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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
 6 Months Ended
Mar. 31, 2022
Accounting Policies [Abstract]  
Reclassification

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. We reclassified lease expenses associated with subleased property from operating expenses to other expenses totaling $78,174 for the six months ended March 31, 2021 and $34,211 for the three months ended March 31, 2021. We also reclassified $18,000 of capitalized software costs included in Property and Equipment, net at September 30, 2021 to Other assets. These reclassifications had no effect on the previously reported net loss.

 
Principles of Consolidation

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 will operate 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.

 
Earnings per Share

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 March 31, 2022, and March 31, 2021, the total number of common stock equivalents was 8,741,993 and 7,435,702, respectively, comprised of stock options and warrants as of March 31, 2022 and March 31, 2021. The Company incurred a net loss for the three and six months ended March 31, 2022, and 2021, 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

Capital Resources

 

Since its inception, the Company has devoted substantially all 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 generated limited revenues from its principal operations, and there is no assurance of future revenues.

 

As of March 31, 2022, the Company had cash of $8,211,703. However, the Company has not attained profitable operations since inception.

 
Major Customers

Major Customers

 

In the six months ended March 31, 2022 and 2021, revenue was primarily derived from major customers disclosed below.

 

Six months ended March 31, 2022:

 

Customer Name  Sales Amount   % of Total Revenue  

Accounts Receivable

Amount

   % of Total Accounts Receivable 
Customer WP  $520,208    30%  $190,978    30%
Customer CU  $252,137    15%  $189,768    29%

 

Six months ended March 31, 2021:

 

Customer Name  Sales Amount   % of Total Revenue  

Accounts Receivable

Amount

   % of Total Accounts Receivable 
Customer WP  $261,799    28%  $111,975    43%

 

 
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 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.

 

During our analysis of leases in the six months ended March 31, 2022, we determined to renew the office and manufacturing space in Vista, California which was scheduled to expire on January 31, 2023, through March 31, 2025. 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 will have 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 Seoul, Korea office and manufacturing space lease was extended through June 2022 and there is an apartment leased through June 2022. Additionally, 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 March 31, 2022.

 

As of March 31, 2022, our operating leases had a weighted average remaining lease term of 2.1 years and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:

 

      
ROU Asset – October 1, 2021  $386,587 
ROU Asset added during the period   558,371 
Amortization during the period   (94,544)
ROU Asset –March 31, 2022  $850,414 
Lease Liability – October 1, 2021  $398,587 
Lease Liability added during the period   558,371 
Amortization during the period   (91,525)
Lease Liability – March 31, 2022  $865,433 
      
Lease Liability – Short-Term  $349,825 
Lease Liability – Long-Term   515,608 
Lease Liability – Total  $865,433 

 

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 March 31, 2022:

 

Amounts due within twelve months of March 31,

 

      
2023  $373,017 
2024   343,295 
2025   187,692 
Total Minimum Lease Payments   904,004 
Less Effect of Discounting   (38,571)
Present Value of Future Minimum Lease Payments   865,433 
Less Current Portion of Operating Lease Liabilities   349,825 
Long-Term Operating Lease Liabilities  $515,608 

 

 

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 financing lease. As of March 31, 2022, our financing lease had a remaining lease term of 2.2 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the six months ended March 31, 2022 was $4,686.

 

During the year ended September 30, 2021, we recorded an impairment to fully write off the related equipment as it was deemed no longer useful for our operations.

 

The table below summarizes future minimum finance lease payments at March 31, 2022 for the twelve months ended March 31:

 

      
2022  $33,113 
2023   33,113 
2024   11,037 
2025   - 
2026   - 
Total Minimum Lease Payments   77,263 
Amount representing interest   (10,733)
Present Value of Minimum Lease Payments   66,530 
Current Portion of Finance Lease Obligations   29,665 
Finance Lease Obligations, Less Current Portion  $36,865 

 

Rent expense included in general and administrative expense for the six months ended March 31, 2022 and 2021 was $123,373 and $89,876 respectively. Rent expense included in other expense for the six months ended March 31, 2022 and 2021 was $99,209 and $78,174, respectively.

 

Cash and non-cash activities associated with the leases for the six months ended March 31, 2022 are as follows:

 

      
Operating cash outflows from operating leases:  $123,217 
Operating cash outflows from finance lease:  $4,686 
Financing cash outflows from finance lease:  $11,870 

 

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 six months ended March 31, 2022, we recognized sublease income of $85,062 pursuant to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease as of March 31, 2022, for each of the twelve months ended March 31 are as follows:

 

      
2023  $125,104 
2024   128,881 
2025   32,458 
2026   - 
2027   - 
Total  $286,443 

 
Advances Received on Sale of Equity Securities

Advances Received on Sale of Equity Securities

 

As of March 31, 2022, the Company recorded advances received from investors on sales of equity securities of $300,000 as a current liability. See Note 8—Subsequent Events, Exempt Offering Pursuant to Regulation S—Sales of Equity Securities, to the Unaudited Consolidated Financial Statements.

 

 
Loans

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 March 31, 2022 and September 30, 2021 amounted to $16,581 and $20,146, respectively.

 

On February 15, 2019, NuZee KR entered into equipment financing for production equipment with Shin Han Bank for $60,563. In June 2019, NuZee KR purchased additional equipment and increased the loan with Shin Han Bank by $86,518. The financing has a term of 36 months at a rate of 4.33%. Principal payments began in July 2019. The outstanding balance on this loan at March 31, 2022 and September 30, 2021 amounted to $11,686 and $35,898, respectively.

 

The remaining loan payments are as follows:

 

   Ford Motor Credit   ShinHan Bank   Total 
2022 (Apr 2022 - Sep 2022)  $3,888    4,619      
2023 (Oct 2022 - Mar 2023)   3,945    7,067      
Total Current Portion  $7,833    11,686    19,519 
                
2023 (Apr 2023 - Sep 2023)  $8,748    -      
Total Long-Term Portion  $8,748    -    8,748 
Grand Total  $16,581    11,686    28,267 

 
Revenue Recognition

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

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 gain amounted to $25,593 and $5,480 for the six months ended March 31, 2022 and 2021, 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

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 March 31, 2022 and September 30, 2021, the carrying value of inventory was $631,284 and $573,464, respectively.

 

 

   March 31, 2022   September 30, 2021 
Raw materials  $573,733   $552,621 
Finished goods   57,551    20,843 
Less – Inventory reserve   -    - 
Total  $631,284   $573,464 

 
Joint Venture

Joint Venture

 

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 Mazatlan, 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 March 31, 2022, the only activity in NLA was the contribution of two machines as described above and other start up related activities. $2,296 and $3,975 of a loss was recognized under the equity method of accounting during the six months ended March 31, 2022 and March 31, 2021, respectively.