NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June
30, 2022
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as
the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”),
and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the year ended September 30, 2021 as filed with the SEC on December 22, 2021. In the opinion of management,
all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative
of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements as reported in the Annual Report on Form 10-K for the year ended September 30, 2021, have
been omitted.
Reclassification
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. We reclassified lease expenses associated with subleased property from Operating expenses to Other expenses totaling $118,885
for the nine months ended June 30, 2021 and $40,712 for the three months ended June 30, 2021. We also reclassified $18,000 of capitalized
software costs included in Property and Equipment, net at September 30, 2021 to Prepaid expenses and other current assets. 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”).
On
February 25, 2022 (the “Closing Date”), the Company acquired substantially all the assets and certain specified liabilities
(the “Acquisition”) of Dripkit, Inc., a Delaware corporation (“Dripkit”), pursuant to the Asset Purchase Agreement,
dated as of February 21, 2022 (the “Asset Purchase Agreement”), by and among the Company, Dripkit, and Dripkit’s existing
investors (the “Stock Recipients”) who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant
to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus
the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement.
Dripkit is engaged in the business of manufacturing and sales of a single serve pour over coffee format that has a large-size single
serve pour over pack that sits on top of the cup. Dripkit operates as a new Dripkit Coffee business division that is wholly owned by
NuZee, Inc. The Company analyzed the Acquisition under ASC 805 and concluded that it should be accounted for as a business combination.
The Acquisition has been included in the Company’s financial statements from the date of the Acquisition.
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 June 30, 2022, and June 30, 2021, the total number of common stock equivalents was 9,706,438 and 8,289,864, respectively,
comprised of stock options and warrants as of June 30, 2022 and June 30, 2021. The Company incurred a net loss for the three and nine
months ended June 30, 2022, and 2021, respectively, and therefore basic and diluted earnings per share for those periods are the same
because all potential common equivalent shares would be antidilutive.
Capital
Resources
Since
its inception, the Company has devoted substantially all its efforts to business planning, research and development, recruiting management
and technical staff, acquiring operating assets, raising capital, and the commercialization and manufacture of its single serve coffee
products. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.
As
of June 30, 2022, the Company had cash of $7,523,099. However, the Company has not attained profitable operations since inception.
Major
Customers
In
the nine months ended June 30, 2022 and 2021, revenue was primarily derived from major customers disclosed below.
SCHEDULE OF REVENUE BY MAJOR CUSTOMERS
Nine
months ended June 30, 2022:
Customer Name | |
Sales Amount | | |
% of Total Revenue | | |
Accounts Receivable Amount | | |
% of Total Accounts Receivable | |
Customer WP | |
$ | 660,997 | | |
| 26 | % | |
$ | 239,579 | | |
| 42 | % |
Customer CU | |
$ | 252,137 | | |
| 10 | % | |
$ | 52,564 | | |
| 9 | % |
Customer S | |
$ | 242,580 | | |
| 10 | % | |
$ | 62,590 | | |
| 11 | % |
Nine
months ended June 30, 2021:
Customer Name | |
Sales Amount | | |
% of Total Revenue | | |
Accounts Receivable Amount | | |
% of Total Accounts Receivable | |
Customer WP | |
$ | 456,247 | | |
| 32 | % | |
$ | 124,814 | | |
| 39 | % |
Lease
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities
on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different
types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.
The
Company performs a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842.
The Company has a long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas,
has a remaining lease term through June 2024. The lease has an option to extend beyond the stated termination date, but exercise of this
option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease
term of 12 months or less.
During
our analysis of leases in the nine months ended June 30, 2022, we determined to renew the office and manufacturing space in Vista, California
which was scheduled to expire on January 31, 2023, through March 31, 2025. The lease has a monthly base rent of $8,451, plus common area
expenses. Along with the extension, we leased an additional 1,796 square feet that has a monthly base rent of $2,514 through March 31,
2025. We extended our sub-leased property in Vista, California, through January 31, 2023. The lease has a monthly rent of $2,111 and
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 June 30, 2022.
As
of June 30, 2022, our operating leases had a weighted average remaining lease term of 1.6 years and a weighted-average discount rate
of 5.5%. Other information related to our operating leases is as follows:
SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
| |
| | |
ROU Asset – October 1, 2021 | |
$ | 386,587 | |
ROU Asset added during the period | |
| 558,371 | |
Amortization during the period | |
| (213,539 | ) |
ROU Asset – June 30, 2022 | |
$ | 731,419 | |
Lease Liability – October 1, 2021 | |
$ | 398,587 | |
Lease Liability added during the period | |
| 558,371 | |
Amortization during the period | |
| (210,194 | ) |
Lease Liability – June 30, 2022 | |
$ | 746,764 | |
| |
| | |
Lease Liability – Short-Term | |
$ | 180,939 | |
Lease Liability – Long-Term | |
| 565,825 | |
Lease Liability – Total | |
$ | 746,764 | |
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 June 30, 2022:
Amounts
due within twelve months of June 30,
SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| |
| | |
2023 | |
$ | 292,775 | |
2024 | |
| 322,280 | |
2025 | |
| 186,759 | |
Total Minimum Lease Payments | |
| 801,814 | |
Less Effect of Discounting | |
| (55,050 | ) |
Present Value of Future Minimum Lease Payments | |
| 746,764 | |
Less Current Portion of Operating Lease Liabilities | |
| 180,939 | |
Long-Term Operating Lease Liabilities | |
$ | 565,825 | |
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 finance lease. As of June 30, 2022, our finance lease had a remaining lease term of 1.9 years and a discount rate of 12.75%. The interest
expense on finance lease liabilities for the nine months ended June 30, 2022 was $6,741.
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 June 30, 2022 for the twelve months ended June 30:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| |
| | |
2022 | |
$ | 33,113 | |
2023 | |
| 33,113 | |
2024 | |
| 2,759 | |
Total Minimum Lease Payments | |
| 68,985 | |
Amount representing interest | |
| (8,679 | ) |
Present Value of Minimum Lease Payments | |
| 60,306 | |
Current Portion of Finance Lease Obligations | |
| 30,610 | |
Finance Lease Obligations, Less Current Portion | |
$ | 29,696 | |
Rent
expense included in Operating expense for the nine months ended June 30, 2022 and 2021 was $221,972 and $132,279, respectively. Rent expense
included in Other expense for the nine months ended June 30, 2022 and 2021 was $157,267 and $118,885, respectively.
Cash
and non-cash activities associated with the leases for the nine months ended June 30, 2022 are as follows:
SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
| |
| | |
Operating cash outflows from operating leases: | |
$ | 216,334 | |
Operating cash outflows from finance lease: | |
$ | 6,741 | |
Financing cash outflows from finance lease: | |
$ | 18,094 | |
In
September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020, under terms that are co-terminus
with the original lease ending June 30, 2024. During the nine months ended June 30, 2022, we recognized sublease income of $140,753 pursuant
to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease
as of June 30, 2022, for each of the twelve months ended June 30 are as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| |
| | |
2023 | |
$ | 126,017 | |
2024 | |
| 129,835 | |
Total | |
$ | 255,852 | |
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 June 30, 2022 and September
30, 2021 amounted to $14,643 and $20,146, respectively.
The
remaining loan payments are as follows:
SCHEDULE OF LOAN PAYMENTS
| |
Ford Motor
Credit | |
2022 (Jul 2022 - Sep 2022) | |
$ | 1,951 | |
2023 (Oct 2022 - Jun 2023) | |
| 5,939 | |
Total Current Portion | |
$ | 7,890 | |
| |
| | |
2023 (Jul 2023 - Sep 2023) | |
$ | 6,753 | |
Total Long-Term Portion | |
$ | 6,753 | |
| |
| | |
Grand Total | |
$ | 14,643 | |
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 had a term of 36 months at a rate
of 4.33%. Principal payments began in July 2019. The outstanding balance on this loan at June 30, 2022 and September 30, 2021 amounted
to $0 and $35,898, respectively. This loan was paid in full in this reporting period.
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 loss amounted to $(19,604) and $(2,374) for the nine months ended June 30, 2022 and 2021, 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.
Prepaid
expenses and other current assets
Prepaid
expenses and other current assets at June 30, 2022 and September 30, 2021, were as follows:
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
June 30,
2022 | | |
September 30,
2021 | |
Prepaid expenses and other current assets | |
$ | 1,174,297 | | |
$ | 482,288 | |
The
prepaid expenses and other current assets balance of $1,174,297 as
of June 30, 2022 primarily consists of deferred financing costs related to our ATM offering of $368,783 and
our underwritten public offering completed in August 2022 of $273,762 (see Note 8—Subsequent Events),
prepaid insurance and deposits, and the balance of $482,288 as
of September 30, 2021 primarily consists of prepaid insurance and a customer deposit.
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 June 30, 2022 and September 30, 2021, the carrying value of inventory
was $682,580 and $573,464, respectively.
SCHEDULE OF INVENTORY
| |
June 30,
2022 | | |
September 30,
2021 | |
Raw materials | |
$ | 638,444 | | |
$ | 552,621 | |
Finished goods | |
| 44,136 | | |
| 20,843 | |
Less – Inventory reserve | |
| - | | |
| - | |
Total | |
$ | 682,580 | | |
$ | 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 June 30, 2022, the only activities in NLA were the contribution of two machines,
as described above, and start up and initial marketing and sales activities. $4,215 and $4,077 of losses were recognized under the equity
method of accounting during the nine months ended June 30, 2022 and June 30, 2021, 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 nine months ended June 30, 2022 and 2021 are as follows:
Geographic
Concentration
SCHEDULE OF GEOGRAPHIC OPERATIONS
| |
Nine Months
Ended | | |
Nine Months
Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | |
Net Revenue: | |
| | | |
| | |
North America | |
$ | 2,031,781 | | |
$ | 1,077,986 | |
South Korea | |
| 476,564 | | |
| 364,097 | |
Net Revenue | |
$ | 2,508,345 | | |
$ | 1,442,083 | |
Property and equipment, net: | |
As of June 30, 2022 | | |
As of September 30, 2021 | |
North America | |
$ | 400,842 | | |
$ | 517,966 | |
South Korea | |
| 209,254 | | |
| 154,562 | |
Japan | |
| 2,200 | | |
| 1,496 | |
Property and equipment,
net | |
$ | 612,296 | | |
$ | 674,024 | |
3.
RELATED PARTY TRANSACTIONS
For
the nine months ended June 30, 2022 and June 30, 2021, respectively, the Company had sales of $0 and $28,299 of materials to NLA.
4.
BUSINESS COMBINATIONS
As
described in Note 1, on February 25, 2022, the Company acquired substantially all the assets and certain specified liabilities of Dripkit
pursuant to the Asset Purchase Agreement, dated as of February 21, 2022, by and among the Company, Dripkit, and Dripkit’s existing
investors who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement,
the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities,
including a $13,000 bridge loan and approximately $3,176 of payables, subject to certain adjustments and holdbacks as provided in the
Asset Purchase Agreement resulting in an acquisition accounting purchase price of $876,176. The Company analyzed the Acquisition under
ASC 805 and concluded that it should be accounted for as a business combination.
Pursuant
to the terms of the Asset Purchase Agreement, on the Closing Date, the cash portion of the purchase price was reduced by the following
amounts: (a) $22,000, in satisfaction of a bridge loan made from the Company to Dripkit in February 2022 to provide Dripkit with operational
financing prior to the Closing Date, (b) $35,500, as an indemnity holdback for the purpose of satisfying any indemnification claims made
by the Company pursuant to the Asset Purchase Agreement, and (c) $40,000, as a cash bulk sales holdback (the “Cash Bulk Sales Holdback
Amount”). In addition, on the Closing Date, the Company held back $40,000 worth of stock consideration as the Stock Bulk Sales
Holdback Amount (together with the Cash Bulk Sales Holdback Amount, the “Bulk Sales Holdback Amount”).
On
the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as
follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of 178,681
shares of the Company’s common stock. The Company repaid the entire outstanding principal amount of Dripkit’s Small Business
Association Economic Injury Disaster Loan in the amount of $78,656. In addition, the Company recorded a liability on its balance sheet
in Accounts Payable of $115,500 related to potential future amounts due related to the Bulk Sales Holdback of $80,000 and the indemnity
holdback of $35,500.
In
the quarter ended June 30, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy
sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement,
the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows in the quarter ended June 30,
2022: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) 18,475
shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.
Dripkit was acquired for purposes of supplementing our current product offerings. Dripkit operates as a new Dripkit Coffee
business division that is wholly-owned by NuZee, Inc.
The
following table presents the allocation of the aggregate purchase price paid by the Company for the Acquisition of $860,000, plus the
assumption of certain assumed liabilities, including a $13,000 bridge loan and approximately $3,176 of payables, resulting in an acquisition
accounting purchase price of $876,176, to the assets acquired for the acquisition of Dripkit:
SCHEDULE
OF ALLOCATION OF AGGREGATE PURCHASE PRICE
| |
| |
Total purchase price | |
$ | 876,176 | |
Assets acquired: | |
| | |
Inventory | |
$ | 9,664 | |
Property and equipment | |
| 5,100 | |
Identifiable intangible assets | |
| 330,000 | |
Total assets acquired | |
$ | 344,764 | |
| |
| | |
Estimated fair value of net assets acquired | |
$ | 344,764 | |
Goodwill | |
$ | 531,412 | |
Identified
Intangibles and Goodwill
The
Company identified tradename and customer relationships intangible assets. The tradename and customer relationships intangible assets
will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill recognized results from such factors
as an assembled workforce and management’s industry know-how. See Note 5—Goodwill and Intangible Assets for additional information
on identified intangible assets and goodwill.
The
nine months ended June 30, 2022 includes the operating results of Dripkit for the period from February 25, 2022, the date of acquisition,
to June 30, 2022. The consolidated statement of operations for the three and nine months ended June 30, 2022 includes revenue of approximately
$30,164 and $32,645, respectively, net loss of approximately $109,249 and $122,370, respectively, and amortization expense, of approximately
$19,833 and $26,444, respectively, contributed by Dripkit.
During
the nine months ended June 30, 2022, the Company incurred $270,478
of transaction costs related to the Acquisition which are included in Operating expenses.
Unaudited
Pro forma Financial Information
The
following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the
Dripkit Acquisition for the three and nine months ended June 30, 2022 and 2021, as if the Acquisition had occurred as of the beginning
of the first period presented instead of on February 25, 2022.
The
pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations
that would have been realized if the Acquisition had been completed on October 1, 2021, nor does it purport to project the results of
operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration
costs related to the acquired company.
The
proforma financial information for the Company and Dripkit is as follows:
SCHEDULE
OF UNAUDITED
PRO FORMA FINANCIAL INFORMATION
| |
| | |
| | |
| | |
| |
| |
For the three months ended June 30, | | |
For the nine months ended June 30, | |
Description | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues | |
$ | 774,019 | | |
$ | 631,744 | | |
$ | 2,585,802 | | |
$ | 1,787,270 | |
Net loss | |
$ | 2,624,975 | | |
$ | 3,101,583 | | |
$ | 8,491,254 | | |
$ | 15,234,435 | |
For
purposes of the pro forma disclosures above, the primary adjustments for the three months and nine months ended June 30, 2022 include
the elimination of transaction costs of approximately $8,917 and $270,478, respectively.
5.
GOODWILL AND INTANGIBLE ASSETS
Changes
in goodwill for the nine months ended June 30, 2022, consists of the following:
SCHEDULE
OF CHANGES
IN GOODWILL
| |
June 30, 2022 | |
Balance at September 30, 2021 | |
$ | - | |
Dripkit acquisition | |
| 531,412 | |
Balance at June 30, 2022 | |
$ | 531,412 | |
As
of June 30, 2022, the Company’s intangible assets consisted of the following:
SCHEDULE
OF INTANGIBLE ASSETS
| |
Amortization | | |
June 30, 2022 | |
| |
Period
(Years) | | |
Gross | | |
Accumulated Amortization | | |
Net | |
Tradenames | |
| 5 | | |
$ | 230,000 | | |
$ | 15,333 | | |
$ | 214,667 | |
Customer relationships | |
| 3 | | |
| 100,000 | | |
| 11,111 | | |
| 88,889 | |
Balance at June 30, 2022 | |
| | | |
$ | 330,000 | | |
$ | 26,444 | | |
$ | 303,556 | |
Amortization
expense was $26,444 for the nine months ended June 30, 2022.
6.
ISSUANCE OF EQUITY SECURITIES
Exercise
of Warrants
In
the nine months ended June 30, 2022, we issued 384,447 shares of common stock related to exercises of 2021 Warrants (as defined below),
including 380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants (as defined below) and 4,000 shares of common
stock issued upon exercise of 8,000 Series B Warrants (as defined below). In connection with such exercises, in the nine months ended
June 30, 2022, we received aggregate net proceeds of $1,702,596.
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 could 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. Pursuant to the Equity Distribution Agreement, we paid 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 were 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 were not obligated to make any sales of shares of our common stock under
the Equity Distribution Agreement. In the nine months ended June 30, 2022, we issued and sold 49,326
shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $95,256. In connection with such sales, we
paid compensation to the Agent in the amount of $3,003. As further described in Note 8 – Subsequent Events, we terminated the Equity
Distribution Agreement on August 5, 2022.
Grant
of Restricted Stock Awards to the Company’s Independent Board Members
On
March 17, 2022, pursuant to the Company’s non-employee director compensation policy, the Compensation Committee (the “Committee”)
of the Company’s Board of Directors (the “Board”) granted 23,584 restricted shares (the “Restricted Shares”)
of the Company’s common stock to each of the Company’s five independent directors pursuant to the NuZee, Inc. 2013 Stock
Incentive Plan, totaling 117,920 Restricted Shares. The Restricted Shares are scheduled to vest in full on the one-year anniversary of
the grant date, subject to each independent director’s continued service as a director of the Company. The Company recognized common
stock compensation expense of $71,916 for the nine months ended June 30, 2022 related to these Restricted Shares.
April
2022 Exempt Offering
On
April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, the
Company sold 884,778 units (the “2022 Units”), at a price of $2.00 per 2022 Unit for aggregate net proceeds of $1,649,736,
with each 2022 Unit consisting of (a) one share of our common stock and (b) one warrant (each, a “2022 Warrant” and collectively,
the “2022 Warrants”) to purchase one whole share of our common stock with an initial exercise price of $2.00 per share.
7.
STOCK OPTIONS AND WARRANTS
Options
During
the nine months ended June 30, 2022, the Company granted 100,000 new stock options, issued 14,000 shares upon the exercise of outstanding
stock options, and had 223,500 stock options that were forfeited because of the termination of employment.
The
fair value of each option award granted in the nine months ended June 30, 2022 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 historical
volatility of a peer group of companies. The expected term of options granted was determined using the simplified method under SAB
107 which represents the mid-point between the vesting term and the contractual term. The risk-free rate is calculated using the
U.S. Treasury yield curve and is based on the expected term of the option.
The
Black-Scholes option pricing model was used with the following weighted average assumptions for options granted during the nine months
ended June 30, 2022:
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS FOR FAIR VALUE MEASUREMENT OF OPTIONS GRANTED
| |
June 30, 2022 | |
Risk-free interest rate | |
| 2.38 | % |
Expected option life | |
| 6 years | |
Expected volatility | |
| 70.53 | % |
Expected dividend yield | |
| 0.00 | % |
Exercise price | |
$ | 2.16 | |
The
following table summarizes stock option activity for the nine months ended June 30, 2022:
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 | |
| 100,000 | | |
| 2.16 | | |
| | | |
| | |
Exercised | |
| (14,000 | ) | |
| 0.90 | | |
| | | |
| | |
Expired | |
| - | | |
| - | | |
| | | |
| | |
Forfeited | |
| (223,500 | ) | |
| 13.16 | | |
| | | |
| | |
Outstanding at June 30, 2022 | |
| 4,374,191 | | |
$ | 4.25 | | |
| 7.8 | | |
$ | - | |
Exercisable at June 30, 2022 | |
| 1,932,379 | | |
$ | 4.92 | | |
| 6.8 | | |
$ | - | |
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 $2,687,529 and $8,002,917 for the nine months ended June 30, 2022 and June 30, 2021, respectively. Unamortized option
expense as of June 30, 2022, for all options outstanding amounted to $1,808,520. These costs are expected to be recognized over a weighted
average period of 1.4 years.
A
summary of the status of the Company’s nonvested options as of June 30, 2022, 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 | |
| 100,000 | | |
| 2.16 | |
Forfeited | |
| (54,333 | ) | |
| 4.43 | |
Vested | |
| (474,653 | ) | |
| 5.90 | |
Nonvested options at June 30, 2022 | |
| 2,441,813 | | |
$ | 4.74 | |
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 (the “2020 Warrants”) to purchase our common stock at an exercise price
of $9.00 a share. The 2020 Warrants became 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 of (i) 2,777,777 units (the
“2021 Units”), at a price to the public of $4.50 per 2021 Unit, with each 2021 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 “2021 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. The 2021 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 2021 Warrants unless we fail
to maintain a current prospectus relating to the common stock issuable upon the exercise of the 2021 Warrants (in which case, the 2021
Warrants may only be exercised via a “cashless” exercise provision).
On
April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, the
Company sold 884,778 2022 Units, with each 2022 Unit consisting of (a) one share of our common stock and (b) one 2022 Warrant. Each 2022
Warrant entitles the holder to purchase one share of our common stock at an exercise price of $2.00 per share. The 2022 Warrants have
a term of 5 years. Holders may exercise their 2022 Warrants on a “cashless” basis pursuant to a formula set forth in the
form of 2022 Warrant.
The
following table summarizes warrant activity for the nine months ended June 30, 2022:
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 | |
| 884,778 | | |
| 2.00 | | |
| | | |
| | |
Exercised | |
| (384,447 | ) | |
| 4.51 | | |
| | | |
| | |
Expired | |
| - | | |
| - | | |
| | | |
| | |
Outstanding at June 30, 2022 | |
| 5,332,246 | | |
$ | 4.52 | | |
| 3.9 | | |
| - | |
Exercisable at June 30, 2022 | |
| 5,332,246 | | |
$ | 4.52 | | |
| 3.9 | | |
$ | - | |
In
the nine months ended June 30, 2022, we issued 384,447 shares of common stock related to exercises of 2021 Warrants, including 380,447
shares of common stock issued upon exercise of 380,447 Series A Warrants and 4,000 shares of common stock issued upon exercise of 8,000
Series B Warrants. In connection with such exercises, in the nine months ended June 30, 2022, we received aggregate net proceeds of $1,702,596.
8.
SUBSEQUENT EVENTS
Termination
of Equity Distribution Agreement
On
August 5, 2022, we terminated our Equity Distribution Agreement with the Agent. See Note 6—Issuance of Equity Securities for additional
information regarding the Equity Distribution Agreement. Prior to termination, we issued and sold 49,326 shares of our common stock under
the Equity Distribution Agreement, raising net proceeds of $95,256.
August
2022 Underwritten Public Offering
On August 10, 2022, we completed an underwritten
public offering (the “Offering”) of 4,200,000 shares of our common stock, pursuant to an Underwriting Agreement dated as of
August 7, 2022 and a prospectus supplement to the Company’s effective shelf registration statement on Form S-3 (Registration No.
333-248531). The aggregate gross proceeds from the Offering were approximately $3.4 million. We received proceeds of approximately $3.2
million, after deducting underwriting discounts and before deducting Offering costs payable by us.