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, 2015

 

¨  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  x       No ¨  

 

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, 2015, NuZee, Inc. had 27,937,521 shares of common stock outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

PART I.

Item 1.       Financial Statements.

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

(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. 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited financial statements
F-1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited financial statements

F-2

 

 

 

  

 

 

The accompanying notes are an integral part of these unaudited financial statements
F-3

 

 

 

 

                    

Nuzee, Inc. 

NOTES TO  FINANCIAL  STATEMENTS 

(Unaudited)

March  31,  2015 

 

 

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,  2014  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  Form10-K  have  been  omitted. 

 

In the quarter ended March 31, 2015, the Company has elected to early adopt Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. The adoption of this ASU allows the company to remove the inception to date information and all references to development stage.

 

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. 

Stock 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 February 2015, the Company issued a secured convertible promissory note in the sum of $600, 000 to Masateru Higashida, the Company’s    major shareholder.  Interest calculated at the annual rate of zero percent (0%) for the period until April 2016. If the outstanding principle and all accrued and unpaid interest on the debt hereof (the “Debt”) is not repaid by the Company in full by the Repayment Date, the Debt or any portion thereof may be converted at the option of the Holder, upon written notice to the Company at any time after the Repayment Date, into that number of shares of the Company’s Common Stock equal to the Debt or that portion thereof that the Holder elects to convert, divided by price per share of $0.51. This note shall by cancelled on the date of conversion of the entirety of the Debt.

 

3.      CONTINGENT LIABILITY

In January 22th, 2015, NuZee, Inc., a California Corporation (“Tenant”) signed a standard industrial lease with H.G. Fenton Property company, a California Corporation (“Landlord”). The address for the Premises is 2865 Scott Street, Suite 101-102, Vista, CA 92081. The commencement date is March 1st, 2015 and expiration date is April 30th, 2017. Monthly rent expense for this location is $3,793.00 and will increase up to $4,024.00 over the time.

 

4.      INTELLECTUAL PROPERTY

The Company has been granted licenses to use the trademarks CEREBOOST and SVETOL in Company materials and on product packaging. Pursuant to the Trademark License Agreements dated October 11, 2013, the agreement may be terminated by either party, without cause, upon 30 days written notice. Additionally, if the Company fails to purchase the annual minimum amount (500 kg) of product from the licensor for any 12 month period, the licensor may terminate the Company’s license upon 15 days written notice.

 

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5.         COMMON  STOCK  

           During November 2014, the Company resold 130,000 shares of treasury stock at $0.30 per share, for an aggregate purchase price of $39,000.

           During December 2014, the Company resold 450,000 shares of treasury stock at $0.30 per share, for an aggregate purchase price of $135,000.

           During December 2014, the Company sold 20,000 shares of common stock at $0.66 per share, for an aggregate purchase price of $13,200.

           During January 2015, the Company cancelled 1,160,000 shares of common stock.

           During January 2015, the Company resold 140,000 shares of treasury stock at $0.30 per share, for an aggregate purchase price of $42,000.

           During March 2015, the Company sold 20,000 shares of common stock at $0.70 per share, for an aggregate purchase price of $14,000.

 

6.    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.

During February 2015 the Company granted 45,000 options to employee. The right to exercise these options shall vest and become exercisable on the last day of business of December 31, 2015. The exercise price is $0.30 per share.

 During February 2015 the Company granted 100,000 options to consultants for services. The right to exercise these options shall vest and become exercisable following September 30, 2015. The exercise price is $0.30 per share.

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 six months ended March 31, 2015:

    Risk-free interest rate 1% - 2%

    Expected option life 5 – 6 years

    Expected volatility 300%

    Expected dividend yield 0.0%

During the six months ended March 31, 2015, 132,291 options are exercisable and the Company recognized $24,326 of stock options expenses. Unamortized option expense as of March 31, 2015 for all options outstanding amounted to approximately $32,332.

 

7.  STOCK WARRANTS

During April, 2014, the Company granted 100,000 warrants to advisors.  The right to exercise these warrants shall vest in equal eight quarterly installments over the twenty-four (24) months following the date their vesting begins, subject to their continued engagement as a service provider though each such date. The exercise price equal to the current fair market value per share on the date of grant and will expire ten years from the grant date, unless terminated earlier as provided by the Warrant Agreements.

The Black-Scholes warrant pricing model was used with the following weighted average assumptions for options granted during the six months ended March 31, 2015:

Risk-free interest  rate  2.53%  Expected  life  10 years  

Expected volatility  300%   

Expected dividend  yield  0.0% 

    During six months ended March 31, 2015, 50,000 warrants are exercisable and the Company recognized $15,768 of warrant expenses.

 

8.    SUBSEQUENT  EVENTS 
     

           During April 2015, the Company resold 473,802 shares of common stock at $0.70 per share, for an aggregate purchase price of  $331,662.

 

 

F-5

 

 

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)   

            Over the next 6 months, the Company’s growth plans include continuing efforts to:
 

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

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

·         Establish the Nuzee brands top 3 in their product categories consistent with our mission of providing natural products that work.

 

We have retained and plan to expend our sales and marketing team who can immediately contribute to our network of US and international channels as such seeding our product becomes a near term priority.  We have already started developing working relationships with key online and national distributors who serve the coffee and single-serve pod consumers.  We plan to accelerate our traction by using manufacturer representatives with food and beverage experience. 

 

 In order to build distribution the Company is first determining the total distribution launch cost among the potential channels as each has their own upfront and recurring cost structure.  Under investigation are the following company directed channels:

 

·         direct – coffeeblenders.com shopping via search and digital marketing

·         e-commerce affiliates (such as Amazon)

·         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. 

 

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 two ways:

 

1.       Multi-Level Marketing (MLM) Firms – for example manufacturer on behalf of “Amway” for product extensions of their Great Value and Equate private brands. 

2.       Product Brands – for example license to “Maxwell House” the Coffee Blender product as a new product line extension to expand their single-serve business.

 

The Company  plans  going  forward  include  the  following  milestones: 

              

            

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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. 

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, 2015, we have accumulated losses of $5,227,673. This loss was attributed to $4,540,688 of operating expenses.

 

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.

 

For the three months ending March 31th, 2015, we earned revenues of $15,586 from sales of our products and incurred operating expenses in the amount of $416,349. These operating expenses include purchase of new machines for future productions as well as general administrative expenses.  

For the six months ending March 31th, 2015, we earned revenues of $723,329 from sales of our products and incurred operating expenses in the amount of $698,020. 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 2015 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 31th,  2014  we had  a cash balance of $282,492 and $238,160 at September 30th, 2014.  Total assets increased by 37.9% from $396,713 at September 2014 to $547,126 at March 31, 2015.

 

As of March 31, 2015 we had current liabilities of $627, 590 and $51,564 at September 30, 2014, mainly due to the $600,000 convertible promissory note. Accounts Payable decreased by approximately 53 % to $20,548 as of December 31, 2014 from $43,384 at September 30, 2014. Other Current Liabilities decreased by approximately 13% to $7,132 as of December 31, 2014 from $8,180 at September 30, 2014.

 

Our current ratio decreased from 705% in September 30, 2014 to 81% as of March 31, 2015.

 

Our auditor has indicated that there is substantial doubt about our ability to continue as a going concern as a result of our lack of significant revenues, and if we are unable to generate significant revenue or secure financing, we may be required to cease or curtail our operations.  Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

 

Our current  cash  balance  as  of  March 31th,  2015 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 as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

 

 

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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  February 12,  2015.              

     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,  2015. 

 

Item 3.    Defaults  Upon  Senior  Securities  None. 

Item 4.    Mine  Safety  Disclosures  Not applicable.

Item 5.    Other  Information 

 

      None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 6.   Exhibits 

 

101**      Interactive  Data  Files 

101.INS

101.SCH

101.CAL

101.DEF

101.LAB

101.PRE

XBRL Instance  Document 

XBRL Taxonomy  Extension  Schema  Document 

XBRL Taxonomy  Extension  Calculation  Linkbase  Document  XBRL  Taxonomy  Extension  Definition  Linkbase  Document  XBRL  Taxonomy  Extension  Label  Linkbase  Document 

XBRL Taxonomy  Extension  Presentation  Linkbase  Document 

 

*       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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