Exhibit 99.1

 

 

NuZee JAPAN Co., Ltd

Contents

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

NuZee JAPAN Co., Ltd:

We have audited the accompanying balance sheets of NuZee JAPAN Co., Ltd (the "Company") as of January 31, 2016 and 2015 and the related statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the years in the two-year period ended January 31, 2016. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as January 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended January 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

/s/ Farber Hass Hurley LLP

Camarillo, California

 

 

 

 

NuZee JAPAN Co., Ltd
BALANCE SHEETS
		January 31, 2016				January 31, 2015
ASSETS
Current assets:
Cash		$	152,190			$	154,151
Accounts receivable			79,194				140,132
Inventories			87,793				101,611
Other current assets			118,610				113,958
Total current assets			437,787				509,852
Equipment, net			16,005				38,571
Total assets		$	453,792			$	548,423
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	690			$	2,687
Accounts payable - related party			113,556				5,644
Current portion of capital lease obligation			3,028				3,028
Loan payable - short term - related party			57,438				100,629
Other current liabilities			23,206				27,712
Other current liabilities - related party			3,180				889
Total current liabilities			201,098				140,589
Non-current liabilities:
Loan payable - long term - related party			-				58,700
Capital lease obligations, net of current portion			15,181				16,907
Total non-current liabilities			15,181				75,607
Stockholders' equity:
Capital stock			545,844				545,844
Retained earnings (deficit)			(248,092	)			(160,624	)
Accumulated other comprehensive loss			(60,239	)			(52,993	)
Total stockholders' equity			237,513				332,227
Total liabilities and stockholders' equity		$	453,792			$	548,423

 

 

See independent auditors' report and accompanying notes to financial statements

 

NuZee JAPAN Co., Ltd
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
		Year Ended January 31, 2016				Year Ended January 31, 2015
Revenues		$	800,586			$	386,070
Cost of sales			524,862				244,817
Gross Profit			275,724				141,253
Operating expenses			363,480				282,252
Loss from operations			(87,756	)			(140,999	)
Other income			22,823				25
Other expense			(22,535	)			(19,546	)
Net loss			(87,468	)			(160,520	)
Foreign currency translation			(7,246	)			(51,179	)
Comprehensive loss		$	(94,714	)		$	(211,699	)

 

 

 

 

 

 

See independent auditors' report and accompanying notes to financial statements

 

 

NuZee JAPAN Co., Ltd
STATEMENTS OF STOCKHOLDERS' EQUITY
For the period from February 1, 2014 to January 31, 2016
	Common Stock								Accumulated				Foreign Currency Traslation				Total Stockholders'
	Shares				Amount				Deficit				Adjustments				Equity (deficit)
Balance January 31, 2014			300,000			$	290,670			$	(104	)		$	(1,814	)		$	288,752
Common stock issued for cash			267,800				255,174				-				-				255,174
Net loss			-				-				(160,520	)			-				(160,520	)
Other comprehensive loss			-				-				-				(51,179	)			(51,179	)
Balance January 31, 2015			567,800			$	545,844			$	(160,624	)		$	(52,993	)		$	332,227
Net loss			-				-				(87,468	)			-				(87,468	)
Other comprehensive loss			-				-				-				(7,246	)			(7,246	)
Balance January 31, 2016			567,800			$	545,844			$	(248,092	)		$	(60,239	)		$	237,513

 

 

 

 

 

 

 

See independent auditors' report and accompanying notes to financial statements

 

 

 

NuZee JAPAN Co., Ltd
STATEMENTS OF CASH FLOWS
		For the Year Ended January 31, 2016				For the Year Ended January 31, 2015
Operating activities:
Net loss		$	(87,468	)		$	(160,520	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation			7,025				286
Impairment loss			16,856				-
Change in operating assets and liabilities:
Accounts receivable			60,937				(140,132	)
Inventories			13,818				(101,611	)
Other current assets			(4,652	)			(29,853	)
Accounts payable			105,916				8,331
Other current liabilities			(2,216	)			29,307
Net cash provided by (used in) operating activities			110,216				(394,192	)
Investing activities:
Purchase of equipment			-				(19,899	)
Net cash used in investing activities			-				(19,899	)
Financing activities:
Proceeds from borrowings			-				167,715
Payments on capital lease obligations			(1,726	)			-
Repayment of loans - related parties			(101,891	)			(8,405	)
Proceeds from issuance of common stock			-				255,174
Net cash provided by (used in)financing activities			(103,617	)			414,484
Net change in cash			6,599				393
Effect of foreign exchange on cash and cash equivalents			(8,560	)			(51,178	)
Cash, beginning of period			154,151				204,936
Cash, end of period		$	152,190			$	154,151
Supplemental disclosure of cash flow information:
Cash paid for interest		$	-			$	-
Cash paid for taxes		$	1,526			$	1,730
Non-cash investing and financing activities:
Equipment purchased via capital lease		$	-			$	19,935

 

 

 

See independent auditors' report and accompanying notes to financial statements

NuZee Japan Co., Ltd

Notes to Financial Statements

January 31, 2016 and 2015

 

 

1.  ORGANIZATION

 

NuZee Japan Co., Ltd. (the "Company", "we", "our") was incorporated on December 16, 2013 in Aichi, Japan. The Company's fiscal year end is January 31. The Company is a start-up organization which markets and distributes consumer products primarily in the beverage segment. The Company primarily intends to purchase and resell its proprietary products directly to consumers through its website portal as well as through online stores such as Amazon Japan, Rakuten and Japan Post online shop.

 

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.

 

Use of Estimates

In preparing these 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

The Company's financial instruments include cash, accounts payable accrued liabilities and short-term debt. The estimated fair value of these instruments approximates its carrying amount due to the short maturity of these instruments.

 

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 $152,190 and $154,151 cash and no cash equivalents at January 31, 2016 and 2015, respectively.

   

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. There were no bad debt expenses recorded during the period reported on.

 

Major Customers

In the year ended January 31, 2016 and 2015, revenue was from two major customers.

Year ended January 31, 2016:

Year ended January 31, 2015:

 Revenue Recognition

The Company recognizes revenue only when all of the following criteria have been met:

Cost of products sold is primarily comprised of purchased packaged coffee products. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs and other shipping and handling activity.

 

 

Selling, General and Administrative Expense

Selling, general and administrative expense (SG&A) is primarily comprised of marketing expenses, sales related expense, administrative and other indirect overhead costs, depreciation expense and other miscellaneous operating items. The largest SG&A expense incurred was "Outside Service" for the period ended January 31, 2016 and 2015 and the amount was $50,626 and $86,673, respectively. "Outside Service" mainly relates to sales commission paid to the Japan Post which has the platform of Company's online shop.

 

Inventory

Inventory, consisting principally of products held for sale is stated at the lower of cost or market or net realizable value, using the First-In, First-Out method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At January 31, 2016 and 2015 the Company concluded the carrying value of the inventory of $87,793 and $101,611 respectively.

 

Related Party Transactions

Eguchi Holdings Co., Ltd. ("EHCL") is the beneficial owner of Five Hundred Thousand (500,000) common shares of the Company, which represents eighty-eight percent (88%) of all the Company's common shares outstanding. Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed by the related party.

 

The Company has a payable to EHCL for cost of goods paid by them on behalf of the Company. Balance of this accounts payable was $113,556 and $5,644 as of January 31, 2016 and 2015. Total purchases during 2016 and 2015 amounted to $397,176 and $17,423, respectively. The Company has a payable to EHCL for operating expenses paid by them on behalf of the Company. Balance of this other payable was $3,180 and $889 as January 31, 2016 and 2015. Total operating expenses incurred from EHCL amounted to $15,396 and $1,546 for 2016 and 2015, respectively.

 

 

During December 2014, the Company borrowed the sum of $171,072 from EHCL. The due date of this loan is August 31, 2016. The outstanding balances at January 31, 2016 and 2015 were $57,438 and $159,329, respectively. Interest is calculated at annual rate of 4.3 %. During the period ended January 31, 2016 and 2015, the Company recognized interest expense of $4,378 and $992 relating to these related party loans.

During May 2014, the Company entered into a rental agreement for an office space and warehouse with EHCL. The Company agrees to pay approximately $1,350 per month for office and warehouse on the last day of each month. The agreement expires on August 31, 2019. Future payments due under this lease are as follows:

Property, Plant and Equipment

Equipment is stated at cost, net of depreciation. The Company depreciates equipment on a straight line basis, over the estimated useful lives of 5 years. Depreciation expense for the years ended January 31, 2016 and 2015 was $7,025 and $286 respectively. Repair and maintenance costs are expensed as incurred.

The Company is the lessee of certain equipment under a capital lease extending through 2021. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6 year life. The leased equipment has been recorded in the accompanying financial statements in equipment of $19,507 and $18,459 and accumulated depreciation of $3,502 and $256.

Future minimum lease payments under capital lease as of January 31, 2016 for each of the remaining years are as follows:

  

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. A loss of disposition of asset is recognized when the carrying amount is not recoverable and exceeds fair value. There was an impairment loss of $16,856 recognized for the year ended January 31, 2016. This impairment loss was incurred due to the asset which is never placed in service. There was no impairment loss recognized for the year ended January 31, 2015.

 

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 is the foreign currency translation adjustment.

 

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 January 31, 2016 and 2015.

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.

 

3.  COMMON STOCK  

As of January 31, 2016, the authorized capital stock of the Company consists of 2,000,000 common shares, of which 567,800 shares of common stock are issued and outstanding.

 

 

During December 2013, the Company sold 30,000,000 shares of common stock at approximately $0.0097 per share, for an aggregate purchase price of $290,670.

 

During August 2014, the Company sold 20,000,000 shares of common stock at approximately $0.0096  per share, for an aggregate purchase price of $192,122.

 

During November 2014, the Company declared a one for one hundred reverse stock split. The total number of share issued was reduced to 500,000.

During September 2014, the Company sold 53,100 shares of common stock at approximately $0.9505 per share, for an aggregate purchase price of $50,730.

During December 2014, the Company sold 14,700 shares of common stock at approximately $0.8382 per share, for an aggregate purchase price of $12,322.

 

4.  INCOME TAX

 

As of January 31, 2016 and, 2015, 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. Net operating loss carry forward is $203,101 as of January 31, 2016 and will begin expiring in 2022.

 

5.  SUBSEQUENT EVENTS

 

Acquisition

On August 16, 2016, the Company entered into a Share Exchange Agreement with NuZee, Inc., a Nevada corporation ("NuZee US"), Eguchi Holdings Co., Ltd and the shareholders of the Company whereby the Company will exchange seventy percent (70%) of its issued and outstanding common stock for 1,148,734 shares of NuZee US's common stock, par value $0.00001 per share. The remaining thirty percent (30%) of the Company's issued and outstanding common stock is, and will be at the closing, owned by the Company's current president and Chairman of its Board of Directors.

NuZee US's President and Director is the sole owner of From East Holdings Co., Ltd. ("From East"), a shareholder of the Company. From East owns 14,700 shares of the Company's common stock, or approximately 2.6% of the Company's current issued and outstanding shares. At the Closing, From East will exchange all of its shares of the Company for 42,492 shares of NuZee US's common stock.

Each issued and outstanding common share of the Company shall be converted into the right to receive NuZee US Shares pursuant to the Exchange Ratio at the Closing. Fractional shares shall be rounded up or down per the amount of the fraction. Upon the Closing (October 3, 2016), the Company shall become a majority owned subsidiary of the NuZee US.