As filed with the Securities and Exchange Commission on November 12, 2019
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Exact Name of Registrant as Specified in Its Charter)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Statement. If any of the securities being registered on box.þ If this
☐ If this 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,
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
(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.
(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 The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the
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 SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2019 PRELIMINARY PROSPECTUS Shares
Common Stock
We are offering Prior to this offering,
so listed. Our common stock is currently listed on the OTCQB Marketplace (the “OTCQB”) under the symbol “NUZE.” We have assumed a public offering price of $11.00 per share, the last reported sale price for our common stock as reported on the OTCQB on October 22, 2019 (which does not give effect to the reverse stock split described below due to the absence of sale price data following the effectiveness of the reverse stock split). The actual public offering price per share will be We completed a l-for-3 reverse stock split on October 28, 2019, which became effective on November 12, 2019. All share and per share information in this prospectus (except the last reported sale price for our
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or
____________
We have granted a 45-day option to the underwriters to purchase up to an additional 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 , 2019. Sole Book-Running Manager The Benchmark Company
Prospectus dated , 2019
TABLE OF CONTENTS
We
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
Until , 2019 (25 days after the date of this prospectus), all dealers that buy, sell or trade our i
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 Overview Our Company We We believe we are the only commercial-scale producer of single serve drip cup coffee and that we have contractual protections and certain other advantages in place within the North American market, as outlined by the factors described below. As we have with Kraft Heinz, and in particular their Gevalia Kaffe brand, and Royal Cup Coffee & Tea, 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 We may also consider co-packaging 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.
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.
Moreover, we believe the 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 packaging is fully recyclable and does not use any plastics. The majority of the packaging is paper based and biodegradable, while the foil used to package the filter for freshness is recyclable. 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
cup level.
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 pour over coffee production. We have entered into a written exclusivity agreement with the premier supplier of the 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. 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 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. 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 recently entered into co-packing agreements with Kraft Heinz, under their Gevalia Kafee® brand, and 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 to work with and grow with like 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 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 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 Recent momentum and current co-packing clients
A select list of our current co-packing customers include: Gevalia Kafee (Kraft Heinz), Royal Cup Coffee & Tea, Copper Cow Coffee, Alumbre Coffee, C&C Hawaii Coffee, Lion Coffee, Idyllwild Coffee and
We Our competitive strengths
We believe that the •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 •Exclusivity provides us protection in our core market.We have an exclusive agreement with the world’s leading manufacturer of equipment and filters used in packaging single serve pour over coffee. We believe that this agreement along with our operating expertise and SQF Level 2 certifications provide us with meaningful protections from the entry of potential competitors in our core North American market. •Significant production and operational experience in single serve pour over coffee.We have been producing single serve pour over coffee for almost four years in increasing scale and complexity. We believe the process and equipment for producing pour over single serve coffee is •Co-packing agreements with large international companies.We have recently announced a co-packing agreement with a large international company. We believe that as our potential co-packing customers continue to realize that we have the 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 •Food grade SQF Level 2 certification. SQF Level 2 certification can take up to a
•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, and have an exclusive agreement with FUSO, a Japanese manufacturer. We believe that having offices in Japan and Korea provides us with direct access to Our business strategy
We intend to •Continually grow our base of large national or international co-packing customers.We have recently announced a
•Co-pack for smaller scale, rapidly growing, innovative coffee customers and
•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 to have the facility operational by our second fiscal quarter of the upcoming fiscal year (on or •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. As we look at other potential international manufacturing locations, we look for characteristics similar to the Korean 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 is at an all-time high. According to the United States Department of Agriculture (USDA), global coffee consumption is forecast to reach a record 167.9 million bags in 2019/20 (a bag is equivalent to 60 kilograms). The United States is 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.
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
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 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. The2019 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 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 Our Risks and History of Losses Investing in our common stock involves a high degree of risk. You should carefully consider the •Our ability to sustain our recent growth rates and manage our rapid growth; 6Statista, March 2019 – https://www.statista.com/topics/2219/single-serve-coffee-market/ 7Statista, August 2019 – https://www.statista.com/statistics/316217/us-ownership-of-single-cup-brewing-systems/ 8CGS, 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 9GLobalwebindex, April 2019 – https://blog.globalwebindex.com/chart-of-the-week/lifting-the-lid-on-sustainable-packaging/ 10USA Today, March 2019 – https://www.usatoday.com/story/tech/2019/03/13/heres-why-your-used-k-cups-coffee-pods-arent-usually-recycled/3067283002/ 11Food Dive, September 2018 – https://www.fooddive.com/news/coffee-pods-lose-ground-as-consumers-look-for-sustainable-premium-java-exp/531816/ •Our ability to obtain sufficient funding to expand our business and respond to business opportunities; •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 •Our ability to manage our supply chain to continue to satisfy our future operation needs; and
We have incurred net losses since our inception in 2011, including net losses of $3.6 million and $1.8 million for the years ended September 30, 2018 and 2017, respectively, and $13.4 million for the nine months ended June 30, 2019. As of June 30, 2019, our accumulated deficit was approximately $26.0 million. We Recent Developments Reverse Stock Split On October 28, 2019, we completed a l-for-3 reverse stock split, which became effective on November 12, 2019 (the “Reverse Split”). The accompanying financial statements and notes to the
Private Placement Transaction On November 7, 2019, we completed a private placement financing transaction pursuant to which we issued approximately 111,738 shares of Corporate information We Our corporate website is www.mynuzee.com. Information contained on, THE OFFERING SUMMARY
All share and per share information in this prospectus (except the last reported sale price for our common stock) has been retroactively adjusted to give effect to 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 13,587,580 shares outstanding as of June 30, 2019, and excludes the following: •1,787,334 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2019, with a weighted-average exercise price of $6.90 per share; •1,544,333 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. 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, 2018 and 2017 and the balance sheet data as of September 30, 2018 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the nine months ended June 30, 2019 and 2018 and the balance sheet data as of June 30, 2019 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 nine months ended June 30, 2019 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.”
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
We
effectively manage our business and recruit and retain sales and marketing, 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 If we do not address these risks successfully, it could have a material adverse effect on our business and financial 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 2013, including net losses of $3.6 million and $1.8 million for the years ended September 30, 2018 and 2017, respectively, and $13.4 million for the nine months ended June 30, 2019. As of June 30, 2019, our accumulated deficit was approximately $26.0 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, 2018 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, 2018, 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 need 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. 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: 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. 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. 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 an 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 potentially affect and the valuation of our stock. Risks Related to Our Business Continued innovation and the successful development and timely launch of new products and product extensions are critical to our financial results and achievement of 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. 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 Our success depends, in part, on our relationships with the manufacturers of our packing equipment, including our exclusivity arrangement. We source our sophisticated packing equipment from companies located in East Asia. Furthermore, we have entered into an exclusivity agreement with the primary manufacturer of the co-packing equipment we use in our operations, which we believe significantly restricts 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. However, availability is in general extremely limited for equipment of the top quality offered by this manufacturer, though other manufacturers do offer lower-grade alternatives. Our exclusivity agreement may be terminated with limited notice, and we may not be able to
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 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 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 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 The loss of Our success depends on the skills, experience and performance of 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.
Orders covered by firm purchase orders are generally not cancelable; however, customers may decide to delay or cancel orders. In the event that we experience any delays or cancellations, we may have difficulty enforcing the provisions of the purchase order and 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 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. Since our inception in 2011, we have increased the number of our full- and part-time employees to 27 as of September 30, 2019, and we expect to continue hiring 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 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 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. 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 If we Our businesses involve the 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 the Company, its products, its customers and/or its 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 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
If we fail to comply with FDA regulations our business could suffer. The manufacture and marketing of beverage and nutraceutical products are subject to extensive regulation by the U.S. Food and Drug Administration (“FDA”) and foreign and state regulatory authorities. In the United States, beverage and nutraceutical companies such as ours must comply with laws and regulations promulgated by the FDA. These laws and regulations require various authorizations prior to a product being marketed in the United States. Manufacturing facilities and practices are also subject to FDA regulations. The FDA regulates the clinical testing, manufacture, labeling, sale, distribution and promotion of nutraceutical and, to the extent applicable, beverage products in the United States. Any failure by us to comply with regulatory requirements, including any future changes to such requirements, could have a material adverse effect on our business, prospects, financial condition and results of operations. Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements of registering our facilities and listing our products with the FDA. We are subject to reporting regulations. These regulations require us to report to the FDA if any of our products may have caused or contributed to a death or serious injury and such product or a similar product that we market would likely cause or contribute to a death or serious injury. Unless an exemption applies, we must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the product or to remedy a violation of the Food, Drug and Cosmetic Act. The FDA also requires that we maintain records of corrections or removals, regardless of whether such corrections and removals are required to be reported to the FDA. In addition, the FDA closely regulates promotion and advertising, and our promotional and advertising activities could come under scrutiny by the FDA. The FDA also requires that manufacturing be in compliance with its Quality System Regulation, or QSR. The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Any failure by us to maintain compliance with the QSR requirements could result in the shutdown of, or restrictions on, our manufacturing operations, to the extent we have any, and the recall or seizure of our products, which would have a material adverse effect on our business. In the event that one of our suppliers fails to maintain compliance with our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. The FDA has broad enforcement powers. If we violate applicable regulatory requirements, the FDA may bring enforcement actions against us, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Violations of regulatory requirements, at any stage, including after approval, may result in various adverse consequences, including the delay by a regulatory agency in approving or refusal to approve a product, withdrawal or recall of an approved product from the market, or other voluntary agency-initiated action that could delay further development or marketing, as well as the imposition of criminal penalties. The health benefits of the functional ingredients in our products are not guaranteed. Although clinical studies indicate certain ingredients used in our products may have health benefits, there is no guarantee that a consumer of our products will experience such health benefits. Additionally, negative publicity, opposing studies concerning any of our ingredients or negative changes in consumers’ perception of the health benefits of our products may result in loss of market share or potential market share and negatively impact our operations. 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 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. Employment litigation and unfavorable publicity could negatively affect our future business. Employees may, from time to time, bring lawsuits against us regarding injury, creation of a hostile work place, discrimination, wage and hour, sexual harassment and other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their sales. If we were to face any employment related claims, our business could be negatively affected. Risks Related to this Offering and Ownership of our Common StockRisks 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 intention is to list our common stock on a national securities exchange, 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. While we are seeking to list our common stock on a national securities exchange, there is no assurance that our securities will ever be listed on a major stock exchange. While we are seeking to list our common stock on a national securities exchange, we cannot ensure that we will be able to satisfy the listing standards or that our common stock will be accepted for listing on any such exchange. Should we fail to satisfy the initial listing standards of such exchanges, or our common stock are otherwise rejected for listing, our common stock will continue to trade on the OTC Markets, in which event the trading price of our common stock could suffer, the trading market for our common stock may be less liquid, and our common stock price may be subject to increased volatility. 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 we intend to apply to have our securities listed on a national securities exchange, 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; 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. 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 38.6% of our voting stock and, upon completion of this offering, that same group will hold approximately % 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 $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split). Our Chief Executive Officer and Chairman of the Board of Directors individually beneficially owned approximately 34.9% of our voting stock prior to this offering, and will hold approximately % 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. 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 shares of common stock based on the number of shares outstanding as of June 30, 2019. 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, shares of our common stock are currently restricted as a result of
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 In the future, we may also identify 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 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. 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 If our remedial measures are insufficient to address material weaknesses and we are unable to maintain an effective system of
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 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. 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, securities.
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, controlling the procedures for the conduct and scheduling of 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 The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the
We
We We are required to advance expenses, as incurred, to any indemnitee in connection with defending a We will not be obligated pursuant to our articles of incorporation and second amended and restated bylaws to indemnify a
If you purchase shares of common stock 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 $ 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 $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), our pro forma as adjusted net tangible book value as of June 30, 2019, would have been $ million, or $ per share. This amount represents an immediate increase in net tangible book value of $ per share of our common stock to existing stockholders and an immediate dilution in net tangible book value of $ 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 a national securities exchange, 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 a national securities exchange. 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 a national securities exchange, in which case this offering may not be completed. We cannot assure you that we will be able to continue to comply with the minimum bid price requirement and other standards of the national securities exchange on which our common stock may become listed. 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 national securities exchange on which our common stock may become listed. It is not uncommon for the market price of a company’s common stock to decline in the period following 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 a national securities exchange. Our failure to meet these requirements may result in our common stock being delisted from such national securities exchange, 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. 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; 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 scientific or 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 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 and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. We estimate that the net proceeds to us from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full, assuming a public offering price of $11.00 per share, 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 $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares 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. The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2019: On an actual basis, retroactively adjusted to give effect to the Reverse Split; and As adjusted to give effect to the sale of shares of common stock in this offering assuming a public offering price of $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), 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.
A $1.00 increase or decrease in the assumed public offering price of $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), would increase or decrease, as appropriate, our cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ 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 $11.00 per share, would increase or decrease our cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ 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, pro forma as adjusted cash and cash equivalents, additional paid-in capital and stockholders’ equity as of June 30, 2019, would be $ million, $ million, and $ million, respectively. The number of shares of common stock to be outstanding immediately after this offering is based upon 13,587,580 shares outstanding as of June 30, 2019, and excludes the following: •1,787,334 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2019, with a weighted-average exercise price of $6.90 per share; •1,544,333 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 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 June 30, 2019. Our net tangible book value as of June 30, 2019 was $5,029,256, or $0.37 per share, based on 13,587,580 shares of our common stock outstanding as of June 30, 2019. After giving effect to (i) the Reverse Split, and (ii) the sale and issuance by us of the shares of our common stock in this offering at the assumed public offering price of $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), 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 June 30, 2019 would have been approximately $ , or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to investors purchasing our common stock in this offering. The following table illustrates this per share dilution:
Each $1.00 increase (decrease) in the assumed public offering price of $11.00 per share, which is the last reported sale price of our common stock on the OTCQB on October 22, 2019 (which does not give effect to the Reverse Split due to the absence of sale price data following the effectiveness of the Reverse Split), would increase (decrease) pro forma as adjusted net tangible book value per share to new investors by $ , and would increase (decrease) dilution per share to new investors in this offering by $ , 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 or decrease of 1.0 million in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ per share and increase (decrease) the dilution to new investors by $ per share, 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 $ per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering would be approximately $ per share of common stock. The table and discussion above are based on 13,587,580 shares of common stock outstanding as of June 30, 2019, and excludes the following: •1,787,334 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2019, with a weighted-average exercise price of $6.90 per share; •1,544,333 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 •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. 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, 2018 and 2017 and the balance sheet data as of September 30, 2018 and September 30, 2017 from our audited financial statements included elsewhere in this prospectus. We have derived the statements of operations data for the nine months ended June 30, 2019 and 2018 and the balance sheet data as of June 30, 2019 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 nine months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year or any other period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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 leverage our position as a We believe we are the only commercial-scale producer of single serve drip cup coffee and that we have contractual protections and certain other advantages in place within the North American market, as outlined by the factors described below. As we have with Kraft Heinz, and in particular their Gevalia Kaffe brand, and Royal Cup Coffee & Tea, 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 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 recently entered into co-packing agreements with Kraft Heinz, under their Gevalia Kafee® brand, and 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 to work with and grow with like Copper Cow. A select list of our current co-packing customers include: Gevalia Kafee (Kraft Heinz), Royal Cup Coffee & Tea, 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 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 April of 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 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
For the nine months ended June 30, 2019, net revenues attributable to our operations in North America totaled $715,702, compared to $368,321 of net revenues attributable to our operations in North America during the nine months ended June 30, 2018. Additionally, as of June 30, 2019, $1,543,862 of our Property and equipment, net was attributable to our North American operations, compared to $508,711 attributable to our North American operations as of September 30, 2018. For the nine months ended June 30, 2019, net revenues attributable to our operations in Asia totaled $588,864, compared to $650,528 of net revenues attributable to our operations in Asia during the nine months ended June 30, 2018. Additionally, as of June 30, 2019, $443,889 of our Property and equipment, net was attributable to our Asian operations, compared to $165,682 attributable to our Asian operations as of September 30, 2018. Results of Operations Comparison of Nine Months ended June 30, 2019 and 2018 Revenue
For the nine months ended June 30, 2019, our revenue increased by $285,717, or approximately 28%, compared with the nine months ended June 30, 2018. This increase was primarily related to the increase in co-packing revenue from large well-established companies, partially offset by a shift away from sales of single cup pods and lower sales from our Japanese subsidiary. Cost of sales and gross margin
For the nine months ended June 30, 2019, we earned a total gross profit of Operating Expenses
For the nine months ended June 30, 2019, our operating expenses totaled $13,668,299, compared to $2,330,605 for the nine months ended June 30, 2018, representing a 486% increase. This increase is primarily attributable to an increase in stock compensation expense of $10,202,043 and, to a lesser extent, an increase in employee costs, legal costs and the costs for consultants. Net Loss
For the nine months ended June 30, 2019, we generated net losses attributable to NuZee, Inc. of $13,436,197 versus $2,025,712 for the nine months ended June 30, 2018. This loss was attributable primarily to increased operating expenses due to greater stock compensation expenses and to a lesser extent higher employee and related costs, legal costs, costs for consultants and lower margin rates, as described in further detail above. Comparison of Twelve Months ended September 30, 2018 and 2017 Revenue
For the year ended September 30, 2018, our revenue decreased by $239,438, or approximately 15%, compared with the year ended September 30, 2017. This decrease was primarily related to inefficiencies and related increased costs associated with the shift in our focus away from our branded pour over coffee products and towards our co-packing services. Cost of sales and gross margin
*Less than 1% For the year ended September 30, 2018, we earned a total gross profit of $67,217 from sales of our products direct to consumers as well as to retailers, wholesalers and distributors, compared to a total gross profit of $309,178 for the year ended September 30, 2017. The gross margin rate was 5% for the twelve months ended September 30, 2018, and 19% for the twelve months ended September 30, 2017. This decrease in margin is driven primarily by inefficiencies associated with the shift in our focus away from our branded pour over coffee products and towards our co-packing services. Operating Expenses
For the twelve months ended September 30, 2018, our Company’s operating expenses totaled $3,685,186, compared to $2,076,654 for the twelve months ended September 30, 2017, representing a 77% increase. This increase is primarily attributable to an increase in stock compensation expense of $700,681 and, to a lesser extent, an increase in employee costs, legal costs and the costs for consultants. Net Loss
For the twelve months ended September 30, 2018, we generated net losses attributable to NuZee, Inc. of $3,577,171 versus $1,767,139 for the twelve months ended September 30, 2017. This loss was attributable primarily to increased costs associated with the shift in our focus towards our co-packing services and increased operating expenses due to increased stock compensation expenses, as described in further detail above. Liquidity and Capital Resources Since our inception in 2011, we have incurred significant losses, and as of June 30, 2019, we had an accumulated deficit of approximately $26.0 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 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 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 As of June 30, 2019, we had a cash balance of $3,061,430. Summary of Cash Flows
Operating Activities We used approximately $2,949,569 and We used approximately $2,310,756 and $1,397,828 of cash in operating activities during the years ended September 30, 2018 and 2017, respectively, principally to fund our operating loss. The increase in cash used in operating activities of approximately $912,928 was primarily attributable to the increase in net loss of $1,810,032 for the year ended September 30, 2018 as compared to the year ended September 30, 2017. Investing Activities We used approximately $1,220,333 and $391,855 of cash in investing activities during the nine months ended June 30, 2019 and 2018, respectively, principally to fund the purchase of equipment. We used approximately $550,206 and $35,297 of cash in investing activities during the years ended September 30, 2018 and 2017, respectively, principally to fund the purchase of equipment. For the year ended September 30, 2017, we acquired approximately $201,676 of cash as part of a Financing Activities Historically, we have
Cash provided from financing activities increased from $1,757,830 for the year ended September 30, 2017 to $4,336,392 for the year ended September 30, 2018. During the year ended September 30, 2018, we issued 1,602,989 shares of common stock which generated net cash proceeds of approximately $4,542,659. During the year ended September 30, 2017, we issued 344,180 shares of common stock which generated net cash proceeds of approximately $860,045, and sold 588,747 shares of treasury stock which generated net cash proceeds of $900,783. Off-Balance Sheet Arrangements 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 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. 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 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 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 contractual protections and certain other advantages in place within the North American market, as outlined by the factors described below. As we have with Kraft Heinz, and in particular their Gevalia Kaffe brand, and Royal Cup Coffee & Tea, 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 provides us with a deeper access to our customers, such as tea bag coffee. 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 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. Machine-based single serve coffee, which represents approximately 32% of the market in North America, we believe has an immaterial amount of market share in Japan. Single serve drip cups represent approximately 2.5 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 packaging is fully recyclable and does not use any plastics. The majority of the packaging is paper based and biodegradable, while the foil used to package the filter for freshness is recyclable. 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. Unlike machine-based drip systems, the single serve drip coffee is brandable to the cup level. Why NuZee? We seek to establish ourselves as the leading single serve pour over 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, as a result of our exclusivity agreement, Level 2 SQF Certification from the Safe Quality Food Institute, operational knowledge and recently announced co-packing arrangements with Kraft Heinz and Royal Cup Coffee & Tea, we are the leader in the single serve pour over coffee market in North America. As a result, 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 pour over coffee production. We have entered into 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 we believe significantly restricts our North American competitors’ access to this equipment. While our agreement with FUSO provides for a six month cancelation provision, due to the development of our co-packing business over the past several years, we are currently in active negotiations with FUSO as we aim to extend the period of exclusivity and amend our agreement to modify or eliminate the rights to termination. 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, 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 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 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. 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 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. 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 recently entered into co-packing agreements with Kraft Heinz, under their Gevalia Kafee® brand, and 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 to work with and grow with like Copper Cow. A select list of our current co-packing customers include: Gevalia Kafee (Kraft Heinz), Royal Cup Coffee & Tea, 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 April of 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 recently announced a co-packing agreement with a large international company. We are in active discussions with a number of 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 to have the facility operational by our second fiscal quarter of the upcoming fiscal year (on or before March 31, 2020). At peak potential capacity, we project the Plano, Texas facility would provide 5 – 6 times 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. As we look at other potential international manufacturing locations, we look for characteristics similar to the Korean 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 is at an all-time high. According to the USDA, global coffee consumption is forecast to reach a record 167.9 million bags in 2019/20 (a bag is equivalent to 60 kilograms). The United States is 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 amounts to US$429.5 billion in 2019, and the market is 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.
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. The2019 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 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 located at 2865 Scott St Suite 107 which is used for the production of our Single Serve Pour Over Drip Cup line. We also recently entered into a five year lease for a new manufacturing hub in Plano, Texas (just outside of Dallas), which we intend to be operational during the fourth calendar quarter of 2019. 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. In particular, we have entered into exclusivity agreements, both written and oral, with certain East Asian companies regarding sophisticated packing equipment for pour over coffee production, including FUSO. 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 from Serengeti Trading Company located in Dripping Springs, TX on a contractual basis. The green whole bean is then sent to our roaster at San Diego Coffee, Tea, & Spice, located in Oceanside, CA. For our products that feature nutraceuticals, we send the raw products (roasted ground coffee and nutraceuticals) to Global Health Trax (“GHT”) for mixing into our proprietary blends. We do not have a written agreement with GHT. Rather, all services performed by GHT are on a purchase order basis. After GHT mixes our coffees, the final product is shipped to us for our coffee blenders single serve drip cups and Twin Peaks pour over and boxed for retail sales. We are in the process of evaluating the future of our line of single cup pods. In the past GHT would ship our product to various co-packers we used for our single cup pods. We have a purchase-order based relationship with Serengeti Trading Company (“Serengeti”), through which we purchase green whole bean coffee from Serengeti. From there, the coffee is sent to a roaster, where the coffee is roasted/ground/blended with nutraceuticals and then packaged into single serve pods and boxed for retail sales. GHT also ships the blended coffee to our location for packing into our proprietary single serve consumer product, the “Drip Cup”. 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: Air compression equipment comes from Kaeser Compressor, manufactured in Germany with a local sales and support office in Los Angeles. Nitrogen generation equipment is manufactured by On-Site Gas Systems, and our Drip Cup production is produced on the leading Japanese manufacturer of packaging machines from FUSO. Nitrogen and air compression machinery is capable of handling expansion as the Company expands as well to minimize any ongoing capital expenditures for machinery. Research and Development We focus our research and development efforts on developing new innovative delicious tasting and functional beverages Over the course of the last fiscal year we have maintained a modest R&D budget. With the advent of the functional beverage and new product ideas, we plan to invest more to secure unique flavor and formula profiles but anticipates the out of pocket expense will not be significant as the Company has agreements with flavor and formula design partners to waive development fees in exchange for purchasing the flavorings and ingredients. 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 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 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 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. 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. 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 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. Employees As of September 30, 2019, we had a total of 19 full-time and part-time employees in the U.S. and five employees in Korea and three 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. 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 From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. Currently, we are not a party to any material legal proceedings or subject to any material claims. 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. 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.
(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 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 COO 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 the present, Mr. Gorney has acted as President and CEO of Left Coast Threads, Inc., a company that operates retail clothing stores. Previously, in 2004, 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 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. 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. 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 financial sophistication typically required under the listing standards of a national securities exchange. 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 will operate under a written charter, to be effective prior to the completion of this offering, which satisfies the applicable rules and regulations of the SEC. 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 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 will operate under a written charter, to be effective prior to the completion of this offering, which satisfies the applicable rules and regulations of the SEC. Corporate Governance and Nominating Committee The corporate governance and nominating committee is composed of Messrs. Conner, 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 will operate under a written charter, to be effective prior to the completion of this offering, which satisfies the applicable rules and regulations of the SEC. 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 ChiefOperatingOfficer; 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.
(1) Masateru Higashida was appointed as the Company’s President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary, and Chief Operating Officer (“COO”) on August 19, 2014. Mr. Higashida resigned as the Company’s President and COO on August 28, 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 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:
(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) 33,333 options vest upon the Company’s completion of sales of $15 million of its equity securities in capital raising transactions on or before December 31, 2019; (b) 16,667 options vest upon the Company’s completion of sales of $2 million of its equity securities in capital raising transactions to U.S. investors on or before December 31, 2019; (c) 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 (d) 133,333 options vest upon the Company’s listing on any tier of the Nasdaq Stock Market on or before December 31, 2020. 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 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 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 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) 33,333 options vest upon the Company’s completion of sales of $15 million of its equity securities in capital raising transactions on or before December 31, 2019; (b) 16,667 options vest upon the Company’s completion of sales of $2 million of its equity securities in capital raising transactions to U.S. investors on or before December 31, 2019; (c) 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 (d) 133,333 options vest upon the Company’s listing on any tier of the Nasdaq Stock Market on or before December 31, 2020. 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 beginning November 2019, 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. 2013Stock 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. 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 1,544,333 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 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. 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, 2017, 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. 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. Control by Officers and Directors Our officers and directors and their affiliates beneficially own, in the aggregate, approximately 38.6% of our outstanding common stock as of November 12, 2019. 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 have entered, and intend to continue 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. The indemnification agreements and 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. 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 November 12, 2019, 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 13,594,753 shares of common stock outstanding as of November 12, 2019, 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 shares of common stock outstanding after the close of this offering, assuming the sale of shares of common stock by us in the offering and no exercise of the underwriters of their option to purchase up to an additional 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 November 12, 2019, and restricted stock awards that are scheduled to vest within sixty (60) days of November 12, 2019. These shares are deemed to be outstanding and beneficially owned by the person holding those options and restricted stock units 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 (*).
*Represents beneficial ownership of less than one percent (1%) of the outstanding common stock. (1)Represents (i) 495,361 shares of our Common Stock held by Eguchi Holdings Co, Ltd., of which Mr. Eguchi is President, (ii) 124,444 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. DESCRIPTION OF
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 Common Stock The holders of our common
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 Holders of shares of our common stock do not have cumulative voting Registration Statement on Form S-8 As of November 12, 2019, 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, Dividends
Securities Authorized for Issuance under Equity Compensation Plans
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 restatedbylaws 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 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
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. Listing We intend to apply to list our common stock on a national securities exchange 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. 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 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. 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 that 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) if 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. 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 any applicable income tax or other treaties that 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 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
UnderwriterNumber of shares The Benchmark Company, LLC Total: 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. 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 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. 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. 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 additional common shares.
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. 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 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 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 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. Listing We intend to apply to list our common stock on a national securities exchange 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 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) 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 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 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. The validity of the issuance of the shares of common stock offered hereby will be The consolidated financial statements of NuZee, Inc. (the “Company”) as of September 30, 2018 and 2017 and for each of the two years in the period ended September 30, 2018 included in this prospectus have been so included in reliance on the report (which includes an explanatory paragraph relating to WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1 under
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 NUZEE, INC.
Years Ended September 30, 2018 and 2017 Page Audited Annual Financial Statements 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 Financial Statements: Consolidated Balance Sheets (unaudited)F-25 Consolidated Statements of Operations (unaudited)F-26 Consolidated Statements of Comprehensive Income (Loss) (unaudited)F-27 Consolidated Statements of Changes in Stockholder’s Equity (Deficit) (unaudited)F-28 Consolidated Statements of Cash Flows (unaudited)F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of NuZee, Inc. Vista, California
We have audited the accompanying consolidated balance sheets of NuZee, Inc. and its subsidiaries (collectively, the “Company”) as of September 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, 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, 2018 and 2017, 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.
Going Concern Matter
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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 February 8, 2019, except for Note 11 as to which the date is November 12, 2019 NuZee, Inc. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these
NuZee, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these NuZee, Inc.
The accompanying notes are an integral part of these
The accompanying notes are an integral part of these consolidated financial statements NuZee, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements NuZee, Inc NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2018 1. ORGANIZATION NuZee, Inc. (the “Company”, “we”, “our”) was incorporated on November 9, 2011 in Nevada. The Company is a start-up organization which markets and distributes consumer products primarily in the
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 would exchange 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 8, 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. 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. 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, 2018 and 2017, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive. Going Concern and Capital Resources Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company has generated limited revenues from its principal operations, and there is no assurance of future revenues. As of September 30, 2018, the Company had cash (operating capital) of $1,806,666. The Company has not attained profitable operations since inception.
The accompanying 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, 2018 and 2017. 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 $169,517 and $86,487 of allowance as of September 30, 2018 and 2017, respectively. The allowance mainly represents the estimated chargebacks from retailers. Major Customers For the years ended September 30, 2018 and 2017, revenue was primarily from major customers disclosed below. Besides those revenues, there were $99,203 accounts receivable owed from customer M and $12,564 accounts receivable owed from customer CC as of September 30, 2018.
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 2020. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6-year life. The leased equipment is reported in the accompanying consolidated balance sheets in property and equipment of $7,864 as of September 30, 2018. The capital lease liability is included in other current liabilities on the consolidated balance sheets. Future minimum lease payments under capital lease as of September 30, 2018 for each of the remaining years are as follows:
The Company leases office spaces under leases with terms ranging from month to month to 32 months. Rent expense included in general and administrative expense for the years ended September 30, 2018 and 2017 was $74,001 and $88,903 respectively. Future minimum rents as of September 30, 2018 for each of the remaining years are as follows:
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 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. The Company has three subsidiaries:NuZee JP, NuZee KR and 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. 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 $10,287 and $20,680 as of September 30, 2018 and 2017, 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 $(17,192) and $3,235 for the years ended September 30, 2018 and 2017, respectively. 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. Revenue Recognition The Company recognizes revenue only when all of the following criteria have been met: Persuasive evidence of an arrangement exists; Delivery has occurred or services have been rendered; The fee for the arrangement is fixed or determinable; and Collectability is reasonably assured. Persuasive Evidence of an Arrangement—the Company documents all terms of an arrangement in a written contract signed by partial customer prior to recognizing revenue. For those customers do not have signed contracts with us, we did business with them based on purchase orders received, which include online orders. Delivery Has Occurred or Services Have Been Rendered —The Company performs delivery of all products to customers and recognize revenue upon shipment or ultimate delivery to customers’ delivery sites depending on the terms of the sale. Collectability Is Reasonably Assured—The Company determines that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer by customer basis based on criteria outlined by management. New customers are subject to a credit review process, which evaluates the customer’s financial position and ultimately its ability to pay. The Company does not enter into arrangements unless collectability is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectability is not reasonably assured, revenue is recognized on a cash basis. 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. As of September 30 2018, the Company had $169,517 of sales allowances for estimated chargebacks and returns. Revenue recognized is net of sales allowances. Cost Recognition Cost of products sold primarily consists of direct materials consumed in the manufacturing of primary coffee blender products. 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) primarily consists 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 $787,723 and $741,550 for the years ended September 30, 2018 and 2017, respectively. Company covers shipping fees for wholesalers and distributors and the shipping and handling expenses are recorded under operating expenses in the consolidated statements of operations. The Company expenses advertising costs when incurred. Advertising expense for the years ended September 30, 2018 and 2017 is as follows:
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, 2018 and 2017 amounted to $18,166 and $18,908, 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, 2018 and 2017, the carrying value of inventory of $134,877 and $266,620 respectively, reflected on the consolidated balance sheets is net of this adjustment.
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 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, 2018 and 2017 was $151,848 and $75,917 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, 2018 and 2017 consist of:
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 shipped 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 JP, has an estimated useful life of 5 years. As of September 30, 2018, the intangible assets consist of:
No significant residual value is estimated for the intangible asset. Aggregate amortization expense for the years ended September 30, 2018, and September 30, 2017, totaled $11,475 and $11,475, respectively. The following table represents the total estimated amortization of intangible assets for the next five years:
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, 2018 and 2017. 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 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 May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The collective guidance is effective for interim and annual periods in the first annual period beginning after December 15, 2017, with early adoption permitted. The standard may be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has adopted this Topic 606 on its ongoing financial reporting since October 1, 2018 on a modified retrospective basis, and the impact of this pronouncement will not have a material impact to the Company’s 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 is currently evaluating the impact of these amendments on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, to reduce complexity in accounting standards involving several aspects of the accounting for employee share-based payment transactions, including (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The amendments will be effective for consolidated financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method, amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively, and amendments related to the presentation of excess tax benefits on the statement of cash flows can be applied using either a prospective transition method or a retrospective transition method. The Company has adopted ASU No. 2016-09 with no impact on its consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments should be applied using a retrospective transition method, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will adopt ASU No. 2016-15 on its consolidated financial statements starting from October 1, 2018. The Company believes that the adoption of ASU No. 2016-15 will not have a material impact on its consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250). The ASU adds SEC disclosure requirements for both the quantitative and qualitative impacts that certain recently issued accounting standards will have on the consolidated financial statements of a registrant when such standards are adopted in a future period. Specifically, these disclosure requirements apply to the adoption of ASU No. 2014- 09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company believes the impact of these amendments on its consolidated financial statements in the future will not be material. 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 will adopt ASU No. 2017-09 from October 1, 2018. The Company believes that the adoption of ASU No. 2017-09 will not have a material impact on its consolidated 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 generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The ASU, among other things, eliminates the need to consider the effects of down round features when analyzing convertible debt, warrants and other financing instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The amendments are effective for fiscal years beginning after December 15, 2018, and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this amendment on its consolidated financial statements. 3. ACQUISITION NuZee JAPAN Co., Ltd On August 16, 2016, the Company entered into a Share Exchange Agreement with NuZee JP and its shareholders whereby the Company would exchange 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 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 3, 2016. The Company applied the acquisition method to the business combination and valued each of the 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 assumed at the date of acquisition:
4. INVESTMENT IN UNCONSOLIDATED AFFILIATE The Company has an investment in an equity method affiliate which has main businesses related to the production, sale, import and export of coffee & beans, tea & tea leaf, healthy foods and drinks. The following table is a reconciliation of the Company’s investment in equity affiliate as presented on the consolidated balance sheet as of September 30, 2018:
5. LOANS On June 30, 2016, NuZee JP entered into a loan agreement with Tono Shinyo Kinko Bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The outstanding balance on the loan at September 30, 2018 amounted to $72,572. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seisaku Kouko. The Company borrowed the sum of approximately $87,268 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The loan is unsecured and not guaranteed by a director. The outstanding balance on the loan at September 30, 2018 amounted to $59,720. The loan payments required for the next five years are as follows:
6. GEOGRAPHIC CONCENTRATIONS The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The revenues earned and long-lived assets in Japan increased due to the acquisition of NuZee JP. Information about the Company’s geographic operations for 2018 and 2017 are as follows:
7. RELATED PARTY TRANSACTIONS Loans 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 Company has more funds for production and marketing to fulfill customers’ requirements, which is in the best interest of the Company 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 392,157 shares of the Company’s common stock at $1.53 per share if the Company is unable to pay back the note by then. The conversion feature was evaluated as a derivative and the Company determined that derivative accounting did not apply. 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 $1.53 per share, on or after March 31, 2017. 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 $1.53 per share, in accordance with the terms and conditions of the Convertible Note Purchase Agreement, thus equating to a conversion of $606,000 (i.e., $600,000 principal, plus $6,000 in accrued interest) to the equivalent 396,079 shares of the Corporation’s common stock. During March 2016, the Company borrowed the sum of $100,000 unsecured short-term loan from NuZee Co., Ltd to be repaid on or before March 31, 2017 at an interest rate of one percent (1%). The Company accrued interest of $230 for the years ended September 30, 2017. The Company had a balance of $45,000 at September 30, 2016 and paid back $45,000 of this short-term loan during the year ended September 30, 2017. As of September 30, 2017, the loan had principal and accrued interest balances of $0 and $492, respectively. During August 2016, the Company borrowed the sum of $100,000 unsecured 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 unsecured short-term loan from Masateru Higashida to be repaid on or before March 14, 2018 at an interest rate of one percent (1%). During June 2017, the Company borrowed the sum of $1,200 unsecured short-term loan from Masateru Higashida to be repaid on or before June 14, 2018 at an interest rate of one percent (1%). The Company accrued interest of $443 for the year ended September 30, 2017. The Company paid back $145,000 of the short term loan during the year ended September 30, 2017. As of September 30, 2018, the loan had principal and accrued interest balances of $0 and $0, respectively. During December 2016, the Company borrowed the sum of $18,384 unsecured 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%). During June 2017, the Company borrowed 5,500,000 JPY ($47,361) and $150,000 unsecured short-term loan from NuZee Co., Ltd to be repaid on or before June 30, 2018 at an interest rate of one percent (1%). During August 2017, the Company borrowed the sum of $30,000unsecured short term loan from NuZee Co., Ltd. For the year ended the September 30, 2017, the Company accrued interest of $334. The Company paid back the full principal amount of the loans as of September 30, 2017. As of September 30, 2017, the loans had principal and accrued interest balances of $0 and $272, respectively. During February 2017, the Company borrowed the sum of $4,000 unsecured 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 the total principal amount of $4,000 and accrued interest of $5 on March 31, 2017. During March 2017, the Company borrowed the sum of $100,000 secured short-term loan from Takayuki Nagashima to be repaid on or before June 30, 2017 at an interest rate of one percent (1%). On or about May 9, 2017, the Board of Directors amended the terms of the bridge loan in order to permit Takayuki Nagashima to convert the loan and to receive a (“Note”) evidencing his right, exercisable at this election, to convert, his loan to shares of the Corporation’s stock at $1.53 per share at any time upon reasonable notice to the Corporation. On or about May 9, 2017, Takayuki Nagashima exercised his right to convert the Amended Note to shares of the Corporation’s common stock at the price of $1.53 per share, thus equating to a conversion of $100,000 (i.e., $100,000 principal) to the equivalent 65,359 shares of the Corporation’s common stock. There is $0 and $121 interest balance left as of September 30, 2018 and September 30, 2017, respectively. During April, 2017, the Company borrowed the sum of $50,000 unsecured short-term loan from Eguchi Holdings Co.,Ltd (“EHCL”) and the sum of $50,000 unsecured short-term loan from Eguchi Steel Co.,Ltd (“ESCL”) to be repaid on or before June 30,2017 at an interest rate of one percent (1%). Both of the two short-term loans as well as incurred interests have been paid back as of September 30, 2017. During July, 2017, NuZee JP borrowed the sum of $62,921 unsecured short-term loan from Katsuyoshi Eguchi. Interest was calculated at the annual rate of zero percent (0%). As of September 30, 2017, NuZee JP paid back the full principal amount. 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 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 an officer of the Company and Takayuki Nagashima is the co-owner of the equity method affiliate. Katsuyoshi Eguchi is a director and the minority owner of NuZee JP. EHCL and ESCL are controlled by Katsuyoshi Eguchi. Masateru Higashida, NuZee Co., Ltd, Travis Gorney, Takyuki Nagashima, EHCL, ESCL and Katsuyoshi Eguchi are related parties of the Company. Sales, Purchases and Operating Expenses For the years ended September 30, 2018 and 2017, NuZee JP sold their products to EHCL, and the sales to them totaled approximately $3,420 and $49,703, respectively. The corresponding accounts receivable balance from EHCL was $222 and $6,100 as of September 30, 2018 and 2017 respectively. For the years ended September 30, 2018 and 2017, sales made by NuZee JP to NuZee Co., Ltd., totaled $0 and $488,670, respectively. The corresponding accounts receivable balance was $0 and $6,280 as of September 30, 2018 and 2017, respectively. For the years ended September 30, 2018 and 2017, sales made by NuZee JP to ESCL amounted to $0 and $932, respectively. The corresponding accounts receivable balance was both $0 as of September 30, 2018 and 2017. NuZee JP purchased goods from EHCL totaling to $0 and $15,535 as of September 30, 2018 and September 30, 2017 respectively. The corresponding accounts payable balance to them was $0 and $1,089 as of September 30, 2018 and 2017 respectively. EHCL leased an employee to NuZee JP with no fee during year ended September 30, 2018. NuZee JP had a professional expense of $39,544 to EHCL for the audit related fee paid by them on behalf of the Company. The Company fully paid off the liability as of September 30, 2017. NuZee JP leased an employee to NuZee Co., Ltd. for Contlus during October 2016 to January 2017 for $10,936 and sold greeting cards to NuZee Co., Ltd. for $7,418 during the year ended September 30, 2017. The related receivables outstanding was $437 and $14,020 as of September 30, 2018 and September 30, 2017 respectively. NuZee JP leased an employee to Contlus. During the years ended September 30, 2017 and 2018, NuZee JP billed $24,973 and $18,612 for this arrangement, respectively, and $15,361 remains outstanding as of September 30, 2017. Contlus is the Company’s related party as the Company holds 50% of their issued shares. Contlus has payable balance of $33,450 as of September 30, 2018. During the year ended September 30, 2018, Contlus ceased all operations. NuZee JP transferred outstanding receivable of $33,450 to NuZee INV during the year ended September 30, 2018. Rent During October 2016, NuZee JP entered into a rental agreement of an office space with NuZee Co., Ltd. The Company agrees to pay $1,169 per month for the office on the last day of each month. There is no set expiration date on the agreement. The Company recognized rent expense of $13,999 during the year ended September 30, 2018 from this lease and had an outstanding payable to NuZee Co., Ltd of $1,446 as of September 30, 2018. During September 2016, the Company entered into a rental agreement of an office space and warehouse with EHCL. The Company agrees to pay $1,213 per month for the office and the warehouse on the last day of each month. There is no set expiration date on the agreement. EHCL charged total rent of $7,478 for the year ended September 30, 2018. NuZee JP has an outstanding payable to EHCL of $1,336 as of September 30, 2018. During February 2015, the Company entered into a rental agreement of a warehouse with ESCL. The Company agrees to pay $449 per month for the warehouse on the last day of each month. There is no set expiration date on the agreement. 8. COMMON STOCK During the year ended September 30, 2017, the Company sold 344,180 shares of common stock at prices ranging from $1.53 to $3.00 per share for an aggregate purchase price of $860,045. 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 $1.53 per share, in accordance with the terms and conditions of the Convertible Note Purchase Agreement, thus equating to a conversion of $606,000 (i.e., $600,000 principal, plus $6,000in accrued interest) to the equivalent 396,079 shares of the Corporation’s common stock. During the year ended September 30, 2017, the Company sold 588,747 shares of treasury stock at $1.53 per share, for an aggregate purchase price of $900,783. During May 2017, the Company agreed to amend Nagashima Takayuki’s $100,000 short-term loan to a convertible loan with a conversion price of $1.53 per share. Nagashima Takayuki then converted this loan to 65,359 shares of the Company’s common stock. During August 2017, the Company issued 11,534 shares of treasury stock at $1.29 per share, for services and recognized stock compensation expense of $14,879. During year ended September 30, 2018, the Company sold 1,602,989 shares of common stock at prices ranging from $1.53 to $3.60 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 a 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. 9. 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 143,334 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. 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, 2018 and 2017, respectively:
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 $838,779 and $138,098 for the years ended September 30, 2018 and 2017. Unamortized option expense as of September 30, 2018, for all options outstanding amounted to approximately $2,250,000. 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, 2018.
The following table summarizes stock option activity for the year ended September 30, 2017.
A summary of the status of the Company’s unvested shares as of September 30, 2018 and 2017, are presented below:
10. INCOME TAX As of September 30, 2018, and, 2017, 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 $11,680,849 and $8,710,253 as of September 30, 2018 and 2017, 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 has made a reasonable estimate of the effects on existing deferred tax balances as a result of the Act. 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, 2018 and 2017:
11. SUBSEQUENT EVENTS During October to December 2018, the Company sold 63,724 shares of common stock at $16.38 per share, for an aggregate purchase price of $1,043,769. In October 2018, the Company sold 3,334 shares of common stock at $3.60 per share, for an aggregate purchase price of $12,000. Subsequent to September 30, 2018, the Company received $273,000 in the form of a stock sale. We have not yet received the signed subscription agreement related to this stock sale. We believe we will receive a signed agreement but there is a risk we may not receive the agreement and might have to return these funds. 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. NuZee, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
The accompanying notes are an integral part of these unaudited consolidated financial statements. NuZee, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
The accompanying notes are an integral part of these unaudited consolidated financial statements. NuZee, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
The accompanying notes are an integral part of these unaudited consolidated financial statements. NuZee , Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
The accompanying notes are an integral part of these unaudited consolidated financial statements. NuZee, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
The accompanying notes are an integral part of these unaudited consolidated financial statements. NuZee, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 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 Reclassification Certain amounts in the prior period financial statements have been
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 subsidiaries: NuZee JAPAN Co., Ltd (“NuZee JP”), NuZee KOREA Ltd (“NuZee KR”) 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. Earnings per Share Basic earnings per common share is equal to net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. The Company incurred a net loss for the three months and nine months ended June 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. 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 June 30, 2019, the Company had cash of $3,061,430. The Company has not attained profitable operations since inception. The accompanying consolidated financial statements have been prepared
Major Customers
The Company
lessee, the Company records the lease as a capital lease at its inception. The Company
On April 23, 2019, we entered into the “Third Amendment to Lease” with our current landlord in Vista California. Under the terms of this lease we added 2,134 square feet to our facility. After this expansion, we will have
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 space with terms ranging from month to month to 61 months. Rent expense included in general and administrative expense for the nine months ended June 30, 2019 and 2018 was $99,526 and $107,706, respectively.
Loans On June 30, 2016, NuZee JP entered into a loan agreement with Tono Shinyo Kinko Bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The outstanding balance on the loan at June 30, 2019 amounted to $55,605. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seiaku Kouko. The Company borrowed the sum of approximately $87,268 to be repaid on or before January 20, 2022 at an interest rate of 0.16%. The loan is unsecured and not guaranteed by a director. The outstanding balance on the loan at June 30, 2019 amounted to $48,814. During the nine months ended June 30, 2019, the Company made principal repayments on outstanding loan balances totaling $32,580. 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 June 30, 2019 amounted to $36,942. 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%. Principal payments began in July of 2019. The outstanding balance on this loan at June 30, 2019 amounts to $147,081. The loan payments required for the next five years are as follows:
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 does not have a material impact on our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations. Foreign Currency Translation The financial position and results of operations of 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 ($66,002) and ($30,967) as of June 30, 2019 and September 30, 2018, respectively. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. Inventories Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At June 30, 2019 and September 30, 2018, the carrying value of inventory of $289,856 and $134,877 respectively, reflected on the consolidated balance sheets is net of this adjustment.
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, In February 2016, the FASB issued 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 is currently evaluating the impact of this amendment on its consolidated financial statements. 2. GEOGRAPHIC CONCENTRATION The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. Information about the Company’s geographic operations are as follows:
3. RELATED PARTY TRANSACTIONS Sales, Purchases and Operating Expenses For the nine months ended June 30, 2019 and 2018, NuZee JP sold their products to Eguchi Holdings Co., Ltd (“EHCL”), and the sales to them totaled approximately $3,174 and $3,198 respectively. The corresponding accounts receivable balance from EHCL was $117 and $222 as of June 30, 2019 and September 30, 2018, respectively. EHCL leased an employee to NuZee JP with no fee during the nine months ended June 30, 2019. NuZee INV 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 $34,568 as of June 30, 2019. 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. During September 2016, the Company entered into a rental agreement of an office space and warehouse with EHCL. The Company pays $1,213 per month for the office and the warehouse on the last day of each month. The term of this agreement is 3 years and the Company expects it will be automatically renewed. At June 30, 2019, the payable balance under this lease was $1,068. 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. ESCL is the Company’s related party as they are controlled by Katsuyoshi Eguchi who is a director and the minority owner of NuZee JP. 4. COMMON STOCK During the nine months ended June 30, 2019, the Company sold 337,028 shares of common
During the nine months ended June 30, 2019, the Company issued 50,000 shares of common stock to satisfy a previously committed service obligation of $37,500. 5. STOCK OPTIONS The following table summarizes stock option activity for nine months ended June 30, 2019:
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 $10,608,751 for nine months ended June 30, 2019. Unamortized option expense as of June 30, 2019, for all options outstanding amounted to approximately $19,273,719. These costs are expected to be recognized over a weighted-average period of 1.7 years. The Company recognized stock option expenses of $366,708 for nine months ended June 30, 2018. A summary of the
6. SUBSEQUENT EVENT In July 2019, we sold 34,332 shares for $17.55 per share for an aggregate purchase price of $602,530 in private offerings pursuant to Regulation S, Regulation D or Section 4(a)(2) under the Securities Act. 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. In October and November of 2019, we sold 111,738 shares of common stock for $17.85 per share for an aggregate purchase price of $1,994,138 in private offerings pursuant to Regulation S, Regulation D or Section 4(a)(2) under the Securities Act. Shares NUZEE, INC. Common Stock Prospectus , 2019 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 securities exchange listing fee.
*To be filed by amendment 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 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. II-1 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. (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 1,751,333 shares of our common stock with an average exercise price of $6.85 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-2 Item 16. Exhibits and Financial Statement Schedules (a)Exhibits The following exhibits are filed as part of this registration statement:
*To be filed by amendment. †Indicates management contract or compensatory plan.
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-3 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-4 Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this
|