NuZee, Inc. - Quarter Report: 2014 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from   to   

 

Commission File No. 333-176684 

 

 

 

 

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes­  ¨   No x 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                                                                              

                                                                                                                                                 Yes­  x   No ¨ 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                                                                                                                    Yes­­ ¨   No x 

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.                                                                                                                                                           

                                                                                                                                                   Yes­­ ¨   No ¨ 

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

As of May 9, 2014, NuZee, Inc. had 29,825,357 shares of common stock outstanding.

 

 

Table of Contents

PART I.

 

Item 1.       Financial Statements.

 

(a)       Balance Sheets as at March 31, 2014 (Unaudited) and September 30, 2013 (Audited).

(b)      Statement of Operations for the three months ended March 31, 2014 and 2013, for the six months ended March 31, 2014 and 2013 and for the cumulative period from inception (November 9, 2011) through March 31, 2014 (Unaudited). 

(c)       Statement of Cash Flows for the six  months ended March 31, 2014 and 2013 and for the cumulative period from inception (November 9, 2011) through March 31, 2014 (Unaudited). 

(d)      Notes to Consolidated Financial Statements (Unaudited).

 

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk.

Item 4.       Controls and Procedures

 

PART II.

Item 1.       Legal Proceedings

Item 1A.    Risk Factors

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.       Defaults Upon Senior Securities

Item 4.       Mine Safety Disclosures

Item 5.       Other Information

Item 6.       Exhibits

 

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FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q of NuZee, Inc. contains “forward-looking statements” that may state our management’s plans, future events, objectives, current expectations, estimates, forecasts, assumptions or projections about the company and its business.  Any statement in this report that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as “believes,” “estimates,” “projects,” “expects,” “intends,” “may,” “anticipates,” “plans,” “seeks,” and similar expressions identify forward-looking statements.  Forward-looking statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results.  These statements are not guarantees of future performance, and undue reliance should not be placed on these statements.  It is important to note that our actual results could differ materially from what is expressed in our forward-looking statements due to the risk factors described in the section of our Form 10-K filed on January 14, 2014 entitled “Risk Factors.”

 

We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART I.

Item 1.  Financial Statements.

 

 

 

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Nuzee, Inc.

(A Development  Stage  Company) 

NOTES  TO CONSOLIDATED  FINANCIAL  STATEMENTS 

(Unaudited)

March 31, 2014

 

1.      BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim financial statements of Nuzee, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the initial period ended September 30, 2013 as filed with the SEC. In the opinion of management, all adjustments, consisting of normal 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 consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.

Going Concern

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has had recurring losses, large accumulated deficits, is dependent on the shareholder to provide additional funding for operating expenses and has no recurring revenues. These items raise substantial doubt about the Company’s ability to continue as a going concern.

Equity based payments

The Company accounts for equity instruments issued to employees in accordance with ASC 718 "Stock Compensation". Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method.

2.      RELATED PARTY TRANSACTIONS

During October 2013, the Company entered into a Compromise Agreement with the Company’s majority shareholder to settle the related party receivable. In consideration of the compromises contained in the agreement the Company’s majority shareholder agreed to forgive a note in the amount of $50,000, cancel 8,966,100 shares, and the Company forgave the related party receivable of $139,661.

3.     COMMON STOCK

During March 2014, the Company sold 613,667 shares at $0.60 per share, for an aggregate purchase price of $368,200. 

During March 2014, the Company received $102,000 in funds as deposits to be applied to the purchase of 170,000 shares of common stock.

 

 

 

4.  STOCK OPTIONS

During October 2013 the Company granted 3,471,665 options to employee. The right to exercise these options shall vest and become 25% exercisable on the first anniversary of when granted, with the exception that 100% of options issued to one employee vested immediately. The remaining options shall vest and become exercisable ratably over the next 36 months, with the exception that options issued to 2 employees shall vest and become exercisable over 18 months and option issued to one employee shall vest and become exercisable as of the effective date of the Option Agreement. The exercise price is $0.48 per share and will expire ten years from the grant date, unless terminated earlier as provided by the Option Agreements.

The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on historical trading in the company's stock. The expected term of options granted was determined using the simplified method under SAB 107 and represents one-half the exercise period. The risk-free rate is calculated using the U.S. Treasury yield curve, and is based on the expected term of the option. The Company has estimated there will be no forfeitures.

The Black-Scholes option pricing model was used with the following weighted average assumptions for options granted during the three months ended March 31, 2014:

Risk-free interest rate 1% - 2%

Expected option life 5 – 6 years

Expected volatility 300%

Expected dividend yield 0.0%

At March 31, 2014, 2,011,945 options are exercisable and the Company recognized $1,326,055 of stock options expenses during the six months ended March 31, 2014.

5.  SUBSEQUENT EVENTS

During April 2014, the Company sold 220,000 shares at $0.60 per share, for an aggregate purchase price of $132,000. 

 

 

 

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following plan of operation 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.  This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance.  Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events.  You should not place undue certainty on these forward- looking statements.  These forward-looking statements are subject to certain risk s and uncertainties that could cause actual results to differ materially from our predictions.

 

Plan of Operations

 

Short Term Goals (12 Months)

 

Market Awareness, Growth Expansion

 

Over the next 12 months, the Company’s growth plans include continuing efforts to:

 

·         Launch distributors in Asia to introduce and distribute Coffee Blenders family of products as market awareness and interest in functional beverages is well understood.

 

·         Build a targeted distribution network for our Coffee Blenders functional beverages by signing the retailers that serve the K-cup and Coffee replenishment channels in the United States;

 

·         Increase awareness for Coffee Blenders through communications and sampling programs;

 

In April 2014, we officially launched the Coffee Blenders products through international press announcement and began stocking product for resell on Coffee Blenders.com and Amazon.com  The initial inventory purchased and marketed on Amazon website sold out in less than a week and reorders were stocked.  We plan to increase Amazon fulfillment and online marketing activity to build awareness and trial with consumers.  We also plan to accelerate our traction by using manufacturer representatives with food and beverage experience to identify channels to merchandise Coffee Blenders.  We will continue to invest in search engine marketing (SEM), social marketing and other digital campaigns designed to drive product purchase through direct channels – coffeeblenders.com shopping, digital marketing e-commerce affiliates (such as Amazon), and select health and wellness retailers key mass/grocery retailers Club/Other.

 

Each of the above is compared using a host of costing parameters not limited to the following: product slotting fees, overall margin requirements, market development fees, return allowances, broadcast advertising and promotional marketing plans, in-store and channel detailing, product sampling and customer demoing as well as transportation and logistics cost, cross dock fees, shelf-life expiration swaps, and initial and recurring inventory loading levels.

 

 

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We embarked on researching and building brand and product awareness through editor/blogger outreach, created digital assets for banners and print, performed sampling at local universities, functions, events, etc.  With additional resources, we are exploring co-marketing programs such as:

a.   Coffee Equipment and Brewer Manufacturers – for example work with single-serve coffee machine and equipment manufactures to include our functional coffees with their hardware to co-market to their base of users.

b. Fitness and Health Associations – for example provide sampling and wholesale programs for professional groups to purchase our coffees with brewers for sampling and demonstration.

 

In conjunction with the above channel assessment, the Company is also exploring custom and private labeling whereby the company licenses the product formulation, trademarks, and other assets in the following ways:

 

1.      Multi-Level Marketing (MLM) Firms – for example enter into a private or OEM relationship to build functional coffees for an existing direct sales organization. 

 

2.      Product Brands – for example license to coffee brands and roasters our proprietary functional ingredients  and know-how as a turnkey program to expand their product offering.

 

The Company plans going forward include the following milestones:

 

 

 

If we are unable to receive funding our plans will be dramatically and negatively impacted such that we will prioritize go to market strategies based on reduced operations and available capital.

 

Long Term Goals (Five Years)

 

The Company believes that there will be significant expansion opportunities in existing markets through new products as well as in new regions outside of the United States in a combination of market development and product licensing.

 

 

 

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The Company believes that our limited resources may pose a challenge to our expansion goals and therefore anticipates that it may require additional capital in future years to fund expansion. There can be no assurance that our expansion strategy will be accretive to our earnings within a reasonable period of time. However, the Company believes that it can improve its operational efficiencies and reduce the need for new capital by carefully managing the business based on the following economic fundamentals within accretive margin and cost contribution modeling.

 

Results of Operations

 

From inception on November 9, 2011 through March 31, 2014, we have accumulated losses of $3,441,741. We attribute this loss to the discontinued business operations related to the sale of skin care products, Torque energy drinks and New Zealand bottled water. 

 

We are presently in the development phase of our new product platform for functional beverages and we can provide no assurance that we will be able to attain profitability.

 

From inception through March 31, 2014, we earned revenues of $122,544 from sales of our products and incurred operating expenses in the amount of $3,320,249. These operating expenses included the research and the preparation of our business plan in addition to general and administrative expenses. We anticipate our operating expenses will increase as we further undertake our plan of operations. The increase will be attributed to costs associated with production, storage and delivery of our products as well as research and development of new products.

 

We expect sales in 2014 from our new products through a combination of direct to consumer through our website portal, product awareness as well as through affiliate online stores and retailers.

 

Liquidity and Capital Resources

 

As of March 31, 2014 we had cash (operating capital) of $796,343 and we have no long-term debt. We have not attained profitable operations since inception.   We expect to spend between $1 million - $2 million in expenses over the next 12 months.  Our current cash balance as of March 31, 2014 is not sufficient to fund our operations for the next twelve months.  Therefore, the Company intends to engage in additional financing through the sale of equity securities.

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company and therefore are not required to provide the information for this item for Form 10-Q.

 

 

 

 

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Item 4.  Controls and Procedures

          

As of the end of the period covered by this Report, the Company’s President, and principal financial officer (the “Certifying Officer”), evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  Based on that evaluation, the officer concluded that, as of the date of the evaluation, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management to allow timely decisions regarding required disclosure.

  

The Certifying Officer has also indicated that there were no changes in internal controls over financial reporting during the Company’s last fiscal quarter, and no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

  

Our management, including the Certifying Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control.  The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

PART II.

Item 1.  Legal Proceedings

 

None.

 

Item 1A.  Risk Factors

 

There have been no changes to our risk factors from those disclosed in our Form 10-K filed on January 14, 2014.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered Sales of Equity Securities during the quarter ending March 31, 2014.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

 

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Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

On March 17, 2014, the Company held the Annual Meeting of the Shareholders of the Corporation at 16955 Via Del Campo, San Diego, California, 92127.  The shareholders unanimously approved the directors nominated as directors of the Corporation, reappointment of Malone & Bailey as external audit firm of the Corporation for the fiscal year ended September 30, 2014, and the Nuzee, Inc. 2013 Stock Incentive Plan.

 

Item 6.  Exhibits

 

*      Filed herewith

**   Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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