1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Lease (Policies)

3 Months Ended

Dec. 31, 2019

Policies

Lease

Lease

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from all leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the consolidated balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company implemented ASU No. 2016-02 on October 1, 2019.

As of December 31, 2019, the Company has one significant long-term operating lease for office and manufacturing space and the Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less. On October 9, 2019, NuZee entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment for 60 months. The lease equipment is reported in the accompanying consolidated balance sheets in property and equipment as of December 31, 2019. The finance lease liability is included in loan payable on the consolidated balance sheets as of December 31, 2019. See "Loans" disclosure below. The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning October 1, 2019 was through the recognition of ROU assets and lease liabilities for operating leases. Amounts recognized at October 1, 2019 for operating leases are as follows:

	October 1, 2019
ROU Assets	$487,000
Lease Liability	$487,000

The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earlies comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at October 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing lease upon adoption. No impact was recorded to the income statement or beginning retained earnings for Topic 842.

The leased property has a remaining lease term of 57 months as of October 1, 2019. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable.

Beginning October 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments, including annual rent increases, over the lease term at commencement date. Operating leases in effect prior to October 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of October 1, 2019. Because the lease in question did not have an implicit rate of return, we used our incremental secured borrowing rate based on lease term information available

as of the adoption date or lease commencement date in determining the present value of lease payments. The incremental borrowing rate on lease is 5%.

Other information related to our operating lease considered to be a ROU Asset is as follows:

ROU Asset – October 1, 2019	$ 487,000
Amortization	(24,733)
ROU Asset – December 31, 2019	$ 462,267
Lease Liability – October 1, 2019	$ 487,000
Amortization	(22,855)
Lease Liability – December 31, 2019	$ 464,145

Lease Liability – Short-Term	$   94,327
Lease Liability – Long-Term	369,818
Lease Liability – Total	$ 464,145

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the lease liabilities recorded on the Consolidated Balance Sheet as of December 31, 2019:

Amounts due within 12 months of December 31,

2019	$ 117,122
2020	120,635
2021	124,254
2022	127,982
2023	64,937
Total Minimum Lease Payments	554,930
Less Effect of Discounting	90,785
Present Value of Future Minimum Lease Payments	464,145
Less Current Obligations Under Lease	94,327
Long-Term Lease Obligations	$ 369,818

NuZee JAPAN Co., Ltd is the lessee of certain equipment under a finance lease extending through January 2021. The asset and liability under the finance lease are recorded at the lower of the present value of the minimum lease payments, or the fair value of the asset. Leased equipment is depreciated over a 6-year life. The leased equipment is reported in the accompanying consolidated balance sheets in property and equipment of $6,296 as of December 31, 2019. The finance lease liability is included in other current liabilities on the consolidated balance sheets.

Future minimum lease payments under finance lease obligations as of December 31, 2019 for each of the remaining fiscal years are as follows:

2020	$4,722
2021	$1,574
Total Minimum Lease Payments	$6,296

The Company leases office space with terms ranging from month to month to 61 months. Rent expense included in general and administrative expense for the three months ended December 31, 2019 and 2018 was $84,820 and $33,175, respectively.

Future minimum rents for the office space leased as of December 31, 2019, for each of the remaining fiscal years are as follows:

2020	$178,025
2021	$185,472
2022	$163,516
2023	$167,216
2024	$127,539
Total Minimum Lease Payments	$821,768