IMG 10-Q Quarterly Report Dec. 31, 2017 | Alphaminr
NuZee, Inc.
ALPHAMINR

IMG 10-Q Quarter ended Dec. 31, 2017

Balance Sheet
Cash Flow
Income Statement
NUZEE, INC.
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10-Q 1 nuzee10q123117.htm NUZEE 10Q, 12.31.17
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to
Commission File No. 333-176684
NUZEE, INC.
(exact name of registrant as specified in its charter)
Nevada
38-3849791
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification Number)
2865 Scott Street, Suite 101, Vista, CA, 92081
(Address of principal executive offices)   (zip code)
(760)295-2408
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Titles of each class
Name of each exchange on which registered
None
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ☒ No ☐
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☐
(Do not check if smaller reporting company)
Smaller reporting company
☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐ No ☒

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
As of March 31, 2018, NuZee, Inc. had 37,122,321 shares of common stock outstanding.
Table of Contents
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q of NuZee, Inc. contains "forward-looking statements" that may state our management's plans, future events, objectives, current expectations, estimates, forecasts, assumptions or projections about the company and its business. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and in some cases, words such as "believes," "estimates," "projects," "expects," "intends," "may," "anticipates," "plans," "seeks," and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual outcomes and results to differ materially from the anticipated outcomes or results. These statements are not guarantees of future performance, and undue reliance should not be placed on these statements. It is important to note that our actual results could    differ materially from what is expressed in our forward-looking statements due to the risk factors described in the section of our Form 10-K filed on February 21, 2018 entitled "Risk Factors."
We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.






PART I.
Item 1. Financial Statements.

NuZee, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31,
2017
September 30,
2017
ASSETS
Current assets:
Cash
$
292,454
$
347,327
Accounts receivable, net
85,098
143,893
Accounts receivable - Related party
6,183
12,380
Subscription receivable
153,000
-
Inventories, net
299,861
266,620
Other current assets
190,289
102,926
Other current assets - Related party
26,347
29,378
Total current assets
1,053,232
902,524
Property and equipment, net
260,917
277,987
Other assets:
Goodwill
17,112
17,112
Customer List, net
43,031
45,899
Investment in unconsolidated affiliate
10,167
10,733
Total other assets
70,310
73,744
Total assets
$
1,384,459
$
1,254,255
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
205,842
$
104,973
Loan payable - short term - Related party
200
200
Current portion of long-term loan payable
33,475
44,681
Other current liabilities
80,286
126,687
Other current liabilities - Related party
2,963
1,089
Deferred revenue
6,221
72,750
Total current liabilities
328,987
350,380
Non-current liabilities:
Loan payable - long term, net of current portion
$
133,502
$
133,644
Other noncurrent liabilities
9,599
9,610
Total non-current liabilities
143,101
143,254
Total liabilities
472,088
493,634
Stockholders' equity:
Common stock; 100,000,000 shares authorized, $0.00001 par value;
36,018,792 and 34,720,538 shares issued
$
360
$
347
Additional paid in capital
10,514,231
9,718,648
Accumulated deficit
(9,668,051
)
(9,030,551
)
Accumulated other comprehensive loss
(20,883
)
(20,680
)
Total NuZee, Inc. shareholders' equity
825,657
667,764
Noncontrolling interest
86,714
92,857
Total stockholders' equity
912,371
760,621
Total liabilities and stockholders' equity
$
1,384,459
$
1,254,255
The accompanying notes are an integral part of these unaudited consolidated financial statements
NuZee, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
2017
Three Months Ended
December 31,
2016
Revenues
$
356,879
$
577,507
Cost of sales
239,010
416,868
Gross Profit
117,869
160,639
Operating expenses
760,653
508,334
Loss from operations
(642,784
)
(347,695
)
Other income
507
17,847
Equity in loss of unconsolidated affiliate
(566
)
(15,171
)
Other expense
-
1,076
Interest expense
(713
)
(2,431
)
Net loss
(643,556
)
(346,374
)
Net loss attributable to noncontrolling interest
(6,056
)
(6,422
)
Net loss attributable to NuZee, Inc.
$
(637,500
)
$
(339,952
)
Basic and diluted loss per common share
$
(0.02
)
$
(0.01
)
Basic and diluted weighted average number of common stock outstanding
34,908,982 32,553,835

The accompanying notes are an integral part of these unaudited consolidated financial statements
NuZee, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Noncontrolling
NuZee, Inc.
Interests
Total
For the three months eneded December 31
2017
2016
2017
2016
2017
2016
Net loss
$
(637,500
)
$
(339,952
)
$
(6,056
)
$
(6,422
)
$
(643,556
)
$
(346,374
)
Foreign currency translation
(203
)
(26,261
)
(87
)
(11,255
)
(290
)
(37,516
)
Total other comprehensive loss, net of tax
(203
)
(26,261
)
(87
)
(11,255
)
(290
)
(37,516
)
Comprehensive loss
$
(637,703
)
$
(366,213
)
$
(6,143
)
$
(17,677
)
$
(643,846
)
$
(383,890
)
The accompanying notes are an integral part of these unaudited consolidated financial statements
NuZee, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months
Ended
December 31,
2017
Three Months
Ended
December 31,
2016
Operating activities:
Net loss
$
(643,556
)
$
(346,374
)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and Amortization
23,536
18,646
Option expense
133,486
1,900
Interest expense
-
1,848
Inventory impairment
-
4,112
Equity in loss of unconsolidated affiliate
566
15,171
Change in operating assets and liabilities:
Accounts receivable
58,662
(82,692
)
Accounts receivable - Related party
6,184
-
Inventories
(33,360
)
24,866
Other current assets
(87,407
)
67,910
Other current assets - Related party
4,000
-
Accounts payable
100,892
(77,156
)
Other current liabilities
(10,935
)
19,643
Other current liabilities - Related party
1,874
-
Deferred revenue
(66,529
)
-
Net cash used by operating activities
(512,587
)
(352,126
)
Investing activities:
Purchase of equipment
(38,145
)
(135,731
)
Acquisition of investment in unconsolidated affiliate
-
(50,000
)
Net cash acquired from business acquisition
-
201,676
Net cash provided (used) by investing activities
(38,145
)
15,945
Financing activities:
Proceeds from issuance of Loan - short term - Related party
156,000
18,384
Repayment of loans - short term - Related party
(157,000
)
(34,670
)
Repayment of loans - short term
(11,137
)
(6,438
)
Payments on capital lease
(864
)
-
Proceeds from issuance of common stock
509,110
535,000
Net cash provided by financing activities
496,109
512,276
Effect of foreign exchange on cash and cash equivalents
(250
)
(53,966
)
Net change in cash
(54,873
)
122,129
Cash, beginning of period
347,327
40,613
Cash, end of period
$
292,454
$
162,742
Supplemental disclosure of cash flow information:
Cash paid for interest
$
543
$
584
Cash paid for taxes
$
800
$
-
Noncash investing and financing activities:
Acquisition of NuZee JAPAN Co., Ltd through issuance of common shares
$ - $ 258,465
Software purchased with installment agreement
-
14,807
Subscription receivable from issuance of common stock
153,000 -

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

December 31, 2017
1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim financial statements of NuZee, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's annual report on Form 10-K for the year ended September 30, 2017 as filed with the SEC. In the opinion of management, all adjustments, consisting of recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements as reported in the annual report on Form 10-K have been omitted.
Earnings per Share
Basic earnings per common share equal net earnings or loss divided by the weighted average of shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. The Company incurred a net loss for the three months ended December 31, 2017 and 2016, 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
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has recurring losses, negative operating cash flows, an accumulated deficit and is dependent on its shareholders to provide additional funding for operating expenses. These items raise substantial doubt as to the Company's ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon management's ability to develop profitable operations, continued contributions from the Company's executive officers to finance its operations and the ability to obtain additional funding sources to explore potential strategic relationships and to provide capital and other resources for the further development and marketing of the Company's products and business.
Major Customers
In the three months ended December 31, 2017 and 2016, revenue was primarily from major customers disclosed below. Besides those revenues, there were $54,318 and $0 account receivable owed by customer PO and customer B as of December 31, 2017, and $122,090 and $37,858 account receivable owed by customer PO and K as of December 31, 2016.
Three months ended December 31, 2017 :
Sales Amount
% of Total Revenue
Customer Name
Customer PO
$
167,682
47
%
Customer B
$
72,750
20
%
Three months ended December 31, 2016 :
Sales Amount
% of Total Revenue
Customer Name
Customer PO
$
265,605
46
%
Customer K
$
146,005
25
%
Lease
The Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line basis over the lease term.
NuZee JAPAN Co., Ltd is the lessee of certain equipment under a capital lease extending through 2020. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6-year life. The leased equipment is reported in the accompanying consolidated balance sheets in property and equipment of $10,573 as of December 31, 2017. The capital lease liability is included in other current liabilities on the consolidated balance sheets.
Future minimum lease payments under capital lease as of December 31, 2017 for each of the remaining years are as follows:
2018
$
3,250
2019
$
4,333
2020
$
4,333
2021
$
1,083
Total Minimum Lease Payments
$
12,999
The Company leases office space under leases expiring on May 31, 2020. Rent expense included in general and administrative expense for three months ended December 31, 2017 and 2016 was $32,971 and $13,367 respectively.
Future minimum rents as of December 31, 2017 for each of the remaining years are as follows:
2018
$
42,729
2019
$
58,488
2020
$
39,760
Total Minimum Lease Payments
$
140,977
Loan
On June 30, 2016, NuZee JAPAN Co., Ltd entered into a loan agreement with Tono Shinyo Kinko Bank. The Company borrowed the sum of approximately $145,758 to be repaid on or before June 5, 2021 at an annual interest rate of 1.2%. The loan is unsecured and guaranteed by a director. The Company had $93,209 loan payable at December 31, 2017. On January 27, 2017, NuZee JAPAN Co., Ltd entered into a loan agreement with Nihon Seisaku Kouko. The Company borrowed the sum of approximately $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 Company had $73,768 loan payable at December 31, 2017. During the three months ended December 31, 2017, the Company paid back the principal amount of $11,137.
The loan payments required for the next five years are as follows:
Tono Shinyo
Kinko Bank
Nihon Seisaku
Kouko
2018
$
19,974
$
13,501
2019
$
26,631
$
18,003
2020
$
26,631
$
18,003
2021
$
19,973
$
18,003
2022
$
-
$
6,258
Total Loan Payment
$
93,209
$
73,768
Principles of Consolidation
The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and majority owned subsidiary which has a fiscal year end of January 31. All significant intercompany accounts, balances and transactions have been eliminated in the consolidation.
The Company consolidates its subsidiary in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, or over 50% of the outstanding voting shares of another entity is a condition pointing toward consolidation.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign 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 $20,883 and $20,680 as of December 31, 2017 and September 30, 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 included in the consolidated statements of operations totaled $0 and $1,076 for three months ended December 31, 2017 and 2016, respectively.
Inventories
Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At December 31, 2017 and September 30 2017, the carrying value of inventory of $299,861 and $266,620 respectively, reflected on the consolidated balance sheets is net of this adjustment.
December 31,
2017
September 30,
2017
Raw materials
$
167,518
$
111,043
Work in process
5,535
5,535
Finished goods
135,894
159,128
Less - Inventory reserve
(9,086
)
(9,086
)
Total
$
299,861
$
266,620
Reclassifications have been made to conform with the current year presentation.
2.   GEOGRAPHIC CONCENTRATIONS
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:

Net Revenue:
Three Months
Ended
December 31,
2017
Three Months
Ended
December 31,
2016
North America
$
173,640
$
260,279
Japan
183,239
317,228
$
356,879
$
577,507
Property and equipment, net:
December 31, 2017
September 30, 2017
North America
$
250,343
$
266,522
Japan
10,574
11,465
$
260,917
$
277,987
3.   RELATED PARTY TRANSACTIONS
Loans
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%). During the three months ended December 31, 2017, 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 made principal payments of $2,000 during the three months ended December 31, 2017. The Company accrued interest of $1 and $211 for the three months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the loan had principal and accrued interest balances of $200 and $559, 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%).
During the three months ended December 31, 2016, the Company paid back the total principal amount of $34,670 to Masateru Higashida for loans previously borrowed.
During the three months ended December 31, 2017, 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 made principal payments of $155,000. The Company accrued interest of $169 and $11 for three months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the loans had overpaid principal and accrued interest balances of $1,000 and $441, respectively. The $1,000 of principal overpayment was reclassified to other current assets - related party as of December 31, 2017. The Company took new loans from NuZee Co., Ltd after the balance sheet date in excess of the overpayment.
All short-term loans are related party transactions since Masateru Higashida is the Company's major shareholder and he holds 100% ownership of NuZee Co., Ltd.
Sales, Purchases and Operating Expenses
For three months ended December 31, 2017, NuZee JP sold their products to Eguchi Holdings Co.,Ltd ("EHCL") and the sales to them totaled approximately $924. The corresponding accounts receivable balance from them was $0 as of December 31, 2017. NuZee JP sold their products to NuZee Co., Ltd. during the 2017 fiscal year. The related accounts receivable outstanding was $6,183 as of December 31, 2017. EHCL is the Company's related party as they are controlled by Katsuyoshi Eguchi who is a director and the minority owner of NuZee JP.
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 $797 as of December 31, 2017.
NuZee JP leased an employee to Contlus. For three months ended December 31, 2017, NuZee JP billed $9,206 for this arrangement and $24,550 remains outstanding as of December 31, 2017. Contlus is the Company's related party as the Company holds 50% of their issued shares.
Rent
During October 2016, NuZee JP entered into a rental agreement of an office space with NuZee Co., Ltd.   The Company agrees to pay $1,169 per month for the office on the last day of each month. There is no set expiration date on the agreement.
During September 2016, the Company entered into a rental agreement of an office space and warehouse with EHCL. The Company agrees to pay $1,213 per month for the office and the warehouse on the last day of each month. The term of this agreement is 3 years and will be automatically renewed. The corresponding rent payable balance to them was $2,963 as of December 31, 2017.
During February 2015, the Company entered into a rental agreement of a warehouse with Eguchi Steel Co.,Ltd ("ESCL"). The Company agrees to pay $449 per month for the warehouse on the last day of each month. There is no set expiration date on the agreement. ESCL is the Company's related party as they are controlled by Katsuyoshi Eguchi who is a director and the minority owner of NuZee JP.
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 investment of $50,000 was made during the three months ended December 31, 2016.
The following table is a reconciliation of the Company's investment in equity affiliate as presented on the consolidated balance sheet as of December 31, 2017
INVESTMENT IN AFFILIATE
December 31,
2017
Beginning of period
$
10,733
Additional investments in unconsolidated affiliate
$
-
Distributions received
$
-
Sale of investment in unconsolidated affiliate
$
-
Equity in net income (loss) of unconsolidated affiliate
$
(566
)
End of period
$
10,167
5.   COMMON STOCK
During three months ended December 31, 2017, the Company sold 998,254 shares of common stock at $0.51 per share, for an aggregate purchase price of $509,110.  The Company also received subscriptions for 300,000 shares for a total consideration of $153,000 which were fully collected in January 2018.
6.   STOCK OPTIONS
The following table summarizes stock option activity for three months ended of December 31, 2017:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Shares
Exercise
Price
Contractual Life (years)
Intrinsic
Value
Outstanding at September 30, 2017
3,064,500
$
0.58
9.6
17,425
Granted
-
-
Exercised
-
-
Expired
-
-
Forfeited
-
-
Outstanding at December 31, 2017
3,064,500
$
0.58
9.1
988,154
Exercisable at December 31, 2017
180,500
$
0.48
8.2
75,882
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 $133,486 for three months ended December 31, 2017. Unamortized option expense as of December 31, 2017, for all options outstanding amounted to approximately $859,872 These costs are expected to be recognized over a weighted-average period of 2.9 years. The Company recognized stock option expenses of $1,900 for three months ended December 31, 2016.
A summary of the status of the Company's nonvested shares as of December 31, 2017, is presented below:
Nonvested options
Number of
Nonvested Shares
Nonvested shares at September 30, 2017
2,884,000
Granted
-
Exercised
-
Forfeited
-
Vested
-
Nonvested shares at December 31, 2017
2,884,000
7.   SUBSEQUENT EVENTS
-Common Stock
During January to March 2018, the Company sold 1,103,529 shares of common stock of which 43,529 shares were sold at $0.51 per share and 1,060,000 shares were sold at $1.00 per share, for an aggregate purchase price of $1,082,200.
-Related Party Transaction
During January to March 2018, the Company borrowed the sum of $185,000 unsecured short-term loan from NuZee Co., Ltd.  Repayment of $184,000 and the application of the $1,000 overpayment from the prior quarter was made to NuZee Co., Ltd. before March 31, 2018.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward- looking statements. These forward-looking statements are subject to certain risk s and uncertainties that could cause actual results to differ materially from our predictions.
Plan of Operations
Short Term Goals (12 Months)
Over the next 3 months, the Company's growth plans include continuing efforts to:
◾   Leverage our network of potential (and current) customers that we have been introduced to during our extensive trade show campaign.
Participating in trade shows and conferences has been a huge success for the Company so far.  At each tradeshow there are between 2,000 and 10,000 attendees/exhibitors depending on its size – which gives the Company ample opportunity to meet, talk and most importantly educate the consumer on the benefits of our product as well as the proper usage and applications.  Another benefit of attending trade shows is that there are a lot of the same companies/buyers at each coffee event – The more these buyers see our face and the product, the more likely they are to trust and do business with us.  We are able to create relationships through the shows and networking events, many of these relationships have turned into business opportunities.
◾   Fulfill the current demand of our current customer base and complete transactions with customers that have expressed a strong interest in our company and brands.
◾   NuZee, Inc. is continuously working with our suppliers to lower costs by streamlining our supply chain and building our volumes to take advantage of bulk purchase savings. We are also working to make our co-packing operation more efficient by implementing software that will help us track, manage, & report our operations more effectively and efficiently.
◾   Continue to build our co-packing business and strengthen our operations by hiring an auditing firm to audit our facility to become SQF level 2 certified. This milestone will help to meet the requirements of national chains and brands that require this audit in order to conduct business with them.
◾   Increase awareness of our coffee cold brew extraction capabilities. This will include showcasing our cold brew technology at national tradeshows throughout the next 3 months as well as doing in person meetings with large retailers, customers, & coffee roasters.
◾   Work with our chosen brokers to build new relationships and strengthen existing relationships.
By working with a broker who has a strong connectivity to retailers, it ensures that a unique and appropriate strategy is developed and executed with speed and precision for our brand.  In addition, the broker will be able to guide us in which strategies and tactics will work at each specific retailer, this is vital to the growth of a brand. Additionally, a retailer's strategy and tactics can change over time and knowing this in real time is critical to success.
◾   Continue to increase the awareness for Coffee Blenders/NuZee brand and products. Through participating in all of the tradeshows in 2017, we were able to create relationships with journalists and magazine owners who will often post articles and product reviews in their publication for free. We will also start utilizing subscription box businesses to help spread awareness of the NuZee, Inc. brands as well as the single serve drip cup products.
Increase our sales team to meet the demand of our growing potential customers. Adding additional staffing will help us stay in closer contact with potential buyers and category managers. Each member added to our sales team will be versed on all NuZee, Inc. products and be trained on how to best sell our products.
We have entered into several different channels for distribution and are planning to expand into a few more channels in 2018.  Our current and forecasted company directed channels include;
Direct – coffeeblenders.com shopping via search and digital marketing
E-commerce affiliates (Amazon Exclusives, Groupon, Jet.com, Bulu box)
Select health and wellness retailers
Key mass/grocery retailers – Kroger, HEB, Safeway, Whole Foods, Lowes, Jewel-Osco, Rouses
Club/Other – Sam's Club
Outdoor retailer locations (such as REI/ Bass Pro Shops)
Co-Packing with other coffee roasters on our pour-over drip cup
If we are unable to receive funding our plans will be dramatically and negatively impacted such that we will prioritize go to market strategies based on reduced operations and available capital.
Long Term Goals (Five Years)
The Company believes that our limited resources may pose a challenge to our expansion goals and therefore anticipates that it may require additional capital in future years to fund expansion. There can be no assurance that our expansion strategy will be accretive to our earnings within a reasonable period of time. However, the Company believes that it can improve its operational efficiencies and reduce the need for new capital by carefully managing the business based on the following economic fundamentals within accretive margin and cost contribution modeling.
Results of Operations
Three months ended December 31, 2017 Compared to Three months ended December 31, 2016
Revenue . For the three months ended December 31, 2017, our realized revenue declined by 38% compared with the same time period in 2016. The contributing factors for this decline was the slowdown of sales through our KeHe distribution channel and preparation of moving our facilities.
Gross Profit. For the three months ended December 31, 2017, we earned a total gross profit of $117,869 from sales of our products.  The margin rate was 33% for the three months ended December 31, 2017, and 28% for the three months ended December 31, 2016. This increase is due to stabilization of cost in association with internal production and sale of higher margin product.
Expenses . For the three months ended December 31, 2017, our Company's operating expenses totaled $760,653 which is a reflection of increase in rent due to the move and paying rent in two locations and an increase in company personnel.  There was a 50% increase over the same period of the prior year in travel primarily due to investment opportunities.
Net Loss .  For the three months ended December 31, 2017, we generated net losses of $643,556. This loss was attributed to operating expenses. Attributing factors were move preparations and increased personnel.
Liquidity and Capital Resources
As of September 30, 2017, we had a cash balance of $347,327 and $292,454 as of December 31, 2017; this decrease was primarily from the layout of funds for the new facility.
Accounts receivable decreased about 41% and inventories increased about 12% since September 30, 2017 mainly in preparation of the facilities move.
Our current ratio of 3.2 as of December 31, 2017 reflects a negligible change compared to 2.57 as of September 30, 2017.
Our auditor has indicated that there is substantial doubt about our ability to continue as a going concern due to our lack of significant revenues, and if we are unable to generate significant revenue or secure financing, we may be required to cease or curtail our operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our current cash balance as of December 31, 2017, is not sufficient to fund our operations for the next twelve months. Therefore, the Company intends to engage in additional financing through the sale of equity securities.
Item 3.       Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 4. Controls and Procedures
As of the end of the period covered by this Report, the Company's President, and principal financial officer (the "Certifying Officer"), evaluated the effectiveness of the Company's "disclosure controls and procedures," as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the Company's periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management to allow timely decisions regarding required disclosure.
Our management, including the Certifying Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any systems of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
The Certifying Officer has also indicated that there were no changes in internal controls over financial reporting during the Company's last fiscal quarter, and no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.
PART II.
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
There have been no changes to our risk factors from those disclosed in our Form 10-K filed on February 21, 2018
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended December 31, 2017, we sold 1,298,254 shares of our common stock to several individual investors at a price of $0.51 per share for total proceeds of $509,110, which will be used for general business operations, and subscription receivable of $153,000, which were fully collected in January 2018.
All the investors were non-U.S. persons (as that term is defined in Regulation S of the Securities Act of 1933, as amended) who purchased in transactions outside of the United States.  In issuing shares to those investors, we relied on the exemptions from the registration requirements provided for in Regulation S and/or Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 3.       Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT
NO.
DESCRIPTION
101**
Interactive Data Files
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
**  Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date:
April 6, 2018
NUZEE, INC.
By:
/s/ Masateru Higashida
Masateru Higashida,
Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer)
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