| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The
summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements.
Such financial statements and accompanying notes are the representations of the Company’s management, who are responsible for their
integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America
(“GAAP”) in all material respects and have been consistently applied in preparing the accompanying financial statements. Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period
financial statements. The Company reclassified a write off of deferred financing costs related to the termination of an ATM sales
agreement, and lease expenses associated with subleased property from Operating expenses to Other expenses totaling, $ 477,605 160,489 18,000 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 consolidates NuZee KR and NuZee INV in accordance with ASC 810, and specifically ASC 810-10-15-8 which states, the usual condition
for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting
entity, directly or indirectly, of over 50 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 $ 860,000 197,156 18,475 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 September 30, 2022 and September 30, 2021, the total number of common stock equivalents was 9,307,921 9,343,606 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 8,315,053 8,556,141 Use
of Estimates In
preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and
the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Fair
Value of Financial Instruments Fair
value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not
adjusted for transaction cost. Fair value measurement under generally accepted accounting principles provides for use of a fair value
hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels: Level
1: Unadjusted quoted prices in active markets for identical assets or liabilities. Level
2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs
reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained
from sources independent of the Company. Level
3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants
would use in valuing the asset or liability. The
Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis. The
carrying amounts of cash, accounts receivable, accounts payable, accrued liabilities and short-term debt approximate fair value because
of the short-term nature of these instruments. The carrying amount of long-term debt approximates fair value because the debt is based
on current rates at which the Company could borrow funds with similar remaining maturities. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial instruments when available. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. Cash
and Cash Equivalents The
Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
The Company had no Concentration
of Credit Risk Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The
Company places its cash with high quality banking institutions. From time to time, the Company may or may not maintain cash balances
at certain institutions in excess of the Federal Deposit Insurance Corporation limit. Accounts
Receivable Trade
accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial
condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in
the receivable portfolio and current economic conditions. The Company had $ 6,862 no Major
Customers For
the years ended September 30, 2022 and 2021, the Company’s largest single source of revenue was from one major customer disclosed
below. SCHEDULE OF REVENUE BY MAJOR CUSTOMERS For
the year ended September 30, 2022:
Customer Name Sales Amount % of Total Accounts % of Total
Customer WP $ 882,392 28 % $ 95,351 28 % For
the year ended September 30, 2021:
Customer
Name Sales
Amount %
of Total Accounts
%
of Total
Customer
WP $ 611,412 32 % $ 172,390 31 % Leases 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
the Company’s analysis of leases in the year ended September 30, 2022, the Company determined to renew through March 31, 2025 the
office and manufacturing space in Vista, California which was previously scheduled to expire on January 31, 2023 8,451 leased an additional 1,796 2,514 January
31, 2023 2,111 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 As
of September 30, 2022, the Company’s operating leases had a weighted average remaining lease term of 1.7 5.0 SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE
ROU Asset – October 1, 2021 $ 386,587
ROU Asset added during the period 558,371
Amortization during the period (302,334 )
ROU Asset – September 30, 2022 $ 642,624
Lease Liability – October 1, 2021 $ 398,587
Lease Liability added during the period 558,371
Amortization during the period (300,847 )
Lease Liability – September 30, 2022 $ 656,111
Lease Liability – Short-Term $ 388,325
Lease Liability – Long-Term 267,786
Lease Liability – Total $ 656,111 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 September 30, 2022. Amounts
due within 12 months of September 30, SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES
2023 349,890
2024 250,523
2025 67,310
Total Minimum Lease Payments 667,723
Less Effect of Discounting (11,612 )
Present Value of Future Minimum Lease Payments 656,111
Less Current Portion of Operating Lease Obligations 388,325
Long-Term Operating Lease Obligations $ 267,786 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 $ 2,987 124,500 1.8 12.75 8,853 The
table below summarizes future minimum finance lease payments at September 30, 2022 for the 12 months ended September 30: SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES
2023 $ 33,113
2024 27,594
Total Minimum Lease Payments 60,707
Amount representing interest (6,567 )
Present Value of Minimum Lease Payments 54,140
Current Portion of Finance Lease Obligations 24,518
Finance Lease Obligations, Less Current Portion $ 29,622 Lease
expense included in Operating expense for the year ended September 30, 2022 and 2021 was $ 320,813 162,096 189,223 160,489 During
the year ended September 30, 2022, we had the following cash and non-cash activities associated with our leases: SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES
Operating
cash outflows from operating leases: $ 373,968
Operating
cash outflows from finance leases: $ 7,594
Financing
cash outflows from finance lease: $ 24,260 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. During the year ended September 30, 2022, we recognized sublease income of
$ 185,139 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE
2023 $ 126,971
2024 $ 97,377
Total Minimum Lease Payments to be Received $ 224,348 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 adjustment attributable
to NuZee, Inc. recorded to other comprehensive (loss) gain amounted to ($113,929) 7,662 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. Equity
Method Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method
of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several
factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally
a 20 50 When
the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s
consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding.
When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount
of its share of losses not previously recognized. On
January 9, 2020, a joint venture agreement was signed between Industrial Marino, S.A. de C.V. ( 50 50 313,012 110,000 160,000 43,012 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 as well as our partner appoints
the Chairman of the joint Board. As of September 30, 2022, the activity in NLA consisted of the contribution of two machines as described
above and other start up and initial sales and marketing related activities. $ 5,791 7,889 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. Return
and Exchange Policy The
Company provides a 30-day money-back guarantee if a buyer is not satisfied with a product. All products are thoroughly inspected and
securely packaged before they are shipped to ensure buyers receive the best possible product. If for any reason buyers are unsatisfied
with the products, they can return them and the Company will exchange or refund the purchase minus any shipping charges. For wholesale
customers, return policies vary based on their specific agreements with customers. Under chargebacks agreements with the customers, the
Company agrees to reimburse the seller for a portion of the costs incurred by the seller to advertise and promote certain of the Company’s
products. The Company estimates, accrues and recognizes such chargebacks. These amounts are included in the determination of net sales. As
of September 30, 2022 and September 30, 2021, the Company had no Cost
Recognition Cost
of products sold is primarily comprised of direct materials consumed in the manufacturing of co-packing arrangements or the production
of our own products for resale. Cost of products sold also includes directly related labor salaries and other overhead cost including
depreciation, temporary labor and shipping costs for shipment of raw materials to our facilities. Selling,
General and Administrative Expense Selling,
general and administrative expense (SG&A) is primarily comprised of personnel costs, sales and marketing expenses, depreciation
and amortization, insurance expenses, professional services fees, travel and office expenses, and facilities costs. In some
situations, the Company covers shipping fees for delivering customer orders, and the shipping and handling expenses are recorded under operating expenses in the
consolidated statements of operations. Advertising
Expenses The
Company expenses advertising costs when incurred. Advertising expense for the years ended September 30, 2022 and 2021 is as follows: SCHEDULE OF ADVERTISING EXPENSE
September 30, 2022 September 30, 2021
Advertising $ 192,316 $ 227,845 Research
and Development Research
and development expenses are expensed in the consolidated statements of operations as incurred in accordance with FASB ASC 730, Research
and Development. For the years ended September 30, 2022 and 2021, respectively, research and development expenses amounted to $ 633 1,840 Other
Expense Other
expense of $ 574,710 672,929 Prepaid
expenses and other current assets Prepaid
expenses and other current assets for the years ended September 30, 2022 and 2021 is as follows: SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, 2022 September 30, 2021
Prepaid expenses and other current assets $ 547,773 $ 482,288 The
Prepaid expenses and other current assets balance of $ 547,773 482,288 Inventory 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 September 30, 2022 and 2021, the carrying value of inventory of $ 947,995 573,464 SCHEDULE OF INVENTORY
September 30, 2022 September 30, 2021
Raw materials $ 887,632 $ 552,621
Finished goods 60,363 20,843
Less - Inventory reserve - -
Total $ 947,995 $ 573,464 Property
and Equipment Property
and equipment is stated at cost, net of accumulated depreciation. The Company generally depreciates property and equipment on a straight-line
basis over the estimated useful lives of the assets after the assets are placed in service except for NuZee KR which uses the declining
balance method. Office equipment is depreciated over a 3 7 5 333,196 344,699 Expenditures associated with upgrades and enhancements that improve, add functionality, or otherwise extend
the life of property and equipment that exceed $1,000 are capitalized SCHEDULE OF PROPERTY AND EQUIPMENT
September 30, 2022 September 30, 2021
Machinery & Equipment 1,930,898 1,794,968
Vehicles 73,008 76,267
Leasehold Improvements 62,122 122,698
Less - Accumulated Depreciation (1,540,953 ) (1,319,909 )
Net Property and Equipment $ 525,075 $ 674,024 The
Company is required to make deposits or prepayments and progress payments on equipment purchases before the Company receives possession
and title. As a result, the Company accounts for such payments as Other Assets until it has possession at which time the equipment is
recorded as Property and Equipment. There were no Samples The
Company distributes samples of its products as a component of its marketing program. Costs for samples are expensed at the time the samples
are produced and recorded under operating expenses in the consolidated statements of operations. Long-Lived
Assets The
Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicated that their carrying
amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the
market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly
in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses
combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation
that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability
is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted
cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.
In March 2021, the Company wrote off $ 840,391 Goodwill
and intangible assets We
evaluate goodwill for impairment on an annual basis as of the last day of our fiscal fourth quarter, and whenever events or
circumstances make it more likely than not that an impairment may have occurred. These events or circumstances could include a
significant change in the business climate, legal factors, operating performance indicators, competition, client engagement, or sale
or disposition. We monitor the existence of potential impairment indicators throughout the fiscal year. We test for goodwill
impairment at the reporting unit level. We consider the Company as a reporting unit for goodwill impairment testing. We determined
the Company has one operating segment and two components, NuZee, Inc. and NuZee KR, which are combined into one reporting unit as
they are considered to be economically similar. The impairment test involves comparing the fair value of the reporting unit to its
carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale
of the reporting unit. If the fair value exceeds the carrying value, we conclude that no goodwill impairment has occurred. If the
carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, not
to exceed the carrying value of the goodwill. Since the Company is one reporting unit, the fair value of the Company equals market
capitalization, thus net book value is compared to market capitalization to determine if there is any impairment. During
the year ended September 30, 2022, we recorded a goodwill impairment loss of $ 531,412 Goodwill and Intangible Assets 0 no Intangible
assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line
basis over their economic or legal life, whichever is shorter. We have identifiable useful life intangible assets related to acquired
Dripkit tradename and customer relationships. We test these intangible assets annually for impairment, and when indications of potential
impairment exist. We utilize the relief from royalty method to determine the fair value of the tradename. Management uses considerable
judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. We estimate the fair
value of acquired customer relationships using a weighted average of the income. The income approach applies a fair value methodology
based on discounted cash flows. This analysis requires significant estimates and judgments, including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life
over which cash flows will occur, customer attrition, and determination of our weighted average cost of capital. If the carrying value
of an intangible asset exceeds the fair value, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying
value. During the year ended September 30, 2022, we recorded an impairment loss of $ 63,167 80,555 Goodwill and Intangible Assets 140,000 0 no Income
Taxes In
accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided
for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The
Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes,
the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater than 50% likelihood No Related
parties A
party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls,
is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of
the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence
the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing
its own separate interests is also a related party. Other
Current Liabilities Other
current liabilities are primarily comprised of deposits and advances received from equity investors for certain legal opinions that will
be provided by the Company’s counsel which totaled $ 8,553 99,760 Stock-based
Compensation We
account for share-based awards issued to employees in accordance with Accounting Standards Codification (ASC) 718, “Compensation-Stock
Compensation”. Accordingly, employee share-based payment compensation is measured at the grant date, based on the fair value of
the award, and is recognized as an expense over the requisite service period, which is normally the vesting period. Share-based compensation
to directors is treated in the same manner as share-based compensation to employees, regardless of whether the directors are also employees.
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”).
The Company implemented ASU 2018-07 on October 1, 2019 and the impact of the implementation was not material to the financial statements. We
determine the fair value of share-based payments using the Black Scholes option-pricing model for common stock options and warrants
and the closing price of our common stock for common share issuances. We recognize forfeitures as they occurred. Comprehensive
income/loss Comprehensive
income/loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.
Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive
income/loss are required to be reported in a financial statement that is presented with the same prominence as other financial statements.
The Company’s current component of other comprehensive income/loss pertain to foreign currency translation adjustments. Segment
Information ASC
Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that
public business enterprises report information about operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial reports issued to stockholders. Management has determined
that the Company operates in one business segment, which is the commercialization and development of functional beverages. Recent
Accounting Pronouncements Changes
to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting
Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial
position, results of operations, cash flows, or presentation thereof. The
Company reviewed all recently issued pronouncements in 2022, but not yet effective, and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations. |
