CIMG Inc 10-Q for FY2020 Q1
CIMG Inc. (CIMG)
About this 10-Q
CIMG Inc filed this 10-Q on February 10, 2020, covering the quarter ended December 31, 2019 (FY2020 Q1).
Headline figures
Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $546.21K
- up 54.6% from $353.41K a year earlier
- Net loss
- $3.43M
- compared with a net loss of $2.59M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ________to ________
Commission File No.
(exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
(
(
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol(s) |
| Name of each exchange on which registered |
None |
| N/A |
| N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ |
| x | |
Non-accelerated filer | ¨ |
| Smaller reporting company | |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of February 10, 2020, NuZee, Inc. had
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Table of Contents
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act, as amended (the “Exchange Act”), Such forward-looking statements reflect the views of NuZee, Inc. (hereinafter "NuZee" or the "Company") with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about our Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as "estimate," "expects", "project," "predict," "believe," "expect," "anticipate," "target," "plan," "intend," "seek," "goal," "will," "should," "may," "targets" or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following: dilution of shareholder investments as a result of necessary capital raises, expenditures to produce and distribute our product, changes in sale levels, changes in the nutritional beverage market, competitor growth, third-party relationship dependent growth, changes in health benefits of our ingredients as a result of subsequent studies, general economic or industry conditions, nationally and/or in the communities in which we conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our operations, products, services, and prices.
We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in the section of our Annual Report on Form 10-K/A filed with the SEC on December 31, 2019 entitled "Risk Factors" and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.
Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
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Item 1. Financial Statements.
4
NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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| December 31, 2019 |
| September 30, 2019 |
ASSETS |
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Current assets: |
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Cash |
| $ |
| $ |
Accounts receivable, net |
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Accounts receivable - Related party |
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Inventories, net |
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Deferred offering costs |
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Other current assets |
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Other current assets - Related party |
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Total current assets |
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Property and equipment, net |
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Other assets: |
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Right-of-use Asset |
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Other asset |
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Total assets |
| $ |
| $ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
| $ |
| $ |
Current portion of long-term loan payable |
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Accrued expenses and other current liabilities |
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Current portion of lease liability |
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Other current liabilities - Related party |
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Total current liabilities |
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Non-current liabilities: |
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Lease Liability |
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Loan payable - long term, net of current portion |
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Other noncurrent liabilities |
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Total non-current liabilities |
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Total liabilities |
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Stockholders' equity: |
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Common stock; |
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Additional paid in capital |
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Accumulated deficit |
| ( |
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Accumulated other comprehensive loss |
| ( |
| ( |
Total NuZee, Inc. shareholders' equity |
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Noncontrolling interest |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
| $ |
| $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| Three Months Ended |
| Three Months Ended |
Revenues |
| $ |
| $ |
Cost of sales |
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Gross Profit |
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Operating expenses |
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Loss from operations |
| ( |
| ( |
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Other income |
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Interest income |
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Other expense |
| ( |
| ( |
Interest expense |
| ( |
| ( |
Net loss |
| ( |
| ( |
Net loss attributable to noncontrolling interest |
| ( |
| ( |
Net loss attributable to NuZee, Inc. |
| $ ( |
| $ ( |
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Basic and diluted loss per common share |
| $ ( |
| $ ( |
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Basic and diluted weighted average number of common stock outstanding |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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| Noncontrolling |
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| NuZee, Inc. |
| Interests |
| Total | |||
For the three months eneded December 31 |
| 2019 | 2018 |
| 2019 | 2018 |
| 2019 | 2018 |
Net loss |
| $ ( | $ ( |
| $ ( | $ ( |
| $ ( | $ ( |
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Foreign currency translation |
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Total other comprehensive income, net of tax |
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Comprehensive loss |
| $ ( | $ ( |
| $ ( | $ ( |
| $ ( | $ ( |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
NuZee , Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
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| Accumulated |
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| Additional |
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| other |
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| Common stock |
| paid-in |
| Accumulated |
| Noncontrolling |
| comprehensive |
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| Shares |
| Amount |
| capital |
| deficit |
| interest |
| income (loss) |
| Total |
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Balance September 30, 2019 |
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| $ |
| $ |
| $ ( |
| $ |
| $ ( |
| $ | |
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Common stock issued for cash |
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Stock option expense |
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Other comprehensive gain |
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Net loss |
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Balance December 31, 2019 |
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| $ |
| $ |
| $ ( |
| $ |
| $ ( |
| $ | |
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| Accumulated |
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| Additional |
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| other |
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| Common stock |
| paid-in |
| Accumulated |
| Noncontrolling |
| comprehensive |
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| Shares |
| Amount |
| capital |
| deficit |
| interest |
| income (loss) |
| Total |
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Balance September 30, 2018 |
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| $ |
| $ |
| $ ( |
| $ |
| $ ( |
| $ | |
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Common shares issued for cash |
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Common stock issued to settle payables |
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Stock option expense |
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Stock issuance costs |
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NuZee foreign currency gain |
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Net loss |
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Balance December 31, 2018 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| Three Months Ended |
| Three Months Ended |
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Operating activities: |
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Net loss |
| $( |
| $( |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and Amortization |
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Noncash lease expense |
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Option expense |
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Inventory impairment |
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Allowance for doubtful accounts |
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Loss on sale of assets |
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Loss on settlement of payable |
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Change in operating assets and liabilities: |
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Accounts receivable |
| ( |
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Accounts receivable - Related party |
| ( |
| ( |
Inventories |
| ( |
| ( |
Prepaid expense, deferred offering costs and other current assets |
| ( |
| ( |
Other current assets - Related party |
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Other asset |
| ( |
| ( |
Accounts payable |
| ( |
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Other liabilities |
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Lease liability |
| ( |
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Other current liabilities - related party |
| ( |
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Accrued expense and other current liabilities |
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Net cash used in operating activities |
| ( |
| ( |
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Investing activities: |
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Purchase of equipment |
| ( |
| ( |
Proceeds from sales of equipment |
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Net cash used in investing activities |
| ( |
| ( |
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Financing activities: |
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Repayment of loans |
| ( |
| ( |
Proceeds from issuance of common stock |
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Net cash provided by financing activities |
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Effect of foreign exchange on cash and cash equivalents |
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Net change in cash |
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Cash, beginning of period |
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Cash, end of period |
| $ |
| $ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
| $ |
| $ |
Cash paid for taxes |
| $ |
| $ |
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Noncash investing and financing activities: |
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Stock issued to settle payables |
| $ |
| $ |
Recognition of right-of-use asset and lease liability upon adoption of ASU 2016-02 |
| $ |
| |
Finance lease of equipment to pay off accounts payable |
| $ |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
9
NuZee, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2019
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements of NuZee, Inc. (together with its subsidiaries, referred to herein as the "Company", "we" or "NuZee") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and rules of the Securities and Exchange Commission (the "SEC"), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K/A for the year ended September 30, 2019 as filed with the SEC on December 31, 2019. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.
Principles of Consolidation
The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiary, which has a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.
The Company has three international subsidiaries in NuZee KOREA Ltd. ("NuZee KR"), NuZee JAPAN Co., Ltd ("NuZee JP") and NuZee Investment Co., Ltd. ("NuZee INV"). NuZee KR and NuZee INV are wholly owned subsidiaries of the Company, and NuZee JP is a majority owned subsidiary of the Company.
Stock Split
On October 28, 2019, we completed a l-for-3 reverse stock split, which became effective on November 12, 2019. All share and per share information included in these financial statements and notes thereto have been retroactively adjusted to give effect to the reverse stock split.
Earnings per Share
Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. As of December 31, 2019 and December 31, 2018, the total number of common stock equivalents was
Going Concern and Capital Resources
Since its inception on July 15, 2011, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues.
As of December 31, 2019, the Company had cash of $
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.
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Major Customers
In the three months ended December 31, 2019 and 2018, revenue was primarily from major customers disclosed below.
Three months ended December 31, 2019:
Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable |
Customer WP | $ | $ | ||
Customer K | $ | $ | ||
Customer J | $ | $ |
Three months ended December 31, 2018:
Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable |
Customer J | $ | $ | ||
Customer WP | $ | $ |
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.
As of December 31, 2019, the Company has one significant long-term operating lease for office and manufacturing space and the Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less. On October 9, 2019, NuZee entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment for 60 months. The lease equipment is reported in the accompanying consolidated balance sheets in property and equipment as of December 31, 2019. The finance lease liability is included in loan payable on the consolidated balance sheets as of December 31, 2019. See "Loans" disclosure below. The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning October 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized at October 1, 2019 for operating leases are as follows:
|
| October 1, 2019 |
ROU Assets |
| $ |
Lease Liability |
| $ |
The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earlies comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at October 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.
The leased property has a remaining lease term of 57 months as of October 1, 2019. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable.
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
11
as of the adoption date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on lease is 5%.
Other information related to our operating lease considered to be a ROU Asset is as follows:
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ROU Asset – October 1, 2019 |
| $ |
Amortization |
| ( |
ROU Asset – December 31, 2019 |
| $ |
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Lease Liability – October 1, 2019 |
| $ |
Amortization |
| ( |
Lease Liability – December 31, 2019 |
| $ |
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Lease Liability – Short-Term |
| $ |
Lease Liability – Long-Term |
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Lease Liability – Total |
| $ |
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 December 31, 2019:
Amounts due within 12 months of December 31,
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2019 |
| $ |
2020 |
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2021 |
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2022 |
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2023 |
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Total Minimum Lease Payments |
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Less Effect of Discounting |
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Present Value of Future Minimum Lease Payments |
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Less Current Obligations Under Lease |
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Long-Term Lease Obligations |
| $ |
NuZee JAPAN Co., Ltd 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 $
Future minimum lease payments under finance lease obligations as of December 31, 2019 for each of the remaining fiscal years are as follows:
2020 |
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| $ |
2021 |
|
| $ |
Total Minimum Lease Payments |
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| $ |
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 three months ended December 31, 2019 and 2018 was $
Future minimum rents for the office space leased as of December 31, 2019, for each of the remaining fiscal years are as follows:
2020 |
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| $ |
2021 |
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| $ |
2022 |
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| $ |
2023 |
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| $ |
2024 |
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| $ |
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Total Minimum Lease Payments | $ | ||
12
Loans
On
On
On
On
The loan payments required for the next five years are as follows:
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| Nihon | Ford |
| Alliance |
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|
| Tono Shinyo | Seisaku | Motor | ShinHan | Funding |
|
|
|
| Kinko Bank | Kouko | Credit | Bank | Group |
| Total |
|
|
|
|
|
|
|
|
|
2020 |
| $ | $ | $ | $ | $ |
|
|
2021 |
|
|
| |||||
Total Current Portion |
| $ 25,890 | $ 18,669 | $ 7,359 | $ 49,081 | $ 19,893 |
| $ 120,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
| $ | $ | $ | $ | $ |
|
|
2022 |
|
|
|
| ||||
2023 |
|
|
|
|
|
| ||
2024 |
|
|
|
|
|
| ||
Total Long Term Portion |
| $ 15,534 | $ 20,490 | $ 26,040 | $ 73,622 | $ 94,598 |
| $ 230,284 |
Grand Total |
| $ | $ | $ | $ | $ |
| $ |
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.
13
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 loss amounted to $
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Inventories
Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At December 31, 2019 and September 30, 2019, the carrying value of inventory of $
|
| December 31, 2019 |
| September 30, 2019 |
Raw materials |
| $ |
| $ |
Finished goods |
|
| ||
Less – Inventory reserve |
|
| ||
Total |
| $ |
| $ |
Recent Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07 which simplifies several aspects of the accounting for non-employee transactions by stipulating that the existing accounting guidance for share-based payments to employees (accounted for under ASC Topic 718, "Compensation-Stock Compensation") will also apply to non-employee share-based transactions (accounted for under ASC Topic 505, "Equity"). ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation is not material to the financial statements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. The ASU was issued to address the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company implemented ASU 2017-11 on October 1, 2019, and the impact of the implementation is not material to the financial statements.
2. GEOGRAPHIC CONCENTRATION
The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis.
Information about the Company’s geographic operations are as follows:
14
Geographic Concentrations |
|
|
|
|
|
|
|
| Three Months Ended December 31, 2019 |
| Three Months Ended December 31, 2018 |
Net Revenue: |
|
|
|
North America | $ |
| $ |
Japan |
| ||
South Korea |
| ||
| $ |
| $ |
|
|
|
|
Property and equipment, net: | As of December 31, 2019 |
| As of September 30, 2019 |
North America | $ |
| $ |
Japan |
| ||
South Korea |
| ||
| $ |
| $ |
3. RELATED PARTY TRANSACTIONS
Sales, Purchases and Operating Expenses
For the three months ended December 31, 2019 and 2018, NuZee JP sold their products to Eguchi Holdings Co., Ltd ("EHCL"), and the sales to them totaled approximately $
Rent
During October 2016, NuZee JP entered into a rental agreement of an office space with NuZee Co., Ltd. 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 had 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 lease expired on December 31, 2019, and is expected to continue on a month to month basis. At December 31, 2019 and September 30, 2019, the payable balance under this lease was $
During February 2015, the Company entered into a rental agreement of a warehouse with Eguchi Steel Co.,Ltd ("ESCL"). The Company pays $449 per month for the warehouse on the last day of each month. There is no set expiration date on the agreement.
4. COMMON STOCK
During the three months ended December 31, 2019, the
5. STOCK OPTIONS
The following table summarizes stock option activity for three months ended December 31, 2019:
|
|
|
| Weighted |
| Weighted |
|
|
|
|
|
| Average |
| Average |
|
|
|
| Number of |
| Exercise |
| Remaining |
| Aggregate |
|
| Shares |
| Price |
| Contractual Life (years) |
| Intrinsic Value |
Outstanding at September 30, 2019 |
|
| $ |
|
| $ | ||
Granted |
|
|
|
|
|
| ||
Exercised |
|
|
|
|
|
| ||
Expired |
|
|
|
|
|
| ||
Forfeited |
|
|
|
|
|
| ||
Outstanding at December 31, 2019 |
|
| $ |
|
| |||
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019 |
|
| $ |
|
| $ |
The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized
15
stock option expenses of $
A summary of the status of the Company’s nonvested shares as of December 31, 2019, is presented below:
Nonvested options |
|
|
|
|
|
|
| Number of |
|
| Nonvested Shares |
Nonvested shares at September 30, 2019 | ||
Granted |
| |
Exercised |
| |
Forfeited |
| |
Vested |
| ( |
Nonvested shares at December 31, 2019 |
| |
6. SUBSEQUENT EVENT
NuZee Latin America Joint Venture
On
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward- looking statements. These forward-looking statements are subject to certain risk s and uncertainties that could cause actual results to differ materially from our predictions.
Overview
We are a specialty coffee company and, we believe, the leading single serve pour over coffee co-packer in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve pour over coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have single serve pour over coffee sales operations in Japan as well as manufacturing and sales operations in Korea and a recently announced joint venture in Latin America. In addition, we plan to opportunistically leverage our strengths and relationships to grow our proprietary NuZee and Coffee Blenders brands in the United States and select international markets.
We believe we are the only commercial-scale producer of single serve drip cup coffee and that we have certain advantages in place within the North American market. We intend to leverage our position to be the commercial manufacturer of choice for major companies seeking to enter the single serve drip cup market in North America. We target existing large, high-margin companies and are paid per-package based on the number of single serve pour over drip cups produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for every single serve drip cup our co-packing customers sell in the North American market. While we financially benefit from the success of our manufacturing customers through the sales of their respective single serve drip cup products, we are also able to avoid the risks associated with owning and managing the product and its related inventory. As these companies gain market acceptance of single serve drip cup coffee in North America, we plan to leverage that market expansion to further grow our own brands.
Our primary focus is the development of single serve pour over coffee in the North American market targeting the individual consumer for use at home and office or other settings that would benefit from single serve pour over products, such as our recent expansion into the lodging market through our arrangement with Royal Cup Coffee & Tea, and positioning ourselves as the leading commercial-scale co-packer of single serve pour over coffee products. We may also look to co-package other products that are complementary to single serve pour over drip coffee and provides us with a deeper access to our customers, such as tea bag coffee. The competitive landscape for our services and products can be illustrated as follows:
Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time we have developed expertise in the operation of our sophisticated packing equipment and the related production of the single serve pour over product at both our Vista, California facility and at our production operations in Korea. We plan to carry over this expertise to our recently announced Plano, Texas manufacturing facility, which will serve as our new single serve pour over co-packing hub and corporate headquarters to capture the location’s logistical advantages and lower cost structure.
Recent Developments
NuZee Latin America Joint Venture
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
17
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.
Status of Agreement with FUSO Industries Co. Ltd.
We have been engaged in active negotiations with FUSO Industries Co. Ltd. (“FUSO”) to extend the term of the exclusivity agreement between us and FUSO (the “FUSO Agreement”). We acquired certain of the machines we use in the production of our single serve pour over coffee products pursuant to the terms of the FUSO Agreement, which due to certain exclusivity provisions we believe also restricts our competitors’ access to these machines in North America. However, FUSO has exercised its rights to terminate the FUSO Agreement on 6 months’ prior written notice. While alternative sources exist for the machinery we use to make our products, we intend to continue negotiations with FUSO to extend the term of the FUSO Agreement, and the ultimate outcome cannot be predicted. If we are unsuccessful in extending the term of the FUSO Agreement, it will expire pursuant to its terms on June 30, 2020.
Geographic Concentration
Our operations are primarily split between two geographic areas: North America and Asia.
For the three months ended December 31, 2019, net revenues attributable to our operations in North America totaled $380,586 compared to $156,768 of net revenues attributable to our operations in North America for the three months ended December 31, 2018. Additionally, as of December 31, 2019, $2,005,035 of our Property and equipment, net was attributable to our North American operations, compared to $1,471,859 attributable to our North American operations as of September 30, 2019.
For the three months ended December 31, 2019, net revenues attributable to our operations in Asia totaled $165,622 compared to $196,640 of net revenues attributable to our operations in Asia during the three months ended December 31, 2018. Additionally, as of December 31, 2019, $376,975 of our Property and equipment, net was attributable to our Asian operations, compared to $403,732 attributable to our Asian operations as of September 30, 2019.
Results of Operations
Comparison of Three Months ended December 31, 2019 and 2018
Revenue
|
| Three months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Revenue |
| $ 546,208 |
|
|
| $ | 353,408 |
|
| $ 192,800 |
|
|
| 55 | % |
|
For the three months ended December 31, 2019, our revenue increased by $192,800, or approximately 55%, compared with the three months ended December 31, 2018. This increase was primarily related to increase in co-packing in North America partially offset by decrease in sales in Japan.
Cost of sales and gross margin
|
| Three months ended |
|
| Change | ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % | ||||
Cost of sales |
| $ 423,173 |
|
|
| $ | 209,670 |
|
| $ 213,503 |
|
|
| 102 % |
|
Gross profit |
| $ 123,035 |
|
|
| $ | 143,738 |
|
| ($20,703) |
|
|
| (14)% |
|
Gross profit margin % |
| 23 % |
|
|
|
| 41 % |
|
|
|
|
|
|
|
|
For the three months ended December 31, 2019, we earned a total gross profit of $123,035 from sales of our products direct to consumers, compared to a total gross profit of $143,738 for the three months ended December 31, 2018. The gross margin rate was 23% for the three months ended December 31, 2019, and 41% for the three months ended December 31, 2018. This decrease in margin is driven by operating a shift from machine-based coffee pods in North American in the prior year to a co-packing model for larger customers in the current year. The North American operations is going through a significant ramp up period for larger co-packing orders that included additional labor and other expenses that will improve on a per unit basis as the Company achieves more scale.
18
Operating Expenses
|
| Three months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Operating Expenses |
| $3,549,833 |
|
|
| $ | 2,732,628 |
|
| $817,205 |
|
|
| 30 |
| % |
For the three months ended December 31, 2019, the Company’s operating expenses totaled $3,549,833, compared to $2,732,628 for the three months ended December 31, 2018, representing a 30% increase. This increase is primarily attributable to an increase in employee costs, legal costs, facilities costs and stock based compensation expense.
Net Loss
|
| Three months ended |
|
| Change |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Dollars |
|
| % |
| ||||
Net Loss attributable to NuZee, Inc. |
| $3,421,232 |
|
|
| $ | 2,576,692 |
|
| $844,540 |
|
|
|
| 33% |
|
For the three months ended December 31, 2019, we generated net losses attributable to NuZee, Inc. of $3,421,232 versus $2,576,692 for the three months ended December 31, 2018. This increase is primarily attributable to lower margins, an increase in employee costs, legal costs and facilities costs and an increase in stock compensation expense.
Liquidity and Capital Resources
Since our inception in 2011, we have incurred significant losses, and as of December 31, 2019, we had an accumulated deficit of approximately $28 million. We have not yet achieved profitability, and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. In the United States, we expect to incur additional losses as a result of the costs associated with operating as an exchange-listed public company in the future.
To date, we have funded our operations primarily with proceeds from the private sale of shares of our common stock.
Our principal use of cash is to fund our operations, which includes the commercialization of our pour over coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.
We may need to raise additional funds to support our operating activities, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.
As of December 31, 2019, we had a cash balance of $1,830,952.
Summary of Cash Flows
|
|
| Three Months Ended |
| |||||
|
|
| 2019 |
|
| 2018 |
| ||
Cash used in operating activities |
|
| $ | (1,479,364) |
|
| $ | (742,990) |
|
Cash used in investing activities |
|
| $ | (11,791) |
|
| $ | (125,940) |
|
Cash provided by financing activities |
|
| $ | 1,963,195 |
|
| $ | 1,484,856 |
|
Effect of foreign exchange on cash |
|
| $ | 32,872 |
|
| $ | 19,125 |
|
Net increase in cash |
|
| $ | 504,912 |
|
| $ | 635,051 |
|
Operating Activities
We used $1,479,364 and $742,990 of cash in operating activities during the three months ended December 31, 2019 and 2018, respectively, principally to fund our operating loss. The increase in cash used in operating activities of $736,374 was primarily attributable to the increase in net loss for the three months ended December 31, 2019 as compared to the three months ended December 31, 2018.
19
Investing Activities
We used $11,791 and $125,940 of cash in investing activities during the three months ended December 31, 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.
Cash provided from financing activities increased from $1,484,856 for the three months ended December 31, 2018 to $1,963,195 for the three months ended December 31, 2019. During the three months ended December 31, 2019, we issued 111,738 shares of common stock which generated net cash proceeds of $1,994,523.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by our Company is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date") Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are not effective, at the reasonable assurance level, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, in part due to the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K/A for the year ended September 30, 2019 filed with the SEC on December 31, 2019, which have not yet been remediated. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses. We will not consider these material weaknesses fully remediated until management has tested those internal controls and found them to be operating effectively.
Changes in Internal Control Over Financial Reporting
Other than as described above, there have been no changes in our internal control over financial reporting during the three-month period ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II.
Item 1. Legal Proceedings
As previously disclosed, 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. Also as previously disclosed, the Court on November 22, 2019 denied our motion to dismiss. However, we continue to 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.
Item 1A. Risk Factors
There have been no changes to our risk factors from those disclosed in our annual report on Form 10-K/A filed with the SEC on December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2019, 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.
All the investors were non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933, as amended (the "Securities Act")) who purchased in transactions outside of the United States. In issuing shares to those investors, we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act, as amended.
Item 3. Defaults Upon Senior Securities None.
Item 4. Mine Safety Disclosures Not applicable.
Item 5. Other Information
None.
21
Item 6. Exhibits
EXHIBIT NO. | DESCRIPTION |
10.1* | Multi-Tenant Industrial Triple Net Lease, dated May 9, 2019 by and |
| between Nuzee, Inc. and Icon Owner Pool I Texas LLC |
10.2* | Joint Venture Agreement with respect to NuZee Latin America, S.A. de C.V., dated January 9, 2020, by and between Industrias Marino, S.A. de C.V., and NuZee, Inc. |
31.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as |
| adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as |
| adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 |
| U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act |
| of 2002 |
32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as |
| adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101** | Interactive Data Files |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: | February 10, 2020 |
| NUZEE, INC. | |
|
|
| ||
|
| By: | /s/ Masateru Higashida | |
|
|
| Masateru Higashida, Chief Executive Officer (Principal Executive Officer) | |
|
| By: | /s/ Shanoop Kothari | |
|
|
| Shanoop Kothari, Chief Financial Officer (Principal Financial Officer) | |
23