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Basis of Presentation and Summary of Significant Accounting Policies

3 Months Ended

Dec. 31, 2020

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, 2020 as filed with the SEC on December 28, 2020. 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.

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, its wholly owned subsidiaries and its former majority owned subsidiary (which was sold as of September 28, 2020, as described below), which has a fiscal year end of September 30. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

On September 28, 2020, the Company entered into a Stock Transfer Agreement with Eguchi Holdings Co., Ltd. (“EHCL”), pursuant to which the Company sold all of its equity interests in its former majority-owned subsidiary, NuZee JAPAN Co., Ltd. (“NuZee JP”), representing 70% of the outstanding equity interests of NuZee JP, to EHCL for an aggregate sale price of approximately $34,000.

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

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 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, 2020 and December 31, 2019, the total number of common stock equivalents was 2,314,053 and 1,795,667, respectively, comprised of stock options and warrants. The Company incurred a net loss for the three months ended December 31, 2020 and 2019, respectively, and therefore basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.

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, 2020, the Company had cash of $5,321,558. The Company has not attained profitable operations since inception.

Major Customers

In the three months ended December 31, 2020 and 2019, revenue was primarily derived from major customers disclosed below.

Three months ended December 31, 2020:

C ustomer Name		Sales Amount				% of Total Revenue				Accounts Receivable Amount				% of Total Accounts Receivable
Customer WP		$	156,299				30	%		$	94,066				43	%
Customer RSM		$	66,811				13	%		$	-				0	%
Customer GR		$	65,536				13	%		$	65,352				30	%

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	%

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 does a quarterly analysis of leases to determine if there are any operating leases that require recognition under ASC 842. The Company has one significant 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 of 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.

The impact of ASU No. 2016-02 (“Leases (Topic 842)” on our consolidated balance sheet beginning October 1, 2020, through the recognition of ROU assets and lease liabilities for operating leases are as follows:

		October 1, 2020
ROU Asset		$	652,197
Lease Liability		$	659,391

During the prior year analysis of leases, we determined to renew the office and manufacturing space in Vista, CA through January 31, 2022, which was previously scheduled to be vacated at June 30, 2020. Additionally, the Korean office and manufacturing space lease was extended through June 2022 and an apartment lease was signed through June 2022. Accordingly, we have added ROU assets and lease liabilities related to those leases at June 30, 2020.

The direct-leased property in Vista, California has a remaining lease term through January of 2022. The leased properties in both Korea and Vista, California have options to extend beyond the stated termination date, but exercise of these options are not probable. The sub-leased property in Vista, California, is leased month-to-month and has been calculated as a ROU Asset co-terminous with the direct-leased property.

In September 2020, we entered into an 18-month sublease effective October 1, 2020 reducing our space and term in Plano, Texas. Accordingly, this lease has been added to our right-of-use asset balance at September 30, 2020. This lease is for the Company’s principal executive office located at 1401 Capital Avenue, Suite B, Plano, Texas 75074.

Effective September 1, 2020, we converted our month-to-month sublease in Vista, California to a 17-month sublease ending January 31, 2022 which is co-terminus with our direct lease in Vista. The month-to-month sublease was recognized as a right-of-use asset in our June 30, 2020 analysis. The terms of the 17-month lease are similar to the terms used to value the right-of-use asset at June 30, 2020.

As of December 31, 2020, our operating leases had a weighted average remaining lease term of 2.4 years and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:

ROU Asset – October 1, 2020		$	652,197
Amortization during the period			(64,708	)
ROU Asset –December 31, 2020		$	587,489

Lease Liability – October 1, 2020		$	659,391
Amortization during the period			(63,507	)
Lease Liability – December 31, 2020		$	595,884

Lease Liability – Short-Term		$	265,283
Lease Liability – Long-Term			330,601
Lease Liability – Total		$	595,884

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, 2020:

Amounts due within 12 months of December 31,

2021		$	289,088
2022			157,823
2023			127,982
2024			64,937
2025			-
Total Minimum Lease Payments			639,830
Less Effect of Discounting			(43,946	)
Present Value of Future Minimum Lease Payments			595,884
Less Current Portion of Operating Lease Obligations			(265,283	)
Long-Term Operating Lease Obligations		$	330,601

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 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. This transaction was accounted for as a financing lease. As of December 31, 2020, our financing lease had a remaining lease term of 3.5 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the three months ended December 31, 2020 was $3,133.

The following summarizes ROU assets under finance leases at December 31, 2020:

ROU asset-finance lease at October 1, 2020		$	105,825
Amortization			(6,225	)
ROU asset-finance lease at December 31, 2020		$	99,600

The table below summarizes future minimum finance lease payments at December 31, 2020 for the 12 months ended December 31:

2021		$	33,113
2022			33,113
2023			33,113
2024			19,316
2025			—
Total Minimum Lease Payments			118,655
Amount representing interest			(23,803	)
Present Value of Minimum Lease Payments			94,852
Current Portion of Finance Lease Obligations			(25,307	)
Finance Lease Obligations, Less Current Portion		$	69,545

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, 2020 and 2019 was $93,750 and $84,820, respectively.

Cash and non cash activities associated with the leases for the three months ended December 31, 2020 are as follows:

Operating cash outflows from operating leases:			71,617
Operating cash outflows from finance lease:			3,133
Financing cash outflows from finance lease:			5,146

In September 2020, we subleased the space at 1700 Capital Avenue in Plano, Texas, effective October 1, 2020 under favorable terms that are co-terminus with the original lease ending June 30, 2024. Future minimum lease payments to be received under that sublease as of December 31, 2020, for the 12 months ended December 31:

2021		$	120,621
2022			124,190
2023			127,926
2024			64,918
2025			—
Total		$	437,655

Loans

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, 2020 and September 30, 2020, amounted to $26,061 and $27,916, respectively.

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 term of 36 months at a rate of 4.33% per annum. Principal payments began in July of 2019. The outstanding balance on this loan at December 31, 2020 and September 30, 2020, amounted to $78,262 and $85,001, respectively.

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

		Ford Motor Credit				ShinHan Bank				Total
2021		$	7,555			$	52,175
2022			1,923				13,043
Total Current Portion		$	9,478			$	65,218			$	74,696

2022		$	5,854			$	13,044
2023			8,005
2024			2,724
2025
Total LT Portion		$	16,583			$	13,044			$	29,627
Grand Total		$	26,061			$	78,262			$	104,323

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 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 comprising accumulated other comprehensive income amounted to $1,656 and $27,230 for the three months ended December 31, 2020 and 2019, 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, 2020 and September 30, 2020, the carrying value of inventory of $256,298 and $245,370 respectively, reflected on the consolidated balance sheets is net of this adjustment.

		December 31, 2020				September 30, 2020
Raw materials		$	191,865			$	176,231
Finished goods			64,433				69,139
Less – Inventory reserve			-				-
Total		$	256,298			$	245,370

Joint Venture

On January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. (50%) and NuZee, Inc. (50%) forming NuZee LATIN AMERICA (NLA), S.A. de C.V. NLA was formed pursuant to the laws of Mexico, with corporate domicile in Mazatlan, Mexico. As part of the capitalization of NLA, NuZee contributed two co-packing machines to the joint venture. These machines had an aggregate carrying cost of $313,012. NuZee 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 its partner as the operations of NLA are based in its partners facilities as well as our partner appoints the Chairman of the joint Board. As of December 31, 2020, the only activity in NLA was the contribution of two machines as described above and other start up related activities. $2,056 of a loss was recognized under the equity method of accounting during the three months ended December 31, 2020.