Company Quick10K Filing
Nuzee
Price8.50 EPS-1
Shares14 P/E-10
MCap118 P/FCF-27
Net Debt-1 EBIT-12
TEV117 TEV/EBIT-10
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-Q 2019-12-31 Filed 2020-02-10
S-1 2019-11-12 Public Filing
10-K 2019-09-30 Filed 2019-12-26
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-Q 2018-12-31 Filed 2019-03-29
10-K 2018-09-30 Filed 2019-02-11
10-Q 2018-06-30 Filed 2018-08-16
10-Q 2018-03-31 Filed 2018-05-16
10-Q 2017-12-31 Filed 2018-04-06
10-K 2017-09-30 Filed 2018-02-21
10-Q 2017-06-30 Filed 2017-08-21
10-Q 2017-03-31 Filed 2017-05-19
10-Q 2016-12-31 Filed 2017-02-21
10-K 2016-09-30 Filed 2016-12-29
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-11
10-Q 2015-12-31 Filed 2016-02-16
10-K 2015-09-30 Filed 2016-01-13
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-18
10-Q 2014-12-31 Filed 2015-02-23
10-K 2014-09-30 Filed 2015-02-12
10-Q 2014-06-30 Filed 2014-08-19
10-Q 2014-03-31 Filed 2014-05-15
10-Q 2013-12-31 Filed 2014-02-12
10-K 2013-09-30 Filed 2014-01-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-01-31 Filed 2013-03-08
10-Q 2012-10-31 Filed 2012-12-14
10-K 2012-07-31 Filed 2012-10-29
10-Q 2012-04-30 Filed 2012-07-09
8-K 2020-01-09 Enter Agreement, Exhibits
8-K 2019-10-22 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-10-15 Regulation FD, Other Events, Exhibits
8-K 2019-08-28 Earnings, Regulation FD, Exhibits
8-K 2019-07-30 Regulation FD, Exhibits
8-K 2019-05-09 Enter Agreement, Other Events, Exhibits
8-K 2019-05-07 Sale of Shares, Regulation FD, Exhibits
8-K 2019-01-23 Leave Agreement, Officers, Exhibits
8-K 2018-12-09 Enter Agreement, Exhibits
8-K 2018-08-31 Officers
8-K 2018-07-02 Sale of Shares
8-K 2018-06-27 Enter Agreement, Exhibits

NUZE 10Q Quarterly Report

Item 1. Financial Statements.
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
EX-31.1 nz_ex31z1.htm
EX-31.2 nz_ex31z2.htm
EX-32.1 nz_ex32z1.htm
EX-32.2 nz_ex32z2.htm

Nuzee Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
10.07.95.83.71.6-0.52012201420172020
Assets, Equity
1.3-1.0-3.2-5.5-7.7-10.02012201420172020
Rev, G Profit, Net Income
3.82.71.60.5-0.6-1.72012201420172020
Ops, Inv, Fin

NUZEE, INC. - Form 10-Q SEC filing
0001527613 --09-30 false 2020 Q2 0001527613 2019-10-01 2020-03-31 0001527613 2020-03-31 0001527613 2020-05-07 0001527613 2019-09-30 0001527613 2020-01-01 2020-03-31 0001527613 2019-01-01 2019-03-31 0001527613 2018-10-01 2019-03-31 0001527613 us-gaap:ParentMember 2020-01-01 2020-03-31 0001527613 us-gaap:ParentMember 2019-01-01 2019-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2020-01-01 2020-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2019-01-01 2019-03-31 0001527613 us-gaap:ParentMember 2019-10-01 2020-03-31 0001527613 us-gaap:ParentMember 2018-10-01 2019-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2019-10-01 2020-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2018-10-01 2019-03-31 0001527613 us-gaap:CommonStockMember 2019-09-30 0001527613 us-gaap:AdditionalPaidInCapitalMember 2019-09-30 0001527613 us-gaap:RetainedEarningsMember 2019-09-30 0001527613 us-gaap:NoncontrollingInterestMember 2019-09-30 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-09-30 0001527613 2019-10-01 2019-12-31 0001527613 us-gaap:CommonStockMember 2019-10-01 2019-12-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2019-10-01 2019-12-31 0001527613 us-gaap:RetainedEarningsMember 2019-10-01 2019-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2019-10-01 2019-12-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-10-01 2019-12-31 0001527613 2019-12-31 0001527613 us-gaap:CommonStockMember 2019-12-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001527613 us-gaap:RetainedEarningsMember 2019-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2019-12-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001527613 us-gaap:CommonStockMember 2020-01-01 2020-03-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-03-31 0001527613 us-gaap:RetainedEarningsMember 2020-01-01 2020-03-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-03-31 0001527613 us-gaap:CommonStockMember 2020-03-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2020-03-31 0001527613 us-gaap:RetainedEarningsMember 2020-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2020-03-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-31 0001527613 2018-09-30 0001527613 us-gaap:CommonStockMember 2018-09-30 0001527613 us-gaap:AdditionalPaidInCapitalMember 2018-09-30 0001527613 us-gaap:RetainedEarningsMember 2018-09-30 0001527613 us-gaap:NoncontrollingInterestMember 2018-09-30 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-09-30 0001527613 2018-10-01 2018-12-31 0001527613 us-gaap:CommonStockMember 2018-10-01 2018-12-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2018-10-01 2018-12-31 0001527613 us-gaap:RetainedEarningsMember 2018-10-01 2018-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2018-10-01 2018-12-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-10-01 2018-12-31 0001527613 2018-12-31 0001527613 us-gaap:CommonStockMember 2018-12-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001527613 us-gaap:RetainedEarningsMember 2018-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2018-12-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001527613 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001527613 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001527613 2019-03-31 0001527613 us-gaap:CommonStockMember 2019-03-31 0001527613 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001527613 us-gaap:RetainedEarningsMember 2019-03-31 0001527613 us-gaap:NoncontrollingInterestMember 2019-03-31 0001527613 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001527613 fil:CustomerKMember 2019-10-01 2020-03-31 0001527613 fil:CustomerKMember 2020-03-31 0001527613 fil:CustomerWpMember 2019-10-01 2020-03-31 0001527613 fil:CustomerWpMember 2020-03-31 0001527613 fil:CustomerJMember 2019-10-01 2020-03-31 0001527613 fil:CustomerJMember 2020-03-31 0001527613 fil:CustomerPoMember 2018-10-01 2019-03-31 0001527613 fil:CustomerPoMember 2019-03-31 0001527613 fil:Loan1Member 2019-10-01 2020-03-31 0001527613 fil:Loan1Member 2020-03-31 0001527613 fil:Loan2Member 2019-10-01 2020-03-31 0001527613 fil:Loan2Member 2020-03-31 0001527613 fil:Loan3Member 2019-10-01 2020-03-31 0001527613 fil:Loan3Member 2020-03-31 0001527613 fil:Loan4Member 2019-10-01 2020-03-31 0001527613 fil:Loan4Member 2020-03-31 0001527613 fil:TonoShinyoKinkoBankMemberfil:CurrentPortionMember 2020-03-31 0001527613 fil:NihonSeisakuKoukoMemberfil:CurrentPortionMember 2020-03-31 0001527613 fil:FordMotorCreditMemberfil:CurrentPortionMember 2020-03-31 0001527613 fil:ShinhanBankMemberfil:CurrentPortionMember 2020-03-31 0001527613 fil:TonoShinyoKinkoBankMemberfil:NonCurrentPortionMember 2020-03-31 0001527613 fil:NihonSeisakuKoukoMemberfil:NonCurrentPortionMember 2020-03-31 0001527613 fil:FordMotorCreditMemberfil:NonCurrentPortionMember 2020-03-31 0001527613 fil:ShinhanBankMemberfil:NonCurrentPortionMember 2020-03-31 0001527613 fil:TonoShinyoKinkoBankMember 2020-03-31 0001527613 fil:NihonSeisakuKoukoMember 2020-03-31 0001527613 fil:FordMotorCreditMember 2020-03-31 0001527613 fil:ShinhanBankMember 2020-03-31 0001527613 srt:NorthAmericaMember 2019-10-01 2020-03-31 0001527613 srt:NorthAmericaMember 2018-10-01 2019-03-31 0001527613 country:JP 2019-10-01 2020-03-31 0001527613 country:JP 2018-10-01 2019-03-31 0001527613 fil:SouthKoreaMember 2019-10-01 2020-03-31 0001527613 fil:SouthKoreaMember 2018-10-01 2019-03-31 0001527613 fil:TotalMember 2019-10-01 2020-03-31 0001527613 fil:TotalMember 2018-10-01 2019-03-31 0001527613 srt:NorthAmericaMember 2020-03-31 0001527613 srt:NorthAmericaMember 2019-09-30 0001527613 country:JP 2020-03-31 0001527613 country:JP 2019-09-30 0001527613 fil:SouthKoreaMember 2020-03-31 0001527613 fil:SouthKoreaMember 2019-09-30 0001527613 fil:TotalMember 2020-03-31 0001527613 fil:TotalMember 2019-09-30 0001527613 fil:SalesOrPurchaseTransaction1Member 2019-10-01 2020-03-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2018-10-01 2019-03-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2020-03-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2019-09-30 0001527613 fil:StockTransaction1Member 2019-10-01 2020-03-31 0001527613 fil:StockTransaction1Member 2020-03-31 0001527613 fil:Event1Member 2019-10-01 2020-03-31 0001527613 fil:Event2Member 2019-10-01 2020-03-31 xbrli:pure iso4217:USD xbrli:shares iso4217:USD xbrli:shares

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020

 

or

 

   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. 000-55157

 

NUZEE, INC.

 

(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)

 

1700 Capital Avenue, Suite 100, Plano, TX, 75074

 

(Address of principal executive offices)   (zip code)

 

(760) 295-2408

 

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading symbol(s)

 

Name of each exchange on which registered

None

 

N/A

 

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 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.

 

Large accelerated filer

¨

 

Accelerated Filer

x

Non-accelerated filer

¨

                                           

Smaller reporting company

Emerging growth company

 

 

 

 

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 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 7, 2020, NuZee, Inc. had 13,729,104 shares of common stock outstanding.


1


 

Table of Contents

 

                                                                                                                                                                        

Page

 

 

PART I

 

 

 

Item 1.  Financial Statements

4

Consolidated Balance Sheets (unaudited)

5

Consolidated Statements of Operations (unaudited)

6

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

7

Consolidated Statements of Stockholders' Equity (unaudited)

8

Consolidated Statements of Cash Flows (unaudited)

9

Notes to Consolidated Financial Statements (unaudited)

10

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

17

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.  Controls and Procedures

21

 

 

PART II

22

 

 

Item 1.  Legal Proceedings

22

Item 1A.  Risk Factors

22

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

23

Item 3.  Defaults Upon Senior Securities

23

Item 4.   Mine Safety Disclosures

23

Item 5.  Other Information

23

Item 6.  Exhibits

24

 

 

SIGNATURES

25


2


 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This report includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act, as amended (the "Exchange Act"), Such forward-looking statements reflect the views of NuZee, Inc. (hereinafter "NuZee" or the "Company") with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about our Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as "estimate," "expects", "project," "predict," "believe," "expect," "anticipate," "target," "plan," "intend," "seek," "goal," "will," "should," "may," "targets" or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: the evolving impact of the COVID-19 pandemic on the global economy and our business, dilution of shareholder investments as a result of necessary capital raises, expenditures to produce and distribute our product, changes in sale levels, changes in the nutritional beverage market, competitor growth, third-party relationship dependent growth, general economic or industry conditions, nationally and/or in the communities in which we conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our operations, products, services, and prices.

 

We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in the section of this report and our Annual Report on Form 10-K/A filed with the SEC on December 31, 2019 entitled "Risk Factors" and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.

 

Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.


3


 

Item 1. Financial Statements.


4


 

NuZee, Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

March 31, 2020

 

September 30, 2019

ASSETS

 

                                 

 

                                 

Current assets:

 

 

 

 

Cash

 

$623,617  

 

$1,326,040  

Accounts receivable, net

 

328,927  

 

540,310  

Accounts receivable - Related party

 

130  

 

-  

Inventories, net

 

297,558  

 

500,986  

Deferred offering costs

 

628,643  

 

225,089  

Other current assets

 

179,461  

 

147,367  

Other current assets - Related party

 

-  

 

460  

Total current assets

 

2,058,336  

 

2,740,252  

 

 

 

 

 

Property and equipment, net

 

2,150,451  

 

1,875,591  

 

 

 

 

 

Other assets:

 

 

 

 

Right-of-use asset - operating lease

 

$583,902  

 

$-  

Right-of-use asset - finance lease

 

118,275  

 

-  

Other asset

 

66,813  

 

634,701  

Total other assets

 

768,990  

 

634,701  

 

 

 

 

 

Total assets

 

$4,977,777  

 

$5,250,544  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$80,183  

 

$341,095  

Current portion of long-term loan payable

 

100,381  

 

101,148  

Accrued expenses and other current liabilities

 

633,216  

 

531,861  

Current portion of lease liability - operating lease

 

155,235  

 

-  

Current portion of lease liability - finance lease

 

20,271  

 

-  

Other current liabilities - Related party

 

2,068  

 

2,812  

Total current liabilities

 

991,354  

 

976,916  

 

 

 

 

 

Non-current liabilities:

 

 

 

 

Lease liability - operating lease, net of current portion

 

432,421  

 

-  

Lease liability - finance lease, net of current portion

 

89,541  

 

-  

Loan payable - long term, net of current portion

 

105,130  

 

156,816  

Other noncurrent liabilities

 

8,749  

 

1,750  

Total non-current liabilities

 

635,841  

 

158,566  

 

 

 

 

 

Total liabilities

 

1,627,195  

 

1,135,482  

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

Common stock; 100,000,000 shares authorized, $0.00001 par value;
13,729,104 and 13,617,366 shares issued

 

138  

 

137  

Additional paid in capital

 

34,076,217  

 

28,898,344  

Accumulated deficit

 

(30,707,170) 

 

(24,795,687) 

Accumulated other comprehensive loss

 

(160,354) 

 

(90,635) 

Total NuZee, Inc. stockholders' equity

 

3,208,831  

 

4,012,159  

Noncontrolling interest

 

141,751  

 

102,903  

Total stockholders' equity

 

3,350,582  

 

4,115,062  

 

 

 

 

 

Total liabilities and stockholders' equity

 

$4,977,777  

 

$5,250,544  

 

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


5


 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three Months Ended
March 31 ,2020

 

Three Months Ended
March 31 ,2019

 

Six Months Ended
March 31 ,2020

 

Six Months Ended
March 31 ,2019

Revenues

 

$393,392  

 

$365,956  

 

$939,600  

 

$719,364  

Cost of sales

 

496,692  

 

245,188  

 

919,865  

 

454,858  

Gross Profit (Loss)

 

(103,300) 

 

120,768  

 

19,735  

 

264,506  

 

 

 

 

 

 

 

 

 

Operating expenses

 

2,413,632  

 

1,513,352  

 

5,963,465  

 

4,245,980  

Loss from operations

 

(2,516,932) 

 

(1,392,584) 

 

(5,943,730) 

 

(3,981,474) 

 

 

 

 

 

 

 

 

 

Other income

 

1,134  

 

81  

 

2,981  

 

4,266  

Other expense

 

(15) 

 

(41,109) 

 

(2,599) 

 

(44,353) 

Interest expense

 

(5,407) 

 

(751) 

 

(10,125) 

 

(1,208) 

Net loss

 

(2,521,220) 

 

(1,434,363) 

 

(5,953,473) 

 

(4,022,769) 

Net income (loss) attributable to noncontrolling interest

 

(30,969) 

 

18,639  

 

(41,990) 

 

6,925  

Net loss attributable to NuZee, Inc.

 

$(2,490,251) 

 

$(1,453,002) 

 

$(5,911,483) 

 

$(4,029,694) 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$(0.18) 

 

$(0.11) 

 

$(0.43) 

 

$(0.30) 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of
common stock outstanding

 

13,729,104  

 

13,240,067  

 

13,714,223  

 

13,265,272  

 

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


6


 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

                                                                                       

 

NuZee, Inc.

 

Noncontrolling
Interests

 

Total

For the three months ended March 31

 

         2020        

 

         2019        

 

         2020        

 

         2019        

 

         2020        

 

         2019        

Net loss

 

$(2,490,251) 

 

$(1,453,002) 

 

$(30,969) 

 

$18,639 

 

$(2,521,220) 

 

$(1,434,363) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(96,949) 

 

(2,947) 

 

75,196  

 

47,866 

 

(21,753) 

 

44,919  

Total other comprehensive income (loss), net of tax

 

(96,949) 

 

(2,947) 

 

75,196  

 

47,866 

 

(21,753) 

 

44,919  

Comprehensive income (loss)

 

$(2,587,200) 

 

$(1,455,949) 

 

$44,227  

 

$66,505 

 

$(2,542,973) 

 

$(1,389,444) 

 

                                                                                       

 

NuZee, Inc.

 

Noncontrolling
Interests

 

Total

For the six months ended March 31

 

         2020        

 

         2019        

 

         2020        

 

         2019        

 

         2020        

 

         2019        

Net loss

 

$(5,911,483) 

 

$(4,029,694) 

 

$(41,990) 

 

$6,925 

 

$(5,953,473) 

 

$(4,022,769) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(69,719) 

 

8,381  

 

80,838  

 

52,721 

 

11,119  

 

61,102  

Total other comprehensive income (loss), net of tax

 

(69,719) 

 

8,381  

 

80,838  

 

52,721 

 

11,119  

 

61,102  

Comprehensive income (loss)

 

$(5,981,202) 

 

$(4,021,313) 

 

$38,848  

 

$59,646 

 

$(5,942,354) 

 

$(3,961,667) 

 

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


7


 

NuZee , Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

 

 

 

Common stock

 

paid-in

 

Accumulated

 

Noncontrolling

 

comprehensive

 

 

 

Shares

 

Amount

 

capital

 

deficit

 

interest

 

income (loss)

 

Total

                                                                            

 

                             

 

                             

 

                             

 

                             

 

                             

 

                             

 

                             

Balance September 30, 2019

 

13,617,366 

 

$137 

 

$28,898,344  

 

$(24,795,687) 

 

$102,903  

 

$(90,635) 

 

$4,115,062  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for cash

 

111,738 

 

1 

 

1,994,522  

 

-  

 

-  

 

-  

 

1,994,523  

Stock option expense

 

- 

 

- 

 

2,220,861  

 

-  

 

-  

 

-  

 

2,220,861  

Other comprehensive gain

 

- 

 

- 

 

-  

 

-  

 

5,642  

 

27,230  

 

32,872  

Net loss for ther period

 

- 

 

- 

 

-  

 

(3,421,232) 

 

(11,021) 

 

-  

 

(3,432,253) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2019

 

13,729,104 

 

$138 

 

$33,113,727  

 

$(28,216,919) 

 

$97,524  

 

$(63,405) 

 

$4,931,065  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option expense

 

- 

 

- 

 

962,490  

 

-  

 

-  

 

-  

 

962,490  

Other comprehensive gain / (loss)

 

- 

 

- 

 

-  

 

-  

 

75,196  

 

(96,949) 

 

(21,753) 

Net loss for the period

 

- 

 

- 

 

-  

 

(2,490,251) 

 

(30,969) 

 

-  

 

(2,521,220) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2020

 

13,729,104 

 

$138 

 

$34,076,217  

 

$(30,707,170) 

 

$141,751  

 

$(160,354) 

 

$3,350,582  

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

 

 

 

Common stock

 

paid-in

 

Accumulated

 

Noncontrolling

 

comprehensive

 

 

 

Shares

 

Amount

 

capital

 

deficit

 

interest

 

income (loss)

 

Total

                                                                            

 

                             

 

                             

 

                             

 

                             

 

                             

 

                             

 

                             

Balance September 30, 2018

 

13,194,591 

 

$132 

 

$14,957,491  

 

$(12,607,722) 

 

$93,131  

 

$(30,967) 

 

$2,412,065  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issued for cash

 

116,891 

 

1 

 

1,494,804  

 

-  

 

-  

 

-  

 

1,494,805  

Common stock issued to settle payables

 

5,118 

 

- 

 

107,478  

 

-  

 

-  

 

-  

 

107,478  

Stock option expense

 

- 

 

- 

 

1,789,751  

 

-  

 

-  

 

-  

 

1,789,751  

NuZee foreign currency gain (loss)

 

- 

 

- 

 

-  

 

-  

 

4,855  

 

11,328  

 

16,183  

Net loss for the period

 

- 

 

- 

 

-  

 

(2,576,692) 

 

(11,714) 

 

-  

 

(2,588,406) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2018

 

13,316,600 

 

133 

 

18,349,524  

 

(15,184,414) 

 

86,272  

 

(19,639) 

 

3,231,876  

Common shares issued for cash

 

13,870 

 

- 

 

228,204  

 

-  

 

-  

 

-  

 

228,204  

Stock issuance costs

 

- 

 

- 

 

(27,628) 

 

-  

 

-  

 

-  

 

(27,628) 

Common stock issued for services

 

50,000 

 

1 

 

37,499  

 

-  

 

-  

 

-  

 

37,500  

Common stock issued to settle payables

 

843 

 

- 

 

16,445  

 

-  

 

-  

 

-  

 

16,445  

Stock option expense

 

- 

 

- 

 

481,742  

 

-  

 

-  

 

-  

 

481,742  

NuZee foreign currency gain (loss)

 

- 

 

- 

 

-  

 

-  

 

47,866  

 

(2,947) 

 

44,919  

Net loss for the period

 

- 

 

- 

 

-  

 

(1,453,002) 

 

18,639  

 

-  

 

(1,434,363) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2019

 

13,381,313 

 

$134 

 

$19,085,786  

 

$(16,637,416) 

 

$152,777  

 

$(22,586) 

 

$2,578,695  

 

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


8


 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Six Months Ended
March 31, 2020

 

Six Months Ended
March 31, 2019

                                                                                                                                            

 

                                

 

                                

Operating activities:

 

 

 

 

Net loss

 

$(5,953,473) 

 

$(4,022,769) 

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

Depreciation and Amortization

 

209,386  

 

32,444  

Noncash lease expense

 

55,189  

 

-  

Option expense

 

3,183,351  

 

2,271,493  

Inventory impairment

 

-  

 

23,656  

Allowance for sales return

 

-  

 

15,854  

Loss on sale of assets

 

-  

 

3,217  

Loss on settlement of payable

 

-  

 

91,684  

Change in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

211,383  

 

37,798  

Accounts receivable - Related party

 

(130) 

 

(49) 

Inventories

 

203,428  

 

(165,656) 

Prepaid expense and other current assets

 

(32,094) 

 

(47,638) 

Other current assets - Related party

 

460  

 

(681) 

Other asset

 

(24,552) 

 

(518) 

Accounts payable

 

(141,891) 

 

503,119  

Other liabilities

 

6,999  

 

(6,317) 

Operating lease liabilities

 

(45,210) 

 

-  

Finance lease liabilities

 

(9,209) 

 

-  

Other current liabilities - related party

 

(744) 

 

(1,374) 

Accrued expense and other current liabilities

 

101,355  

 

(45,818) 

 

 

 

 

 

Net cash used in operating activities

 

(2,235,752) 

 

(1,311,555) 

 

 

 

 

 

Investing activities:

 

 

 

 

Cash paid for deferred offering cost

 

(403,554) 

 

-  

Cash paid for purchase of fixed assets, net

 

(16,306) 

 

(1,105,418) 

Proceeds from sales of equipment

 

-  

 

23,600  

Net cash used in investing activities

 

(419,860) 

 

(1,081,818) 

 

 

 

 

 

Financing activities:

 

 

 

 

Repayment of loans

 

(52,453) 

 

(22,228) 

Stock issuance costs

 

-  

 

(27,628) 

Proceeds from issuance of common stock

 

1,994,523  

 

1,723,009  

Net cash provided by financing activities

 

1,942,070  

 

1,673,153  

 

 

 

 

 

Effect of foreign exchange on cash and cash equivalents

 

11,119  

 

64,044  

 

 

 

 

 

Net change in cash

 

(702,423) 

 

(656,176) 

 

 

 

 

 

Cash, beginning of period

 

1,326,040  

 

1,806,666  

Cash, end of period

 

$623,617  

 

$1,150,490  

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Cash paid for interest

 

$1,774  

 

$-  

Cash paid for taxes

 

$800  

 

$-  

 

 

 

 

 

Non-cash transactions

 

 

 

 

Stock issued for services

 

$-  

 

$37,500  

Recognition of right-of-use asset and lease liability upon adoption of ASU 2016-02

 

$517,263  

 

$-  

Recognition of right-of-use asset and lease liability during the period

 

$115,603  

 

$-  

Finance lease of equipment to pay off accounts payable

 

$124,500  

 

$-  

Stock issued to settle payables

 

$-  

 

$32,239  

 

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


9


 

NuZee, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

December 31, 2019

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as the "Company", "we" or "NuZee") 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 (the "SEC"), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K/A for the year ended September 30, 2019 as filed with the SEC on December 31, 2019. 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.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

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, its wholly owned subsidiaries, and its majority owned subsidiary, which has a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

 

The Company has three international subsidiaries in NuZee KOREA Ltd. ("NuZee KR"), NuZee JAPAN Co., Ltd ("NuZee JP") and NuZee Investment Co., Ltd. ("NuZee INV"). NuZee KR and NuZee INV are wholly owned subsidiaries of the Company, and NuZee JP is a majority owned subsidiary of the Company.

 

Stock Split

 

On October 28, 2019, we completed a l-for-3 reverse stock split, which became effective on November 12, 2019. All share and per share information included in these financial statements and notes thereto have been retroactively adjusted to give effect to the reverse stock split.

 

Earnings per Share

 

Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of March 31, 2020 and March 31, 2019, the total number of common stock equivalents was 1,705,000 and 1,314,000, respectively, that is comprised totally of stock options. The Company incurred a net loss for the three and six months ended March 31, 2020 and 2019, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.

 

Going Concern and Capital Resources

 

Since its inception on July 15, 2011, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.

 

As of March 31, 2020, the Company had cash of $623,617. The Company has not attained profitable operations since inception.

 

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. The Company has had limited revenues, recurring losses, and an accumulated deficit and is dependent on its majority shareholder to provide additional funding for operating expenses. These items raise substantial doubt as to the Company's ability to continue as a going concern. The accompanying consolidated 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.

 


10


Major Customers

 

In the six months ended March 31, 2020 and 2019, revenue was primarily from major customers disclosed below.

 

Six months ended March 31, 2020:

 

Customer Name

Sales Amount

% of Total Revenue

Accounts Receivable Amount

% of Total Accounts Receivable

Customer K

284,099   

30 %

206,905   

63 %

Customer WP

247,520   

26 %

115,471   

35 %

Customer J

151,925   

16 %

$   21,302   

6 %

 

Six months ended March 31, 2019:

 

Customer Name

Sales Amount

% of Total Revenue

Accounts Receivable Amount

% of Total Accounts Receivable

Customer PO

329,572   

46 %

$   52,921   

58 %

 

Lease

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the consolidated balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company implemented ASU No. 2016-02 on October 1, 2019.

 

The Company elected the practical expedient under ASU 2018-11 "Leases: Targeted Improvements" which allows the Company to apply the transition provision for Topic 842 at the Company's adoption date instead of at the earlies comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at October 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.

 

Beginning October 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to October 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of October 1, 2019. Because the lease in question did not have an implicit rate of return, we used our incremental secured borrowing rate based on lease term information available as of the adoption date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on ROU Asset lease is 5%.

 

The Company does a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. As of December 31, 2019, the Company had one significant long-term operating lease for office and manufacturing space in Plano, Texas.  The leased property in Plano, Texas, has a remaining lease term through June of 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probably. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.

 

The impact of ASU No. 2016-02 ("Leases (Topic 842)" on our consolidated balance sheet beginning October 1, 2019, through the recognition of ROU assets and lease liabilities for operating leases are as follows:

 

 

October 1, 2019

ROU Assets

 

$517,263

Lease Liability

 

$517,263

 

During the March 31, 2020 analysis of leases, we determined that a portion of the office and manufacturing leases in Vista, CA, that have an expiration within 12 months or less would probably be renewed through January 31, 2022. With this in mind, we have added ROU


11


assets and lease liabilities related to these leases at March 31, 2020, accordingly. The Vista lease was renewed on April 3, 2020 at a reduced square footage.

 

The direct-leased property in Vista, California, has a remaining lease term through January of 2022. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The sub-leased property in Vista, California, is leased month-to-month and has been calculated as a ROU Asset co-terminous with the direct-leased property.

 

As of March 31, 2020, our operating leases had a weighted average remaining lease term of 3.7 years. Other information related to our operating leases is as follows:

 

ROU Asset – October 1, 2019

 

517,263   

ROU Asset added during the period

 

115,603   

Amortization during the period

 

(48,964)  

ROU Asset – March 31, 2020

 

583,902   

 

 

 

Lease Liability – October 1, 2019

 

517,263   

Lease Liability added during the period

 

115,603   

Amortization during the period

 

(45,210)  

Lease Liability – March 31, 2020

 

587,656   

 

Lease Liability – Short-Term

 

155,235   

Lease Liability – Long-Term

 

432,421   

Lease Liability – Total

 

587,656   

 

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of March 31, 2020:

 

Amounts due within 12 months of March 31,

 

2021

 

183,483   

2022

 

177,293   

2023

 

125,172   

2024

 

128,928   

2025

 

32,468   

Total Minimum Lease Payments

 

647,344   

Less Effect of Discounting

 

59,688   

Present Value of Future Minimum Lease Payments

 

587,656   

Less Current Obligations Under Lease

 

155,235   

Long-Term Lease Obligations

 

432,421   

 

NuZee JP is the lessee of certain equipment under a finance lease extending through January 2021. The asset and liability under the finance 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 is reported in the accompanying consolidated balance sheets in property and equipment of $5,525 as of March 31, 2020. The finance lease liability is included in other current liabilities on the consolidated balance sheets.

 

Future minimum lease payments under finance lease obligations as of March 31, 2020 for each of the remaining fiscal years are as follows:

 

2020

 

 

$3,612

2021

 

 

$1,806

Total Minimum Lease Payments

 

 

$5,418

 

On October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment for 60 months. The terms of this agreement require us to pay $2,987 per month for the next 60 months. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,540 for the purchase of this equipment. The transaction was accounted for as a finance lease.

 

The following summarizes ROU assets under finance leases at March 31, 2020:

 

ROU asset-finance lease at October 9, 2019

 

124,500   

Amortization

 

(6,225)  

ROU asset-finance lease at March 31, 2020

 

118,275   

 


12


The table below summarizes future minimum finance lease payments at March 31, 2020 for the 12 months ended March 31:

 

 

2021

 

$ 33,113   

2022

 

33,113   

2023

 

33,113   

2024

 

33,113   

2025

 

11,038   

Total Minimum Lease Payments

 

143,490   

Amount representing interest

 

(33,678)  

Present Value of Minimum Lease Payments

 

109,812   

Current Portion of Finance Lease Obligations

 

20,271   

Finance Lease Obligations, Less Current Portion

 

$ 89,541   

 

The Company leases office space with terms ranging from month to month to 61 months. Rent expense included in general and administrative expense for the six months ended March 31, 2020 and 2019 was $168,620 and $66,350, respectively.

 

Future minimum rents for the office space leased as of March 31, 2020, for each of the remaining fiscal years are as follows:

 

2020

 

141,176   

2021

 

250,526   

2022

 

193,457   

2023

 

178,753   

2024

 

136,193   

 

 

 

Total Minimum Lease Payments

 

900,105   

 

Loans

 

On June 30, 2016, NuZee JP entered into a loan agreement with Tono Shinyo Kinko Bank. NuZee JP borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The outstanding balance on the loan at March 31, 2020 amounted to $34,692. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seisaku Kouko. NuZee JP borrowed approximately $87,268 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The loan is unsecured and not guaranteed by a director. The outstanding balance on the loan at March 31, 2020 amounted to $34,660.

 

On April 1, 2019, NuZee purchased a delivery van from Ford Motor Credit for $41,627. The Company paid $3,500 as a down payment and financed $38,127 for 60 months at a rate of 2.9%. The loan is secured by the van. The outstanding balance on the loan at March 31, 2020 amounted to $31,583.

 

On February 15, 2019 NuZee KR entered into equipment financing for production equipment with ShinHan Bank for $60,563. In June 28, 2019 NuZee KR purchased additional equipment and increased the loan with ShinHan Bank by $86,518. The loan is secured by our production equipment at NuZee KR. The financing bears a term of 36 months at a rate of 4.33% per annum. Principal payments began in July of 2019. The outstanding balance on this loan at March 31, 2020 amounts to $104,576.

 

The loan payments required for the next five years are as follows:

 

 

 

 

Nihon

Ford

 

 

 

 

 

Tono Shinyo

Seisaku

Motor

ShinHan

 

 

 

 

Kinko Bank

Kouko

Credit

Bank

 

Total

 

 

2020

 

$   13,876   

$     9,380   

$     3,669   

$   23,239   

 

 

 

2021

 

13,876   

9,380   

3,722   

23,239   

 

 

Total Current Portion

 

$   27,752   

$   18,760   

$     7,391   

$   46,478   

 

$ 100,381   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

$     6,940   

$     9,380   

$     7,609   

$   23,239   

 

 

2022

 

 

6,520   

7,833   

34,859   

 

 

2023

 

 

 

8,063   

 

 

 

2024

 

 

 

687   

 

 

 

Total Long Term Portion

 

$     6,940   

$   15,900   

$   24,192   

$   58,098   

 

$ 105,130   

Grand Total

 

$   34,692   

$   34,660   

$   31,583   

104,576   

 

205,511   

 


13


Revenue Recognition

 

We determine revenue recognition through the following steps in accordance with FASB Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers", which we adopted as of October 1, 2018 on a modified retrospective basis:

 

identification of the contract, or contracts, with a customer; 

identification of the performance obligations in the contract; 

determination of the transaction price; 

allocation of the transaction price to the performance obligations in the contract; and 

recognition of revenue when, or as, we satisfy a performance obligation. 

 

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

 

Foreign Currency Translation

 

The financial position and results of operations of each of the Company's foreign subsidiary are measured using the foreign subsidiary's local currency as the functional currency. Revenues and expenses of each such subsidiary 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 investment. Foreign currency translation adjustments comprising accumulated other comprehensive income (loss) amounted to $(69,719) and $8,381 for the six months ended March 31, 2020 and 2019, 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.

 

Inventories

 

Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At March 31, 2020 and September 30, 2019, the carrying value of inventory of $297,558 and $500,986 respectively, reflected on the consolidated balance sheets is net of this adjustment.

 

 

 

March 31, 2020

 

September 30, 2019

Raw materials

 

215,662   

 

327,985   

Finished goods

 

81,896   

 

173,001   

Less – Inventory reserve

 

-   

 

-   

Total

 

297,558   

 

500,986   

 

Recent Accounting Pronouncements

 

In June 2018, the FASB issued ASU 2018-07 which simplifies several aspects of the accounting for non-employee transactions by stipulating that the existing accounting guidance for share-based payments to employees (accounted for under ASC Topic 718, "Compensation-Stock Compensation") will also apply to non-employee share-based transactions (accounted for under ASC Topic 505, "Equity"). ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation is not material to the financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company implemented ASU 2017-11 on October 1, 2019, and the impact of the implementation is not material to the financial statements.

 

 

2. GEOGRAPHIC CONCENTRATION

 

The Company is organized based on fundamentally one geographic segment although it does sell its products on a world-wide basis.

 


14


Information about the Company’s geographic operations are as follows:

 

Geographic Concentrations

 

 

 

 

 

 

 

                                                      

Six Months Ended

March 31, 2020

 

Six Months Ended

March 31, 2019

Net Revenue:

 

 

 

North America

$   636,687   

 

$   295,619   

Japan

234,014   

 

388,658   

South Korea

68,899   

 

35,087   

$   939,600   

 

$   719,364   

 

 

 

 

Property and equipment, net:

As of

March 31, 2020

 

As of

September 30, 2019

North America

1,832,792   

 

1,471,859   

Japan

4,384   

 

6,329   

South Korea

313,275   

 

397,403   

2,150,451   

 

1,875,591   

 

 

3. RELATED PARTY TRANSACTIONS

 

Sales, Purchases and Operating Expenses

 

For the six months ended March 31, 2020 and 2019, NuZee JP sold their products to Eguchi Holdings Co., Ltd ("EHCL"), and the sales to them totaled approximately $1,899 and $2,628 respectively. The corresponding accounts receivable balance from EHCL was $130 and $(106) as of March 31, 2020 and September 30, 2019, respectively. EHCL is controlled by Mr. Katsuyoshi Eguchi, who beneficially owns in excess of 5% of NuZee's outstanding common stock and serves as the chief executive officer of NuZee JP.

 

Rent

 

During October 2016, NuZee JP entered into a rental agreement of an office space with NuZee Co., Ltd., an entity 100% beneficially owned by our chief executive officer. The Company pays $1,169 per month for the office on the last day of each month on behalf of NuZee JP. There is no set expiration date on the agreement. As of March 31, 2020, and September 30, 2019, NuZee JP had a payable balance to NuZee Co., Ltd. of $1,558 and $1,552, respectively.

 

During September 2016, the Company entered into a rental agreement of an office space and warehouse with EHCL. The Company pays

$609 per month for the office and the warehouse on the last day of each month. The lease expired on December 31, 2019, and is expected to continue on a month to month basis. At March 31, 2020 and September 30, 2019, the payable balance under this lease was $510 and $1,154, respectively.

 

During February 2015, the Company entered into a rental agreement of a warehouse with Eguchi Steel Co.,Ltd ("ESCL"). The Company pays $449 per month for the warehouse on the last day of each month. There is no set expiration date on the agreement.

 

 

4. COMMON STOCK

 

During the six months ended March 31, 2020, the Company sold 111,738 shares of common stock at a weighted average price of $17.85 per share, for an aggregate purchase price of $1,994,523. The proceeds will be used for general corporate purposes.


15


5.  STOCK OPTIONS

 

The following table summarizes stock option activity for six months ended March 31, 2020:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

 

 

Number of

 

Exercise

 

Remaining

 

Aggregate

 

 

Shares

 

Price

 

Contractual Life (years)

 

Intrinsic Value

Outstanding at September 30, 2019

 

1,811,667   

 

$ 6.86   

 

8.4   

 

$ 33,705,960   

Granted

 

-   

 

-   

 

 

 

 

Exercised

 

-   

 

-   

 

 

 

 

Expired

 

-   

 

-   

 

 

 

 

Forfeited

 

(106,667)  

 

18.19   

 

 

 

 

Outstanding at March 31, 2020

 

1,705,000   

 

$ 6.15   

 

7.8   

 

8,858,560   

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2020

 

460,000   

 

$ 2.10   

 

7.3   

 

$   3,198,360   

 

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 $3,183,351 for the six months ended March 31, 2020. Unamortized option expense as of March 31, 2020, for all options outstanding amounted to $5,843,478. These costs are expected to be recognized over a weighted- average period of 2.0 years. The Company recognized stock option expenses of $2,271,493 for six months ended March 31, 2019.

 

A summary of the status of the Company's nonvested shares as of March 31, 2020, is presented below:

 

Nonvested options

 

 

 

 

 

 

 

Number of

 

 

Nonvested Shares

Nonvested shares at September 30, 2019

1,355,000   

Granted

 

-   

Exercised

 

-   

Forfeited

 

(106,667)  

Vested

 

(3,333)  

Nonvested shares at March 31, 2020

 

1,245,000   

 

 

6. SUBSEQUENT EVENTS

 

Extension of Vista Lease

 

On April 3, 2020, we entered into the sixth amendment to our Vista, CA lease in which we extended our lease from June 1, 2020 until January 31, 2022. In addition to the extension, we reduced our office space in Vista from 5,634 square feet to 3,500 square feet effective on June 1, 2020. The base rent beginning on June 1, 2020 until May 31, 2021 shall be $4,025 per month and $4,146 per month from June 1, 2021 until January 31, 2022.

 

Sale of Equipment to NuZee Latin America

 

On March 31, 2020, NuZee and Industrias Marino, S.A. de C.V., a company incorporated under the laws of Mexico ("El Marino") entered into a Payment Agreement in order to capitalize the previously agreed joint venture between the two companies. As part of this Payment Agreement, El Marino agreed to pay NuZee $110,000 and transfer certain joint venture shares upon the shipment of two machines to the joint venture. On April 2, NuZee received the $110,000 from El Marino as part of this agreement. On April 13, 2020, NuZee shipped two machines to the joint venture as part of this agreement.


16


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. 

 

Overview

 

We are a specialty coffee company and, we believe, the leading single serve pour over coffee co-packer in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve pour over coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have single serve pour over coffee sales operations in Japan as well as manufacturing and sales operations in Korea and a recently announced joint venture in Latin America. In addition, we plan to opportunistically leverage our strengths and relationships to grow our proprietary NuZee and Coffee Blenders brands in the United States and select international markets.

 

We believe we are the only commercial-scale producer of single serve drip cup coffee and that we have certain advantages in place within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve drip cup market in North America. We target existing large, high-margin companies and are paid per-package based on the number of single serve pour over drip cups produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for every single serve drip cup our co-packing customers sell in the North American market. While we financially benefit from the success of our manufacturing customers through the sales of their respective single serve drip cup products, we are also able to avoid the risks associated with owning and managing the product and its related inventory. As these companies gain market acceptance of single serve drip cup coffee in North America, we plan to leverage that market expansion to further grow our own brands.

 

Our primary focus is the development of single serve pour over coffee in the North American market targeting the individual consumer for use at home and office or other settings that would benefit from single serve pour over products, such as our recent expansion into the lodging market through our arrangement with Royal Cup Coffee & Tea, and positioning ourselves as the leading commercial-scale co-packer of single serve pour over coffee products. We may also look to co-package other products that are complementary to single serve pour over drip coffee and provides us with a deeper access to our customers, such as tea bag coffee. The competitive landscape for our services and products can be illustrated as follows:

 

Picture 

 

Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time we have developed expertise in the operation of our sophisticated packing equipment and the related production of the single serve pour over product at both our Vista, California facility and at our production operations in Korea. We plan to carry over this expertise to our recently announced Plano, Texas manufacturing facility, which will serve as our new single serve pour over co-packing hub and corporate headquarters to capture the location’s logistical advantages and lower cost structure.

 

Recent Developments

 

Status of Agreement with FUSO Industries Co. Ltd.

 

We have been engaged in active negotiations with FUSO Industries Co. Ltd. ("FUSO") to extend the term of the exclusivity agreement between us and FUSO (the "FUSO Agreement"). We acquired certain of the machines we use in the production of our single serve pour


17


over coffee products pursuant to the terms of the FUSO Agreement, which due to certain exclusivity provisions we believe also restricts our competitors' access to these machines in North America. However, FUSO has exercised its rights to terminate the FUSO Agreement on 6 months' prior written notice. While alternative sources exist for the machinery we use to make our products, we believe these alternative sources do not provide machinery of the same capabilities, specifications, and market reputation as we have sources from FUSO. Accordingly, we intend to continue negotiations with FUSO to extend the term of the FUSO Agreement, and the ultimate outcome cannot be predicted. If we are unsuccessful in extending the term of the FUSO Agreement, it will expire pursuant to its terms on June 30, 2020.

 

Employees

 

During March 2020, we terminated the employment of two part-time and three full-time employees located in the U.S. Each such employee was offered two weeks' pay as a severance package. We do not expect the departure of these employees to adversely impact our ability to provide our top-quality services and products.

 

Geographic Concentration

 

Our operations are primarily split between two geographic areas: North America and Asia.

 

For the three months ended March 31, 2020, net revenues attributable to our operations in North America totaled $256,101 compared to $138,851 of net revenues attributable to our operations in North America for the three months ended March 31, 2019. For the six months ended March 31, 2020, net revenues attributable to our operations in North America totaled $636,687 compared to $295,619 of net revenues attributable to our operations in North America for the six months ended March 31, 2019. Additionally, as of March 31, 2020, $1,832,792 of our Property and equipment, net was attributable to our North American operations, compared to $1,471,859 attributable to our North American operations as of September 30, 2019.

 

For the three months ended March 31, 2020, net revenues attributable to our operations in Asia totaled $137,291 compared to $227,105 of net revenues attributable to our operations in Asia during the three months ended March 31, 2019. For the six months ended March 31, 2020, net revenues attributable to our operations in Asia totaled $302,913 compared to $423,745 of net revenues attributable to our operations in Asia during the three months ended March 31, 2019. Additionally, as of March 31, 2020, $317,659 of our Property and equipment, net was attributable to our Asian operations, compared to $403,732 attributable to our Asian operations as of September 30, 2019.

 

Results of Operations

 

Comparison of Three Months ended March 31, 2020 and 2019

 

Revenue

 

 

 

Three months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Revenue

 

$ 393,392   

 

 

 

$

365,956   

 

 

$ 27,346   

 

 

 

7

%

 

 

For the three months ended March 31, 2020, our revenue increased by $27,436, or approximately 7%, compared with the three months ended March 31, 2019. This increase was primarily related to increase in co-packing in North America as well certain close out of inventory for a large customer partially offset by decrease in sales in Japan.

 

Cost of sales and gross margin

 

 

 

Three months ended
March 31,

 

 

Change

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

Cost of sales

 

$   496,692    

 

 

 

$

$  245,188    

 

 

$  251,504   

 

 

 

103 %

 

Gross margin

 

$ (103,300)   

 

 

 

$

$  120,768    

 

 

($224,068)  

 

 

 

(186)%

 

Gross margin %

 

(26)%

 

 

 

 

33 %

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2020, we incurred a total gross loss of $103,300, from sales of our products and co-packing services, compared to a total gross profit of $120,768 for the three months ended March 31, 2019. The gross margin rate was (26)% for the three months ended March 31, 2020, and 33% for the three months ended March 31, 2019. This decrease in margin was driven primarily by inefficiencies due to the ramp up of large co-packing orders for new customers during the period compared to a more established business for single cup pods in the prior period, which increased labor and other expenses that we expect to improve on a per-unit basis as our operations scale, as well as a loss incurred on the close-out of certain inventory items for a particular customer.

 


18


Operating Expenses

 

 

 

Three months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Operating Expenses

 

$2,413,632

 

 

 

$

1,513,352

 

 

$900,280

 

 

 

 59

 

%

 

For the three months ended March 31, 2020, the Company's operating expenses totaled $2,413,632, compared to $1,513,352 for the three months ended March 31, 2019, representing a 59% increase. This increase is primarily attributable to an increase in employee costs, legal costs, facilities costs and stock based compensation expense.

 

Net Loss

 

 

 

Three months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Net Loss attributable to NuZee, Inc.

 

$2,490,251

 

 

 

$

1,453,002

 

 

$1,037,249

 

 

 

 

71%

 

 

For the three months ended March 31, 2020, we generated net losses attributable to NuZee, Inc. of $2,490,251 versus $1,453,002 for the three months ended March 31, 2019. This increase is primarily attributable to lower margins, an increase in employee costs, legal costs and facilities costs and an increase in stock compensation expense as described in further detail above.

 

Comparison of Six Months ended March 31, 2020 and 2019

 

Revenue

 

 

 

Six months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Revenue

 

$ 939,600   

 

 

 

$

719,364   

 

 

$ 220,236   

 

 

 

31

%

 

 

For the six months ended March 31, 2020, our revenue increased by $220,236, or approximately 31%, compared with the six months ended March 31, 2019. This increase was primarily related to an increase in co-packing revenues attributable to our operations in North America, partially offset by a decrease in sales in Japan.

 

Cost of sales and gross margin

 

 

 

Six months ended
March 31,

 

 

Change

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

Cost of sales

 

$  919,865    

 

 

 

 

$  454,858    

 

 

$   465,007   

 

 

 

102 %

 

Gross profit

 

$    19,735    

 

 

 

 

$  264,506    

 

 

$ (244,771)  

 

 

 

(93)%

 

Gross profit margin %

 

2 %

 

 

 

 

37 %

 

 

 

 

 

 

 

 

 

For the six months ended March 31, 2020, we earned a total gross profit of $19,735 from sales of our products and co-packing services, compared to a total gross profit of $264,506 for the six months ended March 31, 2019. The gross margin rate was 2% for the six months ended March 31, 2020, and 37% for the six months ended March 31, 2019. This decrease in margin was driven primarily by inefficiencies due to the ramp up of large co-packing orders for new customers during this period compared to a more established business for single cup pods in the prior period, which increased labor and other expenses that we expect to improve on a per unit basis as our operations scale, as well as a loss incurred on the close out of certain inventory items for a particular customer.

 

Operating Expenses

 

 

 

Six months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Operating Expenses

 

$5,963,465

 

 

 

$

4,245,980

 

 

$1,717,485

 

 

 

 40

 

%

 

For the six months ended March 31, 2020, the Company's operating expenses totaled $5,963,465, compared to $4,245,980 for the six months ended March 31, 2019, representing a 40% increase. This increase is primarily attributable to an increase in employee costs, legal costs, facilities costs and stock based compensation expense.

 


19


Net Loss

 

 

 

Six months ended
March 31,

 

 

Change

 

 

 

2020

 

 

2019

 

 

Dollars

 

 

%

 

Net Loss attributable to NuZee, Inc.

 

$5,911,483

 

 

 

$

4,029,694

 

 

$1,881,789

 

 

 

 

47%

 

 

For the six months ended March 31, 2020, we generated net losses attributable to NuZee, Inc. of $5,911,483 versus $4,029,694 for the six months ended March 31, 2019. This increase is primarily attributable to lower margins, an increase in employee costs, legal costs and facilities costs and an increase in stock compensation expense.

 

Liquidity and Capital Resources

 

Since our inception in 2011, we have incurred significant losses, and as of March 31, 2020, we had an accumulated deficit of approximately $31 million. We have not yet achieved profitability, and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. In the United States, we expect to incur additional losses as a result of the costs associated with operating as an exchange-listed public company in the future.

 

To date, we have funded our operations primarily with proceeds from the private sale of shares of our common stock.

 

Our principal use of cash is to fund our operations, which includes the commercialization of our pour over coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.

 

We may need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.

 

As of March 31, 2020, we had a cash balance of $623,617.

 

Summary of Cash Flows

 

 

 

 

Six Months Ended
March 31,

 

 

 

 

          2020          

 

 

          2019          

 

Cash used in operating activities

 

 

 

$(2,235,752) 

 

 

 

$(1,311,555) 

 

Cash used in investing activities

 

 

 

$(419,860) 

 

 

 

$(1,081,818) 

 

Cash provided by financing activities

 

 

 

$1,942,070  

 

 

 

$1,673,153  

 

Effect of foreign exchange on cash

 

 

 

$11,119  

 

 

 

$64,044  

 

Net increase in cash

 

 

 

$(702,423) 

 

 

 

$(656,176) 

 

 

Operating Activities

 

We used $2,235,752 and $1,311,555 of cash in operating activities during the six months ended March 31, 2020 and 2019, respectively, principally to fund our operating loss. The increase in cash used in operating activities of $924,197 was primarily attributable to the increase in net loss for the six months ended March 31, 2020 as compared to the six months ended March 31, 2019.

 

Investing Activities

 

We used $419,860 and $1,081,818 of cash in investing activities during the six months ended March 31, 2020 and 2019, respectively, principally to fund the purchase of equipment.

 

Financing Activities

 

Historically, we have funded our operations through the issuance of our common stock and convertible debt.

 

Cash provided from financing activities increased to $1,942,070 for the six months ended March 31, 2020 from $1,673,153 for the six months ended March 31, 2019. During the six months ended March 31, 2020, we issued 111,738 shares of common stock which generated net cash proceeds of $1,994,523.


20


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 4.  Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by our Company is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date") Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are not effective, at the reasonable assurance level, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, in part due to the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K/A for the year ended September 30, 2019 filed with the SEC on December 31, 2019, which have not yet been remediated. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses. We will not consider these material weaknesses fully remediated until management has tested those internal controls and found them to be operating effectively.

 

Changes in Internal Control Over Financial Reporting

 

Other than as described above, there have been no changes in our internal control over financial reporting during the three-month period ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


21


 

PART II.

 

Item 1. Legal Proceedings

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

Item 1A. Risk Factors

 

The risk factors disclosed in "Item 1A. Risk Factors" included in our Annual Report on Form 10-K/A filed with the SEC on December 31, 2019 are hereby incorporated by reference, except with respect to the following materially revised risk factors, and two additional risks identified since the filing of our Annual Report on Form 10-K/A as a result of the outbreak of the COVID-19 pandemic:

 

Risks Related to Our Financial Condition and Capital Requirements

 

The COVID-19 pandemic is significantly affecting our operations and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time.

 

The novel coronavirus (“COVID-19”) global pandemic is significantly affecting our business operations, as well as the U.S. economy and financial markets. As the COVID-19 crisis is still rapidly evolving, much of its impact remains unknown and difficult to predict. The COVID-19 crisis may have an adverse impact on our business and financial results that we are not currently able to fully quantify.

 

Broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, may affect our revenues and our ability to collect outstanding receivables. Business closings and layoffs, along with travel bans and restrictions and shelter-in-place or similar orders issued to combat the spread of COVID-19, may adversely affect demand for our products, as well as the ability of our customers to pay for goods delivered. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity may be harmed and the trading price of our common stock could decline significantly.

 

In addition, our results and financial condition may be adversely affected by federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic which, if adopted, could result in direct or indirect restrictions to our business, financial condition, results of operations and cash flow. We may also be subject to lawsuits from employees and others exposed to COVID-19 at our facilities. Such actions may involve large demands, as well as substantial defense costs. Our professional and general liability insurance may not cover all claims against us.

 

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

 

The Tax Cuts and Jobs Act (the “TCJA”), enacted in 2017, limited the use of net operating loss carryforwards for periods beginning after 2017 to eighty-percent of taxable income in the period to which the losses were carried. However, this limitation on the use of the carryforwards was eliminated by the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) for tax years beginning before January 1, 2021. In addition, Section 382 may limit the utilization of net operating loss carryforwards. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, or other tax attributes to offset future taxable income or reduce taxes. Our past issuances of stock and other changes in our stock ownership may have resulted in ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitation under Section 382. State NOL carryforwards may be similarly limited. Furthermore, the closing of this offering, alone or together with transactions in our stock that have occurred in the past and may occur in the future, may trigger another ownership change pursuant to Section 382. Because of the cost and complexity involved in the analysis of a Section 382 ownership change and the fact that we do not have any taxable income to offset, we have not undertaken a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Shares issued in this offering or future changes in our stock ownership (either in combination with this offering or separately) could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, even if we attain profitability, we may not be able to use a material portion of our NOLs, and this would reduce our earnings and potentially affect the valuation of our stock.

 

Risks Related to Our Business

 

The COVID-19 pandemic is significantly affecting our business operations.

 

In December 2019, COVID-19 originated in Wuhan, China, and quickly spread to infect many people in the city and surrounding area.  In some cases, COVID-19 causes severe illness and even death.  Since its discovery, COVID-19 has spread worldwide and significantly impacted global economies.  Restrictive measures that have been implemented in the United States and other countries to combat the virus


22


and its spread, such as travel bans, social distancing, quarantines and shelter-in-place orders may also adversely affect our ability to produce as well as the demand for our products and therefore have an adverse effect on our operations, business and financial condition. 

 

We have a sales office in Japan and a manufacturing and sales office in Korea, and we source our manufacturing equipment and filters from East Asian companies. The continued spread of COVID-19 and implementation of restrictive measures may adversely affect our operations in North America and Asia and our business generally, depending on the extent of its spread of the virus, the rate of infection, the severity of illness and the probability of lethality, the relative effect on various portions of the population (such as the aged), the effect on international trade and commerce and on foreign and domestic travel generally of any measures taken to combat the virus, any action taken (such as the lowering of interest rates) by government entities to combat the negative macroeconomic effects of these measures, the timing and availability of any vaccine for the virus, and other factors. If such circumstances continue to deteriorate, our production capabilities and demand for our products may decline, which would have an adverse effect on our results of operations and financial condition.

 

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

 

While we are currently a small company and, therefore, limited in our product development, marketing and sales activities, we anticipate growth in our business operations commensurate with the expansion of our sales and support operations and distribution network and the commercialization of new pour over coffee products. As of March 31, 2020, we have 24 full- and part-time employees, and we intend to hire new employees and independent contractors to support our anticipated growth. This future growth could impose significant added responsibilities on members of our existing management and create strain on our organizational, administrative and operational infrastructure, including sales and marketing, quality control, and customer service. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures, which prior to this offering have been determined to be inadequate. Our status as an exchange-listed public company will require us to increase our investment in financial accounting and reporting. If our current infrastructure is unable to handle our growth, we may need to expand our infrastructure, to identify and recruit new staff and to implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect our operations. Our future financial performance and our ability to expand and market our pour over coffee products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.

 

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

 

None

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.


23


 

 

Item 6.  Exhibits

 

EXHIBIT NO.

DESCRIPTION

10.1

Joint Venture Agreement with respect to NuZee Latin America, S.A. de C.V., dated January 9, 2020, by and between Industrias Marino, S.A. de C.V., and NuZee, Inc. (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A filed on March 10, 2020, SEC File Number 333-234643)

31.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101**

Interactive Data Files

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

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.


24


 

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.

 

Date:

May 7, 2020

 

NUZEE, INC.

 

 

 

 

 

By:

/s/ Masateru Higashida

 

 

 

Masateru Higashida, Chief Executive Officer

(Principal Executive Officer)

 

 

By:

/s/ Shanoop Kothari

 

 

 

Shanoop Kothari, Chief Financial Officer

(Principal Financial Officer)


25