NuZee, Inc. - Quarter Report: 2017 June (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 June 30, 2017

 

 

For the transition period from ____________ to ____________

 

Commission File No. 333-176684

 

NUZEE, INC.

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(exact name of registrant as specified in its charter)

 

Nevada		38-3849791
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

2865 Scott Street, Suite 101,

Vista, CA, 92081

---

(Address of principal executive offices)   (zip code)

 

(760) 295-2408

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(Registrant's telephone number, including area code)

 

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

 

Titles of each class		Name of each exchange on which registered
None		N/A

 

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 ☐

 

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 ☒  No ☐

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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.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒

 

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 August 14, 2017, NuZee, Inc. had 33,350,538 shares of common stock outstanding.

 

 

 

 

 

 

 

PART I.		4
Item 1.	Financial Statements.	4
	(a)     Consolidated Balance Sheets as at March 31, 2017 and September 30, 2016 (Unaudited).	4
	(b)     Consolidated Statements of Operations for the three and six months ended March 31, 2017 and 2016 (Unaudited).	5
	(c)     Consolidated Statements of Comprehensive Loss the three and six months ended March 31, 2017 and 2016 (Unaudited).	6
	(d)     Consolidated Statements of Cash Flows for the three and six months ended March 31, 2017 and 2016 (Unaudited).	7
	(e)     Notes to Financial Statements (Unaudited).	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	19
Item 4.	Controls and Procedures	19
PART II.		20
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

 

 

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 December 29^th, 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.

 

 

 

 

Item 1. Financial Statements

NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
		June 30, 2017				September 30, 2016
ASSETS
Current assets:
Cash		$	151,609			$	40,613
Accounts receivable, net			102,445				57,711
Inventories			380,508				206,356
Prepaid expenses and deposits			148,104				65,726
Total current assets			782,666				370,406
Equipment, net			261,743				151,946
Other assets:
Goodwill			52,424				-
			52,424				-
Total assets		$	1,096,833			$	522,352
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	113,353			$	189,317
Loan payable - short term - Related party			201,561				145,377
Current portion of long-term loan payable			23,883				-
Convertible Notes payable - Related party			-				603,008
Other current liabilities			69,843				7,337
Total current liabilities			408,640				945,039
Non-current liabilities:
Loan payable - long term		$	165,934			$	-
			165,934				-
Stockholders' equity (deficit):
Common stock; 100,000,000 shares authorized, $0.00001 par value;
34,368,509 and 31,154,951 shares issued		$	344			$	311
Additional paid in capital			8,869,523				6,909,523
Accumulated deficit			(8,335,747	)			(7,263,412	)
Less: treasury stock, at cost
(1,182,573 shares held in treasury)			(45,379	)			(69,109	)
Accumulated other comprehensive loss			(19,911	)			-
Total NuZee, Inc. shareholders' equity (deficit)			468,830				(422,687	)
Noncontrolling interest			53,429				-
Total stockholders' equity (deficit)			522,259				(422,687	)
Total liabilities and stockholders' equity (deficit)		$	1,096,833			$	522,352

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		Three Months Ended June 30, 2017				Three Months Ended June 30, 2016				Nine Months Ended June 30, 2017				Nine Months Ended June 30, 2016
Revenues		$	268,262			$	136,268			$	1,222,096			$	231,682
Cost of sales			203,076				72,545				945,536				131,885
Gross Profit			65,186				63,723				276,560				99,797
Operating expenses			437,176				398,388				1,359,384				1,079,426
Loss from operations			(371,990	)			(334,665	)			(1,082,824	)			(979,629	)
Other income			8,426				11,557				39,386				11,833
Equity in loss of unconsolidated affiliate			(2,108	)			-				(50,000	)
Other expense			(1,337	)			(1,712	)			(5,237	)			(4,562	)
Net loss			(367,009	)			(324,820	)			(1,098,675	)			(972,358	)
Net loss attributable to noncontrolling interest			(11,492	)			-				(26,340	)			-
Net loss attributable to NuZee, Inc.		$	(355,517	)		$	(324,820	)		$	(1,072,335	)		$	(972,358	)
Basic and diluted loss per common share		$	(0.01	)		$	(0.01	)		$	(0.03	)		$	(0.03	)
Basic and diluted weighted average number of common stock outstanding			32,744,196				30,656,401				31,539,132				30,582,013

 

 

 

 

 

 

 

 

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

 

 

 

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
										Noncontrolling
		NuZee, Inc.								Interests								Total
For three months ended June 30, 2017		2017				2016				2017				2016				2017				2016
Net loss		$	(355,517	)		$	(324,820	)		$	(11,492	)		$	0			$	(367,009	)		$	(324,820	)
Foreign currency translation			(300	)			-				(129	)			-				(429	)			-
Total other comprehensive loss, net of tax			(300	)			-				(129	)			-				(429	)			-
Comprehensive loss		$	(355,817	)		$	(324,820	)		$	(11,621	)		$	0			$	(367,438	)			(324,820	)

										Noncontrolling
		NuZee, Inc.								Interests								Total
For nine months ended June 30, 2017			2017				2016				2017				2016				2017				2016
Net loss		$	(1,072,335	)		$	(972,358	)			(26,340	)		$	0			$	(1,098,675	)		$	(972,358	)
Foreign currency translation			(19,911	)			-				(8,534	)			-				(28,445	)			-
Total other comprehensive loss, net of tax			(19,911	)			-				(8,534	)			-				(28,445	)			-
Comprehensive loss		$	(1,092,246	)		$	(972,358	)			(34,874	)		$	0			$	(1,127,120	)			(972,358	)

 

 

 

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
		Nine months Ended June 30, 2017				Nine months Ended June 30, 2016
Operating activities:
Net loss		$	(1,098,675	)		$	(972,358	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and Amortization			55,883				31,513
Option expense			23,470				33,736
Interest expense			2,890				-
Inventory impairment			4,112				-
Equity in loss of unconsolidated affiliate			50,000				-
Change in operating assets and liabilities:
Accounts receivable			16,036				4,671
Inventories			59,693				(11,920	)
Prepaid expenses and deposits			(6,640	)			8,594
Accounts payable			(160,000	)			(6,967	)
Other current liabilities			(21,705	)			1,453
Net cash used by operating activities			(1,074,936	)			(911,278	)
Investing activities:
Purchase of equipment			(136,333	)			(2,854	)
Acquisition of investment in unconsolidated affiliate			(50,000	)			-
Net cash acquired from business acquisition			201,676				-
Net cash used by investing activities			15,343				(2,854	)
Financing activities:
Proceeds from issuance of Loan - short term - Related party			479,385				100,000
Repayment of loans - short term - Related party			(322,824	)			(55,000	)
Proceeds from issuance of Loan - short term			89,016				-
Repayment of loans - short term			(26,046	)			-
Proceeds from issuance of common stock			680,510				777,001
Proceeds from issuance of exercise of options			-				1,500
Proceeds from issuance of treasury stock			315,318				-
Net cash provided by financing activities			1,215,359				823,501
Effect of foreign exchange on cash and cash equivalents			(44,770	)			-
Net change in cash			110,996				(90,631	)
Cash, beginning of period			40,613				107,678
Cash, end of period		$	151,609			$	17,047
Supplemental disclosure of cash flow information:
Cash paid for interest		$	2,063			$	-
Cash paid for taxes		$	800			$	800
Noncash investing and financing activities:
Acquisition of NuZee JAPAN Co., Ltd through issuance of common shares
Software purchased with installment agreement		$	14,807			$	-
Conversion of note payable		$	606,000			$	-
Conversion of note payable - Related party		$	100,000			$	-

 

 

NuZee, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2017

 

 

1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim financial statements of NuZee, Inc. (the "Company") 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 September 30, 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 deficit, is dependent on the shareholders to provide additional funding for operating expenses and has limited revenues. These items raise substantial doubts about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company's products and business.

 

Major Customers

 

In the nine months ended June 30, 2017 and 2016, revenue was primarily from major customers disclosed below. Besides those revenues, there were $57,192 account receivable owed by customer PO and $13,680 account receivable owed by customer R as of June 30, 2017 and $5,607 account receivable owed by customer H as of June 30, 2016.

Nine months ended June 30, 2017:

 

Customer Name		Sales Amount				% of Total Revenue
Customer PO		$	613,550				50	%
Customer K		$	168,875				14	%

Customer Name		Sales Amount				% of Total Revenue
Customer A		$	161,824				60	%
Customer H		$	67,288				25	%

Customer Name		Sales Amount				% of Total Revenue
Customer PO		$	150,135				56	%

Customer Name		Sales Amount				% of Total Revenue
Customer A		$	89,665				66	%
Customer H		$	16,822				12	%

 

Lease

 

The Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line basis over the lease term.

 

NuZee JAPAN Co., Ltd is the lessee of certain equipment under a capital lease extending through 2020. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6 year life. The leased equipment has been recorded in the accompanying financial statements in equipment of $12,475 as of June 30, 2017. The capital lease liability is included in other current liabilities on the consolidated balance sheets.

 

Future minimum lease payments under capital lease as of June 30, 2017 for each of the remaining years are as follows:

 

2017		$	2,283
2018			4,403
2019			4,403
2020			3,684
Total Minimum Lease Payments		$	14,773

 

Loan

 

On June 30, 2016, NuZee JAPAN Co., Ltd entered into a loan agreement with Tono Shinyo Kinko bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an interest rate of 1.2%. The Company had $106,819 loan payable at June 30, 2017. On January 27, 2017, NuZee JAPAN Co., Ltd entered into a loan agreement with Nihon Seisaku Kouko. The Company borrowed the sum of approximately $89,016 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The Company had $82,998 loan payable at June 30, 2017.

 

Principles of Consolidation

 

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and majority owned subsidiary which has a fiscal year end of January 31. All significant intercompany accounts, balances and transactions have been eliminated in the consolidation.

 

 

The Company consolidates its subsidiary in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.

 

Foreign Currency Translation

 

The financial position and results of operations of the Company's foreign subsidiaries are measured using the foreign subsidiary's local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders' equity, unless there is a sale or complete liquidation of the underlying foreign investments. Foreign currency translation adjustments resulted in loss of $28,445 and $0 for nine months ended June 30, 2017 and 2016, respectively.

 

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction gains included in operations totaled $896 for nine months ended June 30, 2017 and losses totaled $2,918 for nine months ended June 30, 2016.

 

Equity Method

 

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee company's board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company's accounts are not reflected within the Company's Consolidated Balance Sheets and Statements of Operations; however, the Company's share of the earnings or losses of the Investee company is reflected in the caption ''Equity in loss of unconsolidated affiliate'' in the Consolidated Statements of Operations. The Company's carrying value in an equity method Investee company is reflected in the caption ''Investment in unconsolidated affiliate'' in the Company's Consolidated Balance Sheets.

 

When the Company's carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the Investee company or has committed additional funding. When the Investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

 

Goodwill

 

The Company evaluates goodwill on an annual basis or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

 

Inventories 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 June 30, 2017 and September 30, 2016, the Company concluded the carrying value of the inventory of $380,508 and $206,356 respectively, the amounts reflected on the consolidated balance sheets are net of this adjustment.

 

 

		June 30,				September 30,
		2017				2016
Raw Material		$	189,577			$	124,035
Work in Process			5,852				14,366
Finished Goods			185,079				67,955
		$	380,508			$	206,356

 

 

2.  ACQUISITIONS

 

NuZee JAPAN Co., Ltd.

 

On August 16, 2016, the Company entered a Share Exchange Agreement with NuZee JAPAN Co., Ltd ("NuZee JP") and its shareholders whereby the Company will exchange 1,148,734 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP.  The Company's issued shares had an acquisition date fair value of $258,465. The remaining thirty percent (30%) of NuZee JP's issued and outstanding common stock is, and will be at the closing, owned by NuZee JP's current President and Chairman of its Board of Directors.  The reason for this acquisition is to extend our market shares as well as obtain more business opportunities in both USA and Japan market. This transaction closed on October 3rd, 2016.

 

The Company applied the acquisition method to the business combination and valued each of assets acquired and liabilities assumed at fair value as of the acquisition date. The following table shows the estimated fair value of the assets acquired and liabilities assumes at the date of acquisition:

 

Acquisition of NuZee Japan Co., Ltd.
ASSETS ACQUIRED:
CASH		$	201,676
ACCOUNTS RECEIVABLE			60,770
INVENTORIES			233,845
OTHER CURRENT ASSETS			75,738
PROPERTY PLANT AND EQUIPMENT			16,677
GOODWILL			52,424
TOTAL ASSETS ACQUIRED			641,130
LESS LIABILITIES ASSUMED
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES			(153,440	)
LOAN PAYABLE			(140,922	)
TOTAL LIABILITIES ASSUMED			(294,362	)
LESS NONCONTROLLING INTEREST			(88,303	)
NET ASSETS ACQUIRED FROM NUZEE JP ACQUISITION			258,465

 

Since the date of acquisition, revenues of $737,536 were included in the Company's consolidated net loss for the nine months ended June 30, 2017.

 

 

In accordance with ASC 805-10-50, the Company is providing the following unaudited pro-forma to present a summary of the combined results of the Company's consolidated operations with all acquisitions as if the acquisitions had been completed as of the beginning of the reporting period. Adjustments were made to eliminate any inter-company transactions in the periods presented. There is no pro forma information for 2017 as NuZee Japan Co., Ltd was acquired at the beginning of the period.

 

NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		Three months ended				Nine months ended
		June 30, 2016				June 30, 2016
		(Pro Forma)				(Pro Forma)
Revenues		$	840,875			$	1,118,786
Cost of sales			584,525				777,449
Gross Profit			256,350				341,337
Operating expenses			527,863				1,395,433
Loss from operations			(271,513	)			(1,054,096	)
Other income			19,902				32,284
Equity in loss of unconsolidated affiliate			-				-
Other expense			15,164				(7,823	)
Net loss			(236,447	)			(1,029,635	)
Net loss attributable to noncontrolling interest			-				-
Net loss attributable to NuZee, Inc.		$	(236,447	)		$	(1,029,635	)
Net loss per share, basic and fully diluted		$	(0.01	)		$	(0.03	)
Weighted average of shares outstanding			31,805,135				31,730,747

 

3.  RELATED PARTY TRANSACTIONS

 

 

 

 

 

 

 

 

 

 

 

4.  INVESTMENT IN AFFILIATE

 

 

 

 

INVESTMENT IN AFFILIATE
		2017
Beginning of period		$	-
Additional investments in unconsolidated affiliate		$	50,000
Distributions received		$	-
Sale of investment in unconsolidated affiliate		$	-
Equity in net income (loss) of unconsolidated affiliate		$	(50,000	)
End of period		$	-

 

5.  COMMON STOCK

 

On October 3rd, 2016, the "Company" exchanged 1,148,734 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP. 

 

During October to December 2016, the Company sold 535,000 shares of common stock at $1.00 per share, for an aggregate purchase price of $535,000.

 

During January to March 2017, the company sold 145,510 shares of common stock at $1.00 per share, for an aggregate purchase price of $145,510.

 

 

During April to June 2017, the Company sold 618,271 shares of treasury stock at $0.51per share, for an aggregate purchase price of $315,318.

 

During May 2017, the Company agreed to amend Nagashima Takayuki's $100,000 short-term loan to a convertible loan with a conversion price of $0.51 per share.  Nagashima Takayuki then converted this loan to 196,078 shares of the Company's common stock.

 

6.  STOCK OPTIONS

 

The following table summarizes stock option activity for the nine months ended of June 30, 2017:

 

									Weighted
					Weighted				Average
					Average				Remaining
	Number of				Exercise				Contractual				Aggregate
	Shares				Price				Life (years)				Intrinsic Value
Outstanding at September 30, 2016			573,000			$	0.70
Granted			84,000				0.49
Exercised			-				-
Expired			-				-
Forfeited			-				-
Outstanding at June 30, 2017			657,000			$	0.67				9.0				25,925
Exercisable at June 30, 2017			253,000			$	0.46				9.0				25,925

 

 

 

The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expenses of $23,470 for the nine months ended June 30, 2017. Unamortized option expense as of June 30, 2017, for all options outstanding amounted to approximately $32,190. These costs are expected to be recognized over a weighted-average period of 1.8 years. The Company recognized stock option expenses of $33,736 for the nine months ended June 30, 2016.

 

A summary of the status of the Company's nonvested shares as of June 30, 2017, is presented below:

 

		Number of
		Nonvested Shares
Nonvested shares at September 30, 2016			378,000
Granted			84,000
Exercised			-
Expired			-
Vested			(58,000	)
Nonvested shares at June 30, 2017			404,000

 

7.  SUBSEQUENT EVENTS

 

During July 2017, the Company sold 130,000 shares of treasury stock at $0.51per share, for an aggregate purchase price of $66,300

 

On July 31, 2017, the Company issued 34,602 shares of common stock to a consultant as provided in their consulting agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 3 months, the Company's growth plans include continuing efforts to:

 

▪ Leverage our network of potential (and current) customers that we have been introduced to during our extensive trade show campaign.

Participating in trade shows and conferences has been a huge success for the Company so far.  At each tradeshow there are between 2,000 and 10,000 attendees/exhibitors depending on its size – which gives the Company ample opportunity to meet, talk and most importantly educate the consumer on the benefits of our product as well as the proper usage and applications.  Another benefit of attending trade shows is that there are a lot of the same companies/buyers at each coffee event – The more these buyers see our face and the product, the more likely they are to trust and do business with us.  We are able to create relationships through the shows and networking events, many of these relationships have turned into business opportunities.

 

▪ Fulfill the current demand of our current customer base and complete transactions with customers that have expressed a strong interest in our company and brands.

With recent development of new innovative products, we have good reason to reach back out to our current and new customers to gain more distribution points.

 

▪ Maximize the effectiveness of our current distributors by implementing sales and marketing road-map's.

Currently, we are working closely with KeHE & are able to meet with hundreds of sales reps and buyers for the grocery channel across the US at Table Top events. KeHE offers a sales and marketing Roadmap, which we are actively participating in. These roadmaps are made to help the vendor maximize and increase their sales by putting promotions and other discounts into place ahead of time.  So far we have gained three new accounts in the short few weeks that our New@KeHE promo has launched.

 

▪ Work with our chosen brokers to build new relationships and strengthen existing relationships.

By working with a broker who has a strong connectivity to retailers, it ensures that a unique and appropriate strategy is developed and executed with speed and precision for our brand.  In addition, the broker will be able to guide us in which strategies and tactics will work at each specific retailer, this is vital to the growth of a brand. Additionally, a retailer's strategy and tactics can change over time and knowing this in real time is critical to success.

 

▪ Continue to increase the awareness for Coffee Blenders/NuZee brand and products by submitting articles to Coffee Roasters magazines as well as continually submit blogs/content to several social media platforms

Through participating in all of the tradeshows in 2016, we were able to create relationships with journalists and magazine owners who will often post articles and product reviews in their publication for free.  With the coffee industry being as large as it is, there are numerous coffee magazines and website out there and even more eyes reading the content produced by trusted sources. In addition, we are actively creating new content for our social media pages.

 

We have retained and expanded our sales and marketing team who have continuously contributed to our network of US and international channels as such seeding our product and maintaining relationships is a top priority.  We have developed working relationships with key online and national distributors who serve the coffee and single-serve pod consumers.  We are also expanding our SKU line with cold brew and whole bean, ground coffee & tea products to meet the wants and needs of all consumers.  We plan to accelerate our traction by continuing to work with manufacturer representatives with food and beverage experience.

 

 

We have entered into several different channels for distribution and are planning to expand into a few more channels in 2017.  Our current and forecasted company directed channels include;

 

Direct – coffeeblenders.com shopping via search and digital marketing

E-commerce affiliates (Amazon Exclusives, Groupon, Jet.com, Bulu box)

Select health and wellness retailers

Key mass/grocery retailers – Kroger, HEB, Safeway, Whole Foods, Lowes, Jewel-Osco, Rouses

Club/Other – Sam's Club

Outdoor retailer locations (such as REI/ Bass Pro Shops)

Co-Packing with other coffee roasters on our pour-over drip cup

 

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 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 

 

 

Revenue. For the three months ended June 30, 2017, our realized revenue totaled $268,262. Compared with the same time period in 2016, our revenue increased almost 2 times by selling of our products to various retailers, wholesalers and distributors. Our realized total revenues include $169,540 from NuZee Japan, which is a subsidiary we acquired in October 2016. There are around $99,000 revenue decrease compare with the same period last year since two big orders last year from one customer did not reoccur this year although there are other new customers submitted orders.

 

Gross Profit. For the three months ended June 30, 2017, we earned a total gross profit of $65,186 from sales of our products, which includes $59,180 from NuZee Japan. The gross profit earned during same period of 2016 was $63,723. The margin rate went down from 47% the same period last year to 24% in the three months ended June 30, 2016.  This big decrease in the margin rate was mainly caused by cost of goods sold change. Compare with last year, NuZee,inc increased production in-house this year which increase the cost of goods sold, especially including depreciation, utilities and other overhead cost. However, the margin rate raised 11% from the three months ended March 31, 2017 due to the efficient cost control.

 

Expenses. For the three months ended June 30, 2017, our Company's operating expenses totaled $437,176 which almost the same with same period last year. Of those expenses, $105,316 were from NuZee Japan, which accounts for one quarter of total expenses. Expenses primarily came from outside professional services, cost of employees and sales & marketing expenses. We incurred $102,651 in expenses for professional services which is mainly associated with legal and accounting services as well as other related costs associated with public company operation. There were total $160,441 payroll related expenses accrued during three months ended June 30, 2017, which increased from $100,311 the same period last year. This increase was primarily caused by increasing scale of the company. Among the $84,633 sales and marketing expenses, almost 89% came from advertising of our products with new customers as well as attending tradeshows for exploring more business opportunities.

 

 

Net Loss.  For the three months ended June 30, 2017, we generated net losses of $367,009. This loss was attributed to $437,176 in operating expenses. Among them, NuZee Japan generated net losses of $38,309 and operating expenses of $46,136. Compared with quarter ended March 31, 2017, total net loss decreased $18,283 since the Company expensed less money on professional services. Compared with same period ended June 30, 2016, the overall net loss increased by $42,189 and operating expense increased by $38,788. Most of this increase is caused by the new NuZee Japan.

 

 

Revenue. For the nine months ended June 30, 2017, our realized revenue totaled $1,222,096. Compared with the same time period in 2016, our revenue increased more than 5 times. Our realized total revenues include $742,081 from NuZee Japan.

 

Our revenue rose from $231,682 nine months ended June 30, 2016 to $1,222,096 this quarter by selling of our products to existing and new retailers, wholesalers and distributors. This significant increase for nine months' period between two years were mainly contributed by the Company's proper marketing strategies. As parent company in US, NuZee,Inc's customers are mostly famous big wholesalers. In order to expanded market, we are also utilizing online stores as well as the Amazon platform. Besides these, we also attracted customers who are interested in the co-packing business by using our technology advantage.  With regard to the subsidiary company in Japan, NuZee Japan focused on various distribution channels based on the characteristic of the Asian market, which include but not limited to post office and hotels.

 

Gross Profit. For the nine months ended June 30, 2017, we earned a total gross profit of $276,560 from sales of our products, which includes $185,249 from NuZee Japan. The gross profit earned during same period of 2016 was $99,797. There are around 86% increase within one year. The margin rate went down from 43% nine months ended June 30, 2016 to 23% nine months ended June 30. 2017. This decrease was primarily caused by increase of cost of goods sold. Different from last year, most of productions are in-house this year which increase the cost of goods sold such as depreciation, utilities and other overhead cost.

 

Expenses. For the nine months ended June 30, 2017, our Company's operating expenses totaled $1,359,384. Of those expenses, $310,680 were expenses from NuZee Japan. Expenses primarily came from sales and marketing, outside professional services, cost of employees and office expenses. We incurred $182,832 in expenses for marketing and sales to expand our brand awareness both in the US and Asian markets.

 

There were $294,869 professional services during this time period which is mainly associated with legal and accounting services and an acquisition audit service fee as well as other related costs associated with public company operation. Among the totaled $156,657 office expenses, $130,952 was cost of delivery and postage for shipping out products and samples to customers during the nine month period.  Total operating expenses for the nine months ended June 30, 2016 was $1,079,426, which includes $102,229 marketing and sales related expenses, $283,812 professional service expense and $86,713 office expenses.

 

Net Loss: We had a net loss in the amount of $1,098,675 during the nine months ended June 30, 2017, or a per share loss of $0.03, based on 31,539,132 weighted-average shares outstanding. This loss was attributed to $1,359,384 in operating expenses. Among them, NuZee Japan generated net losses of $87,801 and operating expenses of $310,680. This compares to the net loss in the amount of $972,358 during the nine months ended June 30, 2016, or a per share loss of $0.03, based on 30,582,013 weighted-average shares outstanding,

 

Liquidity and Capital Resources

 

As of September 30, 2016, we had a cash balance of $40,613 and $151,609 as of June 30, 2017; this increase was primarily from the smooth operation of the Company. The cash amount is almost the same compared with last quarter.

 

 

By the end of June 30, 2017, NuZee Japan had $60,659 cash, which accounts for 40% of consolidated cash balance. This percentage decreased by half since last quarter. Accounts receivable increased about 62% and inventories increased about 84% since September 30, 2016 also mainly because of this acquisition.

 

As of June 30, 2017, we had total current liabilities of $0.409 million and $0.945 million as of September 30, 2016. As of March 31, 2017 Masateru Higashida, CEO of NuZee,Inc, sold the $600,000 convertible note to Miura Kenichi, shareholder of NuZee,Inc.  Mr. Miura converted the note (principal and accrued interest) to 1,188,236 NuZee,Inc common stocks on the same day. This led to the decrease in current liabilities . The other parts of current liabilities increased since we received new short-term loans this quarter.

 

Our current ratio increased from 0.39 as of September 30, 2016 to 1.91 as of June 30, 2017, the increase is due to the increase of current assets as related to the cash flow and inventories and the decrease of current liabilities due to sale and conversion of the convertible notes as well as payment of more bills.

 

As of June 30, 2017, we had a $165,934 non-current liability from NuZee Japan's acquisition, loans from Tono Sinyon Bank and Nihon Seisaku Kouko to support daily operation as well as pay back accounts payable of NuZee Japan.

 

Our auditor has indicated that there is substantial doubt about our ability to continue as a going concern due to 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 any adjustments that might result from the outcome of this uncertainty.

 

Our current cash balance as of June 30, 2017, 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.

 

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.

 

 

 

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 December 29, 2016

 

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

 

On July 14, 2017, we sold 210,000 shares of our common stock to three individual investors at a price of $0.51 per share for total proceeds of $107,100, which will be used for general business operations.

 

All three investors were non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933, as amended) who purchased in transactions outside of the United States.  In issuing shares to those investors, we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

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