NuZee, Inc. - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

 

Table of  Contents   

 

PART I. 

 

Item 1.         Financial  Statements. 

 

(a)      Balance  Sheets  as  at  March 31,  2016  (Unaudited)  and  September  30,  2015   

(b)     Statement  of  Operations  for  the  three and six months  ended  March 31,  2016  and  2015  (Unaudited).

(c)      Statement  of  Cash  Flows  for  the  six  months  ended  March 31,  2016  and  2015  (Unaudited). 

(d)     Notes  to 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 

 

 

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 13, 2016  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. 

 

 

 

 

 

 

 

 

 

 

 

Nuzee, Inc. 

NOTES TO  FINANCIAL  STATEMENTS 

(Unaudited)  

March 31,  2016 

 

 

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 (“GAAP”), 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 year ended March 31, 2016 as filed with the SEC. 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 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 doubts about the Company’s ability to continue as a going concern.

 

      2. INVENTORY

 Inventory, consisting principally of products held for sale is stated at the lower of cost or market or net realizable value, using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At March 31, 2016 and 2015 the Company concluded the carrying value of the inventory of $236,923 and $107,304 respectively, the amount reflected on the balance sheet is net of this adjustment.

 

 

3. 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.  During March 2016, the Company and Masateru Higashida decides to extend the repayment date to March 31, 2017 in the best interest of the Corporation and its shareholders, with the annual rate of repayment at an interest rate of one percent (1%) for the period until March 31, 2017.

F-4

 

 

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

 

During March 2016, the Company borrowed the sum of $100,000 short-term loan (the “From East Loan”) from From  East Holdings (“From  East” [aka NuZee Co., Ltd]) to be repaid on or before September 30, 2016 at an interest rate of one percent (1%). Company paid back $30,000 of the short-term loan on March 29^th.

 

The $600,000 convertible promissory note payable and $100,000 short-term loan are related party transactions since Masateru Higashida is the Company’s   major shareholder and he holds 100% ownership of From East Holdings [aka NuZee Co., Ltd]. Both Mr. Higashida and From East Holdings [aka NuZee Co., Ltd] are related parties with the Company.

 

4. ADVANCE RECEIVED

 

       During March 2016, Company received below Advance Received

 

 

  

5. COMMON STOCK  

 

During October 2015, the Company sold 140,000 shares of common stock at $0.70 per share, for an aggregate purchase price of $98,000.

 

During November 2015, the Company sold 50,000 shares of common stock at $0.70 per share, for an aggregate purchase price of $35,000.

 

During December 2015, the Company sold 90,000 shares of common stock at $0.80 per share, for an aggregate purchase price of $72,000

 

During January 2016, the Company sold 60,000 shares of common stock at $0.80 per share, for an aggregate purchase price of $48,000.

 

During February 2016, the Company sold 20,000 shares of common stock at $0.80 per share, for an aggregate purchase price of $16,000.

 

During March 2016, the Company sold 202,500 shares of common stock at $0.80 per share, for an aggregate purchase price of $162,000

 

F-5

 

 

 

6. STOCK OPTIONS

 

Our stock-based compensation arrangements include grants of stock options awards under the 2013 Stock Incentive Plan (the “Plan”).

  

 During the six months ended March 31, 2016, the Company issued, per board approval, stock options under the Plan to purchase an aggregate of 298,000 shares of the Company’s common stock to officers, directors, employees and consultants. The grant date fair value of these options, net of estimated forfeiture rate of 0%, was $39,496 using Black-Scholes option valuation models with the following assumptions: exercise price of $0.30 to $0.80, volatility of 83.6% to 104.7%, expected life of 4.5 years to 10 years, and risk-free rate of 1.11% to 1.74%. The Company is expensing these stock option awards on a straight-line basis over the requisite service period.  The Company recognized expense of $25,807 associated with stock option awards during the six months ended March 31, 2016.  The Company did not have any such expense for the six months ended March 31, 2015.  As of March 31, 2016, there was $13,689 of total unrecognized compensation cost related to an aggregate of 145,000 of non-vested stock option awards. These costs are expected to be recognized over a weighted-average period of .55 years for the stock options awards.

 

The following table summarizes stock option activity as of September 30, 2015 and for the six months ended March 31, 2016:

 

 

 

7. SUBSEQUENT EVENTS

 

During April 2016, the Company sold 272,500 shares of common stock at $0.80 per share for an aggregate purchase price of $218, 000

 

During April 216, the Company issued 5,000 shares of common stock at $0.3 per share for a purchase price of $1,500 to previous employee, Michael Billing.

 

 

 

 

 

 

F-6

 

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:

 

 

 

 

 

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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:

 

 

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 

As of three months ended March 31, 2016, we generated net losses of $647,538. This loss was attributed to $358,665 of operating expenses. Compared with period end March 31, 2015, the overall net loss decreased by $68,687 and operating expense reduced $57,684.The change on operating expenses are mostly contributed by declining cost of Research and Development. The company are moving forward for new products production.

 

As of six months ended March 31, 2016, we generated net losses of $644,964. This loss was attributed to $681,038 of operating expenses. Compared with six months ended March 31, 2015, the overall net loss decreased by $61,370 and operating expense reduced by $42,291. Company moved from developing and research stage to production and sale stage.

 

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.

 

5

 

As of three months ended March 31, 2016, we earned gross profit of $20,678 from sales of our products. The gross profit earned during same period of 2015 was $10,148. There has been more than two times increase in earned gross profit. This increase was mainly caused by the increase of sales revenue, which are three times compared with the same period last year.

 

As of six months ended March 31, 2016, we earned gross profit of $36,074 from product sales. Compare with the same period last year, the gross profit increased two times. This increase was mainly because of good sales performance. The total revenue raised 69% which compares last year.

 

We expect sales in the rest of 2016 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 September 30, 2015 we had a cash balance of $107,678 and $57,056 at March 31, 2016. Total assets decreased by7% from $541,282 at September 30, 2015 to $501,083 at March 31, 2016

 

As of March 31, 2016 we had current liabilities of $816,661 and $666,129 at September 30, 2015. This temporary increase was based on advance received from customers and a short-term loan due on the end of this fiscal year.

 

Our current ratio decreased from 52% in September 30, 2015 to 40% as of March 31, 2016.

 

Compared with period ending March 31 2015, the depreciation amount increase a lot since company purchased machines and equipment during 2015. This quarter, company has no more warrant expense exists. At the same time, cash used by inventory decreased 38% and there has no prepaid expense compared with the same period of 2015. During current quarter, almost 75% of other current liability comes from advance received from our customers.

 

Company has $431,000 cash comes from common stock selling during this quarter as well as $100,000 short-term loan from related party. $30,000 of short-term loan has been paid back on March 29^th.

 

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 31, 2016 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  January 13, 2016 

 

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,  2016. 

 

Item 3.    Defaults  Upon  Senior  Securities   

 

None.

 

 

 

 

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Item 4.    Mine  Safety  Disclosures   

 

Not applicable.

 

Item 5.    Other  Information 

 

None.

 

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 

 

 

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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