The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2017
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim financial statements of NuZee, Inc. (the "Company", "we", "our") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's annual report on Form 10-K for the year ended September 30, 2016 as filed with the SEC. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.
Going Concern
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has had recurring losses, large accumulated deficit, is dependent on the shareholders to provide additional funding for operating expenses and has limited revenues. These items raise substantial doubts about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company's products and business.
Major Customers
In the six months ended March 31, 2017 and 2016, revenue was primarily from below major customers. Besides those revenues, there were $52,616 account receivable owed by customer U, $128,705 account receivable owed by customer PO as of March 31, 2017 and $5,607 account receivable owed by customer H as of March 31, 2016.
Six months ended March 31, 2017:
|
|
|
|
|
|
|
Customer Name
|
|
Sales
Amount
|
|
|
% of Total Revenue
|
|
Customer PO
|
|
$
|
462,006
|
|
|
|
48
|
%
|
Customer K
|
|
$
|
146,005
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
Six months ended March 31, 2016
:
|
|
|
|
|
|
|
|
|
Customer Name
|
|
Sales
Amount
|
|
|
% of Total Revenue
|
|
Customer H
|
|
$
|
50,466
|
|
|
|
53
|
%
|
Customer A
|
|
$
|
34,080
|
|
|
|
36
|
%
|
Lease
The Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line basis over the lease term.
NuZee JAPAN Co., Ltd is the lessee of certain equipment under a capital lease extending through 2020. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6 year life. The leased equipment has been recorded in the accompanying financial statements in equipment of $13,376 as of March 31, 2017. The capital lease liability is included in other current liabilities on consolidated balance sheets.
Future minimum lease payments under capital lease as of March 31, 2017 for each of the remaining years are as follows:
2017
|
|
$
|
3,303
|
|
2018
|
|
|
4,403
|
|
2019
|
|
|
4,403
|
|
2020
|
|
|
3,684
|
|
Total Minimum Lease Payments
|
|
$
|
15,793
|
|
Loan
On June 30, 2016, NuZee JAPAN Co., Ltd entered into a loan agreement with Tono Shinyo Kinko bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an interest rate of 1.2%. The Company had $114,596 loan payable at March 31, 2017. On January 27, 2017, NuZee JAPAN Co., Ltd entered into a loan agreement with Nihon Seisaku Kouko. The Company borrowed the sum of approximately $89,880 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The Company had $88,361 loan payable at March 31, 2017.
Principles of Consolidation
The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and majority owned subsidiary which has a fiscal year end of January 31. All significant intercompany accounts, balances and transactions have been eliminated in the consolidation.
The Company consolidates its subsidiary in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign subsidiaries are measured using the foreign subsidiary's local currency as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders' equity, unless there is a sale or complete liquidation of the underlying foreign investments. Foreign currency translation adjustments resulted in loss of $28,016 and $0 for six months ended March 31, 2017 and 2016, respectively.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Foreign currency transaction gains included in operations totaled $890 for six months ended March 31, 2017 and losses totaled $2,849 for six months ended March 31, 2016.
Equity Method
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation of several factors including, among others, representation on the Investee company's board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting, an Investee company's accounts are not reflected within the Company's Consolidated Balance Sheets and Statements of Operations; however, the Company's share of the earnings or losses of the Investee company is reflected in the caption ''Equity in loss of unconsolidated affiliate'' in the Consolidated Statements of Operations. The Company's carrying value in an equity method Investee company is reflected in the caption ''Investment in unconsolidated affiliate'' in the Company's Consolidated Balance Sheets.
When the Company's carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the Investee company or has committed additional funding. When the Investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
Goodwill
The Company evaluates goodwill on an annual basis or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.
2. ACQUISITIONS
NuZee JAPAN Co., Ltd
On August 16, 2016, the Company entered a Share Exchange Agreement with NuZee JAPAN Co., Ltd ("NuZee JP") and its shareholders whereby the Company will exchange 1,148,734 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP. The Company's issued shares had an acquisition date fair value of $258,465. The remaining thirty percent (30%) of NuZee JP's issued and outstanding common stock is, and will be at the closing, owned by NuZee JP's current President and Chairman of its Board of Directors. The reason for this acquisition is to extend our market shares as well as obtain more business opportunities in both USA and Japan market. This transaction closed on October 3rd, 2016.
The Company applied the acquisition method to the business combination and valued each of assets acquired and liabilities assumed at fair value as of the acquisition date. The following table shows the estimated fair value of the assets acquired and liabilities assumes at the date of acquisition:
Acquisition of NuZee Japan Co., Ltd.
|
|
|
|
|
|
|
|
ASSETS ACQUIRED:
|
|
|
|
CASH
|
|
$
|
201,676
|
|
ACCOUNTS RECEIVABLE
|
|
|
60,770
|
|
INVENTORIES
|
|
|
233,845
|
|
OTHER CURRENT ASSETS
|
|
|
75,738
|
|
PROPERTY PLANT AND EQUIPMENT
|
|
|
16,677
|
|
GOODWILL
|
|
|
52,424
|
|
TOTAL ASSETS ACQUIRED
|
|
|
641,130
|
|
LESS LIABILITIES ASSUMED
|
|
|
|
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
|
|
(153,440
|
)
|
LOAN PAYABLE
|
|
|
(140,922
|
)
|
TOTAL LIABILITIES ASSUMED
|
|
|
(294,362
|
)
|
|
|
|
|
|
LESS NONCONTROLLING INTEREST
|
|
|
(88,303
|
)
|
|
|
|
|
|
NET ASSETS ACQUIRED FROM NUZEE JP ACQUISITION
|
|
|
258,465
|
|
Since the date of acquisition, revenues of $559,340 attributed to NuZee Japan were included in the Company's consolidated net loss for the six months ended March 31, 2017.
In accordance with ASC 805-10-50, the Company is providing the following unaudited pro-forma to present a summary of the combined results of the Company's consolidated operations with all acquisitions as if the acquisitions had been completed as of the beginning of the reporting period. Adjustments were made to eliminate any inter-company transactions in the periods presented. There is no pro forma information for 2017 as NuZee Japan Co., Ltd was acquired at the beginning of the period.
NuZee, Inc.
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
Six Months
ended
|
|
|
|
March 31,
2016
|
|
|
March 31,
2016
|
|
|
|
(Pro Forma)
|
|
|
(Pro Forma)
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
225,197
|
|
|
$
|
277,911
|
|
Cost of sales
|
|
|
147,144
|
|
|
|
192,924
|
|
Gross Profit
|
|
|
78,053
|
|
|
|
84,987
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
481,255
|
|
|
|
867,570
|
|
Loss from operations
|
|
|
(403,202
|
)
|
|
|
(782,583
|
)
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
12,139
|
|
|
|
12,382
|
|
Equity in loss of unconsolidated affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1
|
)
|
|
|
(22,987
|
)
|
Net loss
|
|
|
(391,064
|
)
|
|
|
(793,188
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to NuZee, Inc.
|
|
$
|
(391,064
|
)
|
|
$
|
(793,188
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and fully diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average of shares outstanding
|
|
|
31,542,965
|
|
|
|
31,547,947
|
|
3. RELATED PARTY TRANSACTIONS
During February 2015, the Company issued a secured convertible promissory note in the sum of $600,000 to Masateru Higashida, the Company's major shareholder. Interest was calculated at the annual rate of zero percent (0%) for the period until April 2016. During March 2016, the Company and Masateru Higashida decided to extend the repayment date to March 31, 2017 so that the Company has more funds for production and marketing to fulfill customers' requirements, which is in the best interest of the Corporation and its shareholders. The annual rate of repayment is at an interest rate of one percent (1%) for the period until March 31, 2017. This promissory note will convert to 1,176,471 shares of NuZee, Inc common stock at $0.51 per share if Company is unable to pay back the note by then. During three months ended March 31, 2017, the Company accrued interest of $5,999.98 relating to this related party note.
On March 31, 2017, Masateru Higashida (Lender, a/k/a the "Seller") deemed it beneficial to engage in a private sale (the "Sale") and to sell the Amended Note to Kenichi Miura (the "Purchaser\") upon the terms and conditions of the Convertible Note Purchase Agreement. The Amended Note shall continue to bear interest on the principal amount at the annual interest rate of one percent (1%) per year; and the Amended Note shall continue to be convertible in whole or in part to shares of the Corporation's common stock, at the election of the Lender (now at the election of Purchaser), at a price of $.51 per share, on or after March 31, 2017;
During March 2016, the Company borrowed the sum of $100,000 short-term loan from NuZee Co., Ltd to be repaid on or before March 31, 2017 at an interest rate of one percent (1%). During the six months ended March 31, 2017, the Company accrued interest of $188. The Company paid back $55,000 of this short-term loan as of September 30, 2016, and $20,000 of this short-term loan during the six months ended March 31, 2017.
During August 2016, the Company borrowed the sum of $100,000 short-term loan from Masateru Higashida to be repaid on or before August 31, 2017 at an interest rate of one percent (1%). During March 2017, the Company borrowed the sum of $44,000 short-term loan from Masateru Higashida to be repaid on or before March 14, 2018 at an interest rate of one percent (1%). During the six months ended March 31, 2017, the Company accrued interest of $341. The Company paid back $34,670 as of December 31, 2016 and $41,000 as of March 31, 2017.
During December 2016, the Company borrowed the sum of $18,384 short-term loan from NuZee Co., Ltd to be repaid on or before December 14, 2017 at an interest rate of one percent (1%). Between February and March 2017, the Company borrowed the sum of $ 14,440 short-term loan from NuZee Co., Ltd to be repaid on or before March 23, 2018 at an interest rate of one percent (1%). As of March 31, 2017, Company paid back $19,331 of this short-term loan. During the six months ended March 31, 2017, the Company accrued interest of $57.
During February 2017, the Company borrowed the sum of $4,000 short-term loan from Travis Gorney to be repaid on or before February 14, 2018 at an interest rate of one percent (1%). The Company paid back total principal of $4,000 on March 31, 2017.
During March 2017, the Company borrowed the sum of $100,000 short-term loan from Takayuki Nagashima to be repaid on or before June 30, 2017 at an interest rate of one percent (1%).
All convertible promissory note payable and 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. Travis Gorney is NuZee,Inc's officer and Takayuki Nagashima is the co-owner of the equity method affiliate. Mr. Higashida , NuZee Co., Ltd, Travis Gorney and Takyuki Nagashima are related parties with the Company.
4. INVESTMENT IN AFFILIATE
The Company has investment in equity method affiliate which has main businesses related to produce, sale, import and export of coffee & beans, tea & tea leaf, healthy foods and drinks. Besides that, they plan to manage café or restaurant, sell packaging machines and provide consulting services.
The following table is a reconciliation of the Company's investment in equity affiliate as presented on the consolidated balance sheet:
INVESTMENT IN AFFILIATE
|
|
|
|
|
|
|
|
|
|
2017
|
|
Beginning of period
|
|
$
|
-
|
|
Additional investments in unconsolidated affiliate
|
|
$
|
50,000
|
|
Distributions received
|
|
$
|
-
|
|
Sale of investment in unconsolidated affiliate
|
|
$
|
-
|
|
Equity in net income (loss) of unconsolidated affiliate
|
|
$
|
(47,892
|
)
|
|
|
|
|
|
End of period
|
|
$
|
2,108
|
|
5. COMMON STOCK
On October 3rd, 2016, the "Company" exchanged 1,148,734 shares of its common stock, par value $0.00001 per share, for seventy percent (70%) of the issued and outstanding common stock of NuZee JP.
During October to December 2016, the Company sold 535,000 shares of common stock at $1.00 per share, for an aggregate purchase price of $535,000.
During January to March 2017, the Company sold 145,510 shares of common stock at $1.00 per share, for an aggregate purchase price of $145,510.
On March 31, 2017, Kenichi Miura exercised his right to convert the Amended Note to shares of the Corporation's common stock (the "Conversion"), at the price of $.51 per share, in accordance with the terms and conditions of the Convertible Note Purchase Agreement, thus equating to a conversion of $605,999.98 [i.e., $600,000 principal, plus $5,999.98 in accrued interest] to the equivalent 1,188,236 shares of the Corporation's common stock.
6. STOCK OPTIONS
The following table summarizes stock option activity for the six months ended of March 31, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (years)
|
|
|
Intrinsic Value
|
|
Outstanding at September 30, 2016
|
|
|
573,000
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
Granted
|
|
|
72,000
|
|
|
|
0.48
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
645,000
|
|
|
$
|
0.67
|
|
|
|
9.2
|
|
|
|
25,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
253,000
|
|
|
$
|
0.46
|
|
|
|
9.2
|
|
|
|
25,725
|
|
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 $12,200 for six months ended March 31, 2017. Unamortized option expense as of March 31, 2017, for all options outstanding amounted to approximately $40,021. These costs are expected to be recognized over a weighted-average period of 1.9 years for the stock options awards. The Company recognized stock option expenses of $25,615 for six months ended March 31, 2016.
A summary of the status of the Company's nonvested shares as of March 31, 2017, is presented below:
|
|
Number of
|
|
|
|
Nonvested Shares
|
|
|
|
|
|
|
Nonvested shares at September 30, 2016
|
|
|
378,000
|
|
Granted
|
|
|
72,000
|
|
Exercised
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Vested
|
|
|
(58,000
|
)
|
Nonvested shares at March 31, 2017
|
|
|
392,000
|
|
7. SUBSEQUENT EVENTS
During April and May 2017, the Company sold 388,271 shares of treasury stock at $0.51per share, for an aggregate purchase price of $198,018.
On April 1, 2017, Eguchi Holdings Co., Ltd., a shareholder of NuZee, Inc., lended NuZee, Inc. $50,000 short term loan with 1% annual interest rate and all outstanding principal and interest due and payable on June 30, 2017.
On April 1, 2017, Eguchi Steel Co., Ltd., a shareholder of NuZee, Inc., lended NuZee, Inc. $50,000 short term loan with 1% annual interest rate and all outstanding principal and interest due and payable on June 30, 2017.
During May 2017, Company agrees to change Nagashima Takayuki's $100,000 short-term loan to a convertible loan and Nagashima Takayuki converted this loan to 196,078 shares of common stock of NuZee, Inc.
During May 2017, the Company paid back $5,000 short term loan to NuZee Co., Ltd.
During May 2017, the Company paid back total $13,497 principal and $65 accrued interest to NuZee Co., Ltd.