1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Dec. 31, 2019

Notes

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 Commission (the "SEC"), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K/A for the year ended September 30, 2019 as filed with the SEC on December 31, 2019. 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.

Reclassification

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

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 upon consolidation.

The Company has 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.

Stock Split

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.

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. As of December 31, 2019 and December 31, 2018, the total number of common stock equivalents was 1,795,667 and 1,314,000, respectively, that is comprised totally of stock options. The Company incurred a net loss for the three months ended December 31, 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 December 31, 2019, the Company had cash of $1,830,952. The Company has not attained profitable operations since inception.

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which contemplates continuation of the Company as a going concern. The Company has had limited revenues, recurring losses, and an accumulated deficit and is dependent on its majority shareholder 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, 2019 and 2018, revenue was primarily from major customers disclosed below.

Three months ended December 31, 2019:

Customer Name	Sales Amount	% of Total Revenue	Accounts Receivable Amount	% of Total Accounts Receivable
Customer WP	$ 233,283	43 %	$ 178,114	34 %
Customer K	$ 106,664	20 %	$ 264,842	51 %
Customer J	$   90,085	16 %	$   35,091	7 %

Three months ended December 31, 2018:

Customer Name	Sales Amount	% of Total Revenue	Accounts Receivable Amount	% of Total Accounts Receivable
Customer J	$ 157,653	45 %	$            0	0 %
Customer WP	$   56,285	16 %	$     8,093	1 %

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

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 December 31, 2019 amounted to $41,425. On January 27, 2017, NuZee JP entered into a loan agreement with Nihon Seiaku Kouko. The Company borrowed 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 December 31, 2019 amounted to $39,159.

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 December 31, 2019 amounted to $33,339.

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 loan is secured by our production equipment at NuZee KR. The financing bears a terms of 36 months at a rate of 4.33%. Principal payments began in July of 2019. The outstanding balance on this loan at December 31, 2019 amounts to $122,703.

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. The terms of this agreement require us to pay $2,987 per month for the next 60 months. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,540 for the purchase of this equipment. The outstanding balance on this loan at December 31, 2019 amounts to $114,490.

The loan payments required for the next five years are as follows:

		Nihon	Ford		Alliance
	Tono Shinyo	Seisaku	Motor	ShinHan	Funding
	Kinko Bank	Kouko	Credit	Bank	Group	Total
2020	$   20,712	$   14,002	$     5,484	$   36,811	$   14,493
2021	5,178	4,667	1,875	12,270	5,400
Total Current Portion	$   25,890	$   18,669	$     7,359	$   49,081	$   19,893	$ 120,892
2021	$   15,534	$   14,002	$     5,625	$   36,811	$   16,198
2022		6,488	7,720	36,811	24,518
2023			7,947		27,833
2024			4,748		26,049
Total Long Term Portion	$   15,534	$   20,490	$   26,040	$   73,622	$   94,598	$ 230,284
Grand Total	$   41,424	$   39,159	$   33,399	$ 122,703	$ 114,491	$ 351,176

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 recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

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 $27,230 and $11,328 for the three months ended December 31, 2019 and 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 December 31, 2019 and September 30, 2019, the carrying value of inventory of $680,195 and $500,986 respectively, reflected on the consolidated balance sheets is net of this adjustment.

	December 31, 2019	September 30, 2019
Raw materials	$ 430,393	$ 327,985
Finished goods	249,802	173,001
Less – Inventory reserve	-	-
Total	$ 680,195	$ 500,986

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, 2018. The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation is not material to the 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 implemented ASU 2017-11 on October 1, 2019, and the impact of the implementation is not material to the financial statements.