Company Quick10K Filing
Quick10K
Nuzee
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
10-K 2013-09-30 Annual: 2013-09-30
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
IBN Icici Bank 37,550
HOG Harley Davidson 6,480
HTA Healthcare Trust of America 5,700
NEWM New Media Investment Group 659
CIK Pinnacle Foods 162
XRF China Rapid Finance 58
LTBR Lightbridge 32
ISNS Image Sensing Systems 28
GULF Crimson Exploration 21
XOXO XO Group 0
NUZE 2018-12-31
Part I.
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

Nuzee Earnings 2018-12-31

NUZE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

NUZEE, INC. - Form 10-Q SEC filing
0001527613 --09-30 nuze 0 Non-accelerated Filer Yes true false false 2019 Q1 0001527613 2018-10-01 2018-12-31 0001527613 2018-12-31 0001527613 2018-03-31 0001527613 2019-03-25 0001527613 2018-12-31 2018-12-31 0001527613 2018-09-30 2018-09-30 0001527613 2018-09-30 0001527613 2017-10-01 2017-12-31 0001527613 us-gaap:ParentMember 2018-10-01 2018-12-31 0001527613 us-gaap:ParentMember 2017-10-01 2017-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2018-10-01 2018-12-31 0001527613 us-gaap:NoncontrollingInterestMember 2017-10-01 2017-12-31 0001527613 2017-09-30 0001527613 2017-12-31 0001527613 fil:CustomerAMember 2018-10-01 2018-12-31 0001527613 fil:CustomerBMember 2018-10-01 2018-12-31 0001527613 fil:CustomerAMember 2017-10-01 2017-12-31 0001527613 fil:CustomerBMember 2017-10-01 2017-12-31 0001527613 fil:TonoShinyoKinkoBankMember 2018-12-31 0001527613 fil:NihonSeisakuKoukoMember 2018-12-31 0001527613 srt:NorthAmericaMember 2018-10-01 2018-12-31 0001527613 srt:NorthAmericaMember 2017-10-01 2017-12-31 0001527613 country:JP 2018-10-01 2018-12-31 0001527613 country:JP 2017-10-01 2017-12-31 0001527613 fil:SouthKoreaMember 2018-10-01 2018-12-31 0001527613 fil:SouthKoreaMember 2017-10-01 2017-12-31 0001527613 fil:TotalMember 2018-10-01 2018-12-31 0001527613 fil:TotalMember 2017-10-01 2017-12-31 0001527613 srt:NorthAmericaMember 2018-12-31 0001527613 srt:NorthAmericaMember 2018-09-30 0001527613 country:JP 2018-12-31 0001527613 country:JP 2018-09-30 0001527613 fil:SouthKoreaMember 2018-12-31 0001527613 fil:SouthKoreaMember 2018-09-30 0001527613 fil:TotalMember 2018-12-31 0001527613 fil:TotalMember 2018-09-30 0001527613 fil:SalesOrPurchaseTransaction1Member 2018-10-01 2018-12-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2017-10-01 2017-12-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2018-12-31 0001527613 fil:SalesOrPurchaseTransaction1Member 2018-09-30 0001527613 fil:SalesOrPurchaseTransaction2Member 2018-10-01 2018-12-31 0001527613 fil:SalesOrPurchaseTransaction3Member 2017-10-01 2018-09-30 0001527613 fil:SalesOrPurchaseTransaction3Member 2017-09-30 0001527613 fil:SalesOrPurchaseTransaction4Member 2018-12-31 0001527613 fil:StockTransaction1Member 2017-10-01 2017-12-31 0001527613 fil:StockTransaction1Member 2017-12-31 0001527613 srt:MinimumMemberfil:StockTransaction1Member 2017-12-31 0001527613 srt:MaximumMemberfil:StockTransaction1Member 2017-12-31 0001527613 fil:StockTransaction2Member 2017-10-01 2017-12-31 0001527613 fil:StockTransaction2Member 2018-12-31 0001527613 fil:StockTransaction2Member 2018-10-01 2018-12-31 0001527613 fil:Event1Member 2018-10-01 2018-12-31 xbrli:pure iso4217:USD xbrli:shares iso4217:USD xbrli:shares

 

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 December 31, 2018

 

or

 

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

For the transition period from ________to ________

 

Commission File No. 333-176684

 

                                NUZEE, INC.                                

 

(exact name of registrant as specified in its charter)

 

Nevada

 

383849791

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

2865 Scott Street, Suite 107, Vista, CA, 92081

 

(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:

 

None

 

N/A

Title of each class

 

Name of each exchange on which registered

 

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

¨

Non-accelerated filer

¨

(Do not check if smaller reporting company)

Smaller reporting company

x

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 March 25, 2019, NuZee, Inc. had 39,850,299 shares of common stock outstanding.


1


 

Table of Contents

 

 

Page

 

 

PART I

4

 

 

Item 1.  Financial Statements

4

Consolidated Balance Sheets as at December 31, 2018 (Unaudited) and September 30, 2018

5

Consolidated Statements of Operations for the three months ended December 31, 2018 and 2017 (Unaudited)

6

Consolidated Statements of Comprehensive Loss for the three months ended December 31, 2018 and 2017 (Unaudited)

7

Consolidated Statements of Cash Flows for three months ended December 31, 2018 and 2017 (Unaudited)

8

Notes to Consolidated Financial Statements (Unaudited)

9

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

14

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

17

Item 4.  Controls and Procedures

17

 

 

PART II

18

 

 

Item 1.  Legal Proceedings

18

Item 1A.  Risk Factors

18

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

18

Item 3.  Defaults Upon Senior Securities

18

Item 4.   Mine Safety Disclosures

18

Item 5.  Other Information

18

Item 6.  Exhibits

19

 

 

SIGNATURES

20


2


 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This document contains forward-looking statements which reflect the views of NuZee, Inc. (hereinafter "NuZee" or the "Company") and 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 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: 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, our ability to raise capital, 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 below entitled "Risk Factors" and other sections of this report, which describe factors that could cause our actual results to differ from those set forth in the

forward-looking statements. We do not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such 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


 

PART I.

 

Item 1. Financial Statements.


4


 

 

NuZee, Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

     

 

 

     

December 31, 2018

September 30, 2018

ASSETS         

 

 

  Current assets:     

 

 

  Cash       

2,441,717   

1,806,666   

  Accounts receivable, net     

107,016   

144,632   

  Accounts receivable - Related party     

1,390   

222   

  Inventories, net     

284,761   

134,877   

  Other current assets     

207,343   

134,632   

  Other current assets - Related party     

451   

33,887   

    Total current assets     

3,042,678   

2,254,916   

          

 

 

  Property and equipment, net     

734,273   

674,393   

          

 

 

  Other assets:     

 

 

  Goodwill       

17,112   

17,112   

  Customer List, net     

31,556   

34,424   

  Other asset     

2,208   

1,667   

          

50,876   

53,203   

          

 

 

  Total assets     

3,827,827   

2,982,512   

          

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY     

 

 

  Current liabilities:     

 

 

  Accounts payable     

318,776   

268,283   

  Current portion of long-term loan payable   

34,280   

44,229   

  Other current liabilities     

142,487   

160,773   

  Other current liabilities - Related party   

2,875   

2,782   

    Total current liabilities     

498,418   

476,067   

          

 

 

  Non-current liabilities:     

 

 

  Loan payable - long term, net of current portion   

91,005   

88,063   

  Other noncurrent liabilities     

6,528   

6,317   

          

97,533   

94,380   

          

 

 

  Total liabilities     

595,951   

570,447   

          

 

 

  Stockholders' equity:     

 

 

  Common stock; 100,000,000 shares authorized, $0.00001 par value; 39,949,800 and 39,583,773 shares issued

399   

396   

  Additional paid in capital     

18,349,258   

14,957,227   

  Accumulated deficit

(15,184,414)  

(12,607,722)  

  Accumulated other comprehensive loss     

(19,639)   

(30,967)  

    Total NuZee, Inc. shareholders' equity   

3,145,604   

2,318,934   

  Noncontrolling interest     

86,272   

93,131   

    Total stockholders' equity     

3,231,876   

2,412,065   

          

 

 

  Total liabilities and stockholders' equity   

3,827,827   

2,982,512   

 

 

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


5


 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

             

 

 

             

Three Months Ended
December 31 ,2018

Three Months Ended
December 31 ,2017

  Revenues        

353,408   

356,879   

  Cost of sales      

209,670   

239,010   

        Gross Profit    

143,738   

117,869   

             

 

 

  Operating expenses      

2,732,628   

760,653   

  Loss from operations    

(2,588,890)  

(642,784)  

             

 

 

  Other income      

4,185   

507   

  Equity in loss of unconsolidated affiliate    

-   

(566)  

  Other expense      

(3,244)  

-   

  Interest expense      

(457)  

(713)  

  Net loss        

(2,588,406)  

(643,556)  

  Net loss attributable to noncontrolling interest    

(11,714)  

(6,056)  

  Net loss attributable to NuZee, Inc.    

($2,576,692)  

($637,500)  

             

 

 

  Basic and diluted loss per common share    

$ (0.06)  

$ (0.02)  

             

 

 

  Basic and diluted weighted average number of common stock outstanding    

39,696,767   

34,908,982   

 

 

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


6


 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

         

 

 

 

 

 

 

 

 

 

      

 

 

 

 

 

Noncontrolling

 

 

 

   

 

 

 

 

NuZee, Inc.

 

Interests

 

Total

  For the three months ended December 31

 

2018

2017

 

2018

2017

 

2018

2017

  Net loss    

 

$ (2,576,692)  

$ (637,500)  

 

$ (11,714)  

$ (6,056)  

 

$ (2,588,406)  

$ (643,556)  

         

 

 

 

 

 

 

 

 

 

    Foreign currency translation

 

11,328   

(203)  

 

4,855   

(87)  

 

16,183   

(290)  

  Total other comprehensive loss, net of tax

 

11,328   

(203)  

 

4,855   

(87)  

 

16,183   

(290)  

  Comprehensive loss  

 

$ (2,565,364)  

$ (637,703)  

 

$ (6,859)  

$ (6,143)  

 

$ (2,572,223)  

$ (643,846)  

 

 

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


7


 

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

                   

 

 

                   

Three Months Ended

December 31, 2018

Three Months Ended

December 31, 2017

                   

 

 

Operating activities:                

 

 

  Net loss              

$ (2,588,406)  

$ (643,556)  

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

 

 

  Depreciation and Amortization            

65,711   

23,536   

  Option expense              

1,789,751   

133,486   

  Loss on sale of assets

3,217   

-   

  Loss on settlement of payable

89,053   

-   

  Inventory impairment              

4,560   

-   

  Allowance for sales return            

7,740   

-   

  Equity in loss of unconsolidated affiliate          

-   

566   

Change in operating assets and liabilities:            

 

 

  Accounts receivable              

29,876   

58,662   

  Accounts receivable - Related party          

(1,168)  

6,184   

  Inventories              

(154,444)  

(33,360)  

  Prepaid expense and other current assets          

(72,711)  

(87,407)  

  Other current assets - Related party          

33,436   

4,000   

  Other asset              

(541)  

-   

  Accounts payable              

68,918   

100,892   

  Accounts payable - related party            

-   

(10,935)  

  Deferred revenue              

-   

1,874   

  Other liabilities              

211   

-   

  Other current liabilities - related party          

93   

-   

  Accrued expense and other current liabilities          

(18,286)  

(66,529)  

                   

 

 

  Net cash used by operating activities          

(742,990)  

(512,586)  

                   

 

 

Investing activities:                

 

 

  Purchase of equipment            

(149,540)  

(38,145)  

  Proceeds from sales of equipment            

23,600   

-   

    Net cash used in investing activities        

(125,940)  

(38,145)  

                   

 

 

Financing activities:                

 

 

  Proceeds from issuance of loan - short term - Related party      

-   

156,000   

  Repayment of loans - short term - Related party        

-   

(157,000)  

  Repayment of loans - short term            

(9,949)  

(11,137)  

  Payments on capital lease            

-   

(864)  

  Proceeds from issuance of common stock          

1,494,805   

509,110   

  Net cash provided by financing activities          

1,484,856   

496,109   

                   

 

 

Effect of foreign exchange on cash and cash equivalents          

19,125   

(250)  

                   

 

 

Net change in cash                  

635,051   

(54,873)  

                   

 

 

Cash, beginning of period                

1,806,666   

347,327   

Cash, end of period                

2,441,717   

292,454   

                   

 

 

Supplemental disclosure of cash flow information:            

 

 

  Cash paid for interest            

-   

543   

  Cash paid for taxes              

-   

800   

                   

 

 

Noncash investing and financing activities:            

 

 

  Subscription receivable from issuance of common stock        

-   

153,000   

  Stock issued to settle payables

18,425   

-   

 

 

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


8


 

NuZee, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

December 31, 2018

 

 

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited interim consolidated 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 consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended September 30, 2018 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.

 

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 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.

 

NuZee JAPAN Co., Ltd (“NuZee JP”), NuZee Korea Ltd (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”) are wholly owned subsidiaries of the Company.

 

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. The Company incurred a net loss for the three months ended December 31, 2018 and 2017, 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, 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 December 31, 2018, the Company had cash of $2,275,681. The Company has not attained profitable operations since inception.

 

The accompanying consolidated 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 limited revenues, recurring losses, 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.

 


9


Major Customers

 

In the three months ended December 31, 2018 and 2017, revenue was primarily from major customers disclosed below.

 

Three months ended December 31, 2018:

 

 

 

 

Customer Name

 

Sales Amount

 

% of Total

Revenue

Customer A

 

157,653   

 

45 %

Customer B

 

56,285   

 

16 %

 

 

 

 

 

Three months ended December 31, 2017:

 

 

 

 

Customer Name

 

Sales Amount

 

% of Total Revenue

Customer A

 

167,682   

 

47 %

Customer B

 

72,750   

 

20 %

 

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 is reported in the accompanying consolidated balance sheets in property and equipment of $7,293 as of December 31, 2018. The capital lease liability is included in other current liabilities on the consolidated balance sheets.

 

Future minimum lease payments under capital lease obligations as of December 31, 2018 for each of the remaining fiscal years are as follows:

 

2019

 

 

3,662   

2020

 

 

4,883   

2021

 

 

1,221   

Total Minimum Lease Payments

 

 

9,765   

 

The Company leases office space with terms ranging from month to month to 32 months. Rent expense included in general and administrative expense for the three months ended December 31, 2018 and 2017 was $33,175 and $32,971, respectively.

 

2019

 

63,982   

2020

 

59,732   

Total Minimum Lease Payments

 

123,714   

 

Loan

 

On June 30, 2016, NuZee JP 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 annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The outstanding balance on the loan at December 31, 2018 amounted to $68,179. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seiaku Kouko. The Company borrowed the sum of 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 December 31, 2018 amounted to $57,105.

 

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

 

 

Tono Shinyo Kinko Bank

Nihon Seisaku Kouko 

 

 

 

2019

20,454   

13,826   

2020

27,272   

18,436   

2021

20,454   

18,436   

2022

-   

6,407   

Total Loan Payment

68,180   

57,105   

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principle


10


is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring good or services to a customer. The principles in the standard are applied in five steps: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. We adopted Topic 606 as of October 1, 2018 on a modified retrospective basis. The adoption of Topic 606 does not have a material impact to our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.

 

 

Foreign Currency Translation

 

The financial position and results of operations of the Company's foreign subsidiary is measured using the foreign subsidiary's local currency as the functional currency. Revenues and expenses of such subsidiary has 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 loss amounted to $(19,369) and ($30,967) as of December 31, 2018 and September 30, 2018, 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 December 31, 2018 and September 30, 2018, the carrying value of inventory of $284,761 and $134,877 respectively, reflected on the consolidated balance sheets is net of this adjustment.

 

 

 

December 31, 2018

 

September 30, 2018

Raw materials

 

147,991   

 

30,200   

Work in process

2,250   

 

-   

Finished goods

 

134,520   

 

104,677   

Less - Inventory reserve

-   

 

-  

Total

 

284,761   

 

134,877   

 

Recent Accounting Pronouncements

 

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 is currently evaluating the impact of these amendments on its consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification accounting, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. The amendments are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company adopted ASU No. 2017-09 on October 1, 2018, and this adoption did not have an impact on the Company's 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


11


Mandatorily Redeemable Non-controlling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying generally accepted accounting principles (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 is currently evaluating the impact of this amendment on its consolidated financial statements.

 

2. GEOGRAPHIC CONCENTRATION

 

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

 

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

 

Geographic Concentrations

 

 

 

Net Revenue:

Three Months Ended December 31, 2018

 

Three Months Ended December 31, 2017

 

North America

156,768   

 

173,640   

 

Japan

187,968   

 

183,239   

 

South Korea

8,672  

 

-   

 

 

353,408   

 

356,879   

 

 

 

 

 

Property and equipment, net:

December 31, 2018

 

September 30, 2018

 

North America

441,083   

 

508,711   

 

Japan

7,293   

 

7,864   

 

South Korea

285,897   

 

157,818   

 

 

734,273   

 

674,393   

 

3. RELATED PARTY TRANSACTIONS

 

Sales, Purchases and Operating Expenses

 

For the three months ended December 31, 2018 and 2017, NuZee JP sold their products to EHCL, and the sales to them totaled approximately $741 and $924, respectively. The corresponding accounts receivable balance from EHCL was $1,390 and $222 as of December 31, 2018 and September 30, 2018, respectively.

 

EHCL leased an employee to NuZee JP with no fee during the three months ended December 31, 2018.

 

NuZee JP leased an employee to NuZee Co., Ltd. for Contlus during October 2016 to January 2017 for $10,936 and sold greeting cards to NuZee Co., Ltd. for $7,418 during the year ended September 30, 2017. The related receivables outstanding was $6,019 as of September 30, 2017.

 

NuZee JP leased an employee to Contlus. Contlus is the Company’s related party as the Company holds 50% of their issued shares. Contlus has payable balance of $34,568 as of December 31, 2018.

 

Rent

 

During October 2016, NuZee JP entered into a rental agreement of an office space with NuZee Co., Ltd.   The Company agrees to pay $1,169 per month for the office on the last day of each month. There is no set expiration date on the agreement.

 

During September 2016, the Company entered into a rental agreement of an office space and warehouse with EHCL. The Company agrees to pay $1,213 per month for the office and the warehouse on the last day of each month. The term of this agreement is 3 years and will be automatically renewed. At December 31, 2018, the payable balance under this lease was $2,875.

 

During February 2015, the Company entered into a rental agreement of a warehouse with Eguchi Steel Co.,Ltd (“ESCL”). The Company agrees to pay $449 per month for the warehouse on the last day of each month. There is no set expiration date on the agreement. ESCL is the Company’s related party as they are controlled by Katsuyoshi Eguchi who is a director and the minority owner of NuZee JP.


12


 

4. COMMON STOCK

 

During the quarter ended December 31, 2018, the Company sold 350,673 shares of common stock at prices ranging from $1.70 to $5.46 per share, for an aggregate purchase price of $1,494.805. The proceeds will be used for general corporate purposes.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principal is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring good or services to a customer. The principals in the standard are applied in five steps: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. We adopted Topic 606 as of October 1, 2018 on a modified retrospective basis, which did not have an impact on the Company’s financial statements. The adoption of Topic 606 does not have a material impact to our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.

 

The Company issued 15,354 shares with a fair value of $107,478 to settle a payable amounting to $18,425. The Company recognized a loss on settlement of payables of $89,053 for the three months ended December 31, 2018.

 

 

5.  STOCK OPTIONS

 

The following table summarizes stock option activity for three months ended December 31, 2018:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

 

Average

 

Average

 

 

 

 

Number of

 

Exercise

 

Remaining

 

Aggregate

 

 

Shares

 

Price

 

Contractual Life (years)

 

Intrinsic Value

Outstanding at September 30, 2018

 

3,942,000   

 

0.78   

 

8.9   

 

4,407,160   

Granted

 

-   

 

-   

 

 

 

 

Exercised

 

-   

 

-   

 

 

 

 

Expired

 

-   

 

-   

 

 

 

 

Forfeited

 

-   

 

-   

 

 

 

 

Outstanding at December 31, 2018

 

3,942,000   

 

0.78   

 

8.7   

 

26,679,460   

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2018

 

632,000   

 

0.51   

 

8.2   

 

4,431,760   

 

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 $1,789,751 for three months ended December 31, 2018. Unamortized option expense as of December 31, 2018, for all options outstanding amounted to approximately $6,216,482. These costs are expected to be recognized over a weighted-average period of 2.3 years. The Company recognized stock option expenses of $133,486 for three months ended December 31, 2017.

 

A summary of the status of the Company’s nonvested shares as of December 31, 2018, is presented below:

 

Nonvested options

 

 

 

 

 

 

 

Number of

 

 

Nonvested Shares

Nonvested shares at September 30, 2018

3,310,000   

Granted

 

-   

Exercised

 

-   

Forfeited

 

-   

Vested

 

-   

Nonvested shares at December 31, 2018

 

3,310,000   

 

6. SUBSEQUENT EVENT

 

On January 23, 2019, we terminated the Commercial Contract of Sale (the "Agreement") for the purchase of a building located in Irving, Texas that we entered on December 5, 2018.  Details of the Agreement were reported in our Current Report on Form 8-K filed on December 11, 2018.  All but $100.00 of our deposit was returned.


13


 

 

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 a leading U.S. single serve pour over coffee producer and co-packer. We also have single serve pour over coffee sales operations in Japan as well as manufacturing and sales operations in Korea.We own highly sophisticated packing equipment developed in Japan for pour over coffee production. We have certain exclusive agreements with equipment suppliers based in Japan that restricts our North American competitors access to this equipment or ability to grow. As such, we believe we are a leader in the pour over coffee market in North America.

 

Pour over coffee, or hand drip coffee, is an old-fashioned technique that uses hot water onto ground coffee with a filter. Proponents of drip coffee claim that this method makes better coffee. Single serve pour over coffee, uses the same technique without a machine and straight into a cup using only i) the prepacked filter with coffee and ii) hot water. The image below provides a simple overview of single serve pour over coffee.

 

Picture 

 

As of September 2018 we have opened over 2,000 retail accounts with large chains including; Safeway, Whole Foods, HEB, Rouses, Jewel Osco, Lunardi’s, Akin’s, Buy For Less, Tony’s Finer Foods, Lowe’s, Albertsons, Kings, Meijers, Longs Drugs, Spartan Nash, Piggly Wiggly’s and many other smaller independent stores.  We have obtained these customers by working with brokers, distributors and attending multiple trade show events where there are endless networking and business opportunities.  In addition to the wholesale grocery chains we are working with Amazon and other online retailers, as well as contract co-packing and private labeling with an increased number of coffee roasters nationwide. Our co-packing customers include Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Idyllwild Coffee and Virgin Islands Coffee.

 

Our operational approach has and will remain to develop and manufacture our products under strict guidelines for good manufacturing and food safety practices before releasing our products to the market.  We own our formulas and work with experts in beverage, nutrition and flavoring sciences to ensure our products not only taste delicious but are also good-for-you products using quality and natural ingredients with proven clinical research to support the functional efficacy.

 

Our products compare very favorably with other single serve coffee alternatives in the market, which include K-Cups, instant and tea bag coffee. For example:

 

By the end of the next calendar year, we are targeting that our pour over products will be 100% biodegradable or recyclable making them the most environmentally conscious single serve product in the market

 

We believe our single serve pour over coffee has superior flavor and taste

 

Single serve coffee does not need any hardware and as such, is very portable and requires no cleaning and maintenance

 

Market Opportunity

 

As an emerging company in the functional beverage sector we are participating in a large growing market with historically growing sales. The functional beverage category is expected to reach $105 Billion Dollars by 2021. Over 60% of US consumers drink coffee daily and roughly a third of consumers own a single serve cup machine, providing a large opportunity for our pour over single serve coffee products.


14


Our Strategy

 

Our objective is to be the leading provider of gourmet single serve pour-over coffees in North America and continue to grow our Japanese and Korean operations.  Elements of our business strategy include:

 

Secure additional working capital to support growth and development of NuZee, Inc. sales and support operations 

Build onto our existing product and brand awareness through marketing and communication programs 

Continue to build our loyal base of consumers for Coffee Blenders 

Expand our co-packing operations 

Expand distribution across retail, online and affiliate channels 

Work with brokers to help quicken the process our product gets to distributors and grocery chains 

Work alongside with other roasters, nationwide, and co-pack their roasts into our Drip Cups 

 

Customers

 

Our customers range from multi-store retail chains to wholesale distributors that deliver to both chain and independent stores regionally.  We also sell to office and home delivery services that deliver coffee to homes and businesses locally.  Another portion of our business is online. It involves a service or product exchange from a business to a consumer) site through organic as well as paid marketing campaigns through our affiliate network along with sales stemming from online retail accounts like Amazon.com. We also co-package single serve pour over coffee for other brands.

 

Sales

 

In 2018 Coffee Blenders maintained a healthy relationship with our top retailers, distributors and partners and added a number of new retail chains.  In addition to expanding our shelf space in Safeway Eastern, our product is now in Whole Foods, HEB, Rouses, Jewel Osco, Lunardi’s, Akin’s, Buy For Less, Tony’s Finer Foods, Lowe’s, Albertsons, Kings, Meijers, Longs Drugs, Spartan Nash, Piggly Wiggly’s and many other smaller independent stores. Many of these accounts were gained through KeHE & UNFI, our main distributors as of 2018.

 

Our co-packing customers include Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Idyllwild Coffee and Virgin Islands Coffee.

 

While Coffee Blenders has been on the market for over four years, we still believe that a significant amount of capital will be required to generate additional sales and help support the current accounts that we currently have.  Our sales approach will be maintained by following the 4 stages below:

 

1.       Expand our co-packing operations to accommodate national roasters

2.       Generate consumer trial

3.       Drive repeat sales through heavy in-store promotions

4.       Increase our velocity with our current customers

 

We have learned that by working with the retailers on providing proper employee training on the product, using heavy couponing and doing in store demo’s drive higher sales and more repeat customers.  Our main focus going forward will be to continue our effective approach of attending trade shows to acquire customer accounts.  We have added on to our inside sales force to incubate and curate new accounts.  We plan to expand our affiliate network and online advertising as well as cross promoting via social media to drive our sales through our www.coffeeblenders.com and www.twinpeaksroasters.com domains.

 

At this time, most of the products sold will be under the “Coffee Blenders,” “Twin Peaks” and “NuZee” trademarks.  We have expanded our production capabilities at our headquarters facility in Vista, CA to attract other companies that are interested in producing single serve pour over coffee to produce them at our facility, as well as meet consumer demands.  Our co-packing service is intended to increase market awareness and to help maintain our position as a leader in the U.S. for the pour over drip pouch coffee market.

 

Manufacturing

 

We have a primary manufacturing facility in Vista, California located at 2865 Scott St Suite 107 which is used for the production of our Single Serve Pour-Over Drip Cup line.  We also partner with three third-party manufacturers to manufacture finished products.  We have agreements in place with suppliers and partners for all components required to deliver a finished Coffee Blenders product.  Currently, the Company has not made any long-term commitments to any suppliers or production partners that will burden or impair the Company’s ability to operate.

 

We purchase Green Whole Bean Coffee from Serengeti Trading Company located in Dripping Springs, TX on a contractual basis.  The green whole bean is then sent to our roaster at San Diego Coffee, Tea, & Spice, located in Oceanside, CA.


15


All the raw products (roasted ground coffee and nutraceuticals) are sent to Global Health Trax (“GHT”) for mixing into our proprietary blends.   We do not have a written agreement with GHT.   Rather, all services performed by GHT are on a purchase order basis.  After GHT mixes our coffees, the final product is shipped to us for our coffee blenders single serve drip cups and Twin Peaks pour-over and boxed for retail sales. We are in the process of evaluating the future of our K cups line. In the past GHT would ship our product to various co-packers we used for our K cups.

 

We also work with Pod Pack, located in Baton Rouge, LA, in which green whole bean coffee from our contract with Serengeti Trading Company is then sent to their roaster that they work with, the coffee is roasted/ground/blended with nutraceuticals and then packaged into single-serve containers commonly known as “K cups” and boxed for retail sales.  Pod Pack’s roaster can store our nutraceuticals for production in Louisiana.

 

GHT also ships the blended coffee to our location for packing into our new proprietary single serve consumer product, the “Drip Cup”.

 

Purchasing of packaging material is well diversified among two suppliers: Fleetwood Fibre & Landsberg. We conduct business with these vendors on a purchase order basis.

 

Machinery for production at our Vista location comes from some of the most respected vendors in the industry: Air compression equipment comes from Kaeser Compressor, manufactured in Germany with a local sales and support office in Los Angeles. Nitrogen generation equipment is manufactured by On-Site Gas Systems, and our Drip Cup production is produced on the leading Japanese manufacturer of packaging machines from FUSO Corporation. Nitrogen and air compression machinery is capable of handling expansion as the company expands as well to minimize any ongoing capital expenditures for machinery.

 

Research and Development

 

We focus our research and development efforts on developing new innovative delicious tasting and functional beverages

 

Over the course of the last fiscal year NuZee has maintained a modest R&D budget.  With the advent of the functional beverage and new product ideas, the Company plans to invest more to secure unique flavor and formula profiles but anticipates the out of pocket expense will not be significant as the Company has agreements with flavor and formula design partners to waive development fees in exchange for purchasing the flavorings and ingredients.

 

Competition

 

The beverage industry in general, and the coffee sector in particular, is extremely competitive.  The principal areas of competition include pricing, packaging, development of new products and flavors, and marketing campaigns.  Our Coffee Blenders product is competing directly with Green Mountain brands and licensed brands as well as 3rd party single pour over coffees.  While there are more than 200 varieties of single pour over coffees to choose from there are few, if any functional coffees dedicated to weight-loss, stress reduction, cognitive performance and enhanced workout performance.  Green Mountain brands have enjoyed broad, well-established national distribution through well-funded advertising, and product awareness. In addition, companies and brands manufacturing these products generally have far greater financial, marketing, and distribution resources than we do.

 

Important factors that will affect our ability to compete successfully include taste and functional delivery of our product, trade and consumer promotions, the development of new, unique functions in new and various packaging formats, attractive and unique promotions, branded product advertising, pricing, and the success of our distribution network.

 

We will also be competing to secure distributors who will agree to market our product over those of our competitors, provide stable and reliable distribution, and secure adequate shelf space in retail outlets and search placement in online stores.

 

Our Coffee Blenders products will compete generally with all hot liquid refreshments, including specialty coffees and teas as well as nutraceutical beverages such as BulletProof Coffee, Green Mountain Wellness Coffee, Organo Gold Herbal Coffee, Nuvia Trim Coffee, South Beach Java, Javita, and NatureGift Instant Coffee.  As a result, we continue to look for significant niche markets where our close attention to customer requirements and superior performance are valued.

 

Results of Operations

 

Three months ended December 31, 2018 Compared to Three ended December 31, 2017

 

Revenue.

 

For the three months ended December 31, 2018, our revenue decreased slightly compared with the same time period in 2017.

 

Gross Profit. For the three months ended December 31, 2018, we earned a total gross profit of $143,738 from sales of our products and co-packing services.  The margin rate was 41% for the three months ended December 31, 2018, and 33% for the three months ended December 31, 2017. This increase in margin is driven by lower material costs.


16


Expenses. For the three months ended December 31, 2018, our Company’s operating expenses totaled $2,732,628 versus $760,653 for the same period in the prior year. This increase is a reflection of an increase in employee costs and related costs as well as legal and costs for consultants.

 

Net Loss.  For the three months ended December 31, 2018, we generated net losses of $2,576,692 versus $643,556 for the same period in the prior year. This loss was attributed to an increase operating expenses due to greater employee and related costs as well as great legal and costs for consultants.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had a cash balance of $2,441,717 and $1,806,666 as of September 31, 2018; this increase was primarily due to the sale of common stock.

 

Accounts receivable decreased due to the timing of collections and inventories increased about 111% since September 30, 2018.  Inventories increase in preparation of known orders and ramp up in production at NuZee Korea.

 

Our current ratio of 6.1 as of December 31, 2018 reflects an increase in working capital compared to 4.7 as of September 30, 2018.

 

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, recurring losses from operations, negative cash flow 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 December 31, 2018, 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.

 

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.

.

Changes in Internal Control Over Financial Reporting

 

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.


17


 

PART II.

 

Item 1. Legal Proceedings

None.

 

Item 1A. Risk Factors

 

There have been no changes to our risk factors from those disclosed in our Form 10-K filed on February 11, 2019

 

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

 

During the quarter ended December 31, 2018, we sold 350,673 shares of common stock at prices ranging from $1.20 to $5.46 per share, for an aggregate purchase price of $1,494,805. These proceeds will be used for general business operations.

 

Revenue Recognition

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principal is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring good or services to a customer. The principals in the standard are applied in five steps: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. We adopted Topic 606 as of October 1, 2018 on a modified retrospective basis, which did not have an impact on the Company’s financial statements. The adoption of Topic 606 does not have a material impact to our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.

 

 

All the 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

 

On January 23, 2019, we terminated the Commercial Contract of Sale (the "Agreement") for the purchase of a building located in Irving, Texas that we entered on December 5, 2018.  Details of the Agreement were reported in our Current Report on Form 8-K filed on December 11, 2018.  All but $100.00 of our deposit was returned.


18


 

Item 6. Exhibits

 

EXHIBIT NO.

DESCRIPTION

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.


19


 

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:

March [   ], 2019

 

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)


20