The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto included elsewhere in this Report. Except for historical information contained herein, the following discussion contains forward-looking statements which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Report and specifically under Item 1A of Part I of this Report, Risk Factors. For additional discussion, see "CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS" above.
We are a specialty coffee company and, we believe, a leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of tea-bag style coffee. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.
We believe we are the only commercial-scale producer that has the dual capacity to pack both single serve pour over coffee and tea-bag style coffee within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve pour over and tea-bag style coffee markets in North America. We target existing high-margin companies and are paid per-package based on the number of single serve coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve coffee product our co-packing customers sell in the North American and Korean markets. While we financially benefit from the success of our co-packing customers through the sales of their respective single serve pour over and tea-bag style coffee products, we are also able to avoid the risks associated with owning and managing the product and its related inventory. We have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and tea-bag style coffee, which we believe offers consumers some of the best coffee available in a single serve application in the world.
We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
For additional details regarding our business, see the discussion under Business in Item 1 of Part I of this Report, which is incorporated by reference into this Part II, Item 7 of this Report.
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, our co-packing customers typically supply us with roasted, whole bean coffee that we produce and package into single serve pour over and tea-bag style coffee products according to their formulations and specifications. In addition, under our private label coffee development program, our team works directly with our co-packing customers in developing private labels of signature coffees. Under this program, our team of coffee experts works extensively with our co-packing customers to develop a coffee taste profile to their unique needs and then we source, roast (utilizing our third-party roasting partners), blend, pack (in either our single serve pour over or tea-bag style coffee products), and package single serve coffee products to their exact specifications.
We currently focus on fostering co-packing arrangements with larger companies developing pour over and tea-bag style coffee products. We believe that as our potential co-packing customers continue to realize that we have the experience co-packing for a variety of customer sizes, we will become the co-packer of choice. The standards required to co-pack for large international companies almost always meet or exceed the standards required to co-pack for any other customer. We also believe that as our co-packing customers' competitors realize they have a single serve pour over and tea-bag style coffee solutions, they will be more motivated to develop their own such solutions and that will lead to increased co-packing opportunities for us.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for a particular smaller company in July 2017 and continue to do so today. This company started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new and innovative companies with whom we may work and grow.
As previously announced, we expect to manufacture certain Cuvée Coffee ("Cuvée") single serve filter bag products that Cuvée plans to sell in a nationally recognized retail chain. Pursuant to our co-packing arrangement with Cuvée, we currently, and plan to continue to, manufacture single serve filter bag products according to their formulations and specifications on a purchase order basis. For a discussion of certain risks related to our co-packing arrangements, including our co-packing arrangement with Cuvée, see "Item 1A. Risk Factors" herein.
Although our primary focus is on the manufacture of single serve pour over coffee products pursuant to co-packing arrangements, we have also developed high-quality NuZee branded single serve coffee products that are sold directly to consumers. In addition to being available for direct sale to consumers, our NuZee branded products serve as samples that are provided to potential new co-packing customers to showcase our co-packing capabilities and production expertise. In this regard, our NuZee branded products are a 'stepping-stone' product for our co-packing customers that market high quality packaging and coffee. Sales of our NuZee branded products, including through Amazon, also help promote consumer adoption into the format and to educate coffee drinkers in the United States about this coffee format that is new to North America but widely known in East Asia.
Impact of the COVID-19 Pandemic
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the fiscal years ended September 30, 2021, and September 30, 2020, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or pour over coffee products, and we also believe that potential sales of our pour over coffee products to new or potential customers in the hospitality industry were adversely impacted. In addition, we have experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. We do not believe, however, that these delays had a significant effect on our business or results of operations to date, and in some cases we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. See Item 1A of Part I of this Report for further discussion of risk factors related to COVID-19.
Our operations are primarily split between two geographic areas: North America and Asia.
For the fiscal year ended September 30, 2021, net revenues attributable to our operations in North America totaled $1,441,274, compared to $1,025,151 of net revenues attributable to our operations in North America during the fiscal year ended September 30, 2020. Additionally, as of September 30, 2021, $535,966 of our Property and equipment, net was attributable to our North American operations, compared to $1,422,575 attributable to our North American operations as of September 30, 2020. In March 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the Company's current business operations at that time. $93,375 of the impairment was related to the ROU asset and $747,016 was to property and equipment. This write off is included in operating expenses on our consolidated statement of operations for the year ended September 30, 2021. These assets are co-packing equipment that have limited capabilities compared with other equipment the Company is currently utilizing. Since we have yet to utilize this equipment since it was delivered, we have determined their usefulness to our future operations is limited.
For the fiscal year ended September 30, 2021, net revenues attributable to our operations in Asia totaled $485,386 compared to $377,980 of net revenues attributable to our operations in Asia during the fiscal year ended September 30, 2020. Additionally, as of September 30, 2021, $156,058 of our Property and equipment, net was attributable to our Asian operations, compared to $245,773 attributable to our Asian operations as of September 30, 2020.
Comparison of Years ended September 30, 2021 and 2020
For the year ended September 30, 2021, revenues increased by $523,529, or approximately 37%, compared with the year ended September 30, 2020. This increase was primarily related to increased co-packing revenues in North America and Korea partially offset by the impact from the sale of NuZee JP to EHCL on September 28, 2020, as the results for the year ended September 30, 2020 include revenues from NuZee JP while the results for the year ended September 30, 2021 do not.
The year-over-year growth in revenues described above was driven primarily by increased co-packing revenues. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations by adding, among others, a new Chief Sales Officer & Chief Supply Chain Officer, a new Chief Marketing Officer, a new Vice President of Business Development, and a new Vice President of Sales, North and West Coast, which has resulted in increased orders and increased co-packing opportunities for current and potential new co-packing customers. We expect this co-packing revenue growth trend to continue throughout fiscal year 2022 as a result of our expanded sales and marketing team, as well as from additional co-packing revenues that we expect to be generated from new or potential co-packing arrangements. We expect the revenue growth trend in fiscal year 2022 to be materially similar to our revenue growth in fiscal year 2021.
Cost of sales and gross margin
For the year ended September 30, 2021, we had a total gross loss of $80,093 from sales of our products, compared to a total gross loss of $238,953 for the year ended September 30, 2020. The gross margin rate was (4%) for the year ended September 30, 2021, and (17%) for the year ended September 30, 2020. This increase in margin was driven by greater scale in our manufacturing operations due to increased production during 2021 versus 2020. In the year ended September 30, 2020, the Company incurred increased costs as it continued to scale up its co-packing operations as well as a loss incurred on the close-out of certain inventory items for a particular customer.
For the year ended September 30, 2021, our Company's operating expenses totaled $18,559,277, compared to $9,094,132 for the year ended September 30, 2020, representing a $9,465,145 increase. This increase is primarily attributable to an increase in stock compensation expense and employee compensation costs associated with greater staffing levels, professional services related to fund raising and website development costs which were expensed. In addition, as further described above (see "-Geographic Concentration"), in the year ended September 30, 2021, the Company wrote off $840,391 of assets in North America as these assets were deemed to be no longer useful for the current business operations.
Net Loss attributable to NuZee, Inc. $ 18,552,030 $ 9,477,091 $ 9,074,939 96 %
For the year ended September 30, 2021, we generated net losses attributable to NuZee, Inc. of $18,552,030 versus $9,477,091 for the year ended September 30, 2020. This change is primarily attributable to an increase in stock compensation expense, employee costs, professional services and website development costs offset by an increase in our gross margin due to increased production.
Since our inception in 2011, we have incurred significant losses, and as of September 30, 2021, we had an accumulated deficit of approximately $52.8 million. We have not yet achieved profitability and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. In the United States, we expect to incur additional losses as a result of the costs associated with operating as an exchange-listed public company in the future. We are unable to predict the extent of any future losses or when we will become profitable, if at all.
To date, we have funded our operations primarily with proceeds from the registered public offerings and private placements of shares of our common stock. Our principal use of cash is to fund our operations, which includes the commercialization of our single serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.
As of September 30, 2021, we had a cash balance of $10,815,954. We believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least 12 months from December 22, 2021. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.
In the future, we expect to receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised at the election of the warrant holders, including the Warrants (as defined below) that were sold by us in March 2021 in an underwritten registered public offering. Subsequent to September 30, 2021, we issued 379,197 shares of common stock upon exercise of 379,197 Series A Warrants (as defined below) and issued 4,000 shares of common stock upon exercise of 8,000 Series B Warrants (as defined below). In connection with such exercises, in the first quarter of fiscal year 2022, we received aggregate gross proceeds of $1,729,787. For additional information regarding the Series A Warrants and Series B Warrants, see "-Summary of Cash Flows-Financing Activities" and Notes 6 and 7 to the Consolidated Financial Statements.
In the long-term, we expect we will need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. Our need to raise funds will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. Until we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
Our significant contractual cash requirements as of September 30, 2021 primarily include payments for operating and finance lease liabilities and principal and interest on loans. Our current and long-term obligations related to these items are outlined in the leases portion of Note 2, Basis of Presentation and Summary of Significant Accounting Policies, and Note 3, Loans, of the Notes to Consolidated Financial Statements within this Form 10-K. Additionally, we may incur purchase obligations in the ordinary course of business that are enforceable and legally binding and enter into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. As of September 30, 2021, we had payments for lease and loan obligations of approximately $533,301, of which $222,382 are payable within 12 months as of September 30, 2021. We had no purchase obligations as of September 30, 2021.
Cash used in operating activities $ (7,107,155 ) $ (4,236,256 ) Cash used in investing activities $ (115,361 ) $ (6,696 ) Cash provided by financing activities $ 13,632,263 $ 7,250,477 Effect of foreign exchange on cash $ 7,662 $ 64,980 Net increase in cash
We used $7,107,155 and $4,236,256 cash in operating activities during the years ended September 30, 2021 and 2020, respectively, principally to fund our operating loss. The increase in cash used in operating activities of $2,870,899 was primarily attributable to an overall increase in operating expenses for the year ended September 30, 2021, as compared to the year ended September 30, 2020.
We used $115,361, versus used $6,696 of cash in investing activities during the years ended September 30, 2021 and 2020, respectively. The change in investing cash flow over this period was primarily due to no sales of equipment in 2021 as compared to 2020 in which we had proceeds from sales of equipment.
Historically, we have funded our operations through the issuance of our common stock.
Cash provided from financing activities increased from $7,250,477 for the year ended September 30, 2020, to $13,632,263 for the year ended September 30, 2021.
During the fiscal year ended September 30, 2021, we sold (i) 72,955 shares of common stock to one investor in a registered public offering for aggregate net proceeds of $534,494 pursuant to a Common Stock Purchase Agreement dated as of October 26, 2020 and a prospectus supplement to the Company's effective shelf registration statement on Form S-3 (Registration No. 333-248531) (the "Registration Statement"), and (ii) 256,338 shares of common stock at $9.14 per share for aggregate net proceeds of $2,149,486 pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. In addition, during the fiscal year ended September 30, 2021, we sold pursuant to an Underwriting Agreement dated as of March 19, 2021 and a prospectus supplement to the Registration Statement (i) 2,777,777 units ("Units") in an underwritten registered public offering for aggregate net proceeds of $11,017,304 which includes the proceeds from the underwriter's full exercise of their overallotment option with respect to the warrant component of the Units, with each Unit consisting of (a) one share of our common stock, (b) one Series A warrant (each, a "Series A Warrant" and collectively, the "Series A Warrants") to purchase one share of our common stock with an initial exercise price of $4.50 per whole share, and (c) one Series B warrant (each, a "Series B Warrant" and collectively, the "Series B Warrants" and together with the Series A Warrants, the "Warrants") to purchase one-half share of our common stock with an initial exercise price of $5.85 per whole share, and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter's full exercise of their overallotment option with respect to such warrants. The Warrant holders are obligated to pay the exercise price in cash upon exercise of the Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the Warrants (in which case, the Warrants may only be exercised via a "cashless" exercise provision).
During the year ended September 30, 2020, we sold (i) 111,738 shares of common stock at a weighted average net price of $17.25 per share, for an aggregate net proceeds of $1,927,338 pursuant to private offerings of common stock, (ii) 805,000 shares of common stock at a price of $9.00 per share for aggregate net proceeds of $5,427,640, after deducting underwriting discounts and commissions and offering expenses payable by us (including $225,089 of offering expenses paid in the year ended September 30, 2019), pursuant to our underwritten public offering of common stock and the related underwriting agreement dated June 18, 2020.
On March 11, 2021, we terminated our At Market Issuance Sales Agreement, dated September 1, 2020 (the "ATM Agreement"), with B. Riley Securities, Inc. (f/k/a/ B. Riley FBR, Inc.) and The Benchmark Company, LLC (collectively, the "Agents"), pursuant to which we could from time to time offer and sell up to an aggregate of $50.0 million of shares of our common stock through the Agents in "at-the-market-offerings", as defined in Rule 415 under the Securities Act. We did not sell any shares of common stock under the ATM Agreement. The Company's consolidated statement of cash flows for the year ended September 30, 2021 includes stock issuance expenses of $477,605 in connection with the terminated ATM Agreement.
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). As discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies footnote of the Notes to the Consolidated Financial Statements, the preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. See the Note 2, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for a summary of our accounting policies. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
We determine revenue recognition through the following steps in accordance with FASB Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers", which we adopted as of October 1, 2018 on a modified retrospective basis:
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The Company records the cost of the materials used in creating the good as well as direct labor cost used to produce the good. The Company also includes write-offs for all past due and unsellable inventories as well as loss on inventory due to obsolescence in cost of sales.
Inventories are stated at the lower of cost or net realizable value. Cost is being measured using the weighted average cost method. We regularly review whether the realizable value of our inventory is lower than its book value. If our valuation shows that the realizable value is lower than book value, we take a charge to expense and directly reduce the value of the inventory.
The Company estimates its reserves for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. Indicators that could result in additional inventory write downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While management believes that the reserve for obsolete inventory is adequate, significant judgment is involved in determining the adequacy of this reserve.
We account for share-based awards issued to employees in accordance with Accounting Standards Codification (ASC) 718, "Compensation-Stock Compensation". Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period, which is normally the vesting period. Share-based compensation to directors is treated in the same manner as share-based compensation to employees, regardless of whether the directors are also employees. In June 2018, the FASB issued ASU 2018-07 which simplifies several aspects of the accounting for non-employee transactions by stipulating that the existing accounting guidance for share-based payments to employees (accounted for under ASC Topic 718, "Compensation-Stock Compensation") will also apply to non-employee share-based transactions (accounted for under ASC Topic 505, "Equity"). The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation is not material to the financial statements. We estimate the fair value of share-based payments using the Black Scholes option-pricing model for common stock options and warrants and the closing price of our common stock for common share issuances. We recognized forfeitures as they occurred.
Recent accounting pronouncements which may be applicable to us are described in Note 2 to the Consolidated Financial Statements included as part of this Report.
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