CIMG Inc S-1/A, filed May 14, 2020
CIMG Inc. (CIMG)
As filed with the Securities and Exchange Commission on May 13, 2020
Registration No. 333-234643
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 | ||
AMENDMENT NO. 2 TO FORM S-1 | ||
| REGISTRATION STATEMENT |
|
| UNDER |
|
THE SECURITIES ACT OF 1933 | ||
| NuZee, Inc. |
|
(Exact Name of Registrant as Specified in Its Charter)
Nevada | 5900 | 38-3849791 |
(State or Other Jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer |
| 1700 Capital Avenue, Suite 100 Plano, Texas 75074 |
|
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
| Masateru Higashida Plano, Texas 75074 |
|
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
| Copies to: |
|
Alan A. Lanis, Jr. |
| Ralph V. De Martino Cavas S. Pavri F. Alec Orudjev Schiff Hardin LLP 901 K Street NW, Suite 700 Washington, DC 20001 (202) 724-6846
|
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer þ | Non-accelerated filer ☐ | Smaller reporting company þ |
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 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
|
|
|
|
|
|
| ||||||||||
|
|
|
| |||||||||||||
Title Of Each Class Of Securities To Be Registered |
| Proposed maximum aggregate offering price(2) |
|
| Amount Of | |||||||||||
Common Stock, par value $0.00001 per share(1) |
| $5,750,000 |
|
| $746 | |||||||||||
Underwriters’ warrants(4) |
| -- |
|
| -- | |||||||||||
Common stock underlying underwriters’ warrants (1)(4) |
| $287,500 |
|
| $38 | |||||||||||
Total |
| $6,037,500 |
|
| $784(5) | |||||||||||
|
|
|
| |||||||||||||
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, the shares being registered hereunder include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar transactions.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o), and includes the offering price of shares of common stock that the underwriters have the right to purchase to cover over-allotments, if any.
(3) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
(4) We have agreed to issue, upon the closing of this offering, warrants to The Benchmark Company, LLC entitling it to purchase a number of shares of common stock equal to 5.0% of the aggregate shares of common stock sold in this offering. The exercise price of the warrants will be equal to the public offering price of the common stock offered hereby. The warrants are exercisable commencing six months after the closing date of the offering and will expire five years after the effective date of this registration statement.
(5) Previously Paid.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 13, 2020
PRELIMINARY PROSPECTUS
555,555 Shares
Common Stock
We are offering 555,555 shares of the common stock, par value $0.00001 per share, of NuZee, Inc., a Nevada corporation. The offering price is $ per share.
Prior to this offering, there has been no established public market for our common stock. Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol “NUZE.” Our common stock is currently listed on the OTCQB Marketplace (the “OTCQB”) under the symbol “NUZE.”
We have assumed a public offering price of $9.00 per share, the last reported sale price for our common stock as reported on the OTCQB on March 13, 2020. The actual public offering price per share will be determined between us and the underwriters at the time of pricing and may be at a discount to the current market price. Therefore, the assumed public offering price used throughout this prospectus may not be indicative of the final offering price.
We completed a l-for-3 reverse stock split on October 28, 2019, which became effective on November 12, 2019. Unless we indicate otherwise, all share and per share information in this prospectus reflects the reverse stock split, including the financial statements and notes thereto.
Investing in our common stock involves a high degree of risk. See ‘‘Risk Factors’’ beginning on page 14 of this prospectus for information you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
|
| Per share |
| Total | ||
Price to the public |
| $ |
|
| $ |
|
Underwriting discounts and commissions(1) |
| $ |
|
| $ |
|
Proceeds to us (before expenses) |
| $ |
|
| $ |
|
____________
(1) Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering (excluding any gross proceeds received from the exercise of the underwriters’ over-allotment option), payable to the underwriters, or the reimbursement of certain expenses of the underwriters. See “Underwriting” beginning on page 81 of this prospectus for additional information regarding total underwriter compensation.
We have granted a 45-day option to the underwriters to purchase up to an additional 83,333 shares of common stock solely to cover overallotments, if any, at the public offering price, less underwriting discounts and commissions.
Delivery of the shares offered hereby will be made on or about , 2020.
Sole Book-Running Manager
The Benchmark Company
Prospectus dated , 2020
TABLE OF CONTENTS
Summary Consolidated Financial Data13
Special Note Regarding Forward-Looking Statements33
Selected Consolidated Financial Data41
Management’s Discussion and Analysis of Financial Condition and Results of Operations42
Executive and Director Compensation63
Certain Relationships and Related Party Transactions69
Security Ownership of Certain Beneficial Owners and Management71
Description of Capital Stock73
Material U.S. Federal Income Tax considerations76
Where You Can Find More Information88
Index to Consolidated Financial StatementsF-1
We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
MARKET, INDUSTRY AND OTHER DATA
This prospectus includes industry and market data that we obtained from periodic industry publications, third-party studies and surveys, filings of public companies in our industry and internal company surveys. These sources may include government and industry sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the industry and market data to be reliable as of the date of this prospectus, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein.
Until , 2020 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
i
The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. Before you decide to invest in our common stock, you should read and carefully consider the following summary together with the entire prospectus, including our financial statements and the related notes thereto appearing elsewhere in this prospectus and the matters discussed in the sections in this prospectus entitled “Risk Factors,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” and other sections of this prospectus.
Unless the context otherwise requires, the terms NuZee, the Company, our company, we, us, and our, refer to NuZee, Inc. We completed a l-for-3 reverse stock split on October 28, 2019, which became effective on November 12, 2019. Unless we indicate otherwise, all share and per share information in this prospectus reflects the reverse stock split, including the financial statements and notes thereto.
Overview
Our Company
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 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, as outlined by the factors described below. 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.
We may also consider co-packaging other products that are complementary to single serve pour over drip coffee and provide us with a deeper access to our customers, such as tea bag coffee. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
What is single serve pour over coffee?
Single serve pour over coffee, or hand drip coffee, is a traditional and time-honored technique that pours hot water onto ground coffee with a filter. Proponents of drip coffee believe this method makes better coffee. Single serve pour over coffee uses the same technique without a machine, with the coffee flowing straight into a cup using only hot water and the prepacked coffee filter. The image below compares our single serve pour over coffee to other varieties of hot beverages.
1
Revolutionizing the single serve coffee market in North America
Prior to the success of coffee pods within the last two decades, coffee was primarily consumed at home and via traditional pot-based drip brewers and, to a lesser extent, instant coffee. Pot-based brewers are typically known for good quality coffee that produces multiple cups but are not well-suited for single serve alternatives. In recent years with the advent of coffee pods and increased coffee consumption outside the home, the North American market has been focused on speed and convenience. Coffee pods addressed the need for a single serve coffee solution that was viewed as superior to instant coffee. As coffee consumption has also moved outside the home in recent years, consumer preferences have also changed, leading to greater demand for higher quality coffee alternatives, particularly from younger consumers such as millennials.
Moreover, we believe the typical consumer is increasingly focused on the environmental impact of the product, as well as the taste and quality of the ingredients. We anticipate that pod-based, single serve coffee will face increasing pressure given their heavy reliance on the use of plastics. In our view, consumer preferences in North America have evolved over the last decade to substantially mirror those of Japanese consumers, who have traditionally focused on the taste, eco-footprint and quality of ingredients. We believe machine-based single serve coffee, which represents approximately 27% of the market in North America, has an immaterial amount of market share in Japan. Single serve drip cups represent approximately 2.0 billion units annually in Japan.
The saturation of coffee pods in the North American market, coupled with changing tastes, provides our single serve drip cups with a substantial market opportunity in North America. Our single serve drip cup solution also has a number of advantages over other single serve coffee alternatives:
Our single serve drip coffee products are shipped in zero landfill packaging. The majority of the packaging is paper based and biodegradable, while the inner pouches used to package the filter for freshness are made from 100% recyclable film.
Our solution is portable and does not require a machine. Therefore, the consumer investment required to try our product is very minimal (as opposed to machine based solutions). Single serve drip cups can easily travel and have a number of consume-later applications not available to machine based solutions (camping, travel, office, etc.).
We believe single serve drip coffee is more hygienic than other, machine-based single serve alternatives. For example, the use of a machine requires cleaning and maintenance. If not periodically cleaned or if spent pods are not removed timely, the pods can lead to poor taste and bacterial growth.
Single serve drip coffee is brandable to the cup level, and, unlike machine-based drip systems, the branding remains visible throughout the process of preparing and consuming a cup.
Why NuZee?
We seek to establish ourselves as the leading co-packer of single serve pour over coffee for the North American market, and to expand our own brands as single serve pour over coffee gains market acceptance. We believe that top tier brands that want to compete in the North American single serve pour over coffee market will demand the highest levels of quality from their suppliers. We further believe that we are the leader in the single serve pour over coffee market in North America as a result of our years of working with sophisticated packing equipment manufacturers, Level 2 SQF Certification from the Safe Quality Food Institute, operational knowledge and the co-packing arrangements we are continuing to develop with companies such as Royal Cup Coffee & Tea and Kraft Heinz. As a result of our ongoing efforts, we feel we are well positioned to be the co-packer of choice for companies offering single serve pour over coffee products in the North American market.
We own sophisticated packing equipment developed by East Asian companies for pour over coffee production. We believe these manufacturers are the world leaders for supplying such machines. While lower-grade equipment alternatives do exist, availability is extremely limited for the top-grade equipment that generates co-packing products to the exacting specifications we believe large, established companies will demand. For example, we estimate, based solely on our experience, the current wait time for the production and delivery of co-packing machinery of the type we use in our Vista, California plant is approximately two years. We obtained these machines
2
under a written exclusivity agreement with the premier supplier of the type of high-quality packing equipment we use for our products, FUSO Industries Co. Ltd. (“FUSO”), which contractually remains in effect in the North American market until June 2020, and which we believe significantly restricts our North American competitors’ access to this equipment. However, FUSO has exercised its rights to terminate the exclusivity agreement on six months’ prior written notice. We are exploring options to extend the period of exclusivity with FUSO. If we are unsuccessful in extending the term of the agreement, it will expire pursuant to its terms on June 30, 2020.
We understand that as the single serve drip cup gains momentum in the North American market we will face increasing competition. However, we believe we have a significant head start against any new potential commercial manufacturers in that (i) we have historically had an exclusive arrangement with the premier equipment manufacturer, (ii) we have, and continue to develop, manufacturing expertise on increasingly complex and larger orders, (iii) we have experience dealing with companies of all sizes and their specific requirements (from small roasters to international companies) and (iv) we have SQF Level 2 certification.
We received Level 2 SQF Certification from the Safe Quality Food Institute, which is a customary requirement to produce for large multi-national and international companies. Obtaining Level 2 SQF Certification may take more than a year to achieve. Furthermore, we are in the process of obtaining Level 3 SQF Certification, which involves a comprehensive implementation of even more advanced safety and quality management systems. We are also certified as fair trade, organic, kosher and halal.
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 provide 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:
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.
3
Our sources of revenue
Co-packing
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, we produce and package coffee products according to our customers’ formulations and specifications. We currently focus on fostering co-packing arrangements with larger companies developing pour over coffee products. For example, we have entered into a co-packing agreement with Royal Cup Coffee & Tea.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for Copper Cow in July 2017 and continue to do so today. Copper Cow started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new exciting companies with whom we may work and grow, as we have done with Copper Cow.
NuZee branded products
We have developed products and brands for the primary reason of providing completed finished products to showcase to potential co-packing customers. Our products effectively serve as a sort of “sample” to potential customers that include high quality packaging and coffee. We have received indications of interest from some potential customers in co-packing single serve coffee under the customer’s brand using coffee sourced by us as opposed to the customer providing the coffee, which is how we typically co-pack for customers.
Barista. Our Barista line of products is a high end product line that, in addition to showcasing our production expertise, also includes what we believe to be some of the best coffee available in a single serve application in the world. We plan to sell Barista via traditional retail channels that do not use “pay for placement” distributors. We also have a number of potential co-packing opportunities in which our customers would contract for us to replicate one or more of our Barista products with their foil and packing, providing further evidence of the high-quality nature of this line and coffee. We expect the Barista product line to be our flagship products that are both sold directly to consumers and used as a sales tool for co-packing customers.
Twin Peaks. We currently sell our Twin Peaks single serve pour over coffee exclusively via Amazon, under Amazon’s accelerator program. This program commenced in July 2019 and we expect that as Amazon and its customers become more familiar with single serve pour over coffee, we will increase our revenue for this product.
Pine Ranch. Pine Ranch is a tea bag-style coffee that is available in two distinct roasts: a medium roast called “Smooth Blend” and a dark roast called “Bold Blend”. We introduced this product line in the third quarter of 2019. The brand is initially being sold to retailers and at wholesale, and we plan to offer it direct to consumers in 2020. Pine Ranch is available in dispense boxes that are suitable for offices and retail stores. Pine Ranch is also a zero-landfill product that we can showcase to potential co-packing customers as an alternative to the pour over format. We commenced production for our first tea bag style co-packing customer in October 2019.
Current co-packing clients
We have agreements to co-package coffee for large companies developing pour over coffee products, including Royal Cup Coffee & Tea. In addition, we have entered into similar agreements with others, and we intend to continue to pursue such co-packing arrangements in the future. We believe this interest is due to (i) the saturation of machine based single serve coffee alternatives, (ii) increase in consumer requirements for eco-friendly packaging and (iii) our superior taste compared to other single serve coffee alternatives.
A select list of our current co-packing customers include: Royal Cup Coffee & Tea, Gevalia Kafee (Kraft Heinz), Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Lion Coffee, Idyllwild Coffee and Virgin Islands Coffee.
4
Projected operational capacity
In 2019, we entered into a five year lease for a new manufacturing hub and corporate headquarters in Plano, Texas (within the Dallas metropolitan area). We are poised to have this hub operational quickly once we have obtained the necessary capital. Texas provides us with a variety of benefits versus our Vista, California facility, including reduced operating costs, lower freight costs to most states and better economies of scale. In Plano, we plan to have approximately 20 packing machines (compared with four, expanding to six in Vista, California) and approximately 30 employees. In the future, we plan to look for a more permanent location of appropriate scale in Texas.
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.
On January 9, 2020, we entered into a Joint Venture Agreement (the “JV Agreement”) with Industrias Marino, S.A. de C.V., a company incorporated under the laws of Mexico (“El Marino”), to form a joint venture in Mexico between us and El Marino in Mexico (“NuZee Latin America”). NuZee Latin America will be organized under the laws of Mexico, and its primary business operations are intended to consist of the manufacture of zero-landfill, single serve pour over and tea bag coffee products for sale in Mexico, Central and South America. Both El Marino and we intend to sell raw materials to NuZee Latin America at respective cost plus a 5% margin, with any resulting profits from sales in Mexico, Central and South America to be shared equally among us and El Marino.
Our competitive strengths
We believe that the following strengths contribute to our success:
•Favorable industry trends benefit us. With changing consumer preferences over the last decade that include a greater demand for higher quality coffee alternatives as well as greater flexibility and convenience, we believe we provide a unique alternative to non-single serve drip products currently on the market. For example, we believe our single serve drip cup provides a premium alternative to other single serve coffee alternatives. Recent consumer trends are moving towards premium alternatives to existing mainstream products (i.e. gourmet burgers, craft beers, specialty sodas, organic supermarkets, etc.). In addition to being a premium alternative, our product does not require a machine, which provides our product with a number of other benefits to existing single serve coffee that are machine based.
•Significant production and operational experience in single serve pour over coffee. We have been producing single serve pour over coffee for over four years in increasing scale and complexity. We believe the process and equipment for producing pour over single serve coffee is complex, and a potential new entrant into our market would encounter a significant learning curve to reach our level of operational experience and expertise.
•Co-packing agreements with large international companies. We have co-packing agreements with large international companies, and we believe that as our potential co-packing customers continue to realize that we have the experience co-packing for a variety of customer sizes, we will become the co-packer of choice. The standards required to co-pack for large international companies almost always meet or exceed the standards required to co-pack for any other customer. We also believe that as our co-packing customers’ competitors realize they have a single serve pour over coffee solution, they will be more motivated to develop their own such solution and that will lead to increased co-packing opportunities for us.
•Food grade SQF Level 2 certification. SQF Level 2 certification can take up to a year and requires significant additional resources to obtain. Our existing SQF Level 2 certification allows us to co-pack for large, diversified companies. These companies usually have very strict certification standards and will not outsource production to companies that do not meet the highest level of industry certifications. SQF Level 2 requires us to meet very high quality and compliance standards for production and warehousing as well as chain of custody record keeping and supplier standards, which we believe gives us an advantage compared to potential competitors that do not have this certification. Furthermore, we are also in the process of obtaining Level 3 SQF Certification, through which we are implementing even more advanced safety and quality management systems.
5
•Scarcity of high-quality packaging machinery provides us protection in our core market. We have to date acquired fourteen co-packing machines through an agreement with the world’s leading manufacturer of equipment and filters used in packaging single serve pour over coffee, which contractually remains exclusive to us in the North American market until June 2020 at the earliest. While lower-grade equipment alternatives do exist, availability is extremely limited for the top-grade equipment that generates co-packing products to the exacting specifications we believe large, established companies will demand. We believe that this scarcity, our history as the exclusive operator of such equipment in North America, our operating expertise and our SQF Level 2 certifications provide us with a meaningful advantage and protections from the entry of potential competitors in our core North American market.
•Our Japanese and Korean subsidiaries support our U.S. operations. We have a sales office in Japan and a manufacturing and sales office in Korea. We source our manufacturing equipment and filters from East Asian companies. We believe that having offices in Japan and Korea provides us with direct access to our key vendors that helps us to maintain such relationships as well as helps us operationally in our core U.S. market.
Our business strategy
We intend to achieve our mission and further grow our business by pursuing the following strategies:
•Continually grow our base of large national or international co-packing customers. We have co-packing agreements with large international companies, and we are in active discussions to enter into co-packing agreements with a number of other similar sized companies. We believe that, as the U.S. market continues to gain awareness of single serve pour over coffee, we will continue to grow our base of large domestic or international co-packing customers.
•Co-pack for smaller scale, rapidly growing, innovative coffee customers and capture their growth over time. In addition to co-packing for large domestic or international customers, we believe that select smaller scale, rapidly growing, innovative co-packing customers provide us with different opportunities versus larger customers. For example, smaller scale customers often possess better social media reach and their marketing campaigns have the ability to “go viral.” We believe by selectively choosing high quality smaller customers, we can benefit from growing market acceptable of single serve pour over coffee.
•Increase our production capacity in response to growing demand for co-packing. We have entered into a lease for our planned manufacturing hub in Plano, Texas. We have started to order equipment, begin the SQF Level 2 certification process and begin other processes so that we are poised to have the facility operational as quickly as possible once we have acquired the necessary capital. At peak potential capacity, we project the Plano, Texas facility would provide up to 400% of the current production capacity of our Vista, California facility. We have started this effort in anticipation of growing demand for co-packing.
•Strategically grow and expand our international operations that are strategic to our vision. We plan to strategically grow our current international operations as well as potentially expand international if this growth or expansion is strategic to our vision. We believe the Korean market, albeit competitive, still has significant growth potential as well as strong market acceptance for coffee and single serve pour overs. We have also recently announced the formation of a joint venture for manufacturing and sales in Latin America. As we look at other potential international manufacturing locations, we look for characteristics similar to the Korean, Latin American and U.S. markets.
•Strategically increase the sales of our proprietary brands. We plan to continue to increase the sales of our proprietary brands without utilizing “pay for placement” distributors. We anticipate our direct sales of our proprietary products will benefit as we increase our co-packing revenues because our co-packing customers will help educate consumers on the benefits of single serve pour coffee. We plan to increase our effort on direct sales methodically and concurrently as we increase co-packing revenues and volume.
6
Industry
Coffee consumption in recent years has reached an all-time high. According to the United States Department of Agriculture (USDA), global coffee consumption was forecast to reach a record 167.9 million bags in 2019/20 (a bag is equivalent to 60 kilograms). The United States was the country with the highest consumption with 26.8 million bags forecast for 2019/20, up from 23.6 million in 2014/15 (a 2.6 percent compound annual growth rate, or CAGR)1.
In dollar terms, the global coffee market amounted to US$429.5 billion in 2019, and the market was expected to grow annually by 5.8 percent (CAGR 2019-2023). The United States is the largest market with US$80.9 billion generated in 2019.2
An estimated 63 percent of American adults drink coffee on a daily basis3, and an increasing number of consumers seem to be seeking bolder and more unique coffee experiences. This is evidenced by more Americans’ gourmet coffee consumption reaching a 60/40 advantage over traditional non-gourmet coffee for the first time in the 69-year history of the National Coffee Association’s annual report on coffee consumption.4
The “at home” segment continues to dominate coffee consumption, with 81 percent of volume consumption attributable to the at home market in 2019, representing a 20 percent revenue share. The market share of the at home segment has been relatively constant over the last few years and is expected to maintain a similar share of coffee consumption in 2019-2023.5
1 “Coffee: World Markets and Trade”, United States Department of Agriculture, Foreign Agricultural Service, June 2019 – https://downloads.usda.library.cornell.edu/usda-esmis/files/m900nt40f/xk81jw68v/kp78gs60d/coffee.pdf
2 Statista, August 2019 – https://www.statista.com/outlook/30010000/100/coffee/worldwide#market-revenue
3 National Coffee Association blog, March 2019 – https://nationalcoffee.blog/2019/03/09/national-coffee-drinking-trends-2019/
4 Roast Magazine, March 2019 – https://dailycoffeenews.com/2019/03/11/2019-coffee-and-beverage-trends-inside-the-ncas-annual-report/
5 Statista, August 2019 – https://www.statista.com/outlook/30010000/100/coffee/worldwide#market-revenue
7
Single-serve coffee brewing has grown in popularity in recent years, and single-serve brewing machines were the second most popular brewing system after standard drip coffee makers, with 26 percent of American coffee drinkers using them in 2018.6 Additionally, and according to an online survey by the National Coffee Association, 42 percent of US households owned a single-cup coffee brewing machine in 2019, up from 1 percent in 2005 and 15 percent in 2014.7
While consumers have been purchasing single-serve coffee machines to recreate the café style experience at home, there has been an increased focus on environmental sustainability and demand for eco-friendly products. The 2019 Retail and Sustainability Survey by CGS showed that more than two-thirds of respondents consider sustainability when making a purchase and are willing to pay more for sustainable products.8 In another recent survey of US and UK consumers by Globalwebindex, 42 percent of consumers said that products that have packaging made from
6 Statista, March 2019 – https://www.statista.com/topics/2219/single-serve-coffee-market/
7 Statista, August 2019 – https://www.statista.com/statistics/316217/us-ownership-of-single-cup-brewing-systems/
8 CGS, January 2019 – https://www.globenewswire.com/news-release/2019/01/10/1686144/0/en/CGS-Survey-Reveals-Sustainability-Is-Driving-Demand-and-Customer-Loyalty.html
8
recycled products and/or sustainable materials are important in their day-to-day shopping, and more than half said they have reduced the amount of disposable plastic they use in the past 12 months.9 Greenpeace USA considered coffee pods as “one of the best examples of unnecessary single-use plastics that are polluting our planet” and the big producers of pods having been seeking eco-friendly alternatives.10 Sustainability is expected to continue to be a big trend in the coffee pod market, especially as some cities and local governments consider bans on the use of single-use plastic pods (akin to bans on plastic straws and plastic bags) and as consumers become increasingly concerned about throwing used plastic pods in landfills.11
We believe that many of the prevalent industry trends – the continued consumption and market growth, the prevalence of “at home” consumption, the popularity of single-serve coffee brewing, the increased focus on unique coffee experiences, and consumers’ shift to eco-friendly and sustainable alternatives – will be favorable to our business.
Our Risks and History of Losses
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties summarized below, the risks described under the “Risk Factors” section beginning on page 14 of, and the other information contained in, this prospectus before you decide to invest. Our ability to achieve our mission and execute our strategies is subject to certain challenges, risks and uncertainties, including:
•Our ability to sustain and manage our growth rates;
•Our ability to manage the adverse impacts to our business from the novel coronavirus global pandemic;
•Our ability to obtain sufficient funding to expand our business and respond to business opportunities;
•Our ability to retain our leadership position in co-packing single serve pour over coffee;
•Our ability to acquire new customers or retain existing customers in a cost-effective manner;
•Our ability to successfully improve our production efficiencies and economies of scale; and
•Our ability to manage our supply chain to continue to satisfy our future operation needs.
We have incurred net losses since our inception in 2011, including net losses of $12.1 million and $3.6 million for the years ended September 30, 2019 and 2018, respectively, and $5.9 million for the six months ended March 31, 2020. As of March 31, 2020, our accumulated deficit was approximately $30.7 million. We expect 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 following this offering.
Recent Developments
NuZee Latin America Capitalization
On March 31, 2020, we and El Marino entered into a payment agreement in order to capitalize NuZee Latin America, pursuant to which El Marino agreed to pay $110,000 and transfer to us certain equity interests in NuZee Latin America upon our shipment of two co-packing machines to NuZee Latin America. On April 2, 2020, we received $110,000 from El Marino, and on April 13, 2020, we shipped two co-packing machines to NuZee Latin America in fulfillment of this agreement.
9 Globalwebindex, April 2019 – https://blog.globalwebindex.com/chart-of-the-week/lifting-the-lid-on-sustainable-packaging/
10 USA Today, March 2019 – https://www.usatoday.com/story/tech/2019/03/13/heres-why-your-used-k-cups-coffee-pods-arent-usually-recycled/3067283002/
11 Food Dive, September 2018 – https://www.fooddive.com/news/coffee-pods-lose-ground-as-consumers-look-for-sustainable-premium-java-exp/531816/
9
Status of Agreement with FUSO Industries Co. Ltd.
We have been exploring options 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 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 six 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 sourced from FUSO. Accordingly, we intend to continue seeking 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.
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 connection with the extension, we agreed to reduce 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.
Corporate Information
We were incorporated in 2011 in Nevada as Havana Furnishings, Inc. NuZee Co. Ltd. was incorporated in 2011. NuZee Co. Ltd. merged into Havana Furnishings, Inc. in 2013, and we changed our name to NuZee, Inc. Our principal executive offices are located at 1700 Capital Avenue, Suite 100, Plano, Texas 77055, and our telephone number is (760) 295-2408. We also maintain a California office located at 2865 Scott Street, Suite 107, Vista, California 92081. We lease modest office space in Japan.
Our corporate website is www.mynuzee.com. Information contained on, or that can be accessed through, our website is not a part of this prospectus or incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.
10
THE OFFERING SUMMARY
Common stock offered by us | 555,555 shares (or 638,888 shares, if the underwriters exercise their over-allotment option in full). |
Common stock to be outstanding immediately after this offering | 14,284,659 shares (or 14,367,992 shares, if the underwriters exercise their over-allotment option in full). |
Over-allotment option | We have granted the underwriters an option, exercisable for forty-five (45) days after the date of this prospectus, to purchase up to an additional 83,333 shares of common stock to be offered by us pursuant to this offering at $ per share of common stock, solely to cover over-allotments, if any. |
Use of proceeds | We estimate that the net proceeds to us from this offering will be approximately $4.0 million, or approximately $4.7 million if the underwriters exercise their over-allotment option in full, assuming a public offering price of $9.00 per share, the last reported sale price of our common stock on March 13, 2020. We expect to use the net proceeds from this offering for working capital and general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering. |
Underwriters’ warrants | Upon the closing of this offering, we will issue to The Benchmark Company, LLC, as the representative of the underwriters in this offering, warrants entitling it to purchase a number of shares of common stock equal to 5.0% of the shares of common stock sold in this offering at an exercise price equal to the public offering price of the common stock in this offering. The warrants shall be exercisable commencing six (6) months after the closing of this offering and will expire five (5) years after the effective date of the registration statement of which this prospectus forms a part. |
Lock-Up | We have agreed, subject to certain exceptions and without the approval of the representative of the underwriters, not to offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of our securities for a period of six months following the closing of the offering of the shares. Our directors, executive officers and our primary stockholder have agreed with the underwriters not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of six months commencing on the closing date of this offering. See “Underwriting” beginning on page 81. |
Risk factors | You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. |
11
OTCQB symbol | “NUZE” |
Nasdaq Capital Market symbol | Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol “NUZE.” No assurance can be given that an active trading market will develop for the common stock. |
Unless we indicate otherwise, all share and per share information in this prospectus reflects the Reverse Split, including the financial statements and notes thereto. The number of shares of common stock to be outstanding immediately after this offering is based upon 13,729,104 shares outstanding as of March 31, 2020, and excludes the following:
•1,705,000 shares of our common stock issuable upon the exercise of options outstanding as of March 31, 2020, with a weighted-average exercise price of $6.15 per share;
•1,642,665 shares of our common stock reserved for future grant or issuance under the NuZee, Inc. 2013 Stock Incentive Plan (the “2013 Plan”);
•3,333,334 shares of our common stock reserved for future grant or issuance under the NuZee, Inc. 2019 Stock Incentive Plan (the “2019 Plan”); and
•300,000 shares of our common stock issuable upon the exercise of options that we expect to grant upon the pricing of this offering to our directors, executive officers and certain other employees at an exercise price equal to the public offering price of this offering.
Unless otherwise indicated, this prospectus reflects and assumes the following:
•no exercise of outstanding options; and
•no exercise by the underwriters of their over-allotment option.
12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data for the periods ended and as of the dates indicated. We have derived the statements of operations data for the years ended September 30, 2019 and 2018 and the balance sheet data as of September 30, 2019 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended March 31, 2020 and 2019 and the balance sheet data as of March 31, 2020 from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of results to be expected for any period in the future and the results for the six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year or any other period. You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended March 31, |
|
| Fiscal year ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2019 |
|
| 2018 |
| ||||
Consolidated statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
| $ | 939,600 |
|
| $ | 719,364 |
| $ | 1,793,590 |
|
| $ | 1,388,972 |
|
|
Cost of sales |
|
| 919,865 |
|
|
| 454,858 |
|
| 1,498,473 |
|
|
| 1,321,755 |
|
|
Gross profit |
|
| 19,735 |
|
|
| 264,506 |
|
| 295,117 |
|
|
| 67,217 |
|
|
Selling, general and administrative expenses |
|
| 2,780,114 |
|
|
| 1,974,487 |
|
| 4,540,141 |
|
|
| 2,846,407 |
|
|
Option expense |
|
| 3,183,351 |
|
|
| 2,271,493 |
|
| 7,859,141 |
|
|
| 838,779 |
|
|
Loss from operations |
|
| (5,943,730 | ) |
|
| (3,981,474 | ) |
| (12,104,165 | ) |
|
| (3,617,969 | ) |
|
Equity in loss of unconsolidated affiliate |
|
| - |
|
|
| - |
|
| - |
|
|
| (10,733 | ) |
|
Other income |
|
| 2,981 |
|
|
| 4,266 |
|
| 39,237 |
|
|
| 63,484 |
|
|
Other expense |
|
| (2,599 | ) |
|
| (44,353 | ) |
| (144,741 | ) |
|
| (1,906 | ) |
|
Interest expense |
|
| (10,125 | ) |
|
| (1,208 | ) |
| (5,267 | ) |
|
| (2,468 | ) |
|
Net loss |
|
| (5,953,473 | ) |
|
| (4,022,769 | ) |
| (12,214,936 | ) |
|
| (3,569,592 | ) |
|
Net income (loss) attributable to noncontrolling interest |
| $ | (41,990 | ) |
| $ | 6,925 |
| $ | (26,971 | ) |
| $ | 7,579 |
|
|
Net loss attributable to NuZee, Inc. |
| $ | (5,911,483 | ) |
| $ | (4,029,694 | ) | $ | (12,187,965 | ) |
| $ | (3,577,171 | ) |
|
Basic and diluted loss per common share |
| $ | (0.43 | ) |
| $ | (0.30 | ) | $ | (0.88 | ) |
| $ | (0.29 | ) |
|
Basic and diluted weighted average number of shares of common stock outstanding |
|
| 13,714,223 |
|
|
| 13,265,272 |
|
| 13,867,643 |
|
|
| 12,234,107 |
|
|
|
| As of |
| |||||
|
| March 31, 2020 |
|
| September 30, 2019 |
| ||
Consolidated balance sheet data: |
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 623,617 |
|
|
| $ | 1,326,040 |
|
Working capital |
| 1,066,982 |
|
|
|
| 1,763,336 |
|
Total assets |
| 4,977,777 |
|
|
|
| 5,250,544 |
|
Loan payable – long term, net of current portion |
| 105,130 |
|
|
|
| 156,816 |
|
Lease liability – operating lease, net of current portion |
| 432,421 |
|
|
|
| - |
|
Lease liability – finance lease, net of current portion |
| 89,541 |
|
|
|
| - |
|
Total liabilities |
| 1,627,195 |
|
|
|
| 1,135,482 |
|
Total stockholders’ equity |
| 3,350,582 |
|
|
|
| 4,115,062 |
|
13
Before you invest in our common stock, you should understand the high degree of risk involved. You should carefully consider the following risks and other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before you decide to purchase shares of our common stock. The following risks may adversely impact our business and financial condition. As a result, the trading price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Financial Condition and Capital Requirements
We have limited operating history, which may make it difficult to evaluate our current business and to forecast our future performance.
We have little operating history and are addressing an emerging market. As a result, our current and future business prospects are difficult to evaluate. All potential investors must consider our business prospects in light of the risks and difficulties we have encountered and will continue to encounter as a company operating in a rapidly evolving market. Some of these risks relate to our potential inability to:
effectively manage our business and proprietary information;
recruit and retain sales and marketing, technical and managerial personnel;
recruit and retain sales personnel and appropriate distributor relationships;
successfully develop and protect our intellectual property portfolio;
successfully provide high levels of service as our business expands; and
successfully address other risks, as described in this prospectus or otherwise.
If we do not address these risks successfully, it could have a material adverse effect on our business and financial condition.
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.
14
We have a history of net losses. We expect to continue to incur net losses in the future and we may never generate sufficient revenue from the commercialization of our single serve pour over coffee products or co-packing services to achieve or sustain profitability.
We have incurred net losses since our inception in 2011, including net losses of $12.1 million and $3.6 million for the years ended September 30, 2019 and 2018, respectively, and $5.9 million for the six months ended March 31, 2020. As of March 31, 2020, our accumulated deficit was approximately $30.7 million. We expect 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 following this offering.
These losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity (deficit). Our ability to become and remain profitable will depend on our ability to generate significantly higher revenues from the sales of our pour over coffee products and co-packing services, which depends upon a number of factors, including but not limited to successful sales, manufacturing, marketing and distribution of our products and services.
Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then sustain profitability would have a material adverse effect on our business and financial condition.
Our independent auditor’s report for the fiscal year ended September 30, 2019 includes an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.
Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the year ended September 30, 2019, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Recurring losses from operations raise substantial doubt about our ability to continue as a going concern. If we are unable to continue as a going concern, we might have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. In addition, the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third parties.
We may not be able to raise additional capital to fund our existing operations, market our products and expand our operations.
We believe that the net proceeds of this offering, together with our existing cash balances, will be sufficient to cover our cash needs for at least the next 12-24 months. If our available cash balances, net proceeds from this offering and anticipated cash flow from operations are lower than we anticipate, including due to changes in our business plan, a lower demand for our products or other risks described in this prospectus, we may seek to raise additional capital sooner than currently expected. However, we may not be able raise such additional capital on favorable terms or at all.
We may also consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:
fund development of our products;
acquire, license or invest in technologies or intellectual property relating to our existing products;
acquire or invest in complementary businesses or assets; and
finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
15
success of our current marketing efforts;
our revenue growth rate and ability to generate cash flows from product sales;
effects of competing technological and market developments; and
changes in regulatory oversight applicable to our products.
The various alternatives for raising additional capital include short-term or long-term debt financings, equity offerings, collaborations or licensing arrangements and each one carries potential risks. If we raise funds by issuing equity securities, our stockholders will be further diluted. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations or our ability to issue additional equity securities or issue additional indebtedness. We may also be required under additional debt financing to grant security interests on our assets, including our intellectual property. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our intellectual property, or grant licenses on terms that are not favorable to us which could lower the economic value of those items to us.
The credit markets and the financial services industry have in the past experienced turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and intervention from the U.S. federal government. Furthermore, the capital markets and the financial services industry are currently and expected to continue to be unpredictable and volatile due to the global impact of COVID-19. These events typically make equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. If we cannot secure additional funding when needed, including due to changes in our business plan, a lower demand for our products or other risks described in this prospectus, we may have to delay, reduce the scope of or eliminate one or more sales and marketing initiatives and development programs, which would have a materially adverse effect on our business.
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.
16
Risks Related to Our Business
Our success depends, in part, on our relationships with the manufacturers of our packing equipment, including our ability to extend or replace our current agreement with FUSO.
We source our sophisticated packing equipment from companies located in East Asia. Furthermore, we have entered into a written agreement with the primary manufacturer of the co-packing equipment we use in our operations that provides for exclusivity through June 2020, which we believe has significantly restricted, to date, our North American competitors’ access to this equipment. Our exclusivity agreement does not apply to two companies that had previously purchased packing equipment from this manufacturer, and that may compete with our products and services.
Furthermore, FUSO has exercised its rights to terminate the exclusivity agreement on six months’ prior written notice. We are currently exploring options to extend the period of exclusivity with FUSO. If we are unsuccessful in extending the term of the agreement, it will expire pursuant to its terms on June 30, 2020. In such event, if we are not able to replace the terminating manufacturer in a timely manner or on terms agreeable to us, our competitive position may suffer and our revenues would decline significantly, which would have a material adverse effect on our business, financial condition, and results of operations. Moreover, even if we identify alternative machinery, we believe these alternative sources do not provide machinery of the same capabilities, specifications, and market reputation as we have sourced from FUSO.
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 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.
Continued innovation and the successful development and timely launch of new products and product extensions are critical to our financial results and achievement of our growth strategy.
Achievement of our growth strategy is dependent, among other things, on our ability to extend the product offerings of our existing brands and introduce innovative new products. Although we devote significant focus to the development of new products, we may not be successful in developing innovative new products or our new products may not be commercially successful. Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could be detrimental to our ability to successfully launch such new products and retain partners, in addition to potentially harming our reputation and customer loyalty. Our financial results and our ability to maintain or improve our competitive position will depend on our ability to effectively gauge the direction of our key marketplaces and successfully identify, develop, manufacture, market and sell new or improved products in these changing marketplaces.
17
Our future financial results are difficult to predict, and failure to meet market expectations for our financial performance or our publicly announced guidance may cause the price of our stock to decline.
As we and our industry evolve, we expect to face new challenges with respect to our introduction of innovative products and the changing competitive landscape within the single serve category and the beverage industry. These challenges can occur at various stages, including design, supply chain and sales cycle. Our public forecasts regarding the expected performance of our business and future operating results are forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in our filings with the SEC and in our other public statements, and necessarily reflect current assumptions and judgments that may prove incorrect. As a result, there can be no assurance that our performance will be consistent with any public forecasts or that any variation from such forecasts will not be material and adverse. Failure to meet expectations, particularly with respect to operating margins, earnings per share, operating cash flows and net revenues may result in a decline and/or increased volatility in the price of our stock. In addition, price and volume fluctuations in the stock market as a whole may affect the price of our stock in ways that may be unrelated to our financial performance.
Increased competition, including as a result of industry consolidation, could hurt our businesses.
The beverage industry is intensely competitive and we compete with respect to product, quality, convenience and price. We face significant competition in each of our channels and marketplaces. We compete with major international beverage companies that operate in multiple geographic areas, as well as numerous companies that are primarily local in operation. Our beverages also compete against local or regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the global marketplace or in various local marketplaces or maintain or enhance our relationships with our partners and customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the food and beverage industry.
Changes in the beverage environment and retail landscape could impact our financial results.
The beverage environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the beverage retail landscape is dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Sales to a limited number of customers represent a significant portion of our net sales. The loss of a key customer, including by consolidation in the retail channel, and efforts by our customers to improve their profitability could reduce sales of NuZee branded products and adversely affect our financial performance.
Sales to relatively few customers account for a significant percentage of our net sales, and our success depends in part on our ability to maintain good relationships with these and other key retail and grocery customers. Currently, Amazon and our www.coffeeblenders.com website are our only established domestic retail channels for direct sales to consumers of NuZee branded products. However, we can provide no assurance that any of these customers or any of our other customers will continue to utilize our products or our services at current levels, or at all. Although we generally enter into master agreements with our key customers, these agreements govern the terms and conditions of the relationship and typically do not contain minimum purchase requirements. The loss of one or more of our key customers, or cancellation of or reduction in the amount of purchase by our key customers, could have an adverse effect on our results of operations and financial condition.
In addition, because of the competitive environment facing retailers, many of our customers have increasingly sought to improve their profitability through increased promotional programs, pricing concessions, more favorable trade terms and increased emphasis on private label products. To the extent we provide concessions or trade terms that are favorable to customers, our margins would be reduced. Further, if we are unable to continue to offer terms that are acceptable to our significant customers or our customers determine that they need fewer inventories to
18
service consumers, these customers could reduce purchases of our products or may increase purchases of products from our competitors, which would harm our sales and profitability.
Our industry is also being affected by the trend toward consolidation in the retail channel. Retailers have and will likely continue to seek lower prices from us and demand increased marketing or promotional expenditures. Large retailers also may be more likely to use their distribution networks to introduce and develop private label brands. Strategic partners may also choose to vertically integrate their brands’ manufacturing and distribution. Any of the foregoing could negatively affect our sales of NuZee branded products and our profitability.
Our growth and profitability depend on the performance of third-parties and our relationship with them.
A significant portion of our distribution network, and correspondingly our success in distributing our pour over coffee products, depends on the performance of third-parties. Any non-performance or deficient performance by such parties may undermine our operations and profitability, and may result in total loss to your investment. To distribute our product, we use a broker-distributor-retailer network whereby brokers represent our products to distributors and retailers who, in turn, sell our product to consumers. The success of this network depends on the performance of this network of brokers, distributors and retailers. There is a risk that a broker, distributor or retailer may refuse to or cease to market or carry our product, or that any such entity may not adequately perform its functions within the network by, without limitation, failing to distribute to sufficient retailers or positioning our product in localities that may not be receptive to our product.
Furthermore, such third-parties’ financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sale activities. We must also maintain good commercial relationships with third-party brokers, distributors and retailers so that they will promote and carry our product. Any adverse consequences resulting from the performance of third-parties or our relationship with them could undermine our operations and profitability, and may result in total loss of your investment.
The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business.
Our success depends on the skills, experience and performance of key members of our senior management team, including Masateru Higashida, our Chief Executive Officer, Secretary and Treasurer, Travis Gorney, our President and Chief Operating Officer, and Shanoop Kothari, our Chief Financial Officer. The individual and collective efforts of our senior management team will be important as we continue to expand our commercial activities and develop additional products. The loss or incapacity of existing members of our senior management team could have a material adverse effect on our business and financial condition if we experience difficulties in hiring qualified successors. Our employment agreements with our executive officers are “at will”, and the retention of our executive officers for any period of time cannot be guaranteed. We do not maintain “key person” insurance on any of our employees.
Due to the specialized nature of the business and our small size, we are highly dependent upon our ability to attract and retain qualified sales and marketing, technical and managerial personnel. The loss of the services of existing personnel, as well as the failure to recruit key sales, marketing, technical and managerial personnel in a timely manner would be detrimental to our development and could have a material adverse effect on our business and financial condition. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as sales and marketing, may require the addition of new management personnel, both domestic and international. All of our employees may terminate their employment at any time with short or no advance notice. We may have difficulties locating, recruiting or retaining qualified sales people. Recruiting and retention difficulties will limit our ability to support our development and sales programs and to build a commercially viable business.
19
A substantial portion of our sales are completed on a purchase order basis, including sales under our co-packing arrangements. Customers may issue fewer or smaller purchase orders than we expect under our co-packing arrangements, which could negatively impact our revenues. In additional, although these purchase orders are generally not cancelable, customers may decide to delay or cancel orders, which could also negatively impact our revenues.
Generally under our co-packing arrangements, customers must still issue purchase orders for our products and services. Generally, our co-packing arrangements have no or nominal minimum purchase requirements. In addition, although orders covered by firm purchase orders are generally not cancelable, customers may decide to delay or cancel orders, and we may have difficulty enforcing the provisions of the purchase order. In the event that customers with whom we have co-packing arrangements issue fewer or smaller purchase orders than we expect, or we experience any delays or cancellations in orders (due to current distress in the global economy caused by COVID-19, or otherwise), our revenues could decline substantially. Any such decline could result in us incurring net losses, increasing our accumulated deficit and needing to raise additional capital to fund our operations.
Because our management structure is not centralized, the management of our business operations may be more expensive and more difficult.
As part of our strategy to attract the most qualified individuals, we do not require the members of our management team to relocate to a particular geographic area. Accordingly, the members of our management team are geographically dispersed. This decentralized structure might cause additional expenses in the conduct of our business, and may also delay communication between members of our management team, lower the quality of our management decisions or decrease our ability to take action quickly.
Product safety and quality concerns could negatively affect our business.
Our success depends in part on our ability to maintain consumer confidence in the safety and quality of all of our products. While we are committed to the safety and quality of our products, we may not achieve our product safety and quality standards. Product safety or quality issues, or mislabeling, actual or perceived, or allegations of product contamination or quality or safety issues, even when false or unfounded, could subject us to product liability and consumer claims, negative publicity, a loss of consumer confidence and trust, may require us from time to time to conduct costly recalls from some or all of the channels in which the affected product was distributed, could damage the goodwill associated with our brands, and may cause consumers to choose other products. Such issues could result in the destruction of product inventory and lost sales due to the unavailability of product for a period of time, which could cause our business to suffer and affect our results of operations.
Increases in the cost of high-quality coffee beans or other commodities or decreases in the availability of high quality coffee beans or other commodities could have an adverse impact on our business and financial results.
We purchase, roast, and sell high-quality whole bean coffee and related coffee products. The price of coffee is subject to significant volatility, and may increase due to the factors described below. The high-quality coffee beans we seek tend to trade on a negotiated basis at a premium above the commodity trading price of coffee as quoted on the Intercontinental Exchange, also known as the “C” price of coffee. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality coffee and also impact our ability to enter into fixed-price purchase commitments. The supply and price of coffee we purchase can also be affected by multiple factors in the producing countries, including weather, natural disasters, crop disease (such as coffee rust), general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Because of the significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of coffee due to any of the above factors or a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our business and financial results.
20
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines.
We may be able to pass some or all raw materials, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset increased raw material, energy or other input costs, including but not limited to packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact 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.
Any failure by us to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.
There is inherent risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the single serve component of our business. We set target levels for the manufacture of our pour over coffee products and for the purchase of coffee in advance of customer orders based upon our forecasts of customer demand and those of our business partners. If our forecasts exceed demand, we could experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases, all of which could impact our financial performance. Alternatively, if demand exceeds our forecasts significantly beyond our current manufacturing capacity, we may not be able to satisfy customer demand, which could result in a loss of share if our competitors are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income.
We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position.
Our success depends in part upon our intellectual property rights. We rely primarily on trademark, trade secret laws, confidentiality procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures and services. Other persons could copy or otherwise obtain and use our intellectual properties without authorization, or create intellectual properties similar to ours independently. We may also pursue the registration of our domain names, trademarks and service marks in other jurisdictions, including the United States. However, we cannot assure you that we will be able to protect our proprietary rights. Further, our competitors may be able to independently develop similar intellectual property, duplicate our products and services or design around any intellectual property rights we hold. Further, our intellectual property rights may be subject to termination or expirations. The loss of intellectual property protections or the inability to timely regain intellectual property protections could harm our business and ability to compete.
21
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time subject to legal proceedings and claims relating to the intellectual property rights of others, such as our previously-disclosed litigation in the United States District Court for the Northern District of California, involving allegations by Steeped, Inc. d/b/a Steeped Coffee of infringement. As further described below, we continue to believe such allegations are without merit, and we are continuing to defend vigorously against the allegations.
There may be third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently infringe. We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against us in the United States or any other jurisdiction. We also cannot be certain that our efforts will be effective in completely preventing the infringement of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these third-party infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use of the intellectual property in question.
Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results.
In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned and are taxed accordingly. Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future.
Our business operations are conducted in multiple languages and could be disrupted due to miscommunications or translation errors.
The success of our business depends in part on our marketing efforts in the United States and various countries in East Asia and Latin America, each of which is conducted in the local language. Additionally, our operations often require that complex contracts, communications and technical information be accurately translated into foreign languages. Miscommunications or inaccurate foreign language translations could have a material adverse effect on our business operations and financial condition.
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.
Our businesses involve the collection, storage and transmission of personal, financial or other information that is entrusted to us by our customers and employees. Our information systems also contain our proprietary and other confidential information related to our businesses. Despite the implementation of network security measures, our
22
systems and those of third parties on which we rely may also be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; telecommunications or system failures; server or cloud provider breaches; computer viruses; physical or electronic break-ins; cyber-attacks; catastrophic events; or breaches due to employee error or malfeasance or other attempts to harm our systems. Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology networks and systems to more sophisticated and targeted measures, known as advanced persistent threats, directed at us, our products, customers and/or third-party service providers. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a loss of critical data and delays or interruptions in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us deliver our website, may receive or store information provided by us or our users through our websites. If these third parties fail to adopt or adhere to adequate information security practices, or fail to comply with our online policies, or in the event of a breach of their networks, our users’ data may be improperly accessed, used or disclosed.
If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal or regulatory actions against us in connection with such incidents, which could result in orders or consent decrees forcing us to modify our business practices. Any incidents involving unauthorized access to or improper use of user information, or incidents that are a violation of our online privacy policy, could harm our brand reputation and diminish our competitive position. Any of these events could have a material and adverse effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
Changes in regulatory standards could adversely affect our business.
Our business is subject to extensive domestic and international regulatory requirements regarding distribution, production, labeling and marketing. Changes to regulation of the beverage industry could include increased limitations on advertising and promotional activities or other non-tariff measures that could adversely impact our business. In addition, we face government regulations pertaining to the health and safety of our employees and our consumers as well as regulations addressing the impact of our business on the environment, domestically as well as internationally. Compliance with these health, safety and environmental regulations may require us to alter our manufacturing processes and our sourcing. Such actions could adversely impact our results of operations, cash flows and financial condition, and our inability to effectively and timely comply with such regulations could adversely impact our competitive position.
Significant additional labeling or warning requirements or limitations on the availability of our products may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling (such as requiring labeling of products that contain genetically modified organisms) or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of certain of our products. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products. One such law, which is in effect in California and is known as Proposition 65, requires that a warning appear on any product sold in California that contains a substance that, in the view of the state, causes cancer or birth defects. The state maintains lists of these substances and periodically adds other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a warning if the manufacturer of a product can demonstrate that the use of the product in question exposes consumers to a daily quantity of a listed substance that is below a “safe harbor” threshold that may be established, is naturally occurring, is the result of necessary cooking, or is subject to another applicable exception. While currently substances created
23
by and inherent in the processes of roasting coffee beans or brewing coffee have been determined by the State of California not to pose a significant risk, such chemicals could be added to the Proposition 65 lists in the future. With respect to substances that have not yet been listed under Proposition 65, the Company takes the position that listing is not scientifically justified. The State of California or other parties, however, may take a contrary position. If we were required to add Proposition 65 warnings on the labels of one or more of our beverage products produced for sale in California, the resulting consumer reaction to the warnings and possible adverse publicity could negatively affect our sales both in California and in other marketplaces.
Our international sales and operations subject us to various additional legal, regulatory, financial and other risks.
We operate globally and are attempting to develop products in multiple countries. Consequently, we face complex legal and regulatory requirements in multiple jurisdictions, which may expose us to certain financial and other risks. International operations are subject to a variety of risks, including:
foreign currency exchange rate fluctuations;
greater difficulty in overseeing foreign operations;
logistical and communications challenges;
potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;
burdens and costs of compliance with a variety of foreign laws;
political and economic instability;
foreign tax laws and potential increased costs associated with overlapping tax structures;
greater difficulty in protecting intellectual property;
the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our products; and
general social, economic and political conditions in these foreign markets.
Adverse weather conditions, including climate change, may have an adverse impact on our business and results of operations.
The supply of our raw ingredients required to produce our pour over coffee products could be impacted by adverse weather conditions that increase the cost or reduce the availability of such ingredients. The sales of our products are also influenced to some extent by weather conditions in the markets in which we operate.
Furthermore, there is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit availability or increase the cost of key agricultural commodities, such as coffee and tea, which are important sources of ingredients for our products, and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
24
Risks Related to this Offering and Ownership of our Common Stock Risks Related to this Offering and Ownership of our Common Stock
Our common stock presently is listed for trading on the OTCQB which means you may not be able to resell shares of our common stock publicly, if at all, at times or prices you feel are fair and appropriate.
While our common stock has been approved for listing on the Nasdaq Capital Market, our common stock presently is listed for trading on the OTC Market’s OTCQB service.
A listing on the OTC Markets is generally understood to be a less active, and therefore less liquid, trading market than other types of markets such as a stock exchange. Compared to a listing on a stock exchange, a listing on the OTC Markets can be expected to have an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock. In addition, we have had small trading volume in our common stock, which makes it difficult for our stockholders to sell their shares as and when they choose. Small trading volumes generally depress market prices. As a result, we believe that you may not be able to resell shares of our common stock publicly, if at all, at times or prices that you feel are fair or appropriate.
The market price of our stock may be volatile, and you could lose all or part of your investment. Further, we do not know whether an active, liquid and orderly trading market will develop for our securities or what the market price of our securities will be and as a result it may be difficult for you to sell your shares of our securities.
Prior to this offering there has been a limited public market for shares of our securities. Although our common stock has been approved for listing on the Nasdaq Capital Market, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in shares of our securities is not active. The public offering price for our securities will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the securities after the offering. As a result of these and other factors, you may be unable to resell your shares of our securities at or above the public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our securities and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our securities as consideration, which could have a material adverse effect on our business, financial condition, and results of operations. In addition, the trading price of our common stock following this offering is likely to be highly volatile and subject to wide fluctuations in response to various factors, some of which we cannot control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include but are not limited to:
the success of, or developments in, competitive products or technologies;
regulatory actions with respect to our products and our competitors;
the level of success of our marketing strategy;
announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;
regulatory or legal developments in the United States and other countries;
recruitment or departure of key personnel;
expenses related to any of our development programs and our business in general;
actual or anticipated changes in financial estimates, development timelines or recommendations by securities analysts;
25
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
variations in our financial results or those of companies that are perceived to be similar to us;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
our ability or failure to raise additional capital in equity or debt transactions;
costs associated with our sales and marketing initiatives;
costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products;
sales of our common stock by us, our insiders or our other stockholders; and
general economic, industry and market conditions.
In addition, the stock market in general has in the past experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the relevant companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have a dramatic and material adverse impact on the market price of our common stock.
Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and sales of such shares may have a depressive effect on the share price of our common stock.
Substantially all of the outstanding shares of common stock are “restricted securities” within the meaning of Rule 144. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of common stock. Under Rule 144, affiliates who have held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four-calendar week rule does not apply to companies quoted on the OTC Markets). A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 14,284,659 shares of common stock based on the number of shares outstanding as of March 31, 2020. This includes the shares that we sell in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares, 6,413,288 shares of our common stock are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after this offering. We also intend to register all shares of common stock that we may issue under our 2019 Plan. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.
26
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively, which could affect our results of operations and cause our stock price to decline.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section entitled “Use of Proceeds.” We intend to use the net proceeds from this offering for working capital and general corporate purposes. As a result, you will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. You will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile, and in the past, companies that have experienced volatility in the market price of their stock have been subject to securities litigation, including but not limited to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could have a material adverse effect on our business and financial condition.
Our principal stockholder and management, including our Chief Executive Officer in particular, own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Prior to this offering, our executive officers, directors, holders of 5% or more of our capital stock and their respective affiliates beneficially owned approximately 46.7% of our voting stock and, upon completion of this offering, that same group will hold approximately 45.8% of our outstanding voting stock (assuming no exercise of the underwriters’ over-allotment option, no exercise of outstanding options and no purchases of shares in this offering by any of this group), in each case assuming a public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020. Our Chief Executive Officer and Chairman of the Board of Directors individually beneficially owned approximately 36.0% of our voting stock prior to this offering, and will hold approximately 34.6% of our outstanding voting stock following this offering. This concentration of control creates a number of risks. After this offering, this group of stockholders will have the ability to exert significant influence over us through this ownership position. These stockholders may be able to exert significant influence over all matters requiring stockholder approval, including with respect to elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets or other major corporate transaction, and our stockholders may find it difficult to replace members of management should our stockholders disagree with the manner in which the Company is operated. Furthermore, this concentration of ownership may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders.
27
We incur significant costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives following the listing of our common stock on the Nasdaq Capital Market.
Following the listing of our common stock on the Nasdaq Capital Market, we expect the rules and regulations applicable to companies listed on the Nasdaq Capital Market to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These requirements may divert the attention of our management and personnel from other business concerns, and they could have a material adverse effect on our business, financial condition, and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot accurately predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as executive officers.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
We expect to incur significant costs and devote substantial management time to maintaining our disclosure controls and procedures and internal control over financial reporting, and regardless we may be unable to prevent or detect all errors or acts of fraud or to accurately and timely report our financial results or file our periodic reports in a timely manner.
As a publicly traded company, our management is required to report annually on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We have incurred and expect to continue to incur significant management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers, including complying with the auditor attestation requirements of Section 404(b). In any particular reporting period, we may not be able to complete our evaluation, testing and any required remediation in a timely fashion, and we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation report from our independent registered public accounting firm.
In the future, we may also identify additional material weaknesses or significant deficiencies in our internal control over financial reporting, and we may not be able to remediate them in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404.
We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
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 an unauthorized override of the controls.
28
Because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that the measures we have taken will be effective in mitigating or preventing significant deficiencies or material weaknesses in our internal control over financial reporting in the future. If we fail to effectively remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting to meet the demands that are placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or to report them within the timeframes required by law or exchange regulations.
Additionally, we have engaged only a very limited number of accounting and finance personnel and we rely substantially on outside consultants. We will need to incur additional expenses to hire additional personnel with public company financial reporting expertise to build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures. If we are unable to do so, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
If our remedial measures are insufficient to address material weaknesses and we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.
In connection with our management’s assessment of the effectiveness of our internal control over financial reporting as of September 30, 2019, we identified material weaknesses, which have not yet been remediated as of the date of this prospectus, in our internal control over financial reporting related to (i) a lack of segregation of duties amongst our personnel; (ii) a lack of multiple levels of reviews in our internal control over financial reporting and significant business processes, including management oversight over our foreign subsidiaries; (iii) a lack of formal written policies and procedures; (iv) inadequate risk assessment process over our internal controls resulting in inadequate design of controls over our significant accounts and processes; (v) a lack of controls over information technology related to our accounting systems; and (vi) a lack of independent board oversight and review.
Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected or corrected on a timely basis.
If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, then there exists a risk that our consolidated financial statements may contain material misstatements that are unknown to us at that time, and such misstatements could require us to restate our financial results. Our management or our independent registered public accounting firm may identify other material weaknesses in our internal control over financial reporting in the future. The existence of a material weakness in our internal control over financial reporting may result in current and potential stockholders losing confidence in our financial reporting, which could negatively impact the market price of our common stock.
In addition, the existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act and may consequently result in the SEC revoking the registration of our common stock, or the delisting of our common stock. Any of these events could have a material adverse effect on the market price of our common stock or on our business, financial condition and results of operations.
29
Anti-takeover provisions in our articles of incorporation and second amended and restated bylaws, as well as provisions in Nevada law, might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our securities.
Our articles of incorporation, second amended and restated bylaws and Nevada law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board. Our corporate governance documents include provisions:
providing for a single class of directors where each member of the Board shall serve for a one year term and may be elected to successive terms;
authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
limiting the liability of, and providing indemnification to, our directors, including provisions that require the Company to advance payment for defending pending or threatened claims;
controlling the procedures for the conduct and scheduling of board and stockholder meetings;
limiting the number of directors on our board and the filling of vacancies or newly created seats on the board to our Board then in office; and
providing that directors may be removed by stockholders at any time.
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.
As a Nevada corporation, we are also subject to provisions of Nevada corporate law, including Section 78.411, et seq. of the Nevada Revised Statutes, which prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last two years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any profits from an investment in our common stock will depend on whether the price of our common stock increases.
We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our articles of incorporation and second amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Nevada law. In addition, our articles of incorporation and second amended and restated bylaws provide for the following:
We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Nevada law. Nevada law provides that a
30
corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
We will also indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
We are required to advance expenses, as incurred, to any indemnitee in connection with defending a proceeding, except that such indemnitee shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
The rights conferred in our articles of incorporation and second amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
If you purchase shares of common stock in this offering, you will experience immediate dilution in your investment. You will experience further dilution if we issue additional equity securities in future financing transactions.
Purchasers of common stock in this offering will pay a price per share that exceeds the net tangible book value per share of our common stock. Investors participating in this offering will incur immediate and substantial dilution. After giving effect to our receipt of approximately $4.0 million of estimated net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, from our sale of common stock in this offering at an assumed public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, our pro forma as adjusted net tangible book value as of March 31, 2020, would have been $7,400,577, or $0.52 per share. This amount represents an immediate increase in net tangible book value of $0.28 per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $8.48 per share of our common stock to new investors purchasing shares of common stock in this offering. See the section entitled “Dilution” below for a more detailed illustration of the dilution you would incur if you purchase common stock in this offering.
If we issue additional common stock, or securities convertible into or exchangeable or exercisable for common stock, our stockholders, including investors who purchase shares of common stock in this offering, may experience additional dilution, and any such issuances may result in downward pressure on the price of our common stock. We also cannot assure you that we will be able to sell shares or other securities in any future offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders.
Risks Related to the Reverse Split
Although the Reverse Split has increased the market price of our common stock, our stock price may decrease and we may not be able to list our common stock on the Nasdaq Capital Market, in which case this offering may not be completed.
The Reverse Split increased the market price of our common stock such that we expect to meet the minimum bid price requirement of the Nasdaq Capital Market. However, the ongoing effect of the Reverse Split upon the market price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. It is possible that the market price of our common stock going forward and prior to completion of this offering will not permit us to be in compliance with the applicable minimum bid or price requirements. If we are unable meet the minimum bid or price requirements, we may be unable to list our shares on the Nasdaq Capital Market, in which case this offering may not be completed.
31
We cannot assure you that we will be able to continue to comply with the minimum bid price requirement and other standards of the Nasdaq Capital Market.
There can be no assurance that the market price of our common stock will remain at the level required for continuing compliance with the minimum bid price requirement of the Nasdaq Capital Market. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split. If the market price of our common stock declines, the percentage decline may be greater than would have occurred in the absence of the Reverse Split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain the minimum bid price requirement of the Nasdaq Capital Market. In addition to specific listing and maintenance standards, the Nasdaq Capital Market will have broad discretionary authority over the initial and continued listing of securities, which it could exercise with respect to the listing of our common stock.
Furthermore, even if the market price of our common stock continues to comply with the minimum bid price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on the Nasdaq Capital Market. Our failure to meet these requirements may result in our common stock being delisted from the Nasdaq Capital Market, irrespective of our compliance with the minimum bid price requirement.
There are risks associated with the Reverse Split.
There can be no assurance that the Reverse Split will achieve the benefits that we hope it will achieve. In addition, there are certain risks associated with the Reverse Split. For example, we now have additional authorized shares of common stock that the Board could issue in the future without stockholder approval, and such additional shares could be issued, among other purposes, in financing transactions or to resist or frustrate a third-party transaction that is favored by a majority of the independent stockholders. This could have an anti-takeover effect, in that additional shares could be issued, within the limits imposed by applicable law, in one or more transactions that could make a change in control or takeover of us more difficult.
32
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the section captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these terms.
These statements involve risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:
our plans to obtain funding for our operations, including funding necessary to develop, manufacture and commercialize our products candidates;
our ability to negotiate or renegotiate the terms of our agreements with manufacturers of packing machinery;
the impact to our business from the COVID-19 global crisis;
the evolving coffee preferences of North American coffee consumers;
the size and growth of the markets for our products and services;
our commercialization, marketing, and manufacturing capabilities and strategy;
our ability to compete with companies producing similar beverage products;
our expectation that our existing capital resources will not be sufficient to fund our operations for our operations for at least the next 12 months;
regulatory developments in the U.S. and in non-U.S. countries;
our ability to retain key management personnel;
the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology;
the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our ability to develop and maintain our corporate infrastructure, including our internal controls;
our ability to develop innovative new products;
our financial performance; and
our anticipated use of the net proceeds from this offering.
In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in
33
any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
34
We estimate that the net proceeds to us from this offering will be approximately $4.0 million, or approximately $4.7 million if the underwriters exercise their over-allotment option in full, assuming a public offering price of $9.00 per share based on the last reported sale price of our common stock on March 13, 2020, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and general corporate purposes.
Our management will have broad discretion to allocate the net proceeds to us from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds from this offering. We reserve the right to change the use of these proceeds as a result of certain contingencies such as competitive developments, the results of our marketing efforts, acquisition and investment opportunities and other factors. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.
Each $1.00 increase (decrease) in the assumed public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, would increase (decrease) the net proceeds to us from this offering by approximately $0.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 100,000 shares in the number of shares offered by us, together with a concurrent $1.00 increase in the assumed public offering price of $9.00 per share, would increase the net proceeds to us from this offering by approximately $1.4 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a decrease of 100,000 shares in the number of shares offered by us together with a concurrent $1.00 decrease in the assumed public offering price of $9.00 per share, would decrease the net proceeds to us from this offering by approximately $1.3 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.
35
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business and do not intend to declare or pay any cash dividends in the foreseeable future. As a result, you will likely need to sell your shares of common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. Payment of cash dividends, if any, in the future will be at the discretion of our Board and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our Board may deem relevant.
36
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2020:
On an actual basis; and
As adjusted to give effect to the sale of 555,555 shares of common stock in this offering assuming a public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The information in this table is illustrative only and our capitalization following the closing of the offering will be adjusted based upon the actual public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the financial statements and the notes thereto included elsewhere in this prospectus.
| As of March 31, 2020 | ||
| Actual |
| As Adjusted |
Cash and cash equivalents | $ 623,617 |
| $ 4,673,612 |
|
|
|
|
Stockholders’ equity: |
|
|
|
Common stock, $0.00001 par value per share; 100,000,000 shares authorized, actual and as adjusted; 13,729,104 shares issued and outstanding, actual; and 14,284,659 shares issued and outstanding, as adjusted | 138 |
| 143 |
Additional paid-in capital | 34,076,217 |
| 38,126,207 |
Accumulated deficit | (30,707,170) |
| (30,707,170) |
Accumulated other comprehensive loss | (160,354) |
| (160,354) |
Noncontrolling interest | 141,751 |
| 141,751 |
Total stockholders’ equity | $ 3,350,582 |
| $ 7,400,577 |
Total capitalization | $ 3,974,199 |
| $ 12,074,189 |
A $1.00 increase or decrease in the assumed public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, would increase or decrease, as appropriate, our cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $0.5 million and total capitalization by approximately $1.0 million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a 100,000 share increase or decrease in the number of shares offered by us, based on the assumed public offering price of $9.00 per share, would increase or decrease our cash and cash equivalents, additional paid-in capital and total stockholders’ equity by approximately $0.8 million and total capitalization by approximately $1.6 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters’ over-allotment option were exercised in full, as adjusted cash and cash equivalents, additional paid-in capital and stockholders’ equity as of March 31, 2020, would be approximately $5.4 million, $38.8 million, and $8.1 million, respectively.
The number of shares of common stock to be outstanding immediately after this offering is based upon 13,729,104 shares outstanding as of March 31, 2020, and excludes the following:
•1,705,000 shares of our common stock issuable upon the exercise of options outstanding as of March 31, 2020, with a weighted-average exercise price of $6.15 per share;
37
•1,642,665 shares of our common stock reserved for future grant or issuance under 2013 Plan;
•3,333,334 shares of our common stock reserved for future grant or issuance under the 2019 Plan; and
•300,000 shares of our common stock issuable upon the exercise of options that we expect to grant upon the pricing of this offering to our directors, executive officers and certain other employees at an exercise price equal to the public offering price of this offering.
38
If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the assumed public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the closing of this offering.
Our net tangible book value is the amount of our total tangible assets less our total liabilities. Net tangible book value per share is our net tangible book value divided by the number of shares of common stock outstanding as of March 31, 2020. Our net tangible book value as of March 31, 2020 was $3,350,582, or $0.24 per share, based on 13,729,104 shares of our common stock outstanding as of March 31, 2020.
After giving effect to the sale and issuance by us of the shares of our common stock in this offering at the assumed public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, and the receipt and application of the net proceeds, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2020 would have been approximately $7,400,577, or $0.52 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $0.28 per share to our existing stockholders and an immediate dilution of $8.48 per share to investors purchasing our common stock in this offering.
The following table illustrates this per share dilution:
Assumed public offering price per share |
| $ 9.00 |
Net tangible book value per share at March 31, 2020 |
| $ 0.24 |
Increase to net tangible book value per share attributable to investors purchasing our common stock in this offering |
| $ 0.28 |
Pro forma net tangible book value per share as of March 31, 2020, after giving effect to this offering |
| $ 0.52 |
Dilution of pro forma net tangible book value per share to investors purchasing our common stock in this offering |
| $ 8.48 |
|
|
|
Each $1.00 increase (decrease) in the assumed public offering price of $9.00 per share, which is the last reported sale price of our common stock on the OTCQB on March 13, 2020, would increase (decrease) pro forma as adjusted net tangible book value per share to new investors by $0.04, and would increase (decrease) dilution per share to new investors in this offering by $0.96, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 100,000 in the number of shares of common stock offered by us would increase our pro forma as adjusted net tangible book value by approximately $0.05 per share and decrease the dilution to new investors by $0.05 per share, and each decrease of 100,000 in the number of shares of common stock offered by us would decrease our pro forma as adjusted net tangible book value by approximately $0.06 per share and increase the dilution to new investors by $0.06 per share, in each case assuming the assumed public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering would be approximately $0.56 per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering would be approximately $8.44 per share of common stock.
The table and discussion above are based on 13,729,104 shares of common stock outstanding as of March 31, 2020, and excludes the following:
•1,705,000 shares of our common stock issuable upon the exercise of options outstanding as of March 31, 2020, with a weighted-average exercise price of $6.15 per share;
•1,642,665 shares of our common stock reserved for future grant or issuance under the 2013 Plan;
•3,333,334 shares of our common stock reserved for future grant or issuance under the 2019 Plan; and
39
•300,000 shares of our common stock issuable upon the exercise of options that we expect to grant upon the pricing of this offering to our directors, executive officers and certain other employees at an exercise price equal to the public offering price of this offering.
To the extent that any outstanding options are exercised, new investors will experience further dilution.
40
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our consolidated financial statements and the accompanying notes appearing at the end of this prospectus. We have derived the statements of operations data for the years ended September 30, 2019 and 2018 and the balance sheet data as of September 30, 2019 and September 30, 2018 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the six months ended March 31, 2020 and 2019 and the balance sheet data as of March 31, 2020 from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of results to be expected for any period in the future and the results for the six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year or any other period.
|
| Six months ended March 31, |
|
| Fiscal Year ended September 30, |
| ||||||||||
| 2020 |
|
| 2019 |
|
| 2019 |
|
| 2018 |
| |||||
Consolidated statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
| $ | 939,600 |
|
| $ | 719,364 |
|
| $ | 1,793,590 |
|
| $ | 1,388,972 |
|
Gross profit |
|
| 19,735 |
|
|
| 264,506 |
|
|
| 295,117 |
|
|
| 67,217 |
|
Net loss |
|
| (5,953,473) |
|
|
| (4,022,769) |
|
|
| (12,214,936) |
|
|
| (3,569,592) |
|
Net loss attributable to NuZee, Inc. |
|
| (5,911,483) |
|
|
| (4,029,694) |
|
|
| (12,187,965) |
|
|
| (3,577,171) |
|
Basic and diluted loss per common share |
| $ | (0.43) |
|
| $ | (0.30) |
|
| $ | (0.88) |
|
| $ | (0.29) |
|
Basic and diluted weighted average number of shares |
|
| 13,714,223 |
|
|
| 13,265,272 |
|
|
| 13,867,643 |
|
|
| 12,234,107 |
|
|
| As of March 31, |
|
| As of September 30, |
| ||||||
| 2020 |
|
| 2019 |
|
| 2018 |
| ||||
Consolidated balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 623,617 |
| $ | 1,326,040 |
| $ | 1,806,666 |
| ||
Working capital |
|
| 1,066,982 |
|
| 1,763,336 |
|
|
| 1,738,935 |
| |
Total assets |
|
| 4,977,777 |
|
| 5,250,544 |
|
|
| 2,982,512 |
| |
Total current liabilities |
|
| 991,354 |
|
| 976,916 |
|
|
| 476,067 |
| |
Lease liability – operating lease, net of current portion |
|
| 432,421 |
|
| - |
|
|
| - |
| |
Lease liability – finance lease, net of current portion |
|
| 89,541 |
|
| - |
|
|
| - |
| |
Loan payable – net of current portion |
|
| 105,130 |
|
| 156,816 |
|
|
| 88,063 |
| |
Other non-current liabilities |
|
| 8,749 |
|
| 1,750 |
|
|
| 6,317 |
| |
Accumulated deficit |
|
| (30,707,170) |
|
| (24,795,687) |
|
|
| (12,607,722) |
| |
Total stockholders’ equity |
|
| 3,350,582 |
|
| 4,115,062 |
|
|
| 2,412,065 |
| |
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that are based on current expectations and involve various risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We encourage you to review the information the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections in this prospectus.
Our unaudited financial statements are stated in United States Dollars (“$”) and are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this prospectus. In this prospectus, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.
Corporate Overview
Our Company
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 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, as outlined by the factors described below. 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 provide us with a deeper access to our customers, such as tea bag coffee. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate. The competitive landscape for our services and products can be illustrated as follows:
42
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.
Our sources of revenue
Co-packing
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, we produce and package coffee products according to our customers’ formulations and specifications. We currently focus on fostering co-packing arrangements with larger companies developing pour over coffee products. For example, we have entered into a co-packing agreement with Royal Cup Coffee & Tea.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for Copper Cow in July 2017 and continue to do so today. Copper Cow started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new exciting companies with whom we may work and grow, as we have done with Copper Cow.
A select list of our current co-packing customers include: Royal Cup Coffee & Tea, Gevalia Kafee (Kraft Heinz), Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Lion Coffee, Idyllwild Coffee and Virgin Islands Coffee.
NuZee branded products
We have developed products and brands for the primary reason of providing completed finished products to showcase to potential co-packing customers. Our products effectively serve as a sort of “sample” to potential customers that include high quality packaging and coffee. We have received indications of interest from some potential customers in co-packing single serve coffee under the customer’s brand using coffee sourced by us as opposed to the customer providing the coffee, which is how we typically co-pack for customers.
43
Barista. Our Barista line of products is a high end product line that, in addition to showcasing our production expertise, also includes what we believe to be some of the best coffee available in a single serve application in the world. We plan to sell Barista via traditional retail channels that do not use “pay for placement” distributors. We also have a number of potential co-packing opportunities in which our customers would contract for us to replicate one or more of our Barista products with their foil and packing, providing further evidence of the high-quality nature of this line and coffee. We expect the Barista product line to be our flagship products that are both sold directly to consumers and used as a sales tool for co-packing customers.
Twin Peaks. We currently sell our Twin Peaks single serve pour over coffee exclusively via Amazon, under Amazon’s accelerator program. This program commenced in July 2019 and we expect that as Amazon and its customers become more familiar with single serve pour over coffee, we will increase our revenue for this product.
Pine Ranch. Pine Ranch is a tea bag-style coffee that is available in two distinct roasts: a medium roast called “Smooth Blend” and a dark roast called “Bold Blend”. We introduced this product line in the third quarter of 2019. The brand is initially being sold to retailers and at wholesale, and we plan to offer it direct to consumers in 2020. Pine Ranch is available in dispense boxes that are suitable for offices and retail stores. Pine Ranch is also a zero-landfill product that we can showcase to potential co-packing customers as an alternative to the pour over format. We commenced production for our first tea bag style co-packing customer in October 2019.
Geographic Concentration
Our historic operations are primarily split between two geographic areas: North America and Asia.
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 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 Six Months ended March 31, 2020 and 2019
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended |
|
| 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.
44
Cost of sales and gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Six months ended |
|
|
| Change |
| |||||||||||
|
| 2020 |
|
| 2019 |
|
| Dollars |
|
|
| % |
| |||||
Cost of sales |
| $ | 919,865 |
|
| $ | 454,858 |
|
| $ | 465,007 |
|
|
|
| 102 | % | |
Gross margin |
| $ | 19,735 |
|
| $ | 264,506 |
|
| $ | (244,771 | ) |
|
|
| (93 | )% | |
Gross 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 |
|
| 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.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended |
|
| 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, as described in further detail above.
Comparison of Twelve Months ended September 30, 2019 and 2018
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Revenue |
| $ | 1,793,590 |
|
| $ | 1,388,972 |
|
| $ | 404,618 |
|
|
| 29 | % |
For the year ended September 30, 2019, our revenue increased by $404,618, or approximately 29%, compared with the year ended September 30, 2018. 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
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Cost of sales |
| $ | 1,498,473 |
|
| $ | 1,321,755 |
|
| $ | 176,718 |
|
|
| 13 | % |
Gross margin |
| $ | 295,117 |
|
| $ | 67,217 |
|
| $ | 227,900 |
|
|
| 339 | % |
Gross margin % |
|
| 16 | % |
|
| 5 | % |
|
|
|
|
|
|
|
|
For the year ended September 30, 2019, we earned a total gross profit of $295,117 from sales of our products direct to consumers, compared to a total gross profit of $67,217 for the year ended September 30, 2018. The gross margin rate was 16% for the twelve months ended September 30, 2019, and 5% for the twelve months ended September 30, 2018. This increase in margin was driven primarily greater co-packing activity for certain of our larger customers and a general shift away from direct to consumer products in favor of co-packing services.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Operating Expenses |
| $ | 12,399,282 |
|
| $ | 3,685,186 |
|
| $ | 8,714,096 |
|
|
| 236% |
|
For the twelve months ended September 30, 2019, our Company’s operating expenses totaled $12,399,282, compared to $3,685,186 for the twelve months ended September 30, 2018, representing a 236% increase. This increase is primarily attributable to an increase in stock compensation expense of $7,859,141 and, to a lesser extent, an increase in employee costs, legal costs and facilities costs.
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Net Loss attributable to NuZee, Inc. |
| $ | 12,187,965 |
|
| $ | 3,577,171 |
|
| $8,610,794 |
|
|
|
| 241 | % |
For the twelve months ended September 30, 2019, we generated net losses attributable to NuZee, Inc. of $12,187,965 versus $3,577,171 for the twelve months ended September 30, 2018. This increase is primarily attributable to an increase in stock compensation expense of $7,859,141 and, to a lesser extent, an increase in costs associated with our shift in our focus towards our co-packing services and increased employee costs, legal costs and facilities costs.
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 $30.7 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 following this offering.
To date, we have funded our operations primarily with proceeds from the private sale of shares of our common stock. Net proceeds from our sales of common stock and convertible notes total approximately $19.9 million to date.
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 believe that the net proceeds of this offering, together with our existing cash balances, will be sufficient to cover our cash needs for at least the next 12-24 months. We may need to raise additional funds to support our operating
46
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 |
|
| Twelve Months Ended |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2019 |
|
| 2018 |
| ||||
Cash used in operating activities |
| $ | (2,235,752 | ) |
| $ | (1,311,555 | ) |
| $ | (4,400,601 | ) |
| $ | (2,310,756 | ) |
Cash used in investing activities |
| $ | (419,860 | ) |
| $ | (1,081,818 | ) |
| $ | (2,037,968 | ) |
| $ | (550,206 | ) |
Cash provided by financing activities |
| $ | 1,942,070 |
|
| $ | 1,673,153 |
|
| $ | 6,004,897 |
|
| $ | 4,336,392 |
|
Effect of foreign exchange on cash |
| $ | 11,119 |
|
| $ | 64,044 |
|
| $ | (46,954 | ) |
| $ | (16,901 | ) |
Net increase (decrease) in cash |
| $ | (702,423 | ) |
| $ | (656,176 | ) |
| $ | (480,626 | ) |
| $ | 1,459,339 |
|
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.
We used approximately $4,400,601 and $2,310,756 of cash in operating activities during the years ended September 30, 2019 and 2018, respectively, principally to fund our operating loss. The increase in cash used in operating activities of approximately $2,089,845 was primarily attributable to the increase in net loss for the year ended September 30, 2019 as compared to the year ended September 30, 2018.
Investing Activities
We used approximately $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.
We used approximately $2,037,968 and $550,206 of cash in investing activities during the years ended September 30, 2019 and 2018, 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.
Cash provided from financing activities increased from $4,336,392 for the year ended September 30, 2018 to $6,004,897 for the year ended September 30, 2019. During the year ended September 30, 2019, we issued 366,814 shares of common stock which generated net cash proceeds of approximately $5,947,922. During the year ended September 30, 2018, we issued 1,602,988 shares of common stock which generated net cash proceeds of approximately $4,542,659.
Off-Balance Sheet Arrangements
47
We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
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.
Cost of Sales
The Company records the cost of the materials used in creating the good as well as direct labor cost used to produce the good. The Company also includes write-offs for all past due and unsellable inventories as well as loss on inventory due to obsolescence in cost of sales.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is being measured using the weighted average cost method. We regularly review whether the realizable value of our inventory is lower than its book value. If our valuation shows that the realizable value is lower than book value, we take a charge to expense and directly reduce the value of the inventory.
The Company estimates its reserves for inventory obsolescence by examining its inventories on a quarterly basis to determine if there are indicators that the carrying values exceed net realizable value. Indicators that could result in additional inventory write downs include age of inventory, damaged inventory, slow moving products and products at the end of their life cycles. While management believes that the reserve for obsolete inventory is adequate, significant judgment is involved in determining the adequacy of this reserve.
48
Overview
Our Company
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 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, as outlined by the factors described below. 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.
We may also consider co-packaging other products that are complementary to single serve pour over drip coffee and provide us with a deeper access to our customers, such as tea bag coffee. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, reduce manufacturing costs, expand into new markets, and further penetrate the markets in which we currently operate.
What is single serve pour over coffee?
Single serve pour over coffee, or hand drip coffee, is a traditional and time-honored technique that pours hot water onto ground coffee with a filter. Proponents of drip coffee believe this method makes better coffee. Single serve pour over coffee uses the same technique without a machine, with the coffee flowing straight into a cup using only hot water and the prepacked coffee filter. The image below compares our single serve pour over coffee to other varieties of hot beverages.
Revolutionizing the single serve coffee market in North America
Prior to the success of coffee pods within the last two decades, coffee was primarily consumed at home and via traditional pot-based drip brewers and, to a lesser extent, instant coffee. Pot-based brewers are typically known for good quality coffee that produces multiple cups but are not well-suited for single serve alternatives. In recent years with the advent of coffee pods and increased coffee consumption outside the home, the North American market has been focused on speed and convenience. Coffee pods addressed the need for a single serve coffee solution that was viewed as superior to instant coffee. As coffee consumption has also moved outside the home in recent years, consumer preferences have also changed, leading to greater demand for higher quality coffee alternatives, particularly from younger consumers such as millennials.
Moreover, we believe the typical consumer is increasingly focused on the environmental impact of the product, as well as the taste and quality of the ingredients. We anticipate that pod-based, single serve coffee will face increasing pressure given their heavy reliance on the use of plastics. In our view, consumer preferences in North America have evolved over the last decade to substantially mirror those of Japanese consumers, who have traditionally focused on the taste, eco-footprint and quality of ingredients. We believe machine-based single serve coffee, which represents
49
approximately 27% of the market in North America, has an immaterial amount of market share in Japan. Single serve drip cups represent approximately 2.0 billion units annually in Japan.
The saturation of coffee pods in the North American market, coupled with changing tastes, provides our single serve drip cups with a substantial market opportunity in North America. Our single serve drip cup solution also has a number of advantages over other single serve coffee alternatives:
Our single serve drip coffee products are shipped in zero landfill packaging. The majority of the packaging is paper based and biodegradable, while the inner pouches used to package the filter for freshness are made from 100% recyclable film.
Our solution is portable and does not require a machine. Therefore, the consumer investment required to try our product is very minimal (as opposed to machine based solutions). Single serve drip cups can easily travel and have a number of consume-later applications not available to machine based solutions (camping, travel, office, etc.).
We believe single serve drip coffee is more hygienic than other, machine-based single serve alternatives. For example, the use of a machine requires cleaning and maintenance. If not periodically cleaned or if spent pods are not removed timely, the pods can lead to poor taste and bacterial growth.
Single serve drip coffee is brandable to the cup level, and, unlike machine-based drip systems, the branding remains visible throughout the process of preparing and consuming a cup.
Why NuZee?
We seek to establish ourselves as the leading co-packer of single serve pour over coffee for the North American market, and to expand our own brands as single serve pour over coffee gains market acceptance. We believe that top tier brands that want to compete in the North American single serve pour over coffee market will demand the highest levels of quality from their suppliers. We further believe that we are the leader in the single serve pour over coffee market in North America as a result of our years of working with sophisticated packing equipment manufacturers, Level 2 SQF Certification from the Safe Quality Food Institute, operational knowledge the co-packing arrangements we are continuing to develop with companies such as Royal Cup Coffee & Tea and Kraft Heinz. As a result of our ongoing efforts, we feel we are well positioned to be the co-packer of choice for companies offering single serve pour over coffee products in the North American market.
We own sophisticated packing equipment developed by East Asian companies for pour over coffee production. We believe these manufacturers are the world leaders for supplying such machines. While lower-grade equipment alternatives do exist, availability is extremely limited for the top-grade equipment that generates co-packing products to the exacting specifications we believe large, established companies will demand. For example, we estimate, based solely on our experience, the current wait time for the production and delivery of co-packing machinery of the type we use in our Vista, California plant is approximately two years. We obtained these machines under a written exclusivity agreement with the premier supplier of the type of high-quality packing equipment we use for our products, FUSO Industries Co. Ltd. (“FUSO”), which contractually remains in effect in the North American market until June 2020, and which we believe significantly restricts our North American competitors’ access to this equipment. However, FUSO has exercised its rights to terminate the exclusivity agreement on six months’ prior written notice. We are exploring options to extend the period of exclusivity with FUSO. If we are unsuccessful in extending the term of the agreement, it will expire pursuant to its terms on June 30, 2020.
We understand that as the single serve drip cup gains momentum in the North American market we will face increasing competition. However, we believe we have a significant head start against any new potential commercial manufacturers in that (i) we have historically had an exclusive arrangement with the premier equipment manufacturer, (ii) we have, and continue to develop, manufacturing expertise on increasingly complex and larger orders, (iii) we have experience dealing with companies of all sizes and their specific requirements (from small roasters to international companies) and (iv) we have SQF Level 2 certification.
We received Level 2 SQF Certification from the Safe Quality Food Institute, which is a customary requirement to produce for large multi-national and international companies. Obtaining Level 2 SQF Certification may take more
50
than a year to achieve. Furthermore, we are in the process of obtaining Level 3 SQF Certification, which involves a comprehensive implementation of even more advanced safety and quality management systems. We are also certified as fair trade, organic, kosher and halal.
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 provide 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:
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.
Our sources of revenue
Co-packing
We operate as a third-party contract packager for the finished goods of other major companies operating in the coffee beverage industry. Under these arrangements, we produce and package coffee products according to our customers’ formulations and specifications. We currently focus on fostering co-packing arrangements with larger companies developing pour over coffee products. For example, we have entered into a co-packing agreement with Royal Cup Coffee & Tea.
In addition to larger companies, we package for smaller companies that have significant growth potential. For example, we started packaging for Copper Cow in July 2017 and continue to do so today. Copper Cow started with smaller batch, single product SKUs but over the years has meaningfully increased order sizes as well as the number of SKUs. We are continually looking for new exciting companies with whom we may work and grow, as we have done with Copper Cow.
51
A select list of our current co-packing customers include: Royal Cup Coffee & Tea, Gevalia Kafee (Kraft Heinz), Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Lion Coffee, Idyllwild Coffee and Virgin Islands Coffee.
NuZee branded products
We have developed products and brands for the primary reason of providing completed finished products to showcase to potential co-packing customers. Our products effectively serve as a sort of “sample” to potential customers that include high quality packaging and coffee. We have received indications of interest from some potential customers in co-packing single serve coffee under the customer’s brand using coffee sourced by us as opposed to the customer providing the coffee, which is how we typically co-pack for customers.
Barista. Our Barista line of products is a high end product line that, in addition to showcasing our production expertise, also includes what we believe to be some of the best coffee available in a single serve application in the world. We plan to sell Barista via traditional retail channels that do not use “pay for placement” distributors. We also have a number of potential co-packing opportunities in which our customers would contract for us to replicate one or more of our Barista products with their foil and packing, providing further evidence of the high-quality nature of this line and coffee. We expect the Barista product line to be our flagship products that are both sold directly to consumers and used as a sales tool for co-packing customers.
Twin Peaks. We currently sell our Twin Peaks single serve pour over coffee exclusively via Amazon, under Amazon’s accelerator program. This program commenced in July 2019 and we expect that as Amazon and its customers become more familiar with single serve pour over coffee, we will increase our revenue for this product.
Pine Ranch. Pine Ranch is a tea bag-style coffee that is available in two distinct roasts: a medium roast called “Smooth Blend” and a dark roast called “Bold Blend”. We introduced this product line in the third quarter of 2019. The brand is initially being sold to retailers and at wholesale, and we plan to offer it direct to consumers in 2020. Pine Ranch is available in dispense boxes that are suitable for offices and retail stores. Pine Ranch is also a zero-landfill product that we can showcase to potential co-packing customers as an alternative to the pour over format. We commenced production for our first tea bag style co-packing customer in October 2019.
Our business strategy
We intend to achieve our mission and further grow our business by pursuing the following strategies:
•Continually grow our base of large national or international co-packing customers. We have co-packing agreements with large international companies, and we are in active discussions to enter co-packing arrangements with a number of other similar sized companies. We believe that, as the U.S. market continues to gain awareness of single serve pour over coffee, we will continue to grow our base of large domestic or international co-packing customers.
•Co-pack for smaller scale, rapidly growing, innovative coffee customers and capture their growth over time. In addition to co-packing for large domestic or international customers, we believe that select smaller scale, rapidly growing, innovative co-packing customers provide us with different opportunities versus larger customers. For example, smaller scale customers often possess better social media reach and their marketing campaigns have the ability to “go viral.” We believe by selectively choosing high quality smaller customers, we can benefit from growing market acceptable of single serve pour over coffee.
•Increase our production capacity in response to growing demand for co-packing. We have entered into a lease for our planned manufacturing hub in Plano, Texas. We have started to order equipment, begin the SQF Level 2 certification process and begin other processes so that we are poised to have the facility operational as quickly as possible once we have acquired the necessary capital. At peak potential capacity, we project the Plano, Texas facility would provide up to 400% of the current production capacity of our Vista, California facility. We have started this effort in anticipation of growing demand for co-packing.
52
•Strategically grow and expand our international operations that are strategic to our vision. We plan to strategically grow our current international operations as well as potentially expand international if this growth or expansion is strategic to our vision. We believe the Korean market, albeit competitive, still has significant growth potential as well as strong market acceptance for coffee and single serve pour overs. We have also recently announced the formation of a joint venture for manufacturing and sales in Latin America. As we look at other potential international manufacturing locations, we look for characteristics similar to the Korean, Latin American, and U.S. markets.
•Strategically increase the sales of our proprietary brands. We plan to continue to increase the sales of our proprietary brands without utilizing “pay for placement” distributors. We anticipate our direct sales of our proprietary products will benefit as we increase our co-packing revenues because our co-packing customers will help educate consumers on the benefits of single serve pour coffee. We plan to increase our effort on direct sales methodically and concurrently as we increase co-packing revenues and volume.
Industry
Coffee consumption in recent years has reached an all-time high. According to the USDA, global coffee consumption was forecast to reach a record 167.9 million bags in 2019/20 (a bag is equivalent to 60 kilograms). The United States was the country with the highest consumption with 26.8 million bags forecast for 2019/20, up from 23.6 million in 2014/15 (a 2.6 percent compound annual growth rate, or CAGR), according to the UDSA.
In dollar terms, the global coffee market amounted to US$429.5 billion in 2019, and the market was expected to grow annually by 5.8 percent (CAGR 2019-2023). The United States is the largest market with US$80.9 billion generated in 2019, per a study conducted by Statista.
An estimated 63 percent of American adults drink coffee on a daily basis according to the National Coffee Association, and an increasing number of consumers seem to be seeking bolder and more unique coffee experiences. This is evidenced by more Americans’ gourmet coffee consumption reaching a 60/40 advantage over traditional non-gourmet coffee for the first time in the 69-year history of the National Coffee Association’s annual report on coffee consumption.
The “at home” segment continues to dominate coffee consumption, with 81 percent of volume consumption attributable to the at home market in 2019, representing a 20 percent revenue share. The market share of the at home segment has been relatively constant over the last few years and is expected to maintain a similar share of coffee consumption in 2019-2023, according to Statista.
53
Single-serve coffee brewing has grown in popularity in recent years, and single-serve brewing machines were the second most popular brewing system after standard drip coffee makers, with 26 percent of American coffee drinkers using them in 2018, per a Statista study. Additionally, and according to an online survey by the National Coffee Association, 42 percent of US households owned a single-cup coffee brewing machine in 2019, up from 1 percent in 2005 and 15 percent in 2014.
While consumers have been purchasing single-serve coffee machines to recreate the café style experience at home, there has been an increased focus on environmental sustainability and demand for eco-friendly products. The 2019 Retail and Sustainability Survey by CGS showed that more than two-thirds of respondents consider sustainability when making a purchase and are willing to pay more for sustainable products. In another recent survey of US and UK consumers by Globalwebindex, 42 percent of consumers said that products that have packaging made from recycled products and/or sustainable materials are important in their day-to-day shopping, and more than half said they have reduced the amount of disposable plastic they use in the past 12 months. Greenpeace USA considered coffee pods as “one of the best examples of unnecessary single-use plastics that are polluting our planet” and the big producers of pods having been seeking eco-friendly alternatives. Sustainability is expected to continue to be a big
54
trend in the coffee pod market, especially as some cities and local governments consider bans on the use of single-use plastic pods (akin to bans on plastic straws and plastic bags) and as consumers become increasingly concerned about throwing used plastic pods in landfills, according to Food Dive.
We believe that many of the prevalent industry trends – the continued consumption and market growth, the prevalence of “at home” consumption, the popularity of single-serve coffee brewing, the increased focus on unique coffee experiences, and consumers’ shift to eco-friendly and sustainable alternatives – will be favorable to our business.
Manufacturing
We lease a primary manufacturing facility in Vista, California which is used for the production of our Single Serve Pour Over Drip Cup line. On April 3, 2020, we entered into the sixth amendment to our Vista lease in which we extended our lease from June 1, 2020 until January 31, 2022. In connection with the extension, we agreed to reduce 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.
We lease a manufacturing hub in Plano, Texas (within the Dallas metropolitan area), which is poised to be operational as quickly as possible once the necessary capital has been acquired. In Plano, we plan to have up to 20 packing machines (compared with four, expanding to six in Vista, California) and up to 30 employees. We also partner with three third-party manufacturers to manufacture finished products. We have relationships based on purchase orders in place with suppliers and partners for all components required to deliver a finished NuZee branded product. We have acquired our sophisticated packing equipment for pour over coffee production from certain East Asian companies, including FUSO, pursuant to exclusivity arrangements. 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, though the Company is in the process of renegotiating certain provisions of our agreement with FUSO, including the term and termination rights.
We purchase green whole bean coffee on a purchase-order basis from various suppliers of the commodity. From there, the coffee is sent to a roaster, where the coffee is roasted, ground, and blended and then packaged into single serve pods and boxed for retail sales.
We conduct business with multiple vendors of packaging material on a purchase order basis.
Machinery for production at our Vista location comes from some of the most respected vendors in the industry. In particular, our Drip Cup production is produced on the leading Japanese manufacturer of packaging machines from FUSO. We also own nitrogen and air compression machinery that is capable of handling expansion as the Company expands as well to minimize any ongoing capital expenditures for machinery.
Intellectual Property
We currently own the following United States trademarks: “Coffee Blenders”, “It’s Coffee Reimagined”, “Nude Cup”, “Lean Cup”, “Think Cup”, “Relax Cup”, “Active Cup”, and “Twin Peaks”. The Company intends to continue growing its trademark portfolio in the United States with other related slogans and brands as those products come closer to launch.
The Company further intends to expand its brand protections outside of the United States in line with its prospective international growth. As of the date of this report, the Company had registered trademarks “Coffee Blenders”, “Nude Cup”, “Lean Cup”, “Think Cup”, “Relax Cup” and “Twin Peaks” in Japan; registered trademarks “Lean Cup”, “Think Cup” and “Twin Peaks” in Korea; and registered trademarks “Lean Cup”, “Think Cup”, “Relax Cup” and “Active Cup” in China.
We intend to aggressively protect, police and assert its intellectual property rights, including product designs, proprietary product research and concepts as well as its trademark portfolio. Although asserting our rights may result in a substantial cost to the Company, our management strongly believes that the protection of our intellectual
55
property rights is a key component of our operating strategy. As a result of our continuing R&D efforts, we may decide to seek additional protection, if applicable, relating to its formulas, process know-how and proprietary flavors.
In exiting the Torque energy supplement product businesses we ceased using and abandon our registered TORQ and TORQ WRENCH trademarks acquired from the HydroPouch Corporation. We also plan to not pursue or contest the use of NuZee as a product brand in association with water and skincare products as we are in the process of exiting or have exited those businesses.
International operations
Japan
The Japanese market for single serve pour over coffee is mature and as such, we only have a sales operation in Japan that primarily sells single serve drip coffee via the JP Post catalog under the brand of Castillian Coffee. The JP Post catalog is traditional means of marketing via a physical catalog that is still very effective in Japan. We established our Japanese subsidiary in 2016. Castillian Coffee is advertised as one of the best-selling coffee brands on the JP Post catalog.
Korea
We established our Korean subsidiary in 2018. Our Korean subsidiary is in the early stages of business development of attracting potential customers for co-packing. We are one of many producers of single serve pour over coffee products in Korea and do not have any exclusive rights for this region. Our strategy is to leverage our Korean team’s business relationships to secure large co-packing agreements for the markets in Korea, China and other Asian countries. We believe that our Korean subsidiary will be able to secure meaningful co-packing customers beginning in our 2020 fiscal year.
Latin America
We entered into a joint venture agreement with Industrias Marino, S.A. de C.V. in January 2020 in order to expand our geographic footprint beyond the United States and Asia and into Mexico, Central America and South America. Under the JV Agreement, we will collaborate with El Marino to integrate our single serve pour over coffee pouches into El Marino’s brand portfolio, thereby introducing the pour over coffee delivery system to El Marino’s customer base in Mexico. El Marino is a leading manufacturer and marketer of coffee, tea and related products in Mexico with dozens of related brands sold across the country. We intend to explore similar joint ventures in other parts of Latin America.
On March 31, 2020, we and El Marino entered into a payment agreement in order to capitalize NuZee Latin America, pursuant to which El Marino agreed to pay $110,000 and transfer to us certain equity interests in NuZee Latin America upon our shipment of two co-packing machines to NuZee Latin America. On April 2, 2020, we received $110,000 from El Marino, and on April 13, 2020, we shipped two co-packing machines to NuZee Latin America in fulfillment of this agreement.
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. 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.
56
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.
Our corporate structure
We have three international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”), NuZee JAPAN Co., Ltd (“NuZee JP”) and NuZee Investments 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.
Employees
As of March 31, 2020, we had a total of 15 full-time and part-time employees in the U.S. and five employees in Korea and four employees in Japan.
Our operations are overseen directly by management that engages our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration, product development, marketing, and research. We intend to expand our current management to retain other skilled directors, officers, and employees with experience relevant to our business focus. Our management’s relationships will provide the foundation through which we expect to grow our business in the future. We believe that the skill-set of our core management team will be a primary asset in the development of our brands and trademarks.
We have never had a work stoppage, and none of our employees are represented by a labor organization or under any collective bargaining arrangements. We believe our relationships with our employees are good.
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.
Governmental regulation
Our Coffee Blenders products are marketed and sold as conventional food or beverages for regulatory purposes. Such products are regulated by the FDA. Ingredients in such products must be approved food additives or “Generally Regarded as Safe”. We intend to work with ingredient suppliers, manufacturers, and other trade partners that are compliant with the laws and regulation enforced by the FDA. We have not received, nor are we aware of, any inquiries or other regulatory action from the FDA or any other governmental agency regarding our products and we believe we are in full compliance with all FDA regulations.
The advertising, distribution, labeling, production, safety, sale, and transportation in the United States of our products are subject to the Federal Food, Drug, and Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, competition laws, federal, state and local workplace health and safety laws, various federal, state and local environmental protection laws, and various other federal, state and local statutes and regulations.
Legal Proceedings; Product Liability
On June 27, 2019, Steeped, Inc. d/b/a Steeped Coffee (the “Plaintiff”) has filed a complaint (the “Complaint”) against us in the United States District Court for the Northern District of California (the “Court”), alleging that our promotion of certain coffee products and services in 2019 constituted an infringement upon the Plaintiff’s registered trademark. The Complaint seeks an injunction against the continued use of the Plaintiff’s trademarks, as well as actual and punitive damages. On November 22, 2019, the Court denied this motion to dismiss. We continue to
57
believe the allegations set forth in the Complaint are without merit, and we are continuing to defend vigorously against the allegations. However, we are not able to predict the outcome, and there is no assurance that we will prevail.
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.
Available Information
Our annual and quarterly reports, along with all other reports and amendments filed with or furnished to the SEC, are publicly available free of charge on the Investor Relations section of our website at www.mynuzee.com as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance policies, ethics code and board of directors’ committee charters are posted under the Investor Relations section of the website. The information on our website is not part of this prospectus or any report we file with, or furnish to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
58
The following table sets forth the names, ages and positions of our executive officers, key employees and directors as of the date of this prospectus.
Name |
| Age |
|
| Position |
Masateru Higashida |
| 48 |
|
| Chief Executive Officer, Secretary, Treasurer and Director (Chairman) |
Travis Gorney |
| 39 |
|
| President and Chief Operating Officer |
Shanoop Kothari |
| 47 |
|
| Senior Vice President, Chief Financial Officer and Director |
Kevin J. Conner(1) |
| 57 |
|
| Director |
J. Chris Jones(1)(2)(3) |
| 64 |
|
| Director |
Allen S. Morton(1)(2)(3) |
| 68 |
|
| Director |
_______________ |
|
|
|
|
|
(1)Member of the audit committee.
(2)Member of the compensation committee.
(3)Member of the nominating and corporate governance committee.
Executive Officers
Masateru Higashida. Mr. Higashida has served as the Chief Executive Officer, Secretary, and Treasurer of the Company since October 2014, and as Chairman of the Board since April 2013. He previously also held the position of President of the Company from October 2014 until August 2017, and CFO from August 2014 until February 2019. Mr. Higashida previously founded multiple companies, including a Korea-based financial company and a Singapore-based investment company, and began his career in the financial industry in Nagoya, Japan.
Travis Gorney. Mr. Gorney has served as our President and Chief Operating Officer since September 2017. He had previously served the Company as Senior VP of Sales and Marketing from January 2017 to August 2017 and as VP of Sales and Supply Chain Management from February 2016 to January 2017. Mr. Gorney became a full-time employee of the Company in April 2013, following two years of consulting for Mr. Higashida on a project concerning bottled spring water from New Zealand as well as a line of certified organic beauty products. From 2008 through 2018, Mr. Gorney acted as President and CEO of Left Coast Threads, Inc., a company that operates retail clothing stores. Previously, in 2003, Mr. Gorney formed Point Blank Beverage, Inc. where, as President and CEO, he developed a premium energy drink by the name of Torque. Mr. Gorney began his career in the beverage industry as national sales manager for a start-up independent energy beverage company named Rollin X, LLC, where he worked from 2002 until 2004.
Shanoop Kothari. Mr. Kothari has served as our Senior Vice President and Chief Financial Officer since March 2019 and has served on our Board since October 22, 2019. Prior to joining the Company, Mr. Kothari was Managing Director at B. Riley FBR, Inc. (“FBR”) since 2014 and has been involved in providing a wide range of financial services to FBR’s oil and gas clients. Before joining FBR, Mr. Kothari worked in the oil & gas industry as the CFO of a private refinery that was a joint venture with a small private equity firm and HollyFrontier, at Credit Suisse in energy investment banking, in finance for a publicly traded software company as well as in public accounting with Price Waterhouse. Mr. Kothari has 20+ years of accounting, finance and capital markets experience within organizations ranging from a handful of employees to multi-national organizations with tens of thousands of employees. Mr. Kothari holds a BA (Honors) in Accounting from Southern Methodist University and an MBA (High Honors) from Rice University. Mr. Kothari is also a licensed CPA / CIA and possesses Series 7 / 24 licenses.
Directors
Kevin J. Conner. Mr. Conner has served on our Board since October 22, 2019. Mr. Conner is currently Managing Director of Conner & Associates, a restructuring & turnaround servicing firm he founded in 1991. Mr. Conner has held senior management and board seats of public & private companies along with being the Chair of the Conner & Associates’ SEC audit practice. Mr. Conner is frequently retained as a qualified expert witness in matters before both Federal and State courts, including both corporate governance and general business matters. Mr. Conner holds an MS in Taxation from Philadelphia University and a BS in Accounting from West Chester University of
59
Pennsylvania along with being licensed to practice as a CPA in the State of New York and the Commonwealth of Pennsylvania.
J. Chris Jones. Mr. Jones has served on our Board since October 22, 2019. Mr. Jones currently serves as the Managing Director of Haddington Ventures, LLC, a venture fund manager and advisor Mr. Jones co-founded in 1998, where he focuses on acquisitions, financing and administrative issues of portfolio companies. While at Haddington, Mr. Jones has served on over 12 boards of directors of portfolio companies, including multiple companies that were ultimately acquired by publicly traded companies, such as Lodi Gas Storage, which was sold to Buckeye Partners, and Bear Paw Energy, which was sold to Northern Border Partners. Prior to the formation of Haddington, Mr. Jones served as Vice President and Chief Financial Officer of Tejas Power Corporation (“TPC”), a publicly traded company, from 1985 until his appointment as Senior Vice President and Chief Operating Officer in 1995. He also served as a Director of Market Hub Partners, L.P., TPC’s natural gas storage joint venture with Dayton Power & Light, New Jersey Resources, NIPSCO and Public Service Electric and Gas. Prior to his association with TPC, Mr. Jones served as Secretary/Treasurer, and later Chief Financial Officer of The Fisk Group, Inc., a U.S. and international electrical contracting subsidiary of Amec p.l.c., a publicly traded U.K. company. He was employed with The Fisk Group from 1979 to 1985. Mr. Jones began his professional career with the auditing firm Price Waterhouse in Houston, Texas in 1977. He received his BBA degree in Accounting from the University of Texas at Austin in 1977.
Allen S. Morton. Mr. Morton has served on our Board since October 22, 2019. Mr. Morton is presently retired. From April 2013 to September 2018, Mr. Morton served as the Senior Managing Director, Head of Energy and Natural Resources Group of B. Riley FBR, Inc. From July 2013 until January 2014, he served as a director at Aly Energy Services, Inc., prior to which he served in multiple roles, including Managing Director, at RBC Capital Markets from March 2001 until June 2012. Mr. Morton received a BA in economics from Williams College and an MBA from New York University.
Code of Business Conduct and Ethics
The Board has adopted a Code of Business Conduct and Ethics that is applicable to NuZee, Inc. and to all our directors and officers and persons performing similar functions, including our principal executive officer and principal financial officer. A copy of the Company’s Code of Ethics may be obtained on our website at mynuzee.com/code-of-business-ethics/. We intend to disclose future amendments to such code, or any waivers of its requirements, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors on our website identified above. The inclusion of our website address in this prospectus does not include or incorporate by reference the information on our website into this prospectus.
Board Leadership Structure and Role in Risk Oversight
Mr. Masateru Higashida is the chairman of the Board and our Chief Executive Officer. We believe that the Chief Executive Officer is best situated to serve as chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for the Company. We believe that this leadership structure has served the Company well. Our Board has overall responsibility for risk oversight. The Board has delegated responsibility for the oversight of specific risks to Board committees as follows:
•The Audit Committee oversees our risk policies and processes relating to the financial statements and financial reporting processes, as well as key credit risks, liquidity risks, market risks and compliance, and the guidelines, policies and processes for monitoring and mitigating those risks.
•The Compensation Committee oversees the compensation of our chief executive officer and our other executive officers and reviews our overall compensation policies for employees.
•The Nominating Committee oversees risks related to our governance structure and processes.
60
Director Independence
We are not currently listed on a national securities exchange or in an inter-dealer quotation system that has requirements that a majority of the Board be independent. However, our Board has undertaken a review of the independence of the directors and considered whether any director has a material relationship with us that could compromise his ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our Board has determined that Messrs. Conner, Jones and Morton, representing three of our five directors, are “independent directors” as defined under SEC rules and the rules of the Nasdaq Capital Market. Messrs. Higashida and Kothari are not considered independent due to their service as executive officers of the Company.
Committees of the Board of Directors
Our Board has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our Board is described below. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors.
Audit Committee
Our audit committee is composed of Messrs. Conner, Jones and Morton. Mr. Conner serves as the chairperson of our audit committee. Our Board has determined that each member of our audit committee meets the requirements for independence and financial literacy under the applicable rules and regulations of the SEC. Our Board has also determined that Mr. Conner is an “audit committee financial expert” as defined in the rules of the SEC and has the requisite financial sophistication as defined under the listing standards of the Nasdaq Capital Market. The responsibilities of our audit committee will include, among other things:
selecting and hiring the independent registered public accounting firm to audit our financial statements;
overseeing the performance of the independent registered public accounting firm and taking those actions as it deems necessary to satisfy itself that the accountants are independent of management;
reviewing financial statements and discussing with management and the independent registered public accounting firm our annual audited and quarterly financial statements, the results of the independent audit and the quarterly reviews, and the reports and certifications regarding internal control over financial reporting and disclosure controls;
preparing the audit committee report that the SEC requires to be included in our annual proxy statement;
reviewing the adequacy and effectiveness of our internal controls and disclosure controls and procedures;
overseeing our policies on risk assessment and risk management;
reviewing related party transactions; and
approving or, as required, pre-approving, all audit and all permissible non-audit services and fees to be performed by the independent registered public accounting firm.
Our audit committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the rules of the Nasdaq Capital Market.
Compensation Committee
Our compensation committee is composed of Messrs. Jones and Morton. Mr. Morton serves as the chairperson of our compensation committee. Our Board has determined that each member of our compensation committee meets the requirements for independence under the applicable rules and regulations of the SEC. Each member of the compensation committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act. The purpose of our compensation committee will be to oversee our compensation policies, plans and benefit
61
programs and to discharge the responsibilities of our Board relating to compensation of our executive officers. The responsibilities of our compensation committee will include, among other things:
reviewing and approving or recommending to the Board for approval compensation of our executive officers and directors;
overseeing our overall compensation philosophy and compensation policies, plans and benefit programs for service providers, including our executive officers;
reviewing, approving and making recommendations to our Board regarding incentive compensation and equity plans; and
administering our equity compensation plans.
Our compensation committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the rules of the Nasdaq Capital Market.
Corporate Governance and Nominating Committee
The corporate governance and nominating committee is composed of Messrs. Jones and Morton. Mr. Jones serves as chairperson of our corporate governance and nominating committee. Our Board has determined that all members of our nominating and corporate governance committee meet the requirements for independence under the applicable rules and regulations of the SEC. The responsibilities of our nominating and corporate governance committee will include, among other things:
identifying, evaluating and selecting, or making recommendations to our Board regarding, nominees for election to our Board and its committees;
evaluating the performance of our Board and of individual directors;
considering and making recommendations to our Board regarding the composition of our Board and its committees; and
developing and making recommendations to our Board regarding corporate governance guidelines and matters.
Our nominating and corporate governance committee operates under a written charter that satisfies the applicable rules and regulations of the SEC and the rules of the Nasdaq Capital Market.
62
EXECUTIVE AND DIRECTOR COMPENSATION
Our named executive officers for the year ended September 30, 2019, consisting of our principal executive officer and the next two most highly compensated executive officers, were:
Masateru Higashida, Chief Executive Officer, Secretary, and Treasurer;
Travis Gorney, President and Chief Operating Officer; and
Shanoop Kothari, Senior Vice President and Chief Financial Officer.
Summary Compensation Table
The following table provides information regarding the compensation of our named executive officers during the years ended September 30, 2019 and September 30, 2018.
Name and Principal Position |
| Year |
| Salary |
| Bonus |
| Option |
| Total |
Masateru Higashida(1) |
| 2019 |
| 180,000 |
| 120,000 |
| 0 |
| 300,000 |
CEO, Secretary, Treasurer |
| 2018 |
| 180,000 |
| 60,000 |
| 0 |
| 240,000 |
Travis Gorney(2) |
| 2019 |
| 120,000 |
| 0 |
| 0 |
| 120,000 |
President, COO |
| 2018 |
| 120,000 |
| 40,000 |
| 0 |
| 160,000 |
Shanoop Kothari(3) |
| 2019 |
| 125,337 |
| 0 |
| 3,900,000 |
| 4,025,337 |
Senior VP and CFO |
|
|
|
|
|
|
|
|
|
|
(1) Masateru Higashida was appointed as the Company’s President, Chief Executive Officer, Chief Financial Officer, Treasurer, and Secretary on August 19, 2014. Mr. Higashida resigned as the Company’s President on August 31, 2017, and he was no longer acting as CFO as of February 12, 2019.
(2)Travis Gorney was appointed as the Company’s President & Chief Operating Officer effective as of September 1, 2017.
(3)Shanoop Kothari was appointed as the Company’s Senior Vice President and Chief Financial Officer effective as of February 12, 2019.
(4)Amounts listed in this column represent the aggregate fair value of the awards computed as of the grant date of each award in accordance with Financial Accounting Standards Board Accounting Standards Codification No. 718, Compensation-Stock Compensation, or FASB ASC Topic 718, rather than amounts paid to or realized by the named individual. See the notes to our consolidated financial statements for a discussion of assumptions made in determining the grant date fair value and compensation expense of our stock options. These amounts do not necessarily correspond to the actual value that the named executive officers may realize upon exercise.
Narrative to Summary Compensation Table
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive stock options at the discretion of our board of directors in the future. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors from time to time. Except as described below under “— Executive Employment Agreements,” we have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth information regarding outstanding equity awards held by our named executive officers as of September 30, 2019:
63
|
|
|
| Option Awards | ||||||
Name and Principal Position |
| Grant Date |
| Number of |
| Number of |
| Option |
| Option |
Masateru Higashida |
| 07/20/2017 |
| 202,667 |
| 304,000(1) |
| 1.68 |
| 07/20/2027 |
Travis Gorney |
| 06/30/2015 |
| 16,000 |
| – |
| 1.80 |
| 02/23/2026 |
|
| 08/01/2015 |
| 16,667 |
| – |
| 1.80 |
| 02/23/2026 |
|
| 02/01/2016 |
| 16,000 |
| – |
| 1.80 |
| 02/01/2026 |
|
| 07/11/2016 |
| – |
| 106,667(2) |
| 2.64 |
| 07/11/2026 |
|
| 01/01/2017 |
| 8,000 |
| – |
| 1.53 |
| 01/01/2027 |
Shanoop Kothari |
| 04/01/2019 |
| – |
| 200,000(3) |
| 19.50 |
| 04/01/2029 |
(1) The options are subject to vesting over five years from the date of the grant, with 20% becoming exercisable on each anniversary of the date of the grant.
(2) The options vest in their entirety on December 31, 2021.
(3) The options vest, subject to Mr. Kothari’s continued employment, as follows: (a) 16,667 options vest upon the Company’s completion of a strategic acquisition of a business with a purchase price of not less than $25 million; and (b) 133,333 options vest upon the Company’s listing on any tier of the Nasdaq Stock Market on or before December 31, 2020. 50,000 options were to vest upon certain capital raising milestones as of December 31, 2019 that were not fulfilled, and so such options were forfeited as of December 31, 2019.
Executive Employment Arrangements
Agreement with Mr. Higashida
On August 15, 2017, we entered into an Executive Employment Agreement with Mr. Higashida setting forth the terms of his employment. Pursuant to the agreement, Mr. Higashida serves as our Chief Executive Officer, Treasurer and Secretary and as a member of the Board.
Pursuant to the agreement, Mr. Higashida is entitled to an annual base salary, currently set at $180,000, and an annual bonus opportunity in an amount determined each year by the Board of Directors. The payment of the annual bonus is determined by our Board of Directors based upon our achievement of goals and objectives for the relevant year. For Mr. Higashida’s salary and bonus information for 2019, see “— Summary Compensation Table.” Mr. Higashida is also eligible to participate in any equity compensation plan of the Company, including the 2013 Plan and the 2019 Plan, and to receive future equity awards at the Board’s discretion. For awards outstanding as of September 30, 2019, see “— Outstanding Equity Awards at Fiscal Year-End.” Mr. Higashida also participates in all of our employee benefit programs for which he is eligible and receives reimbursement for his reasonable business expenses, including travel expenses.
Pursuant to his employment agreement with us, if Mr. Higashida resigns for “good reason” or his employment is terminated by us without “cause,” each as defined in the agreement, Mr. Higashida is entitled to receive payment equal to (i) his accrued but unpaid salary for the period through the date of his resignation or termination, plus (ii) an amount equal to one and one-half times his annual base salary, plus (iii) an amount equal to one and one-half times the amount of bonus he received during the previous calendar year, plus (iv) reimbursement for premiums paid to continue Mr. Higashida’s health, dental and vision insurance pursuant to the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”) until the of earlier of 18 months or the date on which Mr. Higashida becomes eligible to participate in a group medical plan sponsored by any other employer. For purposes of Mr. Higashida’s agreement, “good reason” means (a) the material breach by the Company of any of its obligations under the agreement, (b) the change of Mr. Higashida’s office, title or responsibilities, or any action by us resulting in the material diminution of Mr. Higashida’s position, duties or authorities, or (c) the relocation of our principal executive offices or the requirement that Mr. Higashida relocate anywhere outside of San Diego County, California, in each case without Mr. Higashida’s written consent, and “cause” means Mr. Higashida’s (x) gross negligence, gross neglect or willful
64
misconduct in the performance of his duties resulting in a material adverse effect on us, (y) conviction for, deferred adjudication of or plea of no contest to a felony, or (z) material breach of any material provision of the agreement.
Also under the agreement, if within 12 months following a change in control of the Company Mr. Higashida resigns for “good reason” or his employment is terminated by us without “cause,” Mr. Higashida is entitled to receive payment equal to (i) his accrued but unpaid salary for the period through the date of his resignation or termination, plus (ii) the value of any accrued and unused paid time off, plus (iii) an amount equal to two times the amount of bonus he received during the previous calendar year, plus (iv) reimbursement for premiums paid to continue Mr. Higashida’s health, dental and vision insurance pursuant to COBRA until the of earlier of 18 months or the date on which Mr. Higashida becomes eligible to participate in a group medical plan sponsored by any other employer.
If Mr. Higashida dies during the term of the agreement, Mr. Higashida’s estate is entitled to receive payment equal to (i) Mr. Higashida’s accrued but unpaid salary for the period through the date of his death, plus (ii) the value of any accrued and unused paid time off, plus (iii) a salary continuance for 12 months.
If Mr. Higashida becomes incapable of performing the duties and services required of him under the agreement on a full-time basis due to accident, physical or mental illness, or other circumstance which renders him mentally or physically incapable, we may terminate Mr. Higashida’s employment for such disability. In such event, Mr. Higashida is entitled to receive the same payment as he would if he were terminated without cause as described above.
Agreement with Mr. Gorney
On August 15, 2017, we entered into an Employment Agreement with Mr. Gorney setting forth the terms of his employment. Pursuant to the agreement, Mr. Gorney serves as our President and Chief Operating Officer.
Pursuant to the agreement, Mr. Gorney is entitled to an annual base salary, currently set at $120,000, and a quarterly bonus opportunity based on us achieving target adjusted gross sales for the preceding quarter, in an amount determined by the Board of Directors for each applicable quarter. Mr. Gorney is also eligible for an annual bonus opportunity in an amount determined each year by the Board of Directors based on a percentage of the Company’s net profits. For Mr. Gorney’s salary and bonus information for 2019, see “— Summary Compensation Table.”
Under the agreement, Mr. Gorney is also eligible to participate in any equity compensation plan of the Company, including the 2013 Plan and the 2019 Plan, and to receive future equity awards at the Board’s discretion. For awards outstanding as of September 30, 2019, see “— Outstanding Equity Awards at Fiscal Year-End.” Mr. Gorney also receives 10 days of paid vacation per year under the agreement and reimbursement for his pre-approved business expenses, including travel expense. Mr. Gorney is further eligible for any additional benefits available to our employees, including health and profit sharing plans or other benefits.
In the event Mr. Gorney’s employment is terminated, regardless of whether such termination is for cause or otherwise, Mr. Gorney is entitled to receive his accrued but unpaid salary for the period through the effective date of his termination, plus any appropriate benefits mandated by COBRA.
Agreement with Mr. Kothari
On March 31, 2019, we entered into an Employment Agreement with Mr. Kothari setting forth the terms of his employment. Pursuant to the agreement, Mr. Kothari serves as our Senior Vice President and Chief Financial Officer.
Pursuant to the agreement, Mr. Kothari is entitled to an annual base salary, currently set at $225,000, and an annual bonus opportunity based on us achieving certain performance milestones established by the Chief Executive Officer and President, in an amount up to $75,000. For Mr. Kothari’s salary and bonus information for 2019, see “— Summary Compensation Table.”
Under the agreement, Mr. Kothari received options to purchase 200,000 shares of our common stock that vest as follows: (a) 16,667 options vest upon the Company’s completion of a strategic acquisition of a business with a
65
purchase price of not less than $25 million; (b) 133,333 options vest upon the Company’s listing on any tier of the Nasdaq Stock Market on or before December 31, 2020; and (c) 50,000 options were to vest upon certain capital raising milestones as of December 31, 2019 that were not fulfilled, and so such options were forfeited as of December 31, 2019. Mr. Kothari is also eligible to participate in any equity compensation plan of the Company, including the 2013 Plan and the 2019 Plan, and to receive future equity awards at the Board’s discretion. For awards outstanding as of September 30, 2019, see “— Outstanding Equity Awards at Fiscal Year-End.” Mr. Kothari also receives 10 days of paid vacation per year under the agreement and reimbursement for his pre-approved business expenses, including travel expense. Mr. Kothari is further eligible for any additional benefits available to our employees, including health and profit sharing plans or other benefits.
In the event Mr. Kothari’s employment is terminated, regardless of whether such termination is for cause or otherwise, Mr. Kothari is entitled to receive his accrued but unpaid salary for the period through the effective date of his termination, plus any appropriate benefits mandated by COBRA.
Director Compensation
We did not pay cash or any other compensation to our directors during the years ended September 30, 2019 and 2018. Other than as set forth elsewhere in this section, we do not have any agreements for compensating our directors for their services in their capacity as directors, although such directors are expected in the future to receive stock options to purchase shares of our common stock as awarded by our Board.
Non-Employee Director Compensation Policy
We intend to compensate our non-employee Board members at a rate of $2,000 per month plus an additional $3,000 per meeting attended in person, subject to Board approval. We have agreed to reimburse Board members for any reasonable expenses incurred by them in connection with any travel requested by and on behalf of our Company.
Equity Incentive Plans
NuZee, Inc. 2013 Stock Incentive Plan
On November 11, 2013, our Board adopted the 2013 Plan for the purposes of promoting the long-term success of the Company and the creation of stockholder value by (a) enhancing the Company’s ability to attract and retain the services of qualified employees, officers, directors, consultants and other service providers, and (b) providing additional incentives for such persons to devote their utmost effort and skill to the advancement and betterment of the Company by providing an opportunity to participate in the ownership of the Company. The 2013 Plan provides for the grant of stock options, restricted share awards, and stock appreciation rights. This summary is qualified in its entirety by the detailed provisions of the 2013 Plan, which is filed as an exhibit hereto.
Administration
The 2013 Plan shall be administered by the Board or a committee consisting exclusively of two or more directors of the Company, who shall be appointed by the Board. The Board may also delegate to an officer of the Company the authority to designate recipients of awards under the 2013 Plan, and the amount of such awards, subject to parameters established by the Board. The Board or a committee thereof will have the authority to interpret the 2013 Plan, grant stock options, restricted share awards and stock appreciation rights, and make all other determinations necessary or advisable for the administration thereof.
Eligibility
Employees of the Company (or certain entities affiliated with the Company) are eligible to receive incentive stock options (as such term is defined in Section 422 of the Code) under the 2013 Plan. Employees of the Company (or certain entities affiliated with the Company), directors, consultants providing services to the Company, certain entities affiliated with the Company, or business ventures in which the Company or its affiliate has a significant ownership interest, are eligible to receive stock options that do not qualify as incentive stock options, restricted stock awards, and stock appreciation rights under the 2013 Plan.
66
Shares Reserved for Issuance under the 2013 Plan
We have reserved 3,333,334 shares of common stock for issuance under the 2013 Plan, of which 1,642,665 shares remain available for future issuance.
Term, Termination, and Amendments
Unless previously terminated, the 2013 Plan will terminate 10 years after the its adoption by the Board, except that awards that are granted under the 2013 Plan prior to its termination will continue to be administered under the 2013 Plan in accordance with their respective terms.
The Board may amend, alter, suspend or terminate the 2013 Plan from time to time. However, the 2019 Plan may not be amended, altered, suspended or terminated in any manner that substantially affects or impairs the rights of any recipient of an outstanding award under the 2013 Plan without such recipient’s consent.
Types of Awards
The 2013 Plan authorizes the issuance of stock options, restricted share awards and stock appreciation rights.
Additional Provisions
No benefit available under the 2013 Plan may be assigned, or award of options or stock appreciation rights assigned, transferred or otherwise disposed of, except in accordance with the laws of decent and distribution or, in the case of stock options, pursuant to a domestic relations order, without the consent of the administrator of the 2013 Plan. Notwithstanding the foregoing, the administrator may grant awards, other than incentive stock options, that are transferable by the participant during his or her lifetime, but only to the extent specifically provided in the award agreement entered into with such participant.
Tax Withholding
The Company has the power to withhold, or require a participant in the 2013 Plan to remit to the Company, an amount sufficient to satisfy any Federal, state, or local tax withholding requirements with respect to any award granted under the 2013 Plan. The administrator of the 2013 Plan may, to the extent permissible under applicable laws, permit a participant to satisfy any such obligation to pay taxes by (a) directing the Company to apply to such amounts any shares of common stock to which the recipient is entitled as a result of the exercise or vesting of an award granted under the 2013 Plan, (b) delivering to the Company shares of common stock already owned by the participant.
NuZee, Inc. 2019 Stock Incentive Plan
On September 18, 2019, our Board adopted the 2019 Plan for the purposes of promoting the long-term success of the Company and the creation of stockholder value by (a) encouraging employees, directors and consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of employees, directors and consultants with exceptional qualifications and (c) linking employees, directors and consultants directly to stockholder interests through increased stock ownership. Our stockholders approved the adoption of the 2019 Plan on October 22, 2019. The 2019 Plan provides for the grant of stock options and restricted shares. This summary is qualified in its entirety by the detailed provisions of the 2019 Plan, which is filed as an exhibit hereto.
Administration
The 2019 Plan shall be administered by a committee consisting exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the committee shall satisfy such requirements as the SEC may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act and any other applicable law. The Board will have the authority to construe and interpret the 2019 Plan, grant stock options and restricted share awards and make all other
67
determinations necessary or advisable for the administration thereof. The Board may also delegate to a separate committee the administration of the 2019 Plan with respect to employees and consultants who are not considered officers of the Company, including the authority to grant and administer Awards to such employees and consultants.
Eligibility
Persons eligible to participate include employees, directors and consultants of the Company and its parent and subsidiary entities.
Shares Reserved for Issuance under the 2019 Plan
We have reserved 3,333,334 shares of common stock for issuance under the 2019 Plan, representing 3.3% of the Company’s authorized shares of common stock.
Term, Termination, and Amendments
Unless previously terminated, the 2019 Plan will terminate 10 years after the its adoption by the Board, except that awards that are granted under the 2019 Plan prior to its termination will continue to be administered under the terms of the 2019 Plan until the awards terminate, expire or are exercised.
The Board may amend, alter, suspend or terminate the 2019 Plan from time to time; provided, however, stockholder approval shall be required for any amendment to the extent necessary and desirable to comply with applicable laws. Additionally, the 2019 Plan may not be amended, altered, suspended or terminated in any manner that would impair the rights of any participant in the 2019 Plan without the written agreement of such participant.
Types of Awards
The 2019 Plan authorizes the issuance of stock options and restricted share awards.
Additional Provisions
No award or other right or interest of a participant under the 2019 Plan may be assigned or transferred for any reason during the participant’s lifetime, other than to the Company or any subsidiary or affiliate, and any attempt to do so shall be void and the relevant award shall be forfeited. Notwithstanding the foregoing, the administrator may grant awards, other than incentive stock options, that are transferable by the participant during his or her lifetime, but only to the extent specifically provided in the award agreement entered into with such participant. No incentive stock option shall be transferable other than by will or the laws of descent and distribution.
Tax Withholding
The Company has the right to deduct or withhold from any payment owed to a participant an amount that is necessary in order to satisfy any amount required to be withheld under U.S. federal, state, local, foreign or other tax law as a result of the issuance of, or lapse of restrictions on, such common stock pursuant to an award, or otherwise require such participant to make provision for payment of any such withholding amount. Subject to such conditions as may be established by the administrator, the administrator may permit a participant to (i) have common stock otherwise issuable under an award withheld to the extent necessary to comply with minimum statutory withholding rate requirements; (ii) tender back to the Company shares of common stock received pursuant to an award to the extent necessary to comply with minimum statutory withholding rate requirements for supplemental income; (iii) deliver to the Company previously acquired common stock; or (iv) have funds withheld from payments of wages, salary or other cash compensation due the participant.
68
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the director and executive officer compensation arrangements discussed above in the sections titled “Management” and “Executive Compensation” the following is a description of each transaction since September 30, 2016, and each currently proposed transaction in which:
•we have been or are to be a participant;
•the amount involved exceeded or will exceed the lesser of (i) $120,000 or (ii) 1% of the average of the Company’s total assets at year end for the last two completed fiscal years; and
•any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock, or any immediate family member of or person sharing the household with any of these individuals or entities, had or will have a direct or indirect material interest.
Mark Gorney, the father of Travis Gorney, our President and COO, is an hourly employee of the Company, and he received approximately $27,000 in compensation for his services during the year ended September 30, 2019. On April 1, 2019, Mark Gorney was also granted options to purchase 5,000 shares of our common stock at an exercise price of $19.50, which vest in four equal annual installments beginning on April 1, 2020. Mark Gorney also received approximately $23,300 in compensation for his services as an hourly employee of the Company during the year ended September 30, 2018.
During the year ended September 30, 2018, we borrowed an aggregate of $339,000 from NuZee Co., Ltd. (“NuZee Ltd.”), an entity 100% beneficially owned by Mr. Higashida, by means of unsecured, short-term loans each bearing interest at a rate of 1%. These loans were fully paid as of September 30, 2018.
Between December 2016 and August 2017, we borrowed an aggregate of $260,185 from NuZee Ltd. by means of unsecured, short-term loans, each bearing interest at a rate of 1%. These loans were fully paid as of September 30, 2018.
During July 2017, NuZee JP borrowed the sum of $62,921 from Katsuyoshi Eguchi, a holder of more than 5% of our common stock and the chief executive officer of NuZee JP, by means of an unsecured, short-term loan bearing zero interest. This loan was fully paid as of September 30, 2017.
Between March 2017 and June 2017, we borrowed an aggregate of $45,200 from Mr. Higashida by means of unsecured, short-term loans each bearing interest at a rate of 1%. These loans were fully paid as of September 30, 2018.
During April 2017, we borrowed the sum of $50,000 from Eguchi Holdings Co., Ltd. and the sum of $50,000 from Eguchi Steel Co., Ltd., both entities controlled by Mr. Eguchi, each by means of an unsecured, short-term loan bearing interest at a rate of 1%. These loans were fully paid as of September 30, 2017.
Certain Family Relationships
There are no family relationships among any of our directors or executive officers.
Policies and Procedures for Related Party Transactions
Our audit committee has the primary responsibility for reviewing and approving or disapproving “related party transactions,” which are transactions between us and related persons in which the aggregate amount involved exceeds or may be expected to exceed the lesser of (i) $120,000 or (ii) 1% of the average of the Company’s total assets at year end for the last two completed fiscal years, and in which a related person has or will have a direct or indirect material interest. The charter of our audit committee provides that our audit committee shall review and approve or disapprove in advance any related party transaction.
69
Control by Officers and Directors
Our officers and directors and their affiliates beneficially own, in the aggregate, approximately 40.1% of our outstanding common stock as of May 1, 2020. As a result, in certain circumstances, these stockholders acting together may be able to determine matters requiring approval of our stockholders, including the election of our directors, or they may delay, defer or prevent a change in control of us. See the section of this prospectus captioned “Security Ownership of Certain Beneficial Owners and Management” below.
Indemnification of Officers and Directors
We intend to enter into separate indemnification agreements with each of our directors and executive officers, in addition to the indemnification provided for in our amended and restated articles of incorporation and second amended and restated bylaws. Our articles of incorporation and second amended and restated bylaws require us to indemnify our directors, executive officers and certain controlling persons to the fullest extent permitted by Nevada law.
70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of May 1, 2020, as adjusted to reflect the sale of common stock offered by us in this offering, for:
•each person, or group of affiliated persons, who we know to beneficially own more than five percent (5%) of our common stock;
•each of our named executive officers;
•each of our directors and director nominees; and
•all of our executive officers and directors as a group.
The percentage of beneficial ownership information shown in the table prior to this offering is based on 13,729,421 shares of common stock outstanding as of May 1, 2020, and assumes no participation in this offering by the parties below. The percentage of beneficial ownership shown in the table after this offering is based upon 14,284,976 shares of common stock outstanding after the close of this offering, assuming the sale of 555,555 shares of common stock by us in the offering and no exercise of the underwriters of their option to purchase up to an additional 83,333 shares of our common stock in this offering.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than five percent (5%) of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant to the exercise of stock options that are either immediately exercisable or exercisable within sixty (60) days of May 1, 2020. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Except as otherwise noted below, the address of each of the individuals and entities named in the table below is c/o NuZee, Inc., 1700 Capital Avenue, Suite 100, Plano, Texas 75074. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
| Shares Beneficially |
| Shares Beneficially | ||||
Name and Address of Beneficial Owner | Number |
| Percent |
| Number |
| Percent |
Directors and Named Executive Officers: |
|
|
|
|
|
|
|
Masateru Higashida(1) | 4,947,212 |
| 36.0% |
| 4,947,212 |
| 34.6% |
Travis Gorney(2) | 563,334 |
| 4.1% |
| 563,334 |
| 3.9% |
Shanoop Kothari | 0 |
| * |
| 133,333(4) |
| * |
Kevin J. Conner | 0 |
| * |
| 0 |
| * |
J. Chris Jones | 0 |
| * |
| 0 |
| * |
Allen S. Morton | 0 |
| * |
| 0 |
| * |
All directors and named executive officers as a group (6 persons) | 5,510,546 |
| 40.1% |
| 5,643,879 |
| 39.5% |
All other 5% Stockholders |
|
|
|
|
|
|
|
Katsuyoshi Eguchi(3) 4-1002, Omori, Moriyama-ku Nagoya-Shi, Aichi-ken, Japan 463-0021 | 902,742 |
| 6.6% |
| 902,742 |
| 6.3% |
_______________ |
|
|
|
|
|
|
|
*Represents beneficial ownership of less than one percent (1%) of the outstanding common stock.
(1)The number of shares beneficially owned before and after this offering consists of (a) 4,744,545 shares of Common Stock and (b) 202,667 shares of Common Stock issuable upon the exercise of stock options within 60 days of May 1, 2020.
(2)The number of shares beneficially owned before and after this offering consists of (a) 506,667 shares of Common Stock and (b) 56,667 shares of Common Stock issuable upon the exercise of stock options within 60 days of May 1, 2020.
71
(3)Represents (i) 495,363 shares of our Common Stock held by Eguchi Holdings Co, Ltd., of which Mr. Eguchi is President, (ii) 124,445 shares of our Common Stock held by Torus International, of which Mr. Eguchi is a director, (iii) 276,267 shares of our Common Stock held by Mr. Eguchi in his personal capacity, and (iv) 6,667 shares of Common Stock held by family members of Mr. Eguchi. Mr. Eguchi also serves as the chief executive officer of NuZee JP, a majority owned subsidiary of the Company.
(4)The number of shares beneficially owned after this offering consists of 133,333 shares of Common Stock issuable upon the exercise of stock options within 60 days of May 1, 2020.
72
This section summarizes our authorized and outstanding securities and certain of the provisions of our articles of incorporation and our second amended and restated bylaws.
General
The Company’s authorized capital stock consists of 200,000,000 shares of capital stock, par value $0.00001 per share, of which 100,000,000 shares are common stock, par value $0.00001 per share and 100,000,000 shares are preferred stock, par value $0.00001 per share. On October 28, 2019, we consummated the Reverse Split at a ratio of 1-for-3, which became effective on November 12, 2019. The accompanying financial statements and notes to the financial statements give effect to the Reverse Split for all periods presented. The shares of common stock retained a par value of $0.00001 per share. Accordingly, the stockholders’ deficit reflects the Reverse Split by reclassifying from “common stock” to “additional paid-in capital” in an amount equal to the par value of the decreased shares resulting from the Reverse Split. As of May 1, 2020, the Company had 13,729,421 shares of common stock outstanding held by approximately 500 stockholders of record, and no shares of preferred stock outstanding.
Common Stock
The holders of our common stock (i) have equal ratable rights to dividends from funds legally available, therefore, when, as and if declared by our Board; (ii) are entitled to share in all of our assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights; and (iv) are entitled to one non-cumulative vote per share on all matters on which stockholders may vote. Reference is made to the Company’s Articles of Incorporation, By-laws and the applicable statutes of the State of Nevada for a more complete description of the rights and liabilities of holders of the Company’s securities.
Preferred Stock
The Company has authorized 100,000,000 shares of preferred stock. There is no preferred stock outstanding. Our Board may designate the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, redemption rights, liquidation preference, sinking fund terms and the number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock or delaying, deterring or preventing a change in control. Such issuance could have the effect of decreasing the market price of the common stock. We currently have no plans to issue any shares of preferred stock.
Non-cumulative Voting
Holders of shares of our common stock do not have cumulative voting rights; meaning that the holders of 50.1% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, and, in such event, the holders of the remaining shares will not be able to elect any of our directors.
Registration Statement on Form S-8
As of May 1, 2020, no shares of our common stock were issuable upon the exercise of options or restricted stock awards issued pursuant to the 2019 Plan. Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock issued or reserved for issuance under the 2019 Plan. The registration statement on Form S-8 will become effective immediately upon filing, and shares covered by such registration statement will thereupon be eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above and Rule 144 limitations applicable to affiliates. See the section captioned “Executive compensation—Equity Inventive Plans” for additional information.
Dividends
We have not paid any cash dividends to stockholders. The declaration of any future cash dividend will be at the discretion of our Board and will depend upon our earnings, if any, our capital requirements and financial position,
73
our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Securities Authorized for Issuance under Equity Compensation Plans
As of the date of this prospectus, we had issued 1,797,336 options to purchase shares of our common stock pursuant to the 2013 Plan. 1,642,665 shares of our common stock remain available for future grant or issuance under the 2013 Plan.
As of the date of this prospectus, we had issued no options to purchase shares of our common stock pursuant to the 2019 Plan. 3,333,334 shares of our common stock remain available for future grant or issuance under the 2019 Plan.
Anti-Takeover Effects of Nevada Law and our Articles of Incorporation and Second Amended and Restated Bylaws
Nevada law, our articles of incorporation, and our second amended and restated bylaws contain certain provisions that have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our Board. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.
Undesignated Preferred Stock. The ability of our Board, without action by the stockholders, to issue up to 100,000,000 shares of preferred stock, which was previously authorized but remain undesignated, with voting or other rights or preferences as designated by our Board could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of us.
Stockholder Meetings. Our second amended and restated bylaws provide that a special meeting of stockholders may be called only by stockholders holding at least ten percent (10%) of the voting shares of the Company, or by our president or a majority of the Board.
Stockholder Action by Written Consent. Nevada law provides that any action that may be taken at any annual or special meeting of the stockholders may be taken without a meeting if a consent thereto in writing is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Stockholders Not Entitled to Cumulative Voting. Our second amended and restated bylaws do not permit stockholders to cumulate their votes in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock may be entitled to elect.
Amendment of Charter and Bylaw Provisions. The amendment of any of the above provisions would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.
The provisions of Nevada law, our articles of incorporation, and our second amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
74
Listing
Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol “NUZE.”
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is V Stock Transfer, LLC. The transfer agent and registrar’s address is 18 Lafayette Place, Woodmere, NY 11598.
75
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income tax consequences of the purchase, ownership and disposition of our common stock purchased in this offering. This discussion is for general information only, is not tax advice and does not purport to be a complete analysis of all the potential tax considerations. This discussion is based upon the provisions of the Code, existing and proposed Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, all in effect as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. We have not sought, and will not seek, any ruling from the Internal Revenue Service, or IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This summary does not address the tax considerations arising under the laws of any U.S. state, local or any non-U.S. jurisdiction, or under U.S. federal non-income tax laws, or the potential application of the Medicare contribution tax on net investment income. In addition, this discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
banks, insurance companies, regulated investment companies, real estate investment trusts or other financial institutions;
persons subject to the alternative minimum tax;
tax-exempt organizations or governmental organizations;
U.S. shareholders of controlled foreign corporations and passive foreign investment companies;
Corporations that accumulate earnings to avoid U.S. federal income tax and personal holding companies;
brokers or dealers in securities or currencies;
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
partnerships or other entities or arrangements classified as partnerships for U.S. federal income tax purposes or other pass-through entities (and investors therein);
persons that own, or are deemed to own, more than five percent of our common stock (except to the extent specifically set forth below);
certain former citizens or long-term residents of the United States;
persons whose functional currency is not the U.S. dollar;
persons who hold our common stock as a position in a hedging transaction, “straddle,” “conversion transaction” or engage in a wash sale or other risk reduction transaction or integrated investment;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our common stock being taken into account in an applicable financial statement within the meaning of 451(b) of the Code;
persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;
persons who hold or receive our common stock pursuant to conversion rights under convertible instruments;
persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Code; or
76
persons deemed to sell our common stock under the constructive sale provisions of the Code.
For the purposes of this discussion, a “U.S. holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes: (a) an individual who is a citizen or resident of the United States, (b) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes), created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons (within the meaning of Section 7701(a)(30) of the Code) have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. A “non-U.S. holder” is, for U.S. federal income tax purposes, a beneficial owner of common stock that is not a U.S. holder or an entity or arrangement treated as a partnership for U.S. federal income tax purposes.
If a partnership or entity classified as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock, and partners in such partnerships, should consult their tax advisors.
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of our common stock arising under the U.S. federal estate or gift tax laws or under the laws of any state, local, non-U.S. or other taxing jurisdiction or under any applicable tax treaty. In addition, significant changes in U.S. federal income tax laws were recently enacted. You should consult with your tax advisor with respect to such changes in U.S. tax law as well as potentially conforming changes in state tax laws.
U.S. Holders
Distributions
As described in the section captioned “Dividend Policy,” we have never paid cash distributions on our common stock and do not anticipate doing so in the foreseeable future. In the event that we do make distributions on our common stock to a U.S. holder, those distributions generally will constitute dividends for U.S. tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, a U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain realized on the sale or exchange of our common stock as described below under the section titled “– Disposition of Our Common Stock.” Under current law, if certain requirements are met, a preferential U.S. federal income tax rate will apply to any dividends paid to a beneficial owner of our common stock who is an individual U.S. holder and meets certain holding period requirements.
Distributions constituting dividends for U.S. federal income tax purposes that are made to U.S. holders that are corporate shareholders may qualify for the dividends received deduction, or DRD, which is generally available to corporate shareholders. No assurance can be given that we will have sufficient earnings and profits (as determined for U.S. federal income tax purposes) to cause any distributions to be eligible for a DRD. In addition, a DRD is available only if certain holding periods and other taxable income requirements are satisfied.
Disposition of Our Common Stock
Upon a sale or other taxable disposition of our common stock, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s adjusted tax basis in the common stock. Capital gain or loss will constitute long-term capital gain or loss if the U.S. holder’s holding period for the common stock exceeds one year. The deductibility of capital losses is subject to certain limitations. U.S. holders who recognize losses with respect to a disposition of our common stock should consult their own tax advisors regarding the tax treatment of such losses.
77
Information Reporting and Backup Withholding
Information reporting requirements generally will apply to payments of dividends (including constructive dividends) on the common stock and to the proceeds of a sale or other disposition of common stock paid by us to a U.S. holder unless such U.S. holder is an exempt recipient, such as a corporation. Backup withholding will apply to those payments if the U.S. holder fails to provide the holder’s taxpayer identification number, or certification of exempt status, or if the holder otherwise fails to comply with applicable requirements to establish an exemption.
Backup withholding is not an additional tax. Rather, any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the U.S. holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS. U.S. holders should consult their own tax advisors regarding their qualification for exemption from information reporting and backup withholding and the procedure for obtaining such exemption.
Non-U.S. Holders
Distributions
As described in the section captioned “Dividend Policy,” we have never paid cash distributions on our common stock and do not anticipate doing so in the foreseeable future. However, if we do pay cash distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of common stock (see “– Disposition of Our Common Stock” below).
Subject to the discussion below on effectively connected income, backup withholding and foreign accounts, any distribution (including constructive distributions) that is treated as a dividend paid to a non-U.S. holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or, if the non-U.S. holder is a qualified beneficiary of a country with which the United States has an income tax treaty, such lower rate as may be specified by the applicable income tax treaty. In order to receive a reduced treaty rate of withholding, a non-U.S. holder generally must provide the applicable withholding agent with an IRS Form W-8BEN, IRS Form W-8BEN-E or other appropriate version of IRS Form W-8 certifying the non-U.S. holder’s entitlement to benefits under that treaty. You should consult your tax advisor concerning whether you may benefit from an applicable income tax treaty.
We generally are not required to withhold tax on dividends paid (or constructive dividends deemed paid) to a non-U.S. holder if the dividends are effectively connected with the holder’s conduct of a U.S. trade or business (or, if an income tax treaty is applicable, attributable to a permanent establishment or fixed base maintained by the holder in the United States) and a properly executed IRS Form W-8ECI stating that the dividends are so connected, is furnished to us (or, if stock is held through a financial institution or other agent, to the applicable withholding agent). Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits, subject to an applicable income tax treaty providing otherwise. In addition, a corporate non-U.S. holder receiving effectively connected dividends may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. You should consult your tax advisor regarding any applicable tax treaties that may provide for different rules.
If a non-U.S. holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent may then be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. withholding tax under an income tax treaty, you should consult with your own tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.
78
Disposition of our Common Stock
In general, subject to the discussion below under “–Backup Withholding and Information Reporting,” a non-U.S. holder generally will not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale or other disposition of our common stock unless:
the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business (or, if an income tax treaty is applicable, the gain is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States);
the non-U.S. holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or
our common stock constitutes a United States real property interest by reason of our status as a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the non-U.S. holder’s disposition of, or their holding period for, our common stock.
We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, your common stock will be treated as U.S. real property interests only if you actually or constructively hold more than five percent of such regularly traded common stock at any time during the shorter of the five-year period preceding your disposition of, or your holding period for, our common stock.
A non-U.S. holder described in the first bullet above will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates and in the manner applicable to U.S. persons, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder described in the second bullet above will be subject to tax at 30% (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, which gain may be offset by U.S. source capital losses for the year (provided such holder has timely filed U.S. federal income tax returns with respect to such losses). You should consult your tax advisor concerning whether any applicable income tax or other treaties may provide for different rules.
Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of distributions (including constructive distributions) on our common stock paid to each non-U.S. holder, their name and address, and the amount of tax withheld, if any. A similar report will be sent to the applicable non-U.S. holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the non-U.S. holder’s country of residence.
Payments of dividends (including constructive dividends) or of proceeds on the disposition of our common stock made to a non-U.S. holder may be subject to information reporting and backup withholding at a current rate of 24% unless the non-U.S. holder establishes an exemption, for example, by properly certifying their non-U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that a holder is a U.S. person.
Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or foreign, except that such requirements may be avoided if the non-U.S. holder provides a properly executed and appropriate IRS Form W-8 or otherwise meets documentary evidence requirements for establishing non-U.S. holder status or otherwise establishes an exemption. Generally, U.S. information reporting and backup
79
withholding requirements will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the U.S. through a non-U.S. office of a non-U.S. broker. Information reporting and backup withholding requirements may, however, apply to a payment of disposition proceeds if the broker has actual knowledge, or reason to know, that the holder is, in fact, a U.S. person that has not provided a properly executed form W-9 to the broker or the broker has been notified by the IRS that it should withhold (generally, because the taxpayer has provided an incorrect TIN or failed to properly report income). For information reporting purposes, certain brokers with substantial U.S. ownership or operations will generally be treated in a manner similar to U.S. brokers.
Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, you may be able to obtain a refund or credit from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance Act
Sections 1471-1474 of the Code (colloquially known as the Foreign Account Tax Compliance Act, or “FATCA”) and the rules and regulations promulgated thereunder generally impose withholding tax at a rate of 30% on U.S. source dividends (including constructive dividends) and other items of U.S. source fixed or determinable annual or periodic income as defined under Section 1473 of the Code and regulations promulgated thereunder if paid to a foreign financial institution (“FFI”) (as specially defined under the FATCA rules), unless the FFI enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of the FFI (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. The U.S. government has entered into inter-governmental agreements (“IGA’s”) with a number of jurisdictions. Where an IGA is applicable, its terms may substantially modify the application of the FATCA reporting rules; however, all such agreements will ultimately grant the U.S. government substantial information concerning the U.S. account holders of the FFI. In addition, FATCA also imposes a U.S. federal withholding tax of 30% on U.S. source dividends (including constructive dividends) on our common stock if paid to a ”non-financial foreign entity” (as specially defined under these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends (including constructive dividends) on our common stock. FATCA withholding also applies to gross proceeds from the sale or other disposition of our common stock; however, proposed regulations would eliminate withholding on such proceeds. IRS stated in the preamble to these proposed regulations that taxpayers may rely on the proposed regulations until final regulations are issued. You should consult your tax advisors regarding the possible implications of FATCA on your investment in our common stock.
The preceding discussion of U.S. federal tax considerations is for general information only. It is not tax advice. Each prospective investor should consult its tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our common, including the consequences of any proposed change in applicable laws.
80
In connection with this offering, we will enter into an underwriting agreement with The Benchmark Company, LLC as representative for the underwriters in this offering. Each underwriter named below has severally agreed to purchase from us, on a firm commitment basis, the number of shares of common stock set forth opposite its name below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus.
Underwriter Number of shares
The Benchmark Company, LLC
Total: 555,555
The underwriting agreement will provide that the underwriters are obligated to purchase all of the common stock offered by this prospectus, other than those covered by the over-allotment option, if any shares of common stock are purchased. The underwriters are offering the shares when, as and if issued to and accepted by them, subject to a number of conditions. These conditions include, among other things, the requirements that no stop order suspending the effectiveness of the registration statement be in effect and that no proceedings for this purpose have been initiated or threatened by the SEC.
The representative of the underwriters has advised us that the underwriters propose to offer our common stock to the public at the offering price set forth on the cover page of this prospectus and to selected dealers at that price less a concession of not more than $ per share. The underwriters and selected dealers may re-allow a concession to other dealers, including the underwriters, of not more than $ per share. After completion of the public offering of the shares of common stock, the offering price, the concessions to selected dealers and the reallowance to their dealers may be changed by the underwriters.
We have been advised by the representative of the underwriters that the underwriters intend to make a market in our securities but that they are not obligated to do so and may discontinue making a market at any time without notice.
In connection with the offering, the underwriters or certain of the securities dealers may distribute prospectuses electronically.
Certain broker-dealers in Japan will act as selling agents (collectively, the “Japan Agents”) in connection with sales to residents of Japan of our common stock offered hereby. The Japan Agents, who are anticipated to be Global Support Limited and Mr. Koichi Nakamura, will not purchase from us any shares of our common stock offered hereby, but rather, will act as agents to identify and refer to the underwriters certain investors located in Japan.
Over-allotment Option
We have granted a 45-day option to the underwriters, exercisable one or more times in whole or in part, to purchase up to an additional 83,333 shares of common stock on the same terms as the other shares being purchased by the underwriters from us, underwriting discounts and commissions to cover over-allotments, if any. The underwriters may exercise this option only to cover over-allotments made in connection with this offering. If the underwriters exercise this option in whole or in part, then the underwriters will be committed, subject to the conditions described in the underwriting agreement, to purchase the additional offered securities in proportion to each of their commitments set forth in the prior table.
Underwriters’ Compensation
Except as disclosed in this prospectus, the underwriters have not received and will not receive from us any other item of compensation or expense in connection with this offering considered by the Financial Industry Regulatory Authority, Inc. (“FINRA”), to be underwriting compensation under its rule of fair price.
81
Discount
The underwriting discount is equal to the public offering price per share, less the amount paid by the underwriters to us per share. The underwriting discount was determined through an arms’ length negotiation between us and the underwriters.
We have agreed to sell the shares of common stock to the underwriters at the initial offering price of $ per share, which represents the initial public offering price of the shares of common stock set forth on the cover page of this prospectus less a 7% underwriting discount. Each Japan Agent will receive a commission percentage depending on the type of investor referral and other considerations. These commissions will be paid to the Japan Agents by the underwriters and will not be paid by us. Accordingly, the net proceeds to us per share will be the same for all shares of our common stock offered hereby, irrespective of the involvement of the Japan Agents. Mr. Higashida, our Chief Executive Officer and Chairman of the Board, will also identify and refer to the underwriters certain investors located in Japan, for which Mr. Higashida will receive no compensation.
The following table shows the public offering price, total underwriting discounts and commissions to be paid to the underwriters, the non-accountable expense allowance, and the net proceeds to us. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 83,333 additional common shares.
|
|
|
|
| Total | ||||||
|
| Per share |
|
| Without Over-Allotment Option |
|
| With Over-Allotment Option | |||
Public offering price |
| $ |
|
|
| $ |
|
|
| $ |
|
Underwriting discounts and commissions |
| $ |
|
|
| $ |
|
|
| $ |
|
Non-accountable expense allowance |
| $ |
|
|
| $ |
|
|
| $ |
|
Net proceeds to us |
| $ |
|
|
| $ |
|
|
| $ |
|
Expense Reimbursement
We have agreed to pay a non-accountable expense allowance to the underwriters equal to 1.0% of the gross proceeds received in this offering (excluding any gross proceeds received from the exercise of the underwriters’ over-allotment option). In addition to the non-accountable expense allowance, we have also agreed to pay or reimburse the underwriters for certain of the underwriters’ out-of-pocket expenses relating to the offering, including all reasonable fees and expenses of the underwriters’ outside legal counsel, which shall not exceed in the aggregate $150,000. All fees already paid shall be reimbursable to us to the extent not actually incurred. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.
We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $600,000.
Warrants
Upon the closing of this offering, we have agreed to sell to the underwriters a warrant to purchase up to 5% of the number of shares of common stock sold in this offering. The warrant will be exercisable at a per share and warrant exercise price equal to 100% of the public offering price per share sold pursuant to this offering, subject to standard anti-dilution adjustments for share splits and similar transactions. The warrant will be exercisable at any time, and from time to time, in whole or in part, during the period from the effective date of the offering, which period shall not extend further than five years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G)(i). The warrant is also exercisable on a cashless basis. The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). Except as permitted by Rule 5110(g)(1), the underwriters (or permitted assignees under the Rule) will not sell, transfer, assign, pledge, or
82
hypothecate the warrants or the securities underlying the warrants, nor will any, of them engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the option or the underlying securities for a period of 180 days from the date of effectiveness of the registration statement of which this prospectus forms a part or the commencement of sales under this prospectus. Although the warrants and the underlying shares have been registered in the registration statement of which this prospectus forms a part, we have also agreed on only one occasion to register all of such underlying common shares at such time as we become eligible to file a resale registration statement on Form S-3. These registration rights apply to all of the securities directly and indirectly issuable upon exercise of the warrants, and shall expire on the fifth anniversary of the effective date of the registration statement of which this prospectus forms a part. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants, other than underwriting commissions incurred and payable by the holders.
Lock-up Agreements
We have agreed with the underwriters that we will not, without the prior consent of The Benchmark Company, LLC, as representative of the underwriters, directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer, or otherwise dispose of or enter into any transaction which may result in the disposition of any common stock or securities convertible into, exchangeable or exercisable for any common stock for a period of six months after the closing of this offering.
In addition, each of our executive officers and directors and our primary stockholder have agreed with the underwriters not to directly or indirectly sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for estate planning purposes or to beneficiaries of officers, directors and shareholders upon their death), or otherwise dispose of or enter into any transaction which may result in the disposition of any common stock or securities convertible into, exchangeable or exercisable for any common stock, without the prior written consent of The Benchmark Company, LLC, as representative of the underwriters, for a period of six months after the closing date of this offering.
Stabilization
In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may over-allot in connection with this offering by selling more shares than they are obligated to purchase under the underwriting agreement, creating a short position in our common stock. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares of common of stock over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares of common stock involved is greater than the number of shares in the over-allotment option. To close out a short position or to stabilize the price per share of our common stock the underwriters may bid for, and purchase, common stock in the open market. The underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of the common stock available for purchase in the open market as compared to the price at which it may purchase the common stock through the over-allotment option. If the underwriters sell more than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased common stock sold by or for the account of such underwriter in stabilizing or short covering transactions.
Finally, the underwriters may bid for, and purchase, common stock in market making transactions, including “passive” market making transactions as described below.
The foregoing transactions may stabilize or maintain the market price of our common stock at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriters are not required to
83
engage in these activities, and may discontinue any of these activities at any time without notice. These transactions may be effected on a national securities exchange or otherwise.
In connection with this offering, the underwriters and selling group members, if any, or their affiliates may engage in passive market making transactions in common stock on a national securities exchange immediately prior to the commencement of sales in this offering, in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 generally provides that:
a passive market maker may not effect transactions or display bids for our common stock in excess of the highest independent bid price by persons who are not passive market makers; net purchases by a passive market maker on each day are generally limited to 30% of the passive market maker’s average daily trading volume in our common share during a specified two-month prior period or 200 shares, whichever is greater, and must be discontinued when that limit is reached; and
passive market making bids must be identified as such.
Passive market making may stabilize or maintain the market price of our common stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
Participation in Future Offerings
Until twelve months from the closing of the offering, the underwriters shall have a right of first refusal to act on our behalf as lead or managing underwriters or exclusive financial advisors for any offering of securities, merger, acquisition or similar transaction.
Determination of Offering Price
Prior to this offering, there has not been a public market for our shares. The public offering price of the shares offered by this prospectus has been determined by negotiation between us and the underwriters. Among the factors considered in determining the public offering price of the shares were:
our history and our prospects;
our financial information and historical performance;
the industry in which we operate;
the status and development prospects for our products and services;
the experience and skills of our executive officers; and
the general condition of the securities markets at the time of this offering.
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the common stock. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the common stock can be resold at or above the public offering price.
84
Listing
Our common stock has been approved for listing on the Nasdaq Capital Market under the symbol “NUZE.”
Electronic Distribution
A prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters of this offering, or by its affiliates. Other than the prospectus in electronic format, the information on the underwriters’ website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.
Other Relationships
The underwriters have informed us that they do not expect to confirm sales of our common stock offered by this prospectus to any accounts over which they exercise discretionary authority.
Some of the underwriters and their affiliates may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They may in the future receive customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers.
Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling Restrictions Outside the United States
Notice to Prospective Investors in Canada
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering. The common shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the common shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Notice to Prospective Investors in the United Kingdom
This prospectus is only being distributed to and is only directed at persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive that are also (i) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion)
85
Order 2005 within, and/or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) (all such persons together being referred to as “relevant persons”). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom who is not a relevant person should not act or rely on this prospectus or any of its contents.
Notice to Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the common shares may not be circulated or distributed, nor may the common shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.
Notice to Prospective Investors in the People’s Republic of China
This prospectus may not be circulated or distributed in China and the common shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of China except pursuant to applicable laws, rules and regulations of China. For the purpose of this paragraph only, China does not include Taiwan and the special administrative regions of Hong Kong and Macau.
Notice to Prospective Investors in Hong Kong
The common shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to our common shares be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to our common shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to Prospective Investors in Taiwan, the Republic of China
The common shares have not been and will not be registered with the Financial Supervisory Commission of the Republic of China (“Taiwan”), pursuant to relevant securities laws and regulations and may not be offered or sold in Taiwan through a public offering or in any manner which would constitute an offer within the meaning of the Securities and Exchange Act of Taiwan or would otherwise require registration with or the approval of the Financial Supervisory Commission of Taiwan.
Notice to Prospective Investors in Japan
The common shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the “Financial Instruments and Exchange Law”), and each underwriter has agreed that it will not offer or sell any common shares, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term, as used in this prospectus means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in
86
compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
87
The validity of the issuance of the shares of common stock offered hereby will be passed upon for us by Polsinelli PC, Los Angeles, California. Schiff Hardin LLP, Washington, DC, is representing the underwriters.
The consolidated financial statements of NuZee, Inc. (the “Company”) as of September 30, 2019 and 2018 and for each of the two years in the period ended September 30, 2019 included in this prospectus have been so included in reliance on the report (which includes an explanatory paragraph relating to NuZee’s ability to continue as a going concern as described in Note 2 to the financial statements) of MaloneBailey, LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock and public warrants, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We file annual, quarterly and special reports and other information with the SEC. Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings will also be available to the public on, or accessible through, our corporate website at www.mynuzee.com. You may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information we file with the SEC or contained on or accessible through our corporate website or any other website that we may maintain is not part of this prospectus or the registration statement of which this prospectus is a part.
88
NUZEE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Annual Financial Statements As of and For the Years Ended September 30, 2019 and 2018
Report of Independent Registered Public Accounting FirmF-2
Financial Statements:
Consolidated Balance SheetsF-3
Consolidated Statements of OperationsF-4
Consolidated Statements of Comprehensive LossF-5
Consolidated Statements of Changes in Stockholder’s EquityF-6
Consolidated Statements of Cash FlowsF-7
Notes to Consolidated Audited Financial StatementsF-8
Unaudited Interim Financial Statements As of and For the Six Months Ended March 31, 2020 and 2019
Financial Statements:
Consolidated Balance Sheets (unaudited)F-23
Consolidated Statements of Operations (unaudited)F-24
Consolidated Statements of Comprehensive Income (Loss) (unaudited)F-25
Consolidated Statements of Changes in Stockholder’s Equity (Deficit) (unaudited)F-26
Consolidated Statements of Cash Flows (unaudited)F-27
Notes to Consolidated Unaudited Financial Statements (unaudited)F-28
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
NuZee, Inc.
Plano, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NuZee, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 24, 2019 expressed an adverse opinion.
Going Concern Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2013.
Houston, Texas
December 24, 2019
F-2
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
|
| September 30, 2019 |
| September 30, 2018 |
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
| $ 1,326,040 |
| $ 1,806,666 |
Accounts receivable, net |
| 540,310 |
| 144,632 |
Accounts receivable - Related party |
| - |
| 222 |
Inventories, net |
| 500,986 |
| 134,877 |
Prepaid expenses and other current assets |
| 372,456 |
| 94,718 |
Other current assets - Related party |
| 460 |
| 33,887 |
Total current assets |
| 2,740,252 |
| 2,215,002 |
|
|
|
|
|
Property and equipment, net |
| 1,875,591 |
| 674,393 |
|
|
|
|
|
Other assets: |
|
|
|
|
Goodwill |
| - |
| 17,112 |
Customer List, net |
| - |
| 34,424 |
Other asset |
| 634,701 |
| 41,581 |
|
| 634,701 |
| 93,117 |
|
|
|
|
|
Total assets |
| $ 5,250,544 |
| $ 2,982,512 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
| $ 341,095 |
| $ 268,283 |
Current portion of long-term loan payable |
| 101,148 |
| 44,229 |
Other current liabilities |
| 531,861 |
| 160,773 |
Other current liabilities - Related party |
| 2,812 |
| 2,782 |
Total current liabilities |
| 976,916 |
| 476,067 |
|
|
|
|
|
Non-current liabilities: |
|
|
|
|
Loan payable - long term, net of current portion |
| $ 156,816 |
| $ 88,063 |
Other non-current liabilities |
| 1,750 |
| 6,317 |
|
| 158,566 |
| 94,380 |
|
|
|
|
|
Total liabilities |
| 1,135,482 |
| 570,447 |
|
|
|
|
|
Stockholders’ equity : |
|
|
|
|
Common stock; 100,000,000 shares authorized, $0.00001 par value; 13,617,366 and 13,194,591 shares issued |
| $ 137 |
| $ 132 |
Additional paid in capital |
| 28,898,344 |
| 14,957,491 |
Accumulated deficit |
| (24,795,687) |
| (12,607,722) |
Accumulated other comprehensive loss |
| (90,635) |
| (30,967) |
Total NuZee, Inc. stockholders’ equity |
| 4,012,159 |
| 2,318,934 |
Noncontrolling interest |
| 102,903 |
| 93,131 |
Total stockholders’ equity |
| 4,115,062 |
| 2,412,065 |
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ 5,250,544 |
| $ 2,982,512 |
The accompanying notes are an integral part of these consolidated financial statements
F-3
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Year Ended |
| Year Ended |
Revenues, net |
| $ 1,793,590 |
| $ 1,388,972 |
Cost of sales |
| 1,498,473 |
| 1,321,755 |
Gross Profit |
| 295,117 |
| 67,217 |
|
|
|
|
|
Operating expenses |
| 12,399,282 |
| 3,685,186 |
Loss from operations |
| (12,104,165) |
| (3,617,969) |
|
|
|
|
|
Other income |
| 39,237 |
| 63,484 |
Equity in loss of unconsolidated affiliate |
| - |
| (10,733) |
Other expense |
| (144,741) |
| (1,906) |
Interest expense |
| (5,267) |
| (2,468) |
Net loss |
| (12,214,936) |
| (3,569,592) |
Net income (loss) attributable to noncontrolling interest |
| (26,971) |
| 7,579 |
Net loss attributable to NuZee, Inc. |
| ($12,187,965) |
| ($3,577,171) |
|
|
|
|
|
Basic and diluted loss per common share |
| $ (0.88) |
| $ (0.29) |
|
|
|
|
|
Basic and diluted weighted average number of common stock outstanding |
| 13,867,643 |
| 12,234,107 |
The accompanying notes are an integral part of these consolidated financial statements
F-4
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| NuZee, Inc. |
| Noncontrolling Interests |
| Total | ||||||
For the years ended September 30, 2019 and 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Net income (loss) |
| $ (12,187,965) |
| $ (3,577,171) |
| $ (26,971) |
| $ 7,579 |
| $ (12,214,936) |
| $ (3,569,592) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
| (59,668) |
| (10,287) |
| 36,743 |
| (7,305) |
| (22,925) |
| (17,592) |
Total other comprehensive income (loss), net of tax |
| (59,668) |
| (10,287) |
| 36,743 |
| (7,305) |
| (22,925) |
| (17,592) |
Comprehensive income (loss) |
| $ (12,247,633) |
| $ (3,587,458) |
| $ 9,772 |
| $ 274 |
| $ (12,237,861) |
| $ (3,587,184) |
The accompanying notes are an integral part of these consolidated financial statements
F-5
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| Common stock |
| Additional paid-in capital |
|
| Accumulated deficit |
| Noncontrolling interest |
| Accumulated other comprehensive income (loss) |
| Total stockholders’ equity | |||
Shares |
| Amount | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance September 30, 2017 |
| 11,573,513 |
| $ 116 |
| $ 9,718,879 |
|
| $ (9,030,551) |
| $ 92,857 |
| $ (20,680) |
| $ (760,621) | |
Common stock issued for cash |
| 1,602,988 |
| 16 |
| 4,542,643 |
|
| - |
| - |
| - |
| 4,542,659 | |
Common stock issued for service |
| 11,534 |
| - |
| 14,880 |
|
| - |
| - |
| - |
| 14,880 | |
Stock issuance costs |
| 6,556 |
| - |
| (157,690) |
|
| - |
| - |
| - |
| (157,690) | |
Stock option expense |
| - |
| - |
| 838,779 |
|
| - |
| - |
| - |
| 838,779 | |
Other comprehensive gain (loss) |
| - | - |
| - |
|
| - |
| (7,305) |
| (10,287) |
| (17,592) |
| |
Net gain (loss) |
| - |
| - |
| - |
|
| (3,577,171) |
| 7,579 |
| - |
| (3,569,592) | |
Balance September 30, 2018 |
| 13,194,591 |
| $ 132 |
| $ 14,957,491 |
|
| $ (12,607,722) | $ | $ 93,131 |
| $ (30,967) |
| $ 2,412,065 | |
Common stock issued for cash |
| 366,814 |
| 4 |
| 5,947,918 |
|
| - |
| - |
| - |
| 5,947,922 | |
Common stock issued to settle payables |
| 5,961 |
| - |
| 123,923 |
|
| - |
| - |
| - |
| 123,923 | |
Stock option expense |
| - |
| - |
| 7,859,141 |
|
| - |
| - |
| - |
| 7,859,141 | |
Common stock issued for services |
| 50,000 |
| 1 |
| 37,499 |
|
|
|
|
|
|
|
| 37,500 | |
Stock issuance costs |
| - |
| - |
| (27,628) |
|
| - |
| - |
| - |
| (27,628) | |
NuZee foreign currency gain (loss) |
| - |
| - |
| - |
|
| - |
| 36,743 |
| (59,668) |
| (22,925) | |
Net loss |
| - |
| - |
| - |
|
| (12,187,965) |
| (26,971) |
| - |
| (12,214,936) | |
Balance September 30, 2019 |
| 13,617,366 |
| $ 137 |
| $28,898,344 |
|
| $ (24,795,687) |
| $ 102,903 |
| $ (90,635) |
| $ 4,115,062 | |
The accompanying notes are an integral part of these consolidated financial statements
F-6
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| For the Year Ended September 30, 2019 |
| For the Year Ended September 30, 2018 |
Operating activities: |
|
|
|
|
Net loss |
| $ (12,187,965) |
| $ (3,569,592) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
Depreciation and Amortization |
| 452,207 |
| 163,323 |
Loss on sale of assets |
| 6,096 |
| 1,906 |
Stock option expense |
| 7,859,141 |
| 838,779 |
Common stock issued for services |
| 37,500 |
| 14,880 |
Inventory impairment |
| - |
| 81,496 |
Allowance for (recovery of) doubtful accounts, net |
| (30,313) |
| 83,030 |
Loss on settlement of payable |
| 91,684 |
| - |
Equity in loss of unconsolidated affiliate |
| - |
| 10,733 |
Change in operating assets and liabilities: |
|
|
|
|
Accounts receivable |
| (365,364) |
| (85,041) |
Accounts receivable - Related party |
| 222 |
| 12,033 |
Inventories |
| (366,109) |
| 49,111 |
Prepaid expenses and other current assets |
| (277,738) |
| (33,781) |
Other current assets - Related party |
| 33,428 |
| (4,807) |
Other asset |
| (451) |
| - |
Accounts payable |
| (19,490) |
| 161,645 |
Other liabilities |
| (4,567) |
| 1,704 |
Accrued expense and other current liabilities |
| 371,088 |
| 38,047 |
Deferred revenue |
| - |
| (74,222) |
Other current liabilities - Related party |
| 30 |
| - |
Net cash used in operating activities |
| (4,400,601) |
| (2,310,756) |
|
|
|
|
|
Investing activities: |
|
|
|
|
Purchase of equipment |
| (1,469,128) |
| (550,206) |
Proceeds from sales of equipment |
| 23,600 |
| - |
Cash paid for deposit on equipment |
| (592,440) |
| - |
Net cash used in investing activities |
| (2,037,968) |
| (550,206) |
|
|
|
|
|
Financing activities: |
|
|
|
|
Proceeds from issuance of common stock |
| 5,947,922 |
| 4,542,659 |
Stock issuance cost |
| (27,628) |
| (157,690) |
Proceeds from loans – long term |
| - |
| (3,259) |
Proceeds from issuance of loan - short term - Related party |
| - |
| 341,000 |
Repayment of loans - short term - |
| (54,350) |
| (45,118) |
Repayment of loans - short term - Related party |
| - |
| (341,200) |
Borrowing of loans – long term |
| 138,953 |
| - |
Net cash provided by financing activities |
| 6,004,897 |
| 4,336,392 |
|
|
|
|
|
Effect of foreign exchange on cash and cash equivalents |
| (46,954) |
| (16,091) |
|
|
|
|
|
Net change in cash |
| (480,626) |
| 1,459,339 |
|
|
|
|
|
Cash, beginning of period |
| 1,806,666 |
| 347,327 |
Cash, end of period |
| $ 1,326,040 |
| $ 1,806,666 |
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
Cash paid for interest |
| $ 1,500 |
| $ 3,909 |
Cash paid for taxes |
| $ 800 |
| $ 800 |
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
Auto purchased on loan |
| $ 38,127 |
| $ - |
Equipment purchased on account |
| $ 124,540 |
| $ - |
Stock issued to settle payables |
| $ 32,239 |
| $ - |
The accompanying notes are an integral part of these consolidated financial statements
F-7
NuZee, Inc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
1. ORGANIZATION
NuZee, Inc. (the “Company”, “we”, “our”, “us’) was incorporated on November 9, 2011 in Nevada. The Company is a start-up organization which is a specialty coffee company and the leading single serve pour over coffee co-packer in the United States. We look 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. In addition, we plan to opportunistically leverage our strengths and relationships to grow our proprietary NuZee, Coffee Blenders®, Twin Peaks® and Pine Ranch® brands in the United States and select international markets.
On August 16, 2016, the Company entered into a Share Exchange Agreement with NuZee JAPAN Co., Ltd (“NuZee JP”) and its shareholders whereby the Company exchanged 382,911 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP. The acquisition of NuZee JP closed on October 3, 2016.
NuZee JP was incorporated on December 16, 2013 in Aichi, Japan and is a start-up organization which markets and distributes consumer products primarily in the beverage segment. NuZee JP primarily intends to purchase and resell its proprietary products directly to consumers through its website portal as well as through online stores such as Rakuten and Japan Post online shop.
On June 11, 2018, the Company started business in South Korea as NuZee KOREA Ltd. (“NuZee KR”).
On September 11, 2018, NuZee Investments Co, Ltd. (“NuZee INV”) was founded in Japan as a wholly owned subsidiary of the Company. NuZee INV primarily manages the Company’s capital raising efforts in Japan as well as investor relations for Japanese shareholders.
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.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects and have been consistently applied in preparing the accompanying financial statements.
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.
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 years ended September 30, 2019 and 2018, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.
F-8
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 September 30, 2019, the Company had cash of $1,326,040 and working capital of $1,763,336. However, 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 and an accumulated deficit. 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.
Use of Estimates
In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is an estimate of the exit price, representing the amount that would be received to, sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under generally accepted accounting principles provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
The carrying amounts of cash, accounts receivable, accounts payable, accrued liabilities and short-term debt approximate fair value because of the short-term nature of these instruments. The carrying amount of long-term debt approximates fair value because the debt is based on current rates at which the Company could borrow funds with similar remaining maturities. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of September 30, 2019 and 2018.
F-9
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash with high quality banking institutions. From time to time, the Company may or may not maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit.
Accounts Receivable
Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. The Company recognized $119,569 and $169,517 of allowance for doubtful accounts as of September 30, 2019 and 2018, respectively.
Major Customers
For the years ended September 30, 2019 and 2018, revenue was primarily from major customers disclosed below.
For the year ended September 30, 2019:
|
|
|
|
|
|
|
|
|
Customer Name |
| Sales Amount |
| % of Total |
| Accounts |
| % of Total |
Customer K |
| $ 344,275 |
| 19 % |
| $ 330,121 |
| 61 % |
Customer M |
| $ 333,855 |
| 19 % |
| $ 35,577 |
| 7 % |
Customer WP |
| $ 282,905 |
| 16 % |
| $ 74,633 |
| 14 % |
For the year ended September 30, 2018:
|
|
|
|
|
|
|
|
|
Customer Name |
| Sales Amount |
| % of Total |
| Accounts |
| % of Total |
Customer M |
| $ 898,330 |
| 64 % |
| $ 99,203 |
| 69 % |
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 JP is the lessee of certain equipment under a capital lease extending through 2021. 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 $6,651 as of September 30, 2019. The capital lease liability is included in other current liabilities on the consolidated balance sheets.
F-10
Future minimum lease payments under capital lease as of September 30, 2019 for each of the remaining years are as follows:
2020 |
|
| 4,901 |
2021 |
|
| 1,750 |
Total Minimum Lease Payments | $ 6,651 | ||
On May 7, 2019, we entered into a lease of 16,603 square-foot facility in Plano, Texas. The lease begins on June 1, 2019 and expires on June 30, 2024, and the base rent begins at $9,616 per month and increases periodically reaching $10,823 per month in the final year of the lease. The base rent does not include the Company’s share of operating expenses which are currently $3,348 per month and could increase up to 10% per year. This facility will become our future single serve pour over co-packing hub.
The Company leases office spaces under leases with terms ranging from month to month to 61 months. Rent expense included in general and administrative expense for the years ended September 30, 2019 and 2018 was $169,624 and $74,001 respectively.
Future minimum rents as of September 30, 2019 for each of the remaining years are as follows:
2020 |
|
|
| $212,286 |
2021 |
|
|
| 159,923 |
2022 |
|
|
| 163,516 |
2023 |
|
|
| 167,216 |
2024 |
|
|
| 127,539 |
Total Minimum Lease Payments | $830,480 | |||
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 in the consolidation.
The Company consolidates its subsidiary in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.
NuZee JAPAN Co., Ltd (“NuZee JP”), NuZee KOREA Ltd (“NuZee KR”) and NuZee Investments Co., Ltd. (“NuZee INV”) are wholly owned subsidiaries of the Company.
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 adjustment recorded to other comprehensive loss amounted to $59,668 and $10,287 as of September 30, 2019 and 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. Foreign currency transaction (gains) losses included in the consolidated statements of operations totaled $(1,615) and $(17,192) for the years ended September 30, 2019 and 2018, respectively.
F-11
Equity Method
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and consolidated statements of operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption ‘‘Equity in loss of unconsolidated affiliate’’ in the consolidated statements of operations. The Company’s carrying value in an equity method investee company is reflected in the caption ‘‘Investment in unconsolidated affiliate’’ in the Company’s consolidated balance sheets.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Goodwill
The Company evaluates goodwill on an annual basis or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. During the year ended September 30, 2019, it was determined that the entire amount of the carrying amount of goodwill was impaired and as a result, goodwill of $17,112 was written off during the year.
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 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 goods 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 did not have a material impact on our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.
Return and Exchange Policy
The Company provides a 30-day money-back guarantee if a buyer is not satisfied with a product. All of the products are thoroughly inspected and securely packaged before they are shipped to ensure buyers receive the best possible product. If for any reason buyers are unsatisfied with the products, they can return them and the Company will exchange or refund the purchase minus any shipping charges. For the wholesale customers, return policies varies based on their specific agreements with customers. Under chargebacks agreements with the customers, the Company agrees to reimburse the seller for a portion of the costs incurred by the seller to advertise and promote certain of the Company’s products. The Company estimates, accrues and recognized such chargebacks. These amounts are included in the determination of net sales.
F-12
As of September 30 2019 and September 30, 2018, the Company had $119,569 and $169,517 of sales allowances for estimated chargebacks and returns, respectively. Revenue recognized is net of sales allowances.
Cost Recognition
Cost of products sold is primarily comprised of direct materials consumed in the manufacturing of co-packing arrangements or the production of our own products for resale. Cost of products sold also includes directly related labors’ salaries and other overhead cost.
Selling, General and Administrative Expense
Selling, general and administrative expense (SG&A) is primarily comprised of marketing expenses, research and development costs, administrative and other indirect overhead costs, depreciation expense and other miscellaneous operating items. Personnel expenses, occupying a majority portion of SG&A, were $1,042,788 and $787,723 for the years ended September 30, 2019 and 2018, respectively. In some situations, the Company covers shipping fees and the shipping and handling expenses are recorded under operating expenses in the consolidated statements of operations.
Advertising Expenses
The Company expenses advertising costs when incurred. Advertising expense for the years ended September 30, 2019 and 2018 is as follows:
| September 30, 2019 | September 30, 2018 |
Advertising | $ 57,357 | $ 63,304 |
The consolidated statements of cash flows are prepared using the indirect method, which reconciles net loss to cash flow from operating activities. The reconciliation adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in net loss. The adjustments also remove cash flows arising from investing and financing activities, which are presented separately from operating activities.
Research and Development
Research and development expenses are expensed in the consolidated statements of operations as incurred in accordance with FASB ASC 730, Research and Development. Research and development expenses for the years ended September 30, 2019 and 2018 amounted to $1,825 and $18,166, respectively.
Inventory
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 September 30, 2019 and 2018, the carrying value of inventory of $500,986 and $134,877 respectively, reflected on the consolidated balance sheets is net of this adjustment.
|
| September 30, 2019 |
| September 30, 2018 |
Raw materials |
| $ 327,985 |
| $ 30,200 |
Finished goods |
| 173,001 |
| 104,677 |
Less - Inventory reserve |
| - |
| - |
Total |
| $ 500,986 |
| $ 134,877 |
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation. The Company generally depreciates property and equipment on a straight-line basis over the estimated useful lives of the assets after the assets are placed in service except for NuZee KR which uses the declining balance method. Office equipment is depreciated
F-13
over a 3-year life, furniture over a 7-year life, and other equipment over a 5-year life. Depreciation expense for the years ended September 30, 2019 and 2018 was $400,671 and $151,848 respectively. Repair and maintenance costs are expensed as incurred. Expenditures associated with upgrades and enhancements that improve, add functionality, or otherwise extend the life of property and equipment that exceed $1,000 are capitalized. Property and equipment as of September 30, 2019 and 2018 consist of:
| September 30, 2019 |
| September 30, 2018 |
Furniture & Fixture | $ 85,872 |
| $ 25,642 |
Machinery & Equipment | 2,317,929 |
| 806,374 |
Vehicles | 63,727 |
| 44,657 |
Leasehold Improvements | 65,113 |
| 56,809 |
Software | -- |
| 14,807 |
Less - Accumulated Depreciation | (657,050) |
| (273,896) |
Net Property and Equipment | $ 1,875,591 |
| $ 674,393 |
The Company is required to make deposits or prepayments and progress payments on equipment purchases before the Company receives possession and title. As a result, the Company accounts for such payments as Other Assets until it has possession at which time the equipment is recorded as Property and Equipment. Deposits for purchase of equipment as of September 30, 2019 is $592,440.
Samples
The Company distributes samples of its products as a component of its marketing program. Costs for samples are expensed at the time the samples are produced and recorded under operating expenses in the consolidated statements of operations.
Long-Lived Assets
The Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicated that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.
Intangible Assets
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible asset consists of customer list which, recognized as a result of the acquisition of NuZee JAPAN Co., Ltd..
As of September 30, 2019, the Company evaluated its intangible asset and as a result of this evaluation the balance was written off.
| September 30, 2019 | |||
| Gross Carrying | Accumulated | Net Carrying | |
| Amount | Amortization | Amount | |
Amortized intangible assets: |
|
|
| |
Customer List |
| $ 57,374 | ($57,374) | - |
Total |
| $ 57,374 | ($57,374) | - |
F-14
Aggregate amortization expense for the years ended September 30, 2019, and September 30, 2018, totaled $34,424 and $11,475, respectively.
Income Taxes
In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of September 30, 2019 and 2018.
Related parties
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Stock-based Compensation
We account for share-based awards issued to employees in accordance with Accounting Standards Codification (ASC) 718, “Compensation-Stock Compensation”. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period, which is normally the vesting period. Share-based compensation to directors is treated in the same manner as share-based compensation to employees, regardless of whether the directors are also employees. We account for share-based compensation to persons other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments and is recognized as expense over the service period. We estimate the fair value of share-based payments using the Black Scholes option-pricing model for common stock options and warrants and the closing price of our common stock for common share issuances. We recognized forfeitures as they occurred.
Comprehensive income/loss
Comprehensive income/loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income/loss are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company’s current component of other comprehensive income/loss pertain to foreign currency translation adjustments.
Non-controlling Interests
Non-controlling interests represent third-party ownership in the net assets of the Company’s consolidated subsidiary and are presented as a component of equity.
Segment Information
ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating Segments in interim financial reports
F-15
issued to stockholders. Management has determined that the Company operates in one business segment, which is the commercialization and development of functional beverages.
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 Company does not believe the impact of this implementation will be material to its financial statements.
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 and the Company anticipates classifying majority of its leases as a right to use asset and the associated operating lease liability of not more than approximately $830,000.
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 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 determined that the adoption of ASU 2017-11 will not have an impact on the Company’s financial statements.
F-16
3. LOANS
On June 30, 2016, NuZee JAPAN Co., Ltd 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 September 30, 2019 amounted to $48,619. On January 27, 2017, NuZee JAPAN Co., Ltd entered into a loan agreement with Nihon Seisaku Kouko. NuZee JP 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 September 30, 2019 amounted to $44,087.
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 September 30, 2019 amounted to $35,196.
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 financing has 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 September 30, 2019 amounts to $130,070.
The loan payments required for the next five years are as follows:
| Tono Shinyo Kinko Bank | Nihon Seisaku Kouko | Ford Motor Credit | ShinHan Bank |
2020 | $ 27,783 | $18,781 | $7,286 | $47,298 |
2021 | 20,828 | 18,781 | 7,500 | 47,298 |
2022 | - | 6,525 | 7,720 | 35,474 |
2023 | - | - | 7,947 | - |
2024 | - | - | 4,743 | - |
Total Loan Payment | $48,611 | $44,087 | $35,196 | $130,070 |
4. GEOGRAPHIC CONCENTRATIONS
The Company is organized based on fundamentally one geographic segment although it does sell its products on a world-wide basis.
Information about the Company’s geographic operations for years ended September 30, 2019 and 2018 are as follows:
|
|
|
| Twelve Months Ended September 30, 2019 | Twelve Months Ended September 30, 2018 |
Net Revenue: |
|
|
North America | $ 1,111,243 | $ 400,177 |
Japan | 656,845 | 968,662 |
South Korea | 25,502 | 20,133 |
| $ 1,793,590 | $ 1,388,972 |
|
|
|
Property and equipment, net: | September 30, 2019 | September 30, 2018 |
North America | $ 1,471,859 | $ 508,711 |
Japan | 6,329 | 7,864 |
South Korea | 397,403 | 157,818 |
| $ 1,875,591 | $ 674,393 |
F-17
5. RELATED PARTY TRANSACTIONS
Loans
During the year ended September 30, 2018, the Company borrowed the sum of $2,000 unsecured short-term loan from Masateru Higashida to be repaid on or before December 31, 2018 at an interest rate of one percent (1%). The Company fully paid the loan during the year ended September 30, 2018.
During the year ended September 30, 2018, the Company borrowed the sum of $154,000 unsecured short-term loan from NuZee Co., Ltd to be repaid on or before October 31, 2018 at an interest rate of one percent (1%) and the sum of $185,000 unsecured short-term loan to be repaid on or before January 31, 2019 at an interest rate of one percent (1%). The Company fully paid these loans as of September 30, 2018.
All short-term loans are related party transactions since Masateru Higashida is the Company’s major shareholder and he holds 100% ownership of NuZee Co., Ltd. Masateru Higashida and NuZee Co., Ltd, are related parties of the Company.
Sales, Purchases and Operating Expenses
For the year ended September 30, 2019 and 2018, NuZee JP sold their products to Eguchi Holdings Co., Ltd (“EHCL”), and the sales to them totaled approximately $6,120 and $3,420 respectively. The corresponding accounts receivable balance from EHCL was ($106) and $222 as of September 30, 2019 and 2018, 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.
NuZee INV has, in prior years, leased an employee to Contlus, Inc. (“Contlus”). Contlus is the Company’s related party as the Company holds 50% of Contlus’s issued shares. Contlus has payable balance of $33,451 and as this balance is deemed uncollectible, it has been written off at September 30, 2019.
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 September 30, 2019, NuZee JP has a payable balance to NuZee Co., Ltd. of $1,552 and NuZee JP has a receivable balance from Nuzee Co. Ltd. of $460.
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 term of this agreement is 3 years and the Company expects it will be automatically renewed. At September 30, 2019, the payable balance under this lease was $1,154.
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.
6. COMMON STOCK
During year ended September 30, 2018, the Company sold 1,602,988 shares of common stock at a weighted average price of $2.83 per share, for aggregate purchase price of $4,542,659. The Company incurred stock issuance costs of $157,690 which includes the fair value of 6,556 shares, amounting to $23,600, issued to settle fees owed to consultant.
During year ended September 30, 2018, the Company issued 11,534 shares with a fair value of $14,880 to a consultant for services received.
During the year ended September 30, 2019, the Company sold 366,814 shares of common stock at a weighted average price of $16.22 per share, for an aggregate purchase price of $5,947,922, as well as incurred $27,628 in stock issuance costs. 26,203 shares were sold to NuZee Co., Ltd. for a total purchase price of $459,855. The proceeds were used for general corporate purposes.
F-18
During the year ended September 30, 2019, the Company issued 5,961 shares of common stock to settle payables amounting to $32,239. The Company recognized a loss on settlement of payables of $91,684 for the year ended September 30, 2019.
During the year ended September 30, 2019, the Company issued 50,000 shares of common stock to satisfy a previously committed service obligation of $37,500.
7. STOCK OPTIONS
During July 2016, the Company issued 106,667 options to an employee. The right to exercise these options shall vest and become exercisable on December 31, 2021. The exercise price is $2.64 per share and will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
During January 2017, the Company issued 28,000 options to employees. The right to exercise these options shall vest and become exercisable on January 2018. The exercise price is $1.20-$1.53 per share and will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
During July 2017, the Company issued 723,333 options to employees and 143,333 options to non-employees. The right to exercise these options shall vest and become exercisable on January 2018. The exercise price is $1.53-$1.68 per share and will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
During June 2018, the Company issued 133,334 options to an employee. The right to excise these options shall vest and become exercisable on July 2019 over a period of 5 years. The exercise price is $3.96 per share and will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
During August 2018, the Company issued 50,000 options to employees and 200,000 options to non-employees. The right to excise these options shall vest and become exercisable on September 2019 over a period of 5 years. The exercise price is $3.60 per share for the non-employee options and $3.96 per share for the employee options. The options will expire ten years from the grant date for non-employee and 6.5 years for employee, unless terminated earlier as provided by the option agreements.
From April to September of 2019, the Company issued 203,333 options to employees and 33,333 options to non-employees. The right to excise these options shall vest and become exercisable on over a period of 4 years for employees and 5 years for non-employees. The exercise price is $19.50 per share for the non-employee options and $19.89 weighted average exercise per share for the employee options. The options will expire ten years from the grant date, unless terminated earlier as provided by the option agreements. Also in 2019, the Company issued 250,000 options to certain employees with milestone based vesting. The exercise price $18.90 per share for these options and the options will expire ten years from the grant date, unless terminated earlier as provided by the option agreements.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on a representative peer group of small public companies in their industry segment as the Company has a limited stock history. The expected term of options granted was determined using the simplified method under SAB 107 and represents the mid-point between the vesting term and the contractual term. The risk-free rate is calculated using the U.S. Treasury yield curve, and is based on the expected term of the option.
The Black-Scholes option pricing model was used with the following weighted average assumptions for options granted during the twelve months ended September 30, 2019 and 2018, respectively:
F-19
For employees | September 30, 2019 | September 30, 2018 |
Risk-free interest rate | 1.55% - 3.11% | 2.58% - 2.61% |
Expected option life | 10 years | 6.5 years |
Expected volatility | 2776% - 2884% | 94.2% - 95.1% |
Expected dividend yield | 0.00% | 0.00% |
Exercise price | $19.50 - $25.50 | $3.96 |
|
|
|
For non-employees | September 30, 2019 | September 30, 2018 |
Risk-free interest rate | 2.55% | 2.27% - 2.82% |
Expected option life | 10 years | 10 years |
Expected volatility | 2669% | 115.70% - 120.6% |
Expected dividend yield | 0.00% | 0.00% |
Exercise price | $19.50 | $3.60 |
The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expense of $7,859,141 and $838,779 for the years ended September 30, 2019 and 2018. Unamortized option expense as of September 30, 2019, for all options outstanding amounted to approximately $9,564,329. These costs are expected to be recognized over a weighted-average period of 3 years.
The following table summarizes stock option activity for the year ended September 30, 2019.
|
| Number of Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (years) |
| Aggregate Intrinsic Value |
Outstanding at September 30, 2018 |
| 1,314,000 |
| $ 2.34 |
| 8.9 |
| $ 4,407,160 |
Granted |
| 486,667 |
| 19.36 |
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
Forfeited |
| (5,000) |
| 19.50 |
|
|
|
|
Outstanding at September 30, 2019 |
| 1,795,667 |
| $ 6.91 |
| 8.4 |
| 33,384,360 |
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 |
| 517,333 |
| $ 2.35 |
| 8.0 |
| 12,019,960 |
The following table summarizes stock option activity for the year ended September 30, 2018.
|
| Number of Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (years) |
| Aggregate Intrinsic Value |
Outstanding at September 30, 2017 |
| 1,021,500 |
| $ 1.74 |
| 9.6 |
| $ 17,425 |
Granted |
| 383,334 |
| 3.81 |
|
|
|
|
Exercised |
| - |
| - |
|
|
|
|
Expired |
| - |
| - |
|
|
|
|
Forfeited |
| (90,834) |
| 1.41 |
|
|
|
|
Outstanding at September 30, 2018 |
| 1,314,000 |
| $ 2.34 |
| 8.9 |
| $ 4,407,160 |
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2018 |
| 210,667 |
| $ 1.53 |
| 7.9 |
| $ 860,960 |
F-20
A summary of the status of the Company’s unvested shares as of September 30, 2019 and 2018, are presented below:
|
| Number of |
|
| Nonvested Shares |
Nonvested shares at September 30, 2017 |
| 961,333 |
Granted |
| 383,334 |
Exercised |
| - |
Forfeited |
| (80,000) |
Vested |
| (161,334) |
Nonvested shares at September 30, 2018 |
| 1,103,333 |
Granted |
| 486,667 |
Exercised |
| - |
Forfeited |
| (5,000) |
Vested |
| (306,667) |
Nonvested shares at September 30, 2019 |
| 1,278,333 |
8. INCOME TAX
As of September 30, 2019, and, 2018, there were no differences between financial reporting and tax bases of assets and liabilities. The Company will have tax losses available to be applied against future years’ income as result of the losses incurred. However, due to the losses incurred in the period and expected future operating results, management determined that it is more likely than not that the deferred tax asset resulting from the tax losses available for carry forward will not be realized through the reduction of future income tax payments. Accordingly, a 100% valuation allowance has been recorded for deferred income tax assets. Cumulative net operating loss carry forward is $15,514,565 and $11,680,849 as of September 30, 2019 and 2018, respectively, and will begin expiring in 2033. The earliest tax year which remains subject to examination is 2015.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company used an effective tax rate of 30% to deferred tax assets because of this tax rule change.
Deferred tax assets consisted of the following as of September 30, 2019 and 2018
|
| 2019 |
| 2018 |
Net Operating Losses |
| $ 4,654,370 |
| $ 3,504,255 |
Valuation Allowance |
| (4,654,370) |
| (3,504,255) |
9. CONTINGENCIES
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. Matters that are probable of unfavorable outcomes to us and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, our estimates of the outcomes of such matters and our experience in contesting, litigating and settling similar matters. As of the date of this report there are no material pending legal proceedings to which we are a party or of which any of our property is the subject, nor are there any such proceedings known to be contemplated by governmental authorities.
10. SUBSEQUENT EVENTS
During October and November of 2019, the Company sold 111,738 shares of common stock at $17.85 per share, for an aggregate purchase price of $1,994,138.
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. The terms of this agreement require us to pay $2,986.84 per month for
F-21
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.
F-22
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 non-current 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; |
| 138 |
| 137 |
13,729,104 and 13,617,366 shares issued |
|
| ||
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. shareholders’ 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.
F-23
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| Three Months Ended |
| Three Months Ended |
| 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 |
| (2,251,220) |
| (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.
F-24
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.
F-25
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 |
| - |
| - |
| - |
| (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 |
| - |
| - |
| - |
| (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 stock 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 |
| - |
| - |
| - |
| - |
| 4,855 |
| 11,328 |
| 16,183 |
Net loss |
| - |
| - |
| - |
| (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 stock 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 |
| - |
| - |
| - |
| (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.
F-26
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
F-27
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2020
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 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.
F-28
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.
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 | Accounts Receivable | % of Total |
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 | Accounts Receivable | % of Total |
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
F-29
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 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 |
F-30
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 of Operating Lease |
| 155,235 |
Long-Term Operating 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 equpment 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 |
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 |
F-31
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:
| Tono Shinyo | Nihon Seisaku | Ford Motor | ShinHan |
| 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 |
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;
F-32
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
F-33
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.
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.
F-34
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.
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 May 31, 2020 until January 31, 2022. In connection with the extension, we agreed to reduce 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.
F-35
Sale of Equipment to NuZee Latin America
On March 31, 2020, we 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 to joint venture between the two companies. As part of this Payment Agreement, El Marino agreed to pay us $110,000 and transfer to us certain equity interests in the joint venture upon our shipment of two co-packing machines to the joint venture. On April 2, 2020, we received $110,000 from El Marino as part of this agreement. On April 13, 2020, we shipped two co-packing machines to the joint venture as part of this agreement.
F-36
555,555 Shares
NUZEE, INC.
Common Stock
Prospectus
, 2020
The Benchmark Company
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the registration of the common stock hereunder. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the Nasdaq Capital Market listing fee.
|
| Amount to Be |
| |
SEC registration fee |
| $ | 784 |
|
FINRA filing fee |
|
| 2,312 |
|
Nasdaq Capital Market listing fee |
|
| 50,000 |
|
Accountants’ fees and expenses |
|
| 44,000 |
|
Transfer and registrar fees and expenses |
|
| 3,000 |
|
Legal fees and expenses |
|
| 550,000 |
|
Miscellaneous expenses |
|
| 20,000 |
|
Total |
| $ | 670,096 |
|
Item 14. Indemnification of Directors and Officers
The Company’s articles of Incorporation and second amended and restated bylaws provide that, to the fullest extent permitted by the laws of the State of Nevada, any person who was or is a party or is threatened to be made a party to any proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, trustee, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise. For the avoidance of doubt, the foregoing indemnification obligation includes, without limitation, claims for monetary damages against an indemnitee to the fullest extent permitted under Chapter 78 of the Nevada Revised Statutes as in existence on the date hereof.
The indemnification provided shall be from and against expenses (including attorneys’ fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by such indemnified person in connection with such action, suit or proceeding if such indemnified person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe such indemnified person’s conduct was unlawful.
In the case of any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that such indemnified person is or was a director, trustee, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable for gross negligence or willful misconduct in the performance of such indemnified person’s duty to the Company unless, and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite circumstances of the case, such indemnified person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper.
The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Company.
To the extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses
II-1
incurred or paid by a director, officer or controlling person of our company in the successful defense of any action, suit or proceeding) is asserted by any of our directors, officers or controlling persons in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.
Item 15. Recent Sales of Unregistered Securities
The following lists set forth information regarding all securities sold or granted by us within the past three years that were not registered under the Securities Act, and the consideration, if any, received by us for such securities:
(1)Between July 2016 and August 2017, we sold to private investors an aggregate of 382,657 shares of treasury stock in exchange for cash at a price per share of $1.53 for an aggregate purchase price of $585,465.
(2)During August 2017, we sold to private investors an aggregate of 11,534 shares of treasury stock in exchange for cash at a price per share of $1.29 for an aggregate purchase price of $14,879.
(3)Between August 2017 and September 2017, we issued and sold to private investors an aggregate of 117,343 shares of our common stock in exchange for cash at a price per share of $1.53 for an aggregate purchase price of $179,535.
(4)Between October 2017 and December 2017, we issued and sold to private investors an aggregate of 432,752 shares of our common stock in exchange for cash at a price per share of $1.53 for an aggregate purchase price of $662,110.
(5)Between January 2018 and March 2018, we issued and sold to private investors an aggregate of 14,510 shares of our common stock in exchange for cash at a price per share of $1.53 and an aggregate of 353,334 shares of our common stock in exchange for cash at a price per share of $3.00, for an aggregate purchase price of $1,082,200.
(6) Between April 2018 and June 2018, we issued and sold to private investors an aggregate of 150,451 shares of our common stock in exchange for cash at a price per share of $3.00 and an aggregate of 92,500 shares of our common stock in exchange for cash at a price per share of $3.60, for an aggregate purchase price of $784,352.
(7)Between July 2018 and September 2018, we issued and sold to private investors an aggregate of 559,444 shares of our common stock in exchange for cash at a price per share of $3.60 for an aggregate purchase price of $2,013,997.
(8)Between October 2018 and December 2018, we issued and sold to private investors an aggregate of 116,891 shares of our common stock in exchange for cash at a price per share ranging from $3.60 to $16.38, for an aggregate purchase price of $1,494,805.
(9)Between January 2019 and March 2019, we issued and sold to private investors an aggregate of 13,870 shares of our common stock in exchange for cash at a price per share of $16.44 for an aggregate purchase price of $228,204, and issued an aggregate of 50,844 shares of our common stock as payment for previously agreed services and to settle certain payables.
(10)Between April 2019 and June 2019, we issued and sold to private investors an aggregate of 206,267 shares of our common stock in exchange for cash at a price per share of $17.52, for an aggregate purchase price of $3,612,183.
(11)During July 2019, we issued and sold to private investors an aggregate of 34,332 shares of our common stock in exchange for cash at a price per share of $17.55 for an aggregate purchase price of $602,530.
II-2
(12)Between October and November 2019, we issued and sold to private investors an aggregate of 111,738 shares of our common stock in exchange for cash at a price per share of $17.85, for an aggregate purchase price of $1,994,138.
(13)Since October 1, 2016, we have granted stock options to purchase an aggregate of 2,695,334 shares of our common stock with an average exercise price of $6.81 per share to certain of our employees, directors, and service providers. |
Each of the foregoing issuances was made in a transaction not involving a public offering pursuant to an exemption from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act, or Regulation D or Regulation S promulgated under the Securities Act. Each of the recipients of securities in any transaction exempt from registration either received or had adequate access, through employment, business or other relationships, to information about us.
II-3
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
The following exhibits are filed as part of this registration statement:
Exhibit Number |
| Description |
1.1 |
| |
3.1 |
| |
3.2 |
| |
3.3 |
| |
3.4 |
| |
4.1 |
| |
5.1 |
| |
10.1*† |
| |
10.2*† |
| Employment Agreement dated February 1, 2016, by and between NuZee, Inc. and Travis Gorney |
10.3*† |
| Employment Agreement dated March 31, 2019, by and between NuZee, Inc. and Shanoop Kothari |
10.4*† |
| |
10.5*† |
| |
10.6* |
| |
10.7* |
| |
21.1* |
| |
23.1 |
| |
23.2 |
|
*Previously filed.
†Indicates management contract or compensatory plan.
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information called for is not required or is shown either in the financial statements or the notes thereto.
II-4
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1)To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)To include any prospectus required by section 10(a)(3) of the Securities Act of 1933.
(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2)That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3)To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4)For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Plano, State of Texas, on the 13th day of May, 2020.
NUZEE, INC. | ||||
|
| |||
By: |
| /s/ Masateru Higashida | ||
|
| Name: |
| Masateru Higashida |
|
| Title: |
| Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
/s/ Masateru Higashida |
|
|
|
May 13, 2020 |
Masateru Higashida |
| Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director |
|
|
/s/ Shanoop Kothari |
|
|
| May 13, 2020 |
Shanoop Kothari |
| Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director |
|
|
/s/ Kevin J. Conner |
|
|
| May 13, 2020 |
Kevin J. Conner |
| Director |
|
|
/s/ J. Chris Jones |
|
|
|
May 13, 2020 |
J. Chris Jones |
| Director |
|
|
/s/ Allen S. Morton |
|
|
|
May 13, 2020 |
Allen S. Morton |
| Director |
|
|
Exhibit 1.1
NUZEE, INC.
UNDERWRITING AGREEMENT
May [ ], 2020
Benchmark Company LLC
150 E. 58th Street, 17th floor
New York, NY 10155
As Representative of the several Underwriters
named on Schedule 1 attached hereto
Ladies and Gentlemen:
The undersigned, NuZee, Inc., a Nevada corporation (the “Company”), hereby confirms its agreement (this “Agreement”) with Benchmark Company LLC (hereinafter referred to as “you” (including its correlatives) or the “Representative”) and with the other underwriters named on Schedule 1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:
1.Purchase and Sale of Shares.
1.1Firm Shares.
1.1.1.Nature and Purchase of Firm Shares.
(i)On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the several Underwriters as provided in this Agreement an aggregate of [ ] shares of common stock, par value $0.00001 per share (the “Common Stock”), of the Company (the “Firm Shares”), and each Underwriter agrees to purchase from the Company, severally and not jointly, at the Closing, the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at the purchase price for one Firm Share of $[ ] (or 93% of the Purchase Price, as defined below).
(ii)The Firm Shares are to be offered together to the public at the offering price per one Firm Share as set forth on Schedule 2-A hereto (the “Purchase Price”).
1.1.2.Firm Shares Payment and Delivery.
(i)Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the second (2nd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the third (3rd) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Schiff Hardin LLP at 901 K Street, NW, Suite 700, Washington, DC 20001 (“Representative’s Counsel”), or at such other place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”
(ii)Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance satisfactory to the Representative) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”) or via DWAC transfer) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
1.2.Over-allotment Option.
1.2.1.Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option (the “Over-allotment Option”) to purchase, in the aggregate, up to [ ] additional shares of the Common Stock (the “Option Shares”, and along with the Firm Shares, the “Shares”), representing fifteen percent (15%) of the Firm Shares sold in the Offering (as defined below), from the Company. The purchase price to be paid per Option Share shall be equal to the price per Option Share set forth in Schedule 2-A. The Shares shall be issued directly by the Company and shall have the rights and privileges described in the Registration Statement, the Pricing Disclosure Package and the Prospectus referred to below. The offering and sale of the Shares is herein referred to as the “Offering.”
1.2.2.Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within forty-five (45) days after the Effective Date. The Underwriters shall not be under any obligation to purchase any the Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of written notice to the Company from the Representative, setting forth the number of the Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (each such date, an “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative’s Counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of the Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of the Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.
1.2.3.Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Representative) representing the applicable number of Option Shares (or through the facilities of DTC or via DWAC transfer) for the account of the Underwriters. The applicable number of Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing prior to the applicable Option Closing Date. The Company shall not be obligated to sell or deliver any Option Shares except upon tender of payment by the Representative for the applicable Option Shares.
1.3 Representative’s Warrants.
1.3.1.Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designees) on the Closing Date a five-year warrant for the purchase of a number of the Firm Shares equal to 5% of the number of the Firm Shares and Option Shares, if any, issued in the Offering, pursuant to a warrant in the form attached hereto as Exhibit A (the “Representative’s Warrant”), at an initial exercise price of $[ ] (or 100% of the Purchase Price). The Representative’s Warrant and the Shares issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrant and the underlying Shares during the period of one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrant, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.
1.3.2.Delivery. Delivery of the Representative’s Warrant shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request in writing at least two (2) Business Days prior to the Closing Date.
2.Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as follows:
2.1.Filing of Registration Statement.
2.1.1.Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-234643), including any related prospectus or prospectuses, for the registration of the Shares and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”). Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus (as defined below) included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated by reference therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.
Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated April [ ], 2020 that was included in the Registration Statement immediately prior to the Applicable Time (as defined below) is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.
“Applicable Time” means [TIME] [a.m. / p.m.], Eastern time, on the date of this Agreement.
“Pricing Disclosure Package” means the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.
2.1.2.Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number []) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Common Stock. The registration of the Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
2.2.Share Exchange Listing. The Shares and the shares of Common Stock underlying the Representative’s Warrants have been approved for listing on the NASDAQ Capital Market (the “Exchange”), subject to official notice of issuance, and the Company has taken no action designed to, or likely to, result in the delisting of the Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing.
2.3.No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.
2.4.Disclosures in Registration Statement.
2.4.1.Compliance with Securities Act and 10b-5 Representation.
(i)Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii)Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to statements made or omitted in reliance upon and in conformity with written information furnished to the Company in writing with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure set forth under the [ ], [ ], [ ], [ ]and [ ] paragraphs in the “Underwriting” section of the Prospectus (the “Underwriters’ Information”).
(iii)The Pricing Disclosure Package, as of the Applicable Time did not, at the Closing Date will not or at any Option Closing Date (if any) will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information; and
(iv)Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.
2.4.2.Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed, as the case may be. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and that is filed as an exhibit to the Registration Statement has been duly authorized and validly executed by the Company, and is in full force and effect.
2.4.3.Prior Securities Transactions. During the past three (3) years from the date of this Agreement, no securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and any Preliminary Prospectus.
2.4.4.Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company's business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.
2.5.Changes after Dates in Registration Statement.
2.5.1.No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company or its Subsidiaries (as defined below) taken as a whole, nor, to the Company’s knowledge, any change or development that, singularly or in the aggregate, would involve a material adverse change in or affecting the condition (financial or otherwise), results of operations, business, or assets of the Company or its Subsidiaries taken as a whole (a “Material Adverse Change”); (ii) there have been no material transactions entered into by the Company or its Subsidiaries, other than as contemplated pursuant to this Agreement; and (iii) no officer or director of the Company has resigned from any position with the Company.
2.5.2.Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities (other than (i) grants under any stock compensation plan and (ii) shares of common stock issued upon exercise or conversion of option, warrants or convertible securities described in the Registration Statement, the Pricing Disclosure Package and the Prospectus) or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital Share.
2.6.Independent Accountants. To the knowledge of the Company, MaloneBailey LLP (“Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as may otherwise be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
2.7.Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein, in all cases on the basis stated in the Registration Statement. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in all material respects in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply in all material respects with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) the Company and its subsidiaries listed in Exhibit 21.1 to the Registration Statement (each, a “Subsidiary” and, collectively, the “Subsidiaries”) considered as one entity, has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its Common Stock or preferred stock (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries (other than (i) grants under any stock compensation plan and (ii) shares of common stock issued upon exercise or conversion of option, warrants or convertible securities described in the Registration Statement, the Pricing Disclosure Package and the Prospectus), and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt. The Company represents that it has no direct or indirect subsidiaries other than those listed in Exhibit 21.1 to the Registration Statement.
2.8.Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued Common Stock or any security convertible or exercisable into Common Stock, or any contracts or commitments to issue or sell Common Stock or any such options, warrants, rights or convertible securities.
2.9.Valid Issuance of Securities, etc.
2.9.1.Outstanding Securities. All issued and outstanding shares of Common Stock of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; and none of such shares of Common Stock were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Common Stock, preferred stock, and any other securities outstanding or to be outstanding upon consummation of the Offering conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements.
2.9.2.Securities Sold Pursuant to this Agreement. The Shares and Representative’s Warrant have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and paid for pursuant to this Agreement, will be validly issued, fully paid and non-assessable; the Shares and Representative’s Warrant will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Shares and Representative’s Warrant has been duly and validly taken; the Common Stock issuable upon exercise of the Representative’s Warrant has been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when issued in accordance with such Representative’s Warrant, such Common Stock will be validly issued, fully paid and non-assessable. The Shares and the Representative’s Warrant conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.10.Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act by reason of the filing of the Registration Statement with the Commission.
2.11.This Agreement and the Representative’s Warrant.
(i)This Agreement has been duly and validly authorized, executed and delivered by the Company.
(ii)The Representatives’ Warrant has been duly and validly authorized by the Company, and, when executed and delivered, will constitute the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except: (A) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (B) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (C) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
2.12.No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the consummation by the Company of the transactions contemplated hereby and by the Registration Statement, the Pricing Disclosure Package and the Prospectus, and the compliance by the Company with the terms hereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Articles of Incorporation (as the same may be amended or restated from time to time, the “Charter”) or the Second Amended and Restated Bylaws of the Company (as the same may be amended or restated from time to time, the “Bylaws”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”) as of the date hereof, except in the cases of clauses (i) and (iii) for such breaches, conflicts or violations which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Change.
2.13.No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not (i) in violation of any term or provision of its Charter or Bylaws, or (ii) in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except in the cases of clause (ii) for such violations which would not reasonably be expected, individually or in the aggregate, to cause a Material Adverse Change.
2.14.Corporate Power; Licenses; Consents.
2.14.1.Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for the absence of which would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Change.
2.14.2.Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency, the Exchange or other body is required for the valid issuance, sale and delivery of the Shares and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrant and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable Securities Act laws, Securities Act Regulations, state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
2.15.D&O Questionnaires. To the Company's knowledge, without investigation, all information contained in the questionnaires (the "Questionnaires") completed by each of the Company's directors and officers immediately prior to the Offering (the "Insiders") as supplemented by all information concerning the Company's directors, officers and principal shareholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.
2.16.Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus and which is required to be disclosed, in each case which, individually or in the aggregate, is reasonably expected to result in a Material Adverse Change.
2.17.Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Nevada as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change.
2.18.Insurance. The Company carries or is entitled to the benefits of insurance, (including, without limitation, as to directors and officers insurance coverage), with, to the Company’s knowledge, reputable insurers, in the amount of directors and officers insurance coverage at least equal to $[ ] and the Company has included each Underwriter as an additional insured party to the directors and officers insurance coverage and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.
2.19.Transactions Affecting Disclosure to FINRA.
2.19.1.Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Shares hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA.
2.19.2.Payments within Six (6) Months. Other than the payment to the Underwriters as provided hereunder in connection with the Offering and except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, within the six (6) months immediately prior to the original filing of the Registration Statement the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member.
2.19.3.Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
2.19.4.FINRA Affiliation. To the Company’s knowledge, and except as may otherwise be disclosed in FINRA questionnaires provided to the Representative’s Counsel, there is no (i) officer or director of the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
2.19.5.Information. All information provided by the Company in its FINRA questionnaire to Representative’s Counsel specifically for use by Representative’s Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.
2.20.Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, or operations of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.
2.21.Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
2.22.Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
2.23.Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative’s Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
2.24.Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of 5% or more of the Company’s outstanding Common Stock (or securities convertible or exercisable into Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in a form substantially similar to that attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.
2.25.Subsidiaries. All Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not, individually or in the aggregate, have a Material Adverse Change. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.26.Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required by the Securities Act Regulations.
2.27.Board of Directors. The Board of Directors of the Company (the “Board”) comprises the persons set forth under the heading of the Pricing Disclosure Package and the Prospectus captioned “Management.” The qualifications of the persons serving as Board members and the overall composition of the Board comply with the Exchange Act, the rules and regulations of the Commission under the Exchange Act (the “Exchange Act Regulations”), the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules (the “Audit Committee”) of the Exchange. In addition, at least a majority of the persons serving on the Board qualify as “independent,” as defined under the listing rules of the Exchange.
2.28.Sarbanes-Oxley Compliance.
2.28.1.Disclosure Controls. Except as disclosed in the Registration Statement, Pricing Disclosure Package and the Prospectus, the Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
2.28.2.Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and has taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.
2.29.Accounting Controls. Except as disclosed in the Registration Statement, Pricing Disclosure Package and the Prospectus, the Company maintains systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, its principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal control over financial reporting, and with respect to such remedial actions disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company represents that it has taken all remedial actions set forth in such disclosure. The Auditor and the Audit Committee have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.
2.30.No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.
2.31.No Labor Disputes. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent.
2.32.Intellectual Property Rights. The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company and its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any material infringement of, or license or similar fees for, any Intellectual Property Rights of others. Neither the Company nor any of its Subsidiaries has received any written notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims in this Section 2.32, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in violation of the rights of any persons.
2.33.Taxes. Each of the Company and its Subsidiaries has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof, except in any case in which the failure so to file would not reasonably be expected to cause a Material Adverse Change. Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary, except for any such taxes that are currently being contested in good faith or as would not reasonably be expected to cause a Material Adverse Change. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Representative, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.
2.34.ERISA Compliance. The Company has no “employee benefit plans” subject to the Employee Retirement Income Security Act of 1974, as amended, or the regulations and published interpretations thereunder.
2.35.Compliance with Laws. Except as otherwise disclosed in the Registration Statement, Pricing Disclosure Package and Prospectus and as could not, individually or in the aggregate, be expected to result in a Material Adverse Change, the Company: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the services provided by the Company (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any other governmental authority alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such material Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received written notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any governmental authority or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such governmental authority or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought would result in a Material Adverse Change; (E) has not received written notice that any governmental authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such governmental authority is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission); and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post-sale warning, or other notice or action relating to the alleged lack of safety of any product or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.
2.36.Intentionally Omitted.
2.37.Real Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any written notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, which would result in a Material Adverse Change.
2.38.Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or its Subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.
2.39.Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company, its Subsidiaries or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.40.Industry Data; Forward-looking statements. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
2.41.Intentionally omitted.
2.42.Testing-the-Waters Communications. The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications made with the written consent of the Representative to entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Representative to engage in Testing-the-Waters Communications. The Company confirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule 2-B hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act; “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.
2.43.Intentionally Omitted.
2.44.Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Common Stock to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.
2.45.Dividends and Distributions. Except as disclosed in the Pricing Disclosure Package, Registration Statement and the Prospectus, no Subsidiary of the Company is currently prohibited or restricted, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary’s capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary’s property or assets to the Company or any other Subsidiary of the Company.
2.46.Lending Relationships. Except as disclosed in the Pricing Disclosure Package, Registration Statement and the Prospectus, the Company (i) does not have any material lending or other relationship with any bank or lending affiliate of the Underwriters and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of the Underwriters.
3.Covenants of the Company. The Company covenants and agrees as follows:
3.1.Amendments to Registration Statement. The Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.
3.2.Federal Securities Laws.
3.2.1.Compliance. The Company, subject to Section 3.2.2, shall comply with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative as soon as practicable, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Shares and the Representative’s Warrant for offering or sale in any jurisdiction, or of the initiation or, to the Company’s knowledge, threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Shares and Representative’s Warrant. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems reasonably necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof as soon as practicable.
3.2.2.Continued Compliance. The Company shall comply with the Securities Act and the Securities Act Regulations so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Shares, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative’s Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.
3.2.3.Intentionally Omitted.
3.2.4.Intentionally Omitted.
3.2.5.Testing-the-Waters Communications. If at any time following the distribution of any Written Testing-the-Waters Communication there has occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
3.3.Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or, upon written request, shall deliver or make available to the Representative and Representative’s Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and upon request will also deliver to the Underwriters, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.4.Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or, upon written request, will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.5.Effectiveness and Events Requiring Notice to the Representative. The Company shall use its commercially reasonable efforts to cause the Registration Statement covering the issuance of the Common Stock underlying the Warrants to remain effective with a current prospectus for at least nine (9) months after the Applicable Time, and shall notify the Representative immediately and confirm the notice in writing: (i) of the cessation of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the initiation by any state securities commission of any proceedings for the suspension of the qualification of the Shares for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company shall make every reasonable effort to obtain promptly the lifting of such order.
3.6.Intentionally Omitted.
3.7.Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the Common Stock on the Exchange for at least three (3) years from the date of this Agreement.
3.8.Intentionally omitted.
3.9.Reports to the Representative; Transfer Agent.
3.9.1.Periodic Reports, etc. For a period of one (1) year from the date of this Agreement, the Company shall furnish or make available to the Representative, as soon as practicable after they are available, copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities, and shall also furnish or make available to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of each Form 8-K prepared and filed by the Company; and (iii) a copy of each registration statement filed by the Company under the Securities Act; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative’s Counsel in connection with the Representative’s receipt of such information. Documents filed with or furnished to the Commission on EDGAR shall be deemed to have been delivered to the Representative pursuant to this Section 3.9.1.
3.9.2.Transfer Agent; Transfer Sheets. For a period of one (1) year after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. VStock Transfer, LLC is acceptable to the Representative to act as Transfer Agent for the Common Stock.
3.9.3.Trading Reports. For a period of six months after the date hereof, during such time as the Shares are listed on the Exchange, the Company shall provide to the Representative, at the Company’s expense, such reports published by the Exchange relating to price trading of the Shares, as the Representative shall reasonably request.
3.10.Payment of Expenses
3.10.1.General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all reasonable, necessary and accountable out-of-pocket expenses actually incurred and incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all Public Filing System filing fees associated with the review of the Offering by FINRA; (b) all fees, expenses and disbursements relating to background checks of the Company’s senior management not to exceed $5,000; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Shares under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (e) the costs associated with receiving commemorative mementos and Lucite tombstones; (f) fees and expenses of the Representative’s Counsel not to exceed $75,000; (g) the cost associated with the Underwriters’ use of Ipreo’s book-building, prospectus tracking and compliance software for the Offering; and (h) the Underwriters’ “road show” expenses for the Offering, with all of the Underwriters’ actual out-of-pocket expenses under sub-sections 3.10.1(c), (e)-(h) not to exceed $150,000. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters; provided, however, that in the event that the Offering is terminated as provided in Section 8.2 hereof, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof. Except as provided in this 3.10.1 or in Section 3.10.2, Section 5 or Section 8.3 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel.
3.10.2.Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.10.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1.0%) of the gross proceeds received by the Company from the sale of the Shares (excluding the Option Shares).
3.11.Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
3.12.Delivery of Earnings Statements to Security Holders. The Company shall timely file such reports pursuant to the Exchange Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the Securities Act.
3.13.Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or stockholders has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares.
3.14.Internal Controls. Except to the extent disclosed in the Registration Statement, Pricing Disclosure Package and Prospectus, the Company shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
3.16.FINRA. For a period of 90 days from the later of the Closing Date or the final Option Closing Date, if any, the Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the original Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
3.17.No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
3.18.Company Lock-Up. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of six months after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i) above or this clause (ii) is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise; or (iii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than pursuant to a registration statement on Form S-8 for employee benefit plans). The restrictions contained in this section shall not apply to (a) the Shares and the Representative’s Securities to be sold hereunder; and (b) the issuance by the Company of securities (1) pursuant to stock option plans or other equity compensation arrangements existing on the date hereof or (2) upon the exercise of an outstanding option or warrant or the conversion of a security outstanding on the date hereof and disclosed in the Registration Statement and the Pricing Disclosure Package.
3.19.Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.
3.20.Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Shares; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
3.21.Reporting Requirements. The Company, during the period when a prospectus relating to the Shares is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Shares as may be required under Rule 463 under the Securities Act Regulations.
4.Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Shares, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and each Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:
4.1.Regulatory Matters.
4.1.1.Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by you, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
4.1.2.FINRA Clearance. On or before the date of this Agreement, FINRA shall have confirmed to the Representative that it has not raised any objection with respect to the fairness and reasonableness of the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.
4.1.3.Exchange Share Market Clearance. On the Closing Date, the Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Option Shares shall have been approved for listing on the Exchange, subject only to official notice of issuance.
4.2.Company Counsel Matters.
4.2.1.Closing Date Opinion of Counsel. On the Closing Date, the Representative shall have received the favorable opinion addressed to each of the Underwriters (including the Representative), of Polsinelli PC, counsel for the Company, to the effect set forth in Exhibit D hereto, and a written statement providing certain “10b-5” negative assurances, addressed to the Underwriters and dated the Closing Date, each in a form reasonably satisfactory to the Representative.
4.2.2.Option Closing Date Opinion of Counsel. On each Option Closing Date, if any, the Representatives shall have received the favorable opinion of counsel listed in Section 4.2.1 dated such Option Closing Date, addressed to each of the Underwriters (including the Representative) and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date the statements made by such counsel in their opinion delivered on the Closing Date.
4.3.Comfort Letters.
4.3.1.Cold Comfort Letter. At the time this Agreement is executed you shall have received a cold comfort letter from the Auditor containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to the Auditor, dated as of the date of this Agreement.
4.3.2.Bring-down Comfort Letter. At each of the Closing Date and each Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) business days prior to the Closing Date or the Option Closing Date, as applicable.
4.4.Officers’ Certificates.
4.4.1.Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer and its Chief Financial Officer, in their respective capacities as such officers only, stating that (i) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (ii) to the best of their knowledge, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct in all material respects (except for those representations and warranties qualified as to materiality, which shall be true and correct in all respects and except for those representations and warranties which refer to facts existing at a specific date, which shall be true and correct as of such date) and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iii) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, a Material Adverse Change.
4.4.2.Secretary’s Certificate. At each of the Closing Date and each Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors (and any pricing committee thereof) relating to the Offering are in full force and effect and have not been modified; and (iii) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
4.5.No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no Material Adverse Change in the condition or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may reasonably be expected to cause a Material Adverse Change, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
4.6.Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.
4.7.Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative’s Counsel shall have been furnished with such documents and opinions as they may require for the purpose of enabling Representative’s Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Shares and the Representative’s Warrant as herein contemplated shall be satisfactory in form and substance to the Representative and Representative’s Counsel.
5.Indemnification.
5.1.Indemnification of the Underwriters.
5.1.1.General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all reasonable and documented legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries (a “Claim”), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in (A) the Registration Statement, the Pricing Disclosure Package, any Preliminary Prospectus, the Prospectus or any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (B) any live “road show” or investor presentations made to investors by the Company; or (C) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Shares and Representative’s Warrant under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement, Pricing Disclosure Package or Prospectus, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Shares to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof. The Company also agrees that it will reimburse each Underwriter Indemnified Party for all reasonable and documented fees and expenses actually incurred (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) (collectively, the “Expenses”), and further agrees wherever and whenever possible to advance payment of Expenses as they are incurred by an Underwriter Indemnified Party in investigating, preparing, pursuing or defending any Claim.
5.1.2.Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the approval of such Underwriter Indemnified Party) and payment of actual expenses if an Underwriter Indemnified Party requests that the Company do so. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such action, and the reasonable and documented fees and expenses of such counsel shall be at the expense of the Company and shall be advanced by the Company; provided, however, that the Company shall not be obligated to bear the reasonable fees and expenses of more than one firm of attorneys selected by the Underwriter Indemnified Party (in addition to one local counsel firm for each relevant jurisdiction, if necessary). Notwithstanding anything to the contrary contained herein, and provided that the Company has timely honored its obligations under Section 5, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld. The Company shall not be liable for any settlement of any action effected without its consent (which shall not be unreasonably withheld). In addition, the Company shall not, without the prior written consent of the Underwriters (which consent shall not be unreasonably withheld), settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action in respect of which advancement, reimbursement, indemnification or contribution may be sought hereunder (whether or not such Underwriter Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination (i) includes an unconditional release of each Underwriter Indemnified Party, acceptable to such Underwriter Indemnified Party, from all liabilities, expenses and claims arising out of such action for which indemnification or contribution may be sought and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any Underwriter Indemnified Party.
5.2.Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all losses, liabilities, claims, damages and expenses described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to such losses, liabilities, claims, damages and expenses (or actions in respect thereof) which arise out of or are based upon untrue statements or omissions, or alleged untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto, or any Written Testing-the-Waters Communication, any live “road show” or investor presentations made to investors by the Company or in any application, in reliance upon, and in conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Shares or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Written Testing-the-Waters Communication.
5.3.Contribution. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5(a) or 5(c) in respect of any Liabilities and Expenses referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such Liabilities and Expenses, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and each of the Underwriters, on the other hand, from the Offering, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in connection with the matters as to which such Liabilities or Expenses relate, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds actually received by the Company from the Offering of the Public Securities purchased under this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions actually received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, on the one hand, and the Underwriters, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company through the Representative by or on behalf of any Underwriter for use in any Preliminary Prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriters’ Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). Notwithstanding the above, no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Securities Act shall be entitled to contribution from a party who was not guilty of such fraudulent misrepresentation.
5.4.Limitation. The Company also agrees that no Indemnified Person shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with advice or services rendered or to be rendered by any Indemnified Person pursuant to this Agreement, the transactions contemplated thereby or any Indemnified Person’s actions or inactions in connection with any such advice, services or transactions, except to the extent that a court of competent jurisdiction has made a finding that Liabilities (and related Expenses) of the Company have resulted from such Indemnified Person’s fraud, bad faith, gross negligence or willful misconduct in connection with any such advice, actions, inactions or services or such Indemnified Person’s breach of this Agreement or any obligations of confidentiality owed to the Company.
5.5.Survival & Third-Party Beneficiaries. The advancement, reimbursement, indemnity and contribution obligations set forth in this Section 5 shall remain in full force and effect regardless of any termination of, or the completion of any Indemnified Person’s services under or in connection with, this Agreement. Each Indemnified Person is an intended third-party beneficiary of this Section 5, and has the right to enforce the provisions of Section 5 as if he/she/it was a party to this Agreement.
6.Default by an Underwriter.
6.1.Default Not Exceeding 10% of Firm Shares or Option Shares. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.
6.2.Default Exceeding 10% of Firm Shares or Option Shares. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Shares or Option Shares, you may in your discretion arrange for yourself or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, you do not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to you to purchase said Firm Shares or Option Shares on such terms. In the event that neither you nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 6, this Agreement will automatically be terminated without liability on the part of the Company (except as provided in Sections 8.3 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.
6.3.Postponement of Closing Date. In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of counsel for the Underwriter may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares or Option Shares.
7.Right of First Refusal. Provided that the Firm Shares are sold in accordance with the terms of this Agreement, the Representatives shall have an irrevocable right of first refusal (the “Right of First Refusal”), for a period of twelve (12) months after the date the Offering is completed, to act as lead or joint investment banker, lead or joint book-runner, lead or joint underwriter and/or lead or joint placement agent, at the Representatives’ sole and exclusive discretion, for each and every future public and private equity and debt offering, including all equity linked financings (each, a “Subject Transaction”), during such twelve (12) month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the Representatives for such Subject Transactions.
8.Effective Date of this Agreement and Termination Thereof.
8.1.Effective Date. This Agreement shall become effective when both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.
8.2.Termination. The Representative shall have the right to terminate this Agreement by notice given to and received by the Company at any time prior to any Closing Date if, prior to that time, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, general securities markets in the United States; (ii) trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; (iii) the United States shall have become involved in a new war or an increase in major hostilities; (iv) a banking moratorium has been declared by a New York State or federal authority; (v) a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; (vi) the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; (vii) the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) the Representative shall have become aware after the date hereof of such a Material Adverse Change, or such adverse material change in general market conditions as in the Representative’s judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Shares or to enforce contracts made by the Underwriters for the sale of the Shares.
8.3.Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters pursuant to Section 6.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative’s Counsel not to exceed $37,500) up to $87,500 and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
8.4.Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
8.5.Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Shares.
9.Miscellaneous.
9.1.Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission and confirmed and shall be deemed given when so delivered or faxed and confirmed or if mailed, two (2) days after such mailing.
If to the Representative:
Benchmark Company LLC
150 E 58th Street, 17th floor
New York, NY 10155
Attn: President
Fax No:
With a copy (which shall not constitute notice) to:
Schiff Hardin LLP
901 K Street, NW, Suite 700
Washington, DC 20001
Attention: Ralph V. De. Martino, Esq.
Fax No: (202) 724-6848
If to the Company:
NuZee, Inc.
1700 Capital Avenue, Suite 100
Plano, Texas 75074
Attn: Masateru Higashida, Chief Executive Officer
With a copy (which shall not constitute notice) to:
Polsinelli PC
2049 Century Park East, Suite 2900
Los Angeles, California 90067
Attention: Alan A. Lanis, Jr.
Fax No: (310) 556-1802
9.2.Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
9.3.Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
9.4.Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and Benchmark Company LLC, dated as of July 18, 2019 shall remain in full force and effect.
9.5.Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.
9.6.Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.7.Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.
9.8.Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature Page Follows]
If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours, | |
| |
NUZEE, INC. | |
By: | __________________________________ |
| Name: |
| Title: |
Confirmed as of the date first written above mentioned, on behalf of itself and as Representative of the several Underwriters named on Schedule 1 hereto:
BENCHMARK COMPANY, LLC
By: |
|
| Name: |
| Title: |
Underwriter |
| Total |
|
| Number of Additional |
|
BENCHMARK COMPANY, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
|
|
|
|
|
Pricing Information
Number of Firm Shares: []
Number of Option Shares: []
Public Offering Price per Firm Share: [ ]
Public Offering Price per Option Share: []
Underwriting Discount per Firm Share: $[]
Underwriting Discount per Option Share: $[]
Written Testing-the-Waters Communications
List of Lock-Up Parties
Form of Representative’s Warrant
Form of Lock-Up Agreement
Form of Press Release
Form of Opinion of Polsinelli PC
Exhibit 4.1
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (AS DEFINED BELOW) TO ANYONE OTHER THAN (I) THE BENCHMARK COMPANY LLC OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING (AS DEFINED BELOW) IN CONNECTION WITH WHICH THIS PURCHASE WARRANT WAS ISSUED TO THE UNDERWRITER AS CONSIDERATION, OR (II) A BONA FIDE OFFICER OR PARTNER OF BENCHMARK COMPANY LLC.
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [ ], 2020. VOID AFTER 5:00 P.M., EASTERN TIME, [ ], 2025.
COMMON STOCK PURCHASE WARRANT
For the Purchase of [ ] Shares of Common Stock
of
NuZee, Inc.
1.Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [] (“Holder”), as registered owner of this common stock purchase warrant (this “Purchase Warrant”), to NuZee, Inc., a Nevada corporation (the “Company”), Holder is entitled, at any time or from time to time beginning [ ], 2020 (the “Commencement Date”), and terminating at or before 5:00 p.m., Eastern time, [ ], 2025, which will be the five-year anniversary of the effective date (the “Effective Date”) of the Company’s registration statement on Form S-1 (File No. 333-234643) (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ ] shares of common stock of the Company, par value $0.00001 per share (the “Shares”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[ ] per Share; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context. This Purchase Warrant is being issued pursuant to that certain Underwriting Agreement, dated [ ], 2020 (the “Agreement”), between the Company and, on behalf of the Underwriters named on Schedule 1 thereto, The Benchmark Company LLC (“Benchmark”). The Company’s offering contemplated by the Agreement is referred to herein as the “Offering.”
2.Exercise.
2.1Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire. Each exercise hereof shall be irrevocable.
2.2Cashless Exercise. In lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 2.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant
to the Company, together with the exercise form attached hereto, in which event the Company will issue to Holder Shares in accordance with the following formula:
X | = | Y(A-B) |
| |||||
A |
| |||||||
Where, |
|
|
| |||||
| X | = | The number of Shares to be issued to Holder; | |||||
| Y | = | The number of Shares for which the Purchase Warrant is being exercised; | |||||
| A | = | The fair market value of one Share; and | |||||
| B | = | The Exercise Price. | |||||
|
|
|
|
|
| |||
For purposes of this Section 2.2, the fair market value of a Share is defined as follows:
(i)if the Company’s common stock is traded on a national securities exchange, the value shall be deemed to be the closing price on such exchange on the Business Day immediately preceding the date that the exercise form is delivered pursuant to Section 8.4 in connection with the exercise of the Purchase Warrant; or
(ii)if the Company’s common stock is not then traded on a securities exchange and if the Company’s common stock is actively traded over-the-counter on any tier of the OTC Markets or any successor over-the-counter market, the value shall be deemed to be the closing bid on the Business Day immediately preceding the date that the exercise form is submitted in connection with the exercise of the Purchase Warrant; provided, however, if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.
2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law which, in the opinion of counsel to the Company, is available.”
2.4 Resale of Shares. Holder and the Company acknowledge that as of the date hereof the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) has published Compliance & Disclosure Interpretation 528.04 in the Securities Act Rules section thereof, stating that the holder of securities issued in connection with a public offering may not rely upon Rule 144 promulgated under the Act to establish an exemption from registration requirements under Section 4(a)(1) under the Act, but may nonetheless apply Rule 144 constructively for the resale of such shares in the following manner: (a) provided that six months has elapsed since the last sale under the registration statement, an underwriter or finder may resell the securities in accordance with the provisions of Rule 144(c), (e), and (f), except for the notice requirement; (b) a purchaser of the shares from an underwriter receives restricted securities unless the sale is made with an appropriate, current prospectus, or unless the sale is made pursuant to the conditions contained in (a) above; (c) a purchaser of the shares from an underwriter who receives restricted securities may include the underwriter’s holding period, provided that the underwriter or finder is not an affiliate of the issuer; and (d) if an underwriter transfers the shares to its employees, the employees may tack the firm’s holding period for purposes of Rule 144(d), but they must aggregate sales of the distributed shares with those of other employees, as well as those of the underwriter or finder, for a six-month period from the date of the transfer to the employees. In the event that following a reasonably-timed written request by Holder to transfer the Shares in accordance with Compliance & Disclosure Interpretation 528.04 counsel for the Company in good faith concludes that Compliance & Disclosure Interpretation 528.04 no longer may be relied upon as a result of changes in applicable laws, regulations, or interpretations of the Staff of the Division of Corporation Finance of the SEC, or as a
result of judicial interpretations not known by the Company or its counsel on the date hereof, then the Company shall promptly, and in any event within five (5) business days following the request, provide written notice to Holder of such determination. In the absence of such conclusion by counsel for the Company, the Company shall, upon such a request of Holder given no earlier than six months after the final closing of the Offering, instruct its transfer agent to permit the transfer of such shares in accordance with Compliance & Disclosure Interpretation 528.04, provided that Holder has provided such documentation as shall be reasonably be requested by the Company to establish compliance with the conditions of Compliance & Disclosure Interpretation 528.04.
3.Transfer.
3.1General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) Benchmark or an underwriter, placement agent, or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of Benchmark or of any such underwriter, placement agent or selected dealer, in each case in accordance with Conduct Rule 5110(g)(1) of the Financial Industry Regulatory Authority (“FINRA”), and (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). After 180 days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. Subject to applicable securities laws, the Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder, in a form reasonably acceptable to the Company, that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the SEC and compliance with applicable state securities law has been established.
4.Registration Rights.
4.1Grant of Right. The Holder shall have the right for a period of no more than five (5) years from the Effective Date to include the Shares underlying the Purchase Warrant (collectively, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of common stock of the Company which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.
4.2Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to this Section 4 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable
Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than ten (10) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been registered for resale under the Act or sold by the Holder. The Holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this section; provided, however, that such “piggy-back” registration rights shall terminate on the fifth (5th) anniversary of the Effective Date as provided in Section 4.1.
4.3Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other out-of-pocket expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify Benchmark contained in the Underwriting Agreement. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant to which Benchmark has agreed to indemnify the Company.
4.4 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
4.5 Documents Delivered to Holders. The Company shall deliver promptly to each Holder participating in the offering who so requests the correspondence and memoranda described below, copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times, during normal business hours, as any such Holder shall reasonably request.
4.6 Underwriting Agreement. The Holders shall be parties to any underwriting agreement relating to the Registrable Securities. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Registrable Securities and the amount and nature of their ownership thereof and their intended methods of distribution.
4.7 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
5.New Purchase Warrants to be Issued.
5.1Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company
shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, determined in the sole discretion of the Company, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6.Adjustments.
6.1Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.
6.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.
6.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation or merger of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation or merger in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation or merger of the Company with or into, another corporation (other than a consolidation
or share reconstruction or amalgamation or merger which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation or merger, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations or mergers.
6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
7. Reservation. The Company shall at all times reserve and keep available out of its authorized and unissued Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder.
8.Certain Notice Requirements.
8.1Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall deliver to each Holder a copy of each notice relating to such events given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.
8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor.
8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same.
8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to the following address or to such other address as the Company may designate by notice to the Holders:
If to the Holder:
Benchmark Company LLC
150 E. 58th Street, 17th floor
New York, NY 10155
Attention: President
with a copy (which shall not constitute notice) to:
Schiff Hardin LLP
901 K Street, NW, Suite 700
Washington, DC 20001
Attn: Ralph V. De Martino, Esq.
Fax No.: (202) 778-6460
If to the Company:
NuZee, Inc.
1700 Capital Avenue, Suite 100
Plano, Texas 75074
Attn: Masateru Higashida, Chief Executive Officer
With a copy (which shall not constitute notice) to:
Polsinelli PC
2049 Century Park East, Suite 2900
Los Angeles, California 90067
Attention: Alan A. Lanis, Jr.
Fax No: (310) 556-1802
9.Miscellaneous.
9.1Amendments. The Company and Benchmark may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and Benchmark may deem necessary or desirable and that the Company and Benchmark deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed
by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. Each of the Company and the Holder hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the courts located in New York, New York, or in the United States District Court located in New York, New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. Each of the Company and the Holder hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company or the Holder may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company and the Holder in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and Benchmark enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
[Signature Page Follows]
IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the [ ] day of [ ], 2020.
NuZee, Inc.
By: _________________________________
Name:
Title:
[Form to be used to exercise Purchase Warrant]
Date: __________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______ shares of common stock, par value $0.00001 per share (the “Shares”), of NuZee, Inc., a Nevada corporation (the “Company”), and hereby makes payment of $____ (at the rate of $____ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:
| X | = | Y(A-B) | |||
A | ||||||
Where, |
|
|
| |||
| X | = | The number of Shares to be issued to Holder; | |||
| Y | = | The number of Shares for which the Purchase Warrant is being exercised; | |||
| A | = | The fair market value of one Share which is equal to $_____; and | |||
| B | = | The Exercise Price which is equal to $______ per share | |||
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
(Print in Block Letters)
Address:
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
[Form to be used to assign Purchase Warrant]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of Common Stock, par value $0.00001 per share, of NuZee, Inc., a Nevada corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________, 20__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Exhibit 5.1
2049 Century Park East, Suite 2900, Los Angeles, California 90067 · 310.556.1801 |
May 13, 2020
Board of Directors
NuZee, Inc.
1700 Capital Avenue, Suite 100
Plano, Texas 75074
Ladies and Gentlemen:
We are acting as counsel to NuZee, Inc., a Nevada corporation (the “Company”), in connection with its registration statement on Form S-1 (File No. 333-234643) (as amended from time to time, the “Registration Statement”), filed with the Securities and Exchange Commission relating to the proposed offering and sale by the Company of (i) up to 638,888 shares (the “Shares”) of the Company’s common stock, par value $0.00001 per share (“Common Stock”), (ii) underwriters’ warrants to purchase Common Stock equal to 5% of the number of Shares sold pursuant to the Registration Statement (the “Underwriter Warrants”), and (iii) all shares of Common Stock issuable upon exercise of the Underwriter Warrants (the “Warrant Shares”). This opinion letter is furnished to you at your request to enable you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. § 229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of such agreements, instruments and documents as we have deemed an appropriate basis on which to render the opinion hereinafter expressed.
In our examination of the aforesaid documents, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the accuracy and completeness of all documents submitted to us, the authenticity of all original documents, and the conformity to authentic original documents of all documents submitted to us as copies (including electronic copies). As to all matters of fact, we have relied on the representations and statements of fact made in the documents so reviewed, and we have not independently established the facts so relied on. This opinion letter is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on Chapter 78 of the Nevada Revised Statutes, as amended, including interpretations thereof in published decisions of the Nevada courts, and applicable provisions of the Nevada Constitution, and solely with respect to the Underwriter Warrants, the laws of the State of New York (but not including any laws, statutes, ordinances, administrative decisions, rules or regulations of any political subdivision below the state level). We express no opinion herein as to any other laws, statutes, ordinances, rules, or regulations.
Based upon, subject to and limited by the foregoing, we are of the opinion that (i) the Shares have been duly authorized by the Company and, when such Shares are issued and sold by the Company and delivered by the Company against receipt of the purchase price therefor, will be validly issued, fully paid and non-assessable, (ii) the Underwriter Warrants have been duly authorized by the Company and, when duly executed by the Company and delivered to the underwriters, will constitute valid and legally binding obligations of the Company, and (iii) the Warrant Shares have been duly authorized and, when issued upon exercise of the Underwriter Warrants in accordance with the terms thereof, will be validly issued, fully paid and non-assessable.
The opinions expressed in item (ii) of the foregoing paragraph with respect to the valid and binding nature of obligations may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other laws affecting creditors’ rights (including, without limitation, the effect of statutory and other law regarding fraudulent conveyances, fraudulent transfers and preferential transfers), by the exercise of judicial discretion and the application of principles of equity, good faith, fair dealing, reasonableness, conscionability and materiality (regardless of whether the Underwriter Warrants are considered in a proceeding in equity or at law), and by the effect of any issuance or promulgation of executive or similar orders.
This opinion letter has been prepared for your use in connection with the Registration Statement. We assume no obligation to advise you of any changes in the foregoing subsequent to the effective time of the Registration Statement.
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption “Legal Matters” in the prospectus constituting a part of the Registration Statement. In giving this consent, we do not thereby admit that we are an “expert” within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Polsinelli PC
polsinelli.com |
Atlanta Boston Chicago Dallas Denver Houston Kansas City Los Angeles Miami Nashville New York Phoenix St. Louis San Francisco Seattle Silicon Valley Washington, D.C. Wilmington Polsinelli PC, Polsinelli LLP in California |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the inclusion in this Registration Statement on Form S-1 (Amendment #2) of our report dated December 24, 2019 with respect to the audited consolidated financial statements of NuZee, Inc. for the years ended September 30, 2019 and 2018. Our report contains an explanatory paragraph regarding the Company’s ability to continue as a going concern.
We also consent to the references to us under the heading “Experts” in such Registration Statement.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
May 13, 2020
