BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Jun. 30, 2023

Accounting Policies [Abstract]

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 for the year ended September 30, 2022 as filed with the SEC on December 23, 2022. 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 for the year ended September 30, 2022, have been omitted.

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 wholly owned subsidiaries. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

The Company has two wholly owned international subsidiaries in NuZee KOREA Ltd. (“NuZee KR”) and NuZee Investment Co., Ltd. (“NuZee INV”).

On February 25, 2022 (the “Closing Date”), the Company acquired substantially all the assets and certain specified liabilities (the “Acquisition”) of Dripkit, Inc., a Delaware corporation (“Dripkit”), pursuant to the Asset Purchase Agreement, dated as of February 21, 2022 (the “Asset Purchase Agreement”), by and among the Company, Dripkit, and Dripkit’s existing investors (the “Stock Recipients”) who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement. Dripkit is engaged in the business of manufacturing and sales of a single serve pour over coffee format that has a large-size single serve pour over pack that sits on top of the cup. Dripkit operates as a new Dripkit Coffee business division that is wholly owned by NuZee, Inc. The Company analyzed the Acquisition under ASC 805 and concluded that it should be accounted for as a business combination. The Acquisition has been included in the Company’s financial statements from the date of the Acquisition.

2022 Reverse Stock Split

On December 28, 2022, we completed a l-for-35 reverse stock split, which became effective on December 28, 2022 upon acceptance of the Company’s filing of an amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of Nevada (the “Reverse Stock Split”). Accordingly, each holder of common stock received one share of common stock for every 35 shares such stockholder held immediately prior to the effectiveness of the Reverse Stock Split.

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, warrants 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 June 30, 2023, and June 30, 2022, the total number of common stock equivalents was 253,862 and 277,327, respectively, comprised of stock options and warrants as of June 30, 2023 and June 30, 2022. The Company incurred a net loss for the three and nine months ended June 30, 2023, and 2022, respectively, and therefore basic and diluted earnings per share for these 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, raising capital and the commercialization and manufacture of its single serve coffee products. The Company has grown revenues from its principal operations; however, there is no assurance of future revenue growth similar to historical levels.

As of June 30, 2023, the Company had cash of $3,280,425 and working capital of $3,180,494. The Company has not attained profitable operations since inception.

The accompanying unaudited interim 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. These items raise substantial doubt as to the Company’s ability to continue as a going concern. The accompanying unaudited interim 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 and to raise additional capital for the further development and marketing of the Company’s products and business.

Major Customers

In the nine months ended June 30, 2023 and 2022, revenue was primarily derived from major customers disclosed below.

Nine months ended June 30, 2023:

Customer Name	Sales Amount		% of Total Revenue			Accounts Receivable Amount		% of Total Accounts Receivable
Customer CL	$	391,232		15	%	$	94,847		44	%
Customer CN		426,748		17	%		22,064		10	%

Nine months ended June 30, 2022:

Customer Name	Sales Amount		% of Total Revenue			Accounts Receivable Amount		% of Total Accounts Receivable
Customer WP	$	660,997		26	%	$	239,579		42	%
Customer CU		252,137		10	%		52,564		9	%
Customer S	$	242,580		10	%	$	62,590		11	%

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 Company implemented ASU No. 2016-02 on October 1, 2019.

The Company performs a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. The Company has a long-term operating lease for office and manufacturing space in Plano, Texas. The leased property in Plano, Texas, has a remaining lease term through June 2024. The lease has an option to extend beyond the stated termination date, but exercise of this option is not probable. The Company did not apply the recognition requirements of ASC 842 to operating leases with a remaining lease term of 12 months or less.

In May 2022, the Company renewed the office and manufacturing space in Vista, California through March 31, 2025, which was scheduled to expire on January 31, 2023. The lease has a monthly base rent of $8,451, plus common area expenses. Along with the extension, we leased an additional 1,796 square feet that has a monthly base rent of $2,514 through March 31, 2025. We extended our sub-leased property in Vista, California through January 31, 2023. The lease has a monthly rent of $2,111 and has been calculated as a ROU Asset co-terminus with the direct leased property. The Company leased a new larger office and manufacturing space in Seoul, Korea beginning November 15, 2021, through November 15, 2023. The lease has a monthly expense of $7,040. Accordingly, we have added ROU Assets and Lease Liabilities related to those leases at June 30, 2023.

Effective December 1, 2022, we entered into a new operating lease for our principal executive office, which is located at 1350 East Arapaho Road, Suite #230, Richardson, Texas 75081. We lease the Richardson office on an annual basis, at a cost of $1,510 per month, through November 30, 2023.

As of June 30, 2023, our operating leases had a weighted average remaining lease term of 1 year and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:

ROU Asset – October 1, 2022	$	642,624
ROU Asset added during the period		-
Amortization during the period		(171,718	)
ROU Asset – June 30, 2023	$	470,906
Lease Liability – October 1, 2022	$	656,111
Lease Liability added during the period		-
Amortization during the period		(195,366	)
Lease Liability – June 30, 2023	$	460,745
Lease Liability – Short-Term	$	297,541
Lease Liability – Long-Term		163,204
Lease Liability – Total	$	460,745

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 June 30, 2023:

Amounts due within twelve months of June 30,

2024	$	373,061
2025		100,712
Total Minimum Lease Payments		473,773
Less Effect of Discounting		(13,028	)
Present Value of Future Minimum Lease Payments		460,745
Less Current Portion of Operating Lease Liabilities		297,541
Long-Term Operating Lease Liabilities	$	163,204

On October 9, 2019, the Company 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 through July 2024. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,500 for the purchase of this equipment. This transaction was accounted for as a finance lease. As of June 30, 2023, our finance lease had a remaining lease term of 0.9 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the nine months ended June 30, 2023, was $3,760.

The table below summarizes future minimum finance lease payments at June 30, 2023 for the twelve months ended June 30:

2024	$	33,113
2025		2,759
Total Minimum Lease Payments		35,872
Amount representing interest		(3,461	)
Present Value of Minimum Lease Payments		32,411
Current Portion of Finance Lease Obligations		30,610
Finance Lease Obligations, Less Current Portion	$	1,801

Lease expenses included in operating expense for the nine months ended June 30, 2023, and 2022 was $147,327 and $221,972, respectively. Lease expense, which represents sublease expense included in other expense for the nine months ended June 30, 2023 and 2022 was $140,559 and $157,267, respectively.

Cash and non-cash activities associated with the leases for the nine months ended June 30, 2023, are as follows:

Operating cash outflows from operating leases:	$	263,950
Operating cash outflows from finance lease:	$	3,247
Financing cash outflows from finance lease:	$	21,729

In September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020, under terms that are co-terminus with the original lease ending June 30, 2024. During the nine months ended June 30, 2023, we recognized sublease income of $133,443 pursuant to the sublease included in other income on our financial statements. Future minimum lease payments to be received under that sublease as of June 30, 2023, for each of the twelve months ended June 30 are as follows:

2024	$	129,835
Total	$	129,835

Loans

On April 1, 2019, we 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, 2023 and September 30, 2022 amounted to $6,760 and $12,692, respectively.

The remaining loan payments for each of the twelve months ended June 30:

	Ford Motor Credit
2024	$	4,759
2025		2,001
Grand Total	$	6,760

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 did 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 subsidiaries 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 recorded to other comprehensive income and loss amounted to $53,287 and $(19,604) for the nine months ended June 30, 2023, and 2022, 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.

Prepaid expenses and other current assets

Prepaid expenses and other current assets at June 30, 2023 and September 30, 2022, were as follows:

	June 30, 2023		September 30, 2022
Prepaid expenses and other current assets	$	283,292	$	547,773

The prepaid expenses and other current assets balance of $283,292 as of June 30, 2023 primarily consists of deposits on inventory purchases and facilities, prepaid insurance, and rent. The balance of $547,773 as of September 30, 2022 primarily consists of deposits on inventory and a retainer for professional services.

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, 2023 and September 30, 2022, the carrying value of inventory was $1,279,300 and $947,995, respectively. No inventory reserve is recognized during the nine months ended June 30, 2023 and June 30, 2022.

	June 30, 2023		September 30, 2022
Raw materials	$	1,212,360	$	887,632
Finished goods		66,940		60,363
Total	$	1,279,300	$	947,995

Equity Method Investment

On January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (50%) and the Company (50%) forming NuZee LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of Mexico, with corporate domicile in Mazatlán, Mexico. As part of the capitalization of NLA, the Company contributed two co-packing machines to the joint venture. These machines had an aggregate carrying cost of $313,012. The Company received $110,000 in cash for this contribution and recorded an investment in NLA of $160,000 and a loss of $43,012 on the contribution of the machines to NLA.

The Company accounts for NLA using the equity method of accounting since the management of day-to-day operations at NLA ultimately lies with the Company’s joint venture partner as the operations of NLA are based in its partners facilities and our partner appoints the Chairman of the joint board of directors of NLA. As of June 30, 2023, the only activities in NLA were the contribution of two machines, as described above, and start up and initial marketing and sales activities. $5,350 and $4,215 of losses were recognized under the equity method of accounting during the nine months ended June 30, 2023 and June 30, 2022, respectively.