities Act. We are not obligated to make any sales of shares
of our common stock under the Equity Distribution Agreement. As of December 31, 2021, no sales had occurred under the Equity Distribution
Agreement. For information regarding sales made under the Equity Distribution Agreement following the quarter ended December 31, 2021,
see Note 6—Subsequent Events.
5.
STOCK OPTIONS AND WARRANTS
Options
During
the three months ended December 31, 2021, the Company granted no new stock options, had 192,666 of stock options that were forfeited
because of the termination of employment, and issued no shares upon the exercise of outstanding stock options.
The
following table summarizes stock option activity for three months ended December 31, 2021:
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, 2021
|
|
|
4,511,691
|
|
|
$
|
4.73
|
|
|
|
8.4
|
|
|
$
|
452,206
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(192,666
|
)
|
|
|
14.11
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021
|
|
|
4,319,025
|
|
|
$
|
4.31
|
|
|
|
8.2
|
|
|
$
|
4,320,497
|
|
Exercisable at December 31, 2021
|
|
|
1,704,638
|
|
|
$
|
4.82
|
|
|
|
7.1
|
|
|
$
|
1,953,581
|
|
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 $1,124,187
for the three months ended December 31,
2021. Unamortized option expense as of December 31, 2021 for all options outstanding amounted to $3,603,243.
These costs are expected to be recognized over a weighted average period of 1.3
years. The Company recognized stock option expense
of $4,507,298
for the three months ended December 31, 2020.
A
summary of the status of the Company’s nonvested options as of December 31, 2021 is presented below:
SUMMARY
OF UNVESTED SHARES
Nonvested
options
|
|
Number of
Nonvested Options
|
|
|
Weighted Average
Grant Date Fair Value
|
|
Nonvested options at September 30, 2021
|
|
|
2,870,799
|
|
|
$
|
5.02
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(26,000
|
)
|
|
|
2.60
|
|
Vested
|
|
|
(230,412
|
)
|
|
|
6.09
|
|
Nonvested options at December 31, 2021
|
|
|
2,614,387
|
|
|
$
|
4.95
|
|
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 40,250 warrants to purchase our common stock at an exercise price of $9.00 a share. These warrants
are exercisable on December 23, 2020 and expire on June 18, 2025.
On
March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”)
of (i) 2,777,777 units (the “Units”), at a price to the public of $4.50 per Unit, with each Unit consisting of (a) one share
of our common stock, (b) one Series A Warrant, and (c) one Series B Warrant (together with the Series A Warrants, the “Warrants”),
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.
Each
Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $4.50 per share. Each
Series B Warrant entitles the registered holder thereof to purchase one-half of a share of our common stock at an exercise price of $5.85
per whole share. These warrants have a term of 5 years.
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).
The
following table summarizes warrant activity for the three months ended December 31, 2021:
SCHEDULE
OF WARRANT ACTIVITY
|
|
Number of Shares Issuable Upon Exercise of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at September 30, 2021
|
|
|
4,831,915
|
|
|
$
|
4.98
|
|
|
|
4.5
|
|
|
$
|
-
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(384,447
|
)
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021
|
|
|
4,447,468
|
|
|
$
|
5.02
|
|
|
|
4.2
|
|
|
|
-
|
|
Exercisable at December 31, 2021
|
|
|
4,447,468
|
|
|
$
|
5.02
|
|
|
|
4.2
|
|
|
$
|
-
|
|
In the three months ended December 31,
2021, we issued 384,447
shares of common stock related to exercises of warrants, including 380,447
shares of common stock issued upon exercise of 380,447
Series A Warrants and 4,000
shares of common stock issued upon exercise of 8,000
Series B Warrants. In connection with such exercises, in the three months ended December 31, 2021, we received aggregate net
proceeds of $1,721,018.
6.
SUBSEQUENT EVENTS
ATM
Offering—Sales under Equity Distribution Agreement
During
the period from January 1, 2022 through February 4, 2022, we issued and sold 4,860 shares of our common stock under the Equity Distribution
Agreement, raising net proceeds of $12,542. In connection with such sales, we paid compensation to the Agent in the amount of $388. See
Note 4—Issuance of Equity Securities for additional information related to the Equity Distribution Agreement and the ATM Offering.
Agreement
with Farmer Bros. Co.
As
previously disclosed in 2020, we entered into an Equipment
Bailment and Contract Manufacturing Agreement (the “FBC Agreement”) with Farmer Bros. Co. (“FBC”), pursuant to
which FBC agreed to provide us with access to manufacturing capacity and was obligated to manufacture finished products for us. On January
27, 2022, we and FBC mutually agreed to terminate the FBC Agreement, effective immediately. Prior to its termination, the Company had
placed one machine with FBC under the FBC Agreement. The Company plans to pick up the machine within 60 days of the termination
date and redeploy the machine to one of its two manufacturing locations in the United States.
Director
Compensation Policy
On
January 11, 2022, the Company’s Board of Directors (the “Board”) adopted and approved a new director compensation policy
pursuant to which the Company will provide the following compensation to its non-employee Board members: (i) annual cash compensation
of $50,000, effective as of October 1, 2021 and payable quarterly in advance; (ii) payment to each Board member of reasonable out-of-pocket
expenses for travel costs to attend Board meetings; (iii) beginning with the Company’s 2022 Annual Meeting of Stockholders, pursuant
to the NuZee, Inc. 2019 Stock Incentive Plan, annual grants of restricted shares of common stock with an aggregate grant date fair value
of $50,000 to each Board member upon such Board member’s election or re-election, as applicable, to the Board at each annual meeting
of stockholders, and (iv) annual payments to the Audit Committee Chair, Compensation Committee Chair and Nominating and Corporate Governance
Committee Chair of $10,000, $7,500 and $5,000, respectively.
Amended Non-Binding Letter of Intent for Potential Asset Acquisition;
Bridge Loan
As previously disclosed in the Company’s Current Report on Form 8-K filed on December 29, 2021, the Company announced it entered into a non-binding letter of intent (the “Letter of Intent”)
affording the Company an exclusivity period lasting until January 31, 2022, to negotiate a definitive agreement (the
“Definitive Agreement”) to acquire substantially all the assets (the “Potential Transaction”) of an
unaffiliated, privately held company in the coffee industry (the “Third Party”). On February 3, 2022, the Company and
the Third Party amended the Letter of Intent to extend the exclusivity period to March 1, 2022 (the “Extension”). In
consideration of the Extension, the Company agreed to loan the Third Party up to $35,000
in the aggregate in two tranches, as follows: (i) $13,000
was loaned to the Third Party on February 3, 2022 and is intended to provide the Third Party with operational financing while the
parties continue negotiations to enter into a Definitive Agreement; and (ii) $22,000
is expected to be loaned to the Third Party, if at all, in the event that a Definitive Agreement is entered into between the
parties, which is expected to be an advance on the purchase price set forth in the Definitive Agreement and is intended to provide
the Third Party with operational financing as the parties work to close the Potential Transaction following signing of the
Definitive Agreement. Upon
closing of the Potential Transaction (if any), the first tranche of $13,000 is expected to be designated as an assumed liability
under the Definitive Agreement for the benefit of the Third Party and the second tranche of $22,000 is expected to be offset and
reduce the purchase price to be paid by the Company. Except in certain limited circumstances, the amounts loaned are expected
to become due and payable on the later of the closing of the Potential Transaction (if any) and March 31, 2022. The amounts loaned
will accrue interest at the rate of 1%
per annum, subject to increase upon certain events of default.