NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March
31, 2023
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as
the “Company”, “we” or “NuZee”) have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”), and rules of the Securities and Exchange Commission (the “SEC”),
and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the year ended September 30, 2022 as filed with the SEC on December 23, 2022. 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, 2022, have
been omitted.
Principles
of Consolidation
The
Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, balances and transactions have
been eliminated upon consolidation.
The
Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee
INV”).
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.
2022
Reverse Stock Split
On
December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on
December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s
Articles of Incorporation, as amended, with the Secretary of State of Nevada (the “Reverse Stock Split”). Accordingly,
each holder of common stock received one share of common stock for every 35 shares such stockholder held immediately prior to the effectiveness
of the Reverse Stock Split.
All
share and per share information included in these financial statements and notes thereto have been retroactively adjusted to give effect
to the Reverse Stock Split.
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 March 31, 2023, and March 31, 2022, the total number of common stock equivalents was 256,291
and 249,771,
respectively, comprised of stock options and warrants as of March 31, 2023 and March 31, 2022. The Company incurred a net loss for
the three and six months ended March 31, 2023, and 2022, respectively, and therefore basic and diluted earnings per share for these
periods are the same because all potential common equivalent shares would be antidilutive.
Going
Concern and Capital Resources
Since
its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management
and technical staff, acquiring operating assets, raising capital and the commercialization and
manufacture of its single serve coffee products. The Company has grown revenues from its principal operations; however, there
is no assurance of future revenue growth similar to historical levels.
As
of March 31, 2023, the Company had cash of $4,699,227 and working capital of $4,874,312. The Company has not attained profitable operations
since inception.
The
accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation
of the Company as a going concern. The Company has had limited revenues, recurring losses and an accumulated deficit. These items raise
substantial doubt as to the Company’s ability to continue as a going concern. The accompanying unaudited interim consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s continued existence
is dependent upon management’s ability to develop profitable operations and to raise additional capital for the further development
and marketing of the Company’s products and business.
Major
Customers
In
the six months ended March 31, 2023 and 2022, revenue was primarily derived from major customers disclosed below.
SCHEDULE
OF REVENUE BY MAJOR CUSTOMERS
Six
months ended March 31, 2023:
Customer Name | |
Sales Amount | | |
% of Total Revenue | | |
Accounts Receivable Amount | | |
% of Total
Accounts
Receivable | |
Customer CL | |
$ | 273,885 | | |
| 14 | % | |
$ | 214,791 | | |
| 51 | % |
Customer CN | |
| 383,248 | | |
| 20 | % | |
| 15,573 | | |
| 4 | % |
Six
months ended March 31, 2022:
Customer Name | |
Sales Amount | | |
% of Total Revenue | | |
Accounts Receivable Amount | | |
% of Total
Accounts Receivable | |
Customer WP | |
$ | 520,208 | | |
| 30 | % | |
$ | 190,978 | | |
| 30 | % |
Customer CU | |
| 252,137 | | |
| 15 | % | |
| 189,768 | | |
| 29 | % |
Lease
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities
on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different
types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.
The
Company performs a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842.
The Company has a long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas,
has a remaining lease term through June 2024. The lease has an option to extend beyond the stated termination date, but exercise of this
option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease
term of 12 months or less.
In
May 2022, the Company renewed the office and manufacturing space in Vista, California through March 31, 2025, which was scheduled to
expire on January
31, 2023. 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 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 March 31, 2023.
Effective
December 1, 2022, we entered into a new operating lease for our principal executive office, which is located at 1350 East Arapaho Road,
Suite #230, Richardson, Texas 75081. We lease the Richardson office on an annual basis, at a cost of $1,510 per month, through November
30, 2023.
As
of March 31, 2023, our operating leases had a weighted average remaining lease term of 1.2 years and a weighted-average discount rate
of 5.0%. Other information related to our operating leases is as follows:
SCHEDULE
OF OTHER INFORMATION RELATED TO OPERATING LEASE
| |
| | |
ROU Asset – October 1, 2022 | |
$ | 642,624 | |
ROU Asset added during the period | |
| - | |
Amortization during the period | |
| (123,505 | ) |
ROU Asset – March 31, 2023 | |
$ | 519,119 | |
Lease Liability – October 1, 2022 | |
$ | 656,111 | |
Lease Liability added during the period | |
| - | |
Amortization during the period | |
| (136,330 | ) |
Lease Liability – March 31, 2023 | |
$ | 519,781 | |
| |
| | |
Lease Liability – Short-Term | |
$ | 377,005 | |
Lease Liability – Long-Term | |
| 142,776 | |
Lease Liability – Total | |
$ | 519,781 | |
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 March 31, 2023:
Amounts
due within twelve months of March 31,
SCHEDULE
OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
| |
| | |
2024 | |
$ | 392,186 | |
2025 | |
| 166,582 | |
Total Minimum Lease Payments | |
| 558,768 | |
Less Effect of Discounting | |
| (38,987 | ) |
Present Value of Future Minimum Lease Payments | |
| 519,781 | |
Less Current Portion of Operating Lease Liabilities | |
| 377,005 | |
Long-Term Operating Lease Liabilities | |
$ | 142,776 | |
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 March 31, 2023, our finance lease had a remaining lease term of 1.2 years and a discount rate of 12.75%. The interest
expense on finance lease liabilities for the six months ended March 31, 2023 was $2,033.
The
table below summarizes future minimum finance lease payments at March 31, 2023 for the twelve months ended March 31:
SCHEDULE
OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
| |
| | |
2023 | |
$ | 33,113 | |
2024 | |
| 11,037 | |
Total Minimum Lease Payments | |
| 44,150 | |
Amount representing interest | |
| (7,626 | ) |
Present Value of Minimum Lease Payments | |
| 36,524 | |
Current Portion of Finance Lease Obligations | |
| 29,665 | |
Finance Lease Obligations, Less Current Portion | |
$ | 6,859 | |
Lease
expenses included in operating expense for the six months ended March 31, 2023 and 2022 was $129,292 and $123,373, respectively. Lease
expense, which represents sublease expense included in Other expense for the six months ended March 31, 2023 and 2022 was $80,205 and
$99,209, respectively.
Cash
and non-cash activities associated with the leases for the six months ended March 31, 2023 are as follows:
SCHEDULE
OF CASH AND NON-CASH ACTIVITIES OF LEASES
| |
| | |
Operating cash outflows from operating leases: | |
$ | 160,271 | |
Operating cash outflows from finance lease: | |
$ | 2,033 | |
Financing cash outflows from finance lease: | |
$ | 17,616 | |
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 six months ended March 31, 2023, we recognized sublease income of $90,263 pursuant
to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease
as of March 31, 2023, for each of the twelve months ended March 31 are as follows:
SCHEDULE
OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
| |
| | |
2024 | |
$ | 128,881 | |
2025 | |
| 32,459 | |
Total | |
$ | 161,340 | |
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 March 31, 2023 and September
30, 2022 amounted to $8,753 and $12,692, respectively.
The
remaining loan payments for each of the twelve months ended March 31:
SCHEDULE OF LOAN PAYMENTS
|
|
Ford
Motor
Credit |
|
2024 |
|
$ |
8,746 |
|
2025 |
|
|
7 |
|
Grand Total |
|
$ |
8,753 |
|
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 income amounted to $72,618 and $25,593 for the six months ended March 31, 2023 and 2022, 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 March 31, 2023 and September 30, 2022, were as follows:
SCHEDULE
OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
March 31, 2023 | | |
September 30, 2022 | |
Prepaid expenses and other current assets | |
$ | 301,380 | | |
$ | 547,773 | |
The
prepaid expenses and other current assets balance of $301,380 as of March 31, 2023 primarily consists of deposits on inventory purchases
and facilities, prepaid insurance, and rent. The balance of $547,773 as of September 30, 2022 primarily consists of deposits on inventory
and a retainer for professional services.
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 March 31, 2023 and September 30, 2022, the carrying value of inventory
was $1,229,903 and $947,995, respectively.
SCHEDULE OF INVENTORY
| |
March 31, 2023 | | |
September 30, 2022 | |
Raw materials | |
$ | 1,134,311 | | |
$ | 887,632 | |
Finished goods | |
| 95,592 | | |
| 60,363 | |
Total | |
$ | 1,229,903 | | |
$ | 947,995 | |
Equity
Method Investment
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 Mazatlán, 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 March 31, 2023, the only activities in NLA were the contribution
of two machines, as described above, and start up and initial marketing and sales activities. $3,497
and $2,296
of losses were recognized under the equity method of accounting during the six months ended March 31, 2023 and March 31, 2022,
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 previously had a minimally staffed office in Japan that provided support for import and export
of product and materials between the U.S. and Japan, as well as investor relations support to its stockholders based in Japan; these
functions are now supported by the Company’s personnel residing in the United States. Information about the Company’s geographic
operations for the six months ended March 31, 2023 and 2022 are as follows:
Geographic
Concentration
SCHEDULE
OF GEOGRAPHICAL OPERATIONS
| |
Six Months Ended | | |
Six Months Ended | |
| |
March 31, 2023 | | |
March 31, 2022 | |
Net Revenue: | |
| | | |
| | |
North America | |
$ | 1,006,717 | | |
$ | 1,401,285 | |
South Korea | |
| 910,797 | | |
| 333,041 | |
Net Revenue | |
$ | 1,917,514 | | |
$ | 1,734,326 | |
Property and equipment, net: | |
As of March 31, 2023 | | |
As of September 30, 2022 | |
North America | |
$ | 230,318 | | |
$ | 378,546 | |
South Korea | |
| 171,376 | | |
| 144,865 | |
Japan | |
| 1,150 | | |
| 1,664 | |
Property and equipment,
net | |
$ | 402,844 | | |
$ | 525,075 | |
3.
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 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, consisting of cash
paid by the Company to Dripkit and the Company’s issuance to the Stock Recipients of shares of the Company’s common stock,
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 5,105 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 year ended September 30, 2022, pursuant to
the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to the
State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts remaining after offsetting
the cost of these sales and use taxes were distributed as follows: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection
with the Cash Bulk Sales Holdback Amount, and (ii) 528 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 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
The
Company identified tradename and customer relationships as intangible assets in connection with the Acquisition. Any tradename and customer
relationship intangible assets will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill
recognized resulted from such factors as an assembled workforce and management’s industry know-how. During the year ended September
30, 2022, we recorded a non-cash impairment charge of $531,412 related to goodwill, resulting in a $0 goodwill balance as of September
30, 2022. During the year ended September 30, 2022, we also recorded non-cash impairment charges for the Dripkit tradename and acquired
customer relationships of $80,555 and $63,167, respectively. See Note 4—Intangible Assets for additional information on our tradename
intangible assets, which were the only intangible assets remaining as of March 31, 2023.
The
consolidated statement of operations for the six months ended March 31, 2023 includes revenues of $77,651, net loss of $219,524, and
amortization expense of $15,000, contributed by Dripkit.
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 six months ended March 31, 2022, as if the Acquisition had occurred on October 1, 2021
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
following is the proforma financial information for the Company and Dripkit:
SCHEDULE
OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
| |
For the three months ended March 31, |
|
|
For the six months ended March 31, | |
Description | |
2022 |
|
|
2022 | |
Revenues | |
$ |
772,165 |
|
|
$ | 1,811,693 | |
Net loss | |
$ |
3,025,896 |
|
|
$ | 5,866,279 | |
For
purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended March 31, 2022 include the elimination
of transaction costs of approximately
$244,622 and $261,561.
4.
INTANGIBLE ASSETS
As
of March 31, 2023, the Company’s intangible assets consisted of the following:
SCHEDULE
OF INTANGIBLE ASSETS
| |
Amortization | | |
March 31, 2023 | |
| |
Period (Years) | | |
Gross | | |
Accumulated Amortization | | |
Net | |
Tradenames | |
| 5 | | |
$ | 140,000 | | |
$ | 15,000 | | |
$ | 125,000 | |
Amortization
expense of intangible assets was $15,000 for the six months ended March 31, 2023.
5.
ISSUANCE OF EQUITY SECURITIES
Restricted
Stock Awards
On
March 17, 2022, pursuant to the Company’s non-employee director compensation policy, the Compensation Committee (the “Committee”)
of the Company’s Board of Directors (the “Board”) granted 674
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 3,370 Restricted Shares. These awards are now fully vested. On March 22, 2023, 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 4,398 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. 2023 Stock Incentive Plan, totaling 21,990 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 $114,779
and $9,590, respectively, for the six months ended
March 31, 2023 and 2022, related to these Restricted Shares. The Restricted Shares are valued using the closing stock price on the grant
date and the Company is expensing these restricted share awards on a straight-line basis over the requisite service period.
On March
15, 2023, the Company granted 58,619 performance-based restricted shares to executive officers, employees and consultants as part of
the 2013 Stock Incentive Plan and the 2019 Stock Incentive Plan. The initial performance period for the Performance-Based Restricted
Shares commenced October 1, 2022 and ends September 30, 2023.
50%
of the Performance-Based Restricted Shares will vest, if at all, in Fiscal Year 2023, based on the Company’s
achievement of a specified amount of cash on hand, sales growth, increased gross margin, and reduced operating losses in Fiscal Year
2023, and the other 50%
of the Performance-Based Restricted Shares will vest, if at all, in Fiscal Year 2024, based on performance metrics
to be set by the Board in its sole and absolute discretion on or before December 31, 2023. Based on management’s estimate as of March 31, 2023, the performance goals for Fiscal Year 2023 won’t
be achieved and the Company recognized common stock compensation expense of $0 for the six months ended March 31, 2023, related to these
Restricted Shares.
The
following table summarizes the restricted common shares activities for the six months ended March 31, 2023 and March 31, 2022:
SCHEDULE
OF RESTRICTED COMMON SHARES
| |
2023 |
|
|
2022 | |
Number of shares outstanding at September 30, 2022 and 2021 | |
|
3,370 |
|
|
| - | |
Restricted shares granted | |
|
80,609 |
|
|
| 3,370 | |
Restricted shares forfeited | |
|
(2,458 |
) |
|
| - | |
Restricted shares vested | |
|
(3,370 |
) |
|
| - | |
Number of shares outstanding at March 31, 2023 and 2022 | |
|
78,151 |
|
|
| 3,370 | |
During the six months ended March 31, 2023, 2,458 restricted shares were forfeited because of the termination of
employment.
Common
stock issued for services
On January 6, 2023, the Company issued 6,000 shares
of common stock to a third-party unaffiliated professional services provider in exchange for certain consulting advice to be provided
to the Company. The shares are valued using the closing stock price on the grant date and the Company recognized common stock compensation
expense of $57,120 for the six months ended March 31, 2023, related to these common stock shares.
Exercise
of Warrants
In the six months ended March 31, 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 six months ended March 31, 2022, we received aggregate net proceeds
of $1,702,596.
No
warrants have been exercised in the six months ended March 31, 2023.
6.
STOCK OPTIONS AND WARRANTS
Options
During
the six months ended March 31, 2023, the Company granted no new stock options, did not issue any shares upon the exercise of
outstanding stock options, and had 9,757 stock options that were forfeited and expired because of the termination of employment and
expiration of options.
The
following table summarizes stock option activity for the six months ended March 31, 2023:
SUMMARY
OF STOCK OPTION ACTIVITY
| |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life (years) | | |
Aggregate Intrinsic Value | |
Outstanding at October 1, 2022 | |
| 113,650 | | |
$ | 149.88 | | |
| 7.4 | | |
$ | 1,207 | |
Forfeited and expired | |
| (9,757 | ) | |
| 120.25 | | |
| - | | |
| - | |
Outstanding at March 31, 2023 | |
| 103,893 | | |
$ | 152.66 | | |
| 6.7 | | |
$ | 1,909 | |
Exercisable at March 31, 2023 | |
| 69,579 | | |
$ | 171.68 | | |
| 6.2 | | |
$ | - | |
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 $82,626 and $2,059,634 for the six months ended March 31, 2023 and March 31, 2022, respectively. Unamortized option
expense as of March 31, 2023, for all options outstanding amounted to $218,123. These costs are expected to be recognized over a weighted
average period of 0.93 years.
A
summary of the status of the Company’s nonvested options as of March 31, 2023, is presented below:
SUMMARY OF UNVESTED SHARES
Nonvested
options
| |
Number of Nonvested Options | | |
Weighted Average Grant Date Fair Value | |
Nonvested options at October 1, 2022 | |
| 50,009 | | |
$ | 154.24 | |
Granted | |
| - | | |
| - | |
Forfeited | |
| (8,883 | ) | |
| 107.79 | |
Vested | |
| (6,812 | ) | |
| 283.56 | |
Nonvested options at March 31, 2023 | |
| 34,314 | | |
$ | 140.60 | |
Warrants
During
the six months ended March 31, 2023, the Company granted no new warrants to purchase shares of common stock and did not issue any shares
upon the exercise of outstanding warrants to purchase shares of common stock.
The
following table summarizes warrant activity for the six months ended March 31, 2023:
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, 2022 | |
| 152,398 | | |
$ | 158.24 | | |
| 3.7 | | |
$ | - | |
Issued | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| - | | |
| - | | |
| | | |
| | |
Outstanding at March 31, 2023 | |
| 152,398 | | |
$ | 158.24 | | |
| 3.2 | | |
| - | |
Exercisable at March 31, 2023 | |
| 152,398 | | |
$ | 158.24 | | |
| 3.2 | | |
$ | - | |
7. Contingency
Steeped Litigation
The Company has an accrual of $150,000 for litigation costs related
to the ongoing Stepped complaint regarding infringement upon their registered trademark. This accrual is based on the initial settlement
proposed by the opposing party. This settlement was declined by the Company, and it has decided to take this accrual to cover any costs
relating to this complaint.