UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 20212022

or

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________to________

 

Commission File No. 001-39338

 

NUZEE, INC.

(exact name of registrant as specified in its charter)

 

Nevada 38-3849791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

1401 Capital Avenue1350 East Arapaho Road, Suite B#230, PlanoRichardson, TXTexas, 7507475081

(Address of principal executive offices) (zip code)

 

(760) 295-2408

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.00001 par value NUZE The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer☐ Accelerated Filer☐
Non-accelerated filer☒ Smaller reporting company☒
Emerging growth company☐   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of February 4, 2022,7, 2023, the registrant had 18,209,697691,088 shares of common stock outstanding.

 

 
 

 

Table of Contents

 

 Page
  
PART I 
  
Item 1. Financial Statements45
Consolidated Balance Sheets (unaudited)45
Consolidated Statements of Operations (unaudited)56
Consolidated Statements of Comprehensive Income (Loss) (unaudited)67
Consolidated Statements of Stockholders’ Equity (unaudited)78
Consolidated Statements of Cash Flows (unaudited)89
Notes to Consolidated Financial Statements (unaudited)910
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1720
Item 3. Quantitative and Qualitative Disclosures About Market Risk2125
Item 4. Controls and Procedures2125
  
PART II2226
  
Item 1. Legal Proceedings2226
Item 1A. Risk Factors2227
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2327
Item 3. Defaults Upon Senior Securities27
Item 4. Mine Safety Disclosures27
Item 5. Other Information27
Item 6. Exhibits2328
SIGNATURES2429

 

2

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Such forward-looking statements reflect the views of NuZee, Inc. (“NuZee” or the “Company”) with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. From time to time, our management or persons acting on our behalf may make forward-looking statements to inform existing and potential security holders about the Company. All statements other than statements of historical facts included in this report regarding our financial position, business strategy, plans and objectives of management for future operations, industry conditions, and indebtedness covenant compliance, or any other matters, are forward-looking statements. When used in this report, forward-looking statements are generally accompanied by terms or phrases such as “estimate,” “expects”, “project,” “predict,” “believe,” “expect,” “anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,” “may” or other words and similar expressions that convey the uncertainty of future events or outcomes. Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Forward-looking statements in this report may include, without limitation, statements regarding:

 

●our plans to obtain funding for our operations, including funding necessary to develop, manufacture and commercialize our products, and provide our co-packing services;services, and to continue as a going concern;
●

the impact to our business from the COVID-19 global crisis, including any supply chain interruptions;

●the evolving coffee preferences of coffee consumers in North America and Korea;
●the size and growth of the markets for our products and co-packing services;
●our ability to compete with companies producing similar products or providing similar co-packing services;
●our expectation that our existing capital resources will be sufficient to fund our operations for at least the next 12 months;nine months and our expectation to need additional capital to fund our planned operations beyond that;

●the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
●

our expectations regarding our ability to maintain compliance with the listing requirements of the Nasdaq Capital Market;

●the impact to our business, including any supply chain interruptions, resulting from changes in general economic, business and political conditions, including changes in the financial markets and macroeconomic conditions resulting from a pandemic such as COVID-19 or otherwise;
   
 ●the evolving coffee preferences of coffee consumers in North America and East Asia;
●the size and growth of the markets for our products and co-packing services;
●our ability to compete with companies producing similar products or providing similar co-packing services;
●our ability to successfully achieve the anticipated results of strategic transactions;
●our expectation regarding our future co-packing revenues;
 ●
●our ability to develop or offer innovative new products and services, and expand our co-packing services to other products that are complementary to our current single serve coffee product offerings;

●

our expectations regarding additional manufacturing, coffee roasting and co-packing capabilities to be provided through our manufacturing partner, as well as our manufacturing partner’s ability to successfully facilitate distribution efforts to the Eastern United States;

●our reliance on third-party roasters or manufacturing partners to roast coffee beans necessary to manufacture our products and to fulfill every aspect of our co-packing services;
   
 ●our reliance on third-party roasters to roast coffee beans necessary to manufacture our productsregulatory developments in the U.S. and fulfill every aspect of our co-packing services;in non-U.S. countries;
   
●regulatory developments in the U.S. and in non-U.S. countries;
●our ability to retain key management, sales and marketing personnel;

●
●the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology;
●the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
●our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting;
●the outcome of pending, threatened or future litigation; and
●our financial performance.

The forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Forward-looking statements speak only as of the date they are made. You should consider carefully the statements in the section of our Annual Report on Form 10-K filed with the SEC on December 22, 2021,23, 2022, titled “Risk Factors” and sections of this report that describe factors that could cause our actual results to differ from those set forth in the forward-looking statements.

Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

 

34

 

Item 1. Financial Statements.Statements

 

NuZee, Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

  December 31, 2021  September 30, 2021 
ASSETS        
Current assets:        
Cash $10,967,104  $10,815,954 
Accounts receivable, net  795,301   555,238 
Inventories, net  384,198   573,464 
Prepaid expenses and other current assets  672,995   482,288 
Total current assets  12,819,598   12,426,944 
         
Property and equipment, net  640,322   674,024 
         
Other assets:        
Right-of-use asset - operating lease  542,162   386,587 
Investment  174,268   175,425 
Other assets  79,591   79,822 
Total other assets  796,021   641,834 
         
Total assets $14,255,941  $13,742,802 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $681,531  $342,790 
Current portion of long-term loan payable  31,610   43,618 
Current portion of lease liability - operating lease  205,098   150,931 
Current portion of lease liability - finance lease  28,729   27,833 
Accrued expenses  129,513   274,009 
Deferred income  327,219   175,822 
Other current liabilities  95,043   138,631 
Total current liabilities  1,498,743   1,153,634 
         
Non-current liabilities:        
Lease liability - operating lease, net of current portion  348,937   247,656 
Lease liability - finance lease, net of current portion  43,830   50,567 
Loan payable - long term, net of current portion  10,729   12,696 
Other noncurrent liabilities  67,565   65,802 
Total non current liabilities  471,061   376,721 
         
Total liabilities $1,969,804  $1,530,355 
         
Stockholders’ equity:        
Common stock; 100,000,000 shares authorized, $0.00001 par value; 18,204,837 and 17,820,390 shares issued and outstanding as of December 31, 2021, and September 30, 2021, respectively $182  $178 
Additional paid in capital  67,684,455   64,839,254 
Accumulated deficit  (55,629,011)  (52,824,808)
Accumulated other comprehensive income  230,511   197,823 
Total stockholders’ equity  12,286,137   12,212,447 
         
Total liabilities and stockholders’ equity $14,255,941  $13,742,802 

The accompanying notes are an integral part of these unaudited consolidated financial statements

4

NuZee, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

  

Three Months Ended

December 31, 2021

  

Three Months Ended

December 31, 2020

 
Revenues, net $1,019,253  $517,987 
Cost of sales  1,003,882   516,284 
Gross profit  15,371   1,703 
         
Operating expenses  2,852,793   5,903,826 
Loss from operations  (2,837,422)  (5,902,123)
         
Loss from investment in unconsolidated affiliate  (1,157)  (2,056)
Other income  42,757   12,621 
Interest income  245   94 
Other expense  (5,818)  (569)
Interest expense  (2,808)  (4,039)
Net loss $(2,804,203) $(5,896,072)
Basic and diluted loss per common share $(0.16) $(0.40)
         
Basic and diluted weighted average number of common stock outstanding  18,011,292   14,741,974 
  December 31, 2022  September 30, 2022 
ASSETS        
Current assets:        
Cash $6,491,819  $8,315,053 
Accounts receivable, net  653,903   345,258 
Inventories, net  1,089,901   947,995 
Prepaid expenses and other current assets  376,264   547,773 
Total current assets  8,611,887   10,156,079 
         
Property and equipment, net  475,284   525,075 
         
Other assets:        
Right-of-use asset - operating lease  569,521   642,624 
Investment in unconsolidated affiliate  167,811   169,634 
Intangible assets, net  132,500   140,000 
Other assets  91,979   77,962 
Total other assets  961,811   1,030,220 
         
Total assets $10,048,982  $11,711,374 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $462,655  $113,708 
Current portion of long-term loan payable  8,005   7,947 
Current portion of lease liability - operating lease  392,714   388,325 
Current portion of lease liability - finance lease  28,729   24,518 
Accrued expenses  624,282   706,492 
Deferred income  298,023   319,707 
Other current liabilities  15,520   39,241 
         
Total current liabilities  1,829,928   1,599,938 
         
Non-current liabilities:        
Lease liability - operating lease, net of current portion  185,351   267,786 
Lease liability - finance lease, net of current portion  18,522   29,622 
Loan payable - long term, net of current portion  2,719   4,745 
Other noncurrent liabilities  77,339   66,484 
Total non-current liabilities  283,931   368,637 
         
Total liabilities  2,113,859   1,968,575 
         
Stockholders’ equity:        
Common stock; 200,000,000 shares authorized, $0.00001 par value; 685,088 and 676,229 shares issued and outstanding as of December 31, 2022, and September 30, 2022, respectively  7   7 
Additional paid in capital  74,541,365   74,281,418 
Accumulated deficit  (66,805,726)  (64,622,520)
Accumulated other comprehensive income  199,477   83,894 
Total stockholders’ equity  7,935,123   9,742,799 
         
Total liabilities and stockholders’ equity $10,048,982  $11,711,374 

 

The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.

 

5

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)OPERATIONS

(UNAUDITED)

 

   2021   2020 
  NuZee, Inc. 
For the three months ended December 31 2021  2020 
Net loss $(2,804,203) $(5,896,072)
         
Foreign currency translation  32,688   1,656 
Total other comprehensive income, net of tax  32,688   1,656 
Comprehensive loss $(2,771,515) $(5,894,416)
  

Three Months

Ended

December 31, 2022

  

Three Months

Ended

December 31, 2021

 
Revenues, net $1,136,348  $1,019,253 
Cost of sales  1,060,816   1,003,882 
Gross profit  75,532   15,371 
         
Operating expenses  2,277,200   2,811,189 
Loss from operations  (2,201,668)  (2,795,818)
         
Loss from equity method investment  (1,823)  (1,157)
Other income  50,737   42,757 
Other expense  (35,790)  (47,422)
Interest income (expense), net  5,338   (2,563)
Net loss $(2,183,206) $(2,804,203)
Basic and diluted loss per common share $(3.23) $(5.45)
         
Basic and diluted weighted average number of common stock outstanding  676,422   514,794 

 

The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.

 

6

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

              Accumulated    
        Additional     other    
  Common stock  paid-in  Accumulated  comprehensive    
  Shares  Amount  capital  deficit  income  Total 
                   
Balance September 30, 2021  17,820,390  $178  $64,839,254  $(52,824,808) $197,823  $12,212,447 
                         
Equity securities issued for cash                        
Equity securities issued for cash, shares                        
Exercise of warrants  384,447   4   1,721,014   -   -   1,721,018 
Stock option expense  -   -   1,124,187   -   -   1,124,187 
Exercise of stock options                        
Exercise of stock options, shares                        
Other comprehensive gain  -   -   -   -   32,688   32,688 
Net loss  -   -   -   (2,804,203)  -   (2,804,203)
Balance December 31, 2021  18,204,837  $182  $67,684,455  $(55,629,011) $230,511  $12,286,137 

              Accumulated    
        Additional     other    
  Common stock  paid-in  Accumulated  comprehensive    
  Shares  Amount  capital  deficit  income  Total 
                   
Balance September 30, 2020  14,570,105  $146  $40,472,229  $(34,272,778) $190,161  $6,389,758 
               -         

Equity securities

issued for cash		  324,959   3   2,683,977   -   -   2,683,980 
Stock option expense  -   -   4,507,298   -   -   4,507,298 
Exercise of stock options  6,000   -   9,180   -   -   9,180 
Other comprehensive gain  -   -   -   -   1,656   1,656 
Net loss  -   -   -   (5,896,072)      (5,896,072)
Balance December 31, 2020  14,901,064  $149  $47,672,684  $(40,168,850) $191,817  $7,695,800 
         
  NuZee, Inc. 
For the three months ended December 31 2022  2021 
Net loss $(2,183,206) $(2,804,203)
         
Foreign currency translation  115,583   32,688 
Total other comprehensive income, net of tax  115,583   32,688 
Comprehensive loss $(2,067,623) $(2,771,515)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

(UNAUDITED)

 

   Three Months Ended   Three Months Ended 
  December 31, 2021  December 31, 2020 
       
Operating activities:        
Net loss $(2,804,203) $(5,896,072)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and Amortization  36,711   121,824 
Noncash lease expense  36,822   70,933 
Stock option expense  1,124,187   4,507,298 
Sales allowance  -   2,018 
Loss from investment in unconsolidated affiliate  1,157   2,056 
         
Change in operating assets and liabilities:        
Accounts receivable  (240,063)  (27,012)
Inventories  189,266   (10,928)
Prepaid expenses and other current assets  66,527   (186,466)
Other assets  231   (906)
Accounts payable  81,507   (27,012)
Deferred income  151,397   (23,125)
Lease liability – operating lease  (36,949)  (63,507)
Accrued expenses and other current liabilities  (188,084)  (169,784)
Other non-current liabilities  1,763   1,610 
Net cash used in operating activities  (1,579,731)  (1,699,073)
         
Investing activities:        
Purchase of equipment  (3,009)  (58,990)
Net cash used in investing activities  (3,009)  (58,990)
         
Financing activities:        
Proceeds from exercise of options  -   9,180 
Repayment of loans  (13,975)  (8,594)
Repayment of finance lease  (5,841)  (5,146)
Proceeds from exercise of warrants, net of issuance costs  1,721,018   - 
Proceeds from issuance of equity securities, net of issuance costs  -   2,683,980 
Net cash provided by financing activities  1,701,202   2,679,420 
         
Effect of foreign exchange on cash  32,688   1,656 
         
Net change in cash  151,150   923,013 
         
Cash, beginning of period  10,815,954   4,398,545 
Cash, end of period $10,967,104  $5,321,558 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $2,808  $4,039 
Cash paid for taxes $-  $250 
         
Non-cash transactions:        
Deferred offering costs accrued $257,234  $213,857 
ROU assets and liabilities added during the period $192,397  $- 
  Shares  Amount  capital  deficit  income  Total 
           Accumulated    
     Additional     other    
  Common stock  paid-in  Accumulated  comprehensive    
  Shares  Amount  capital  deficit  income  Total 
Balance September 30, 2022  676,229  $7  $74,281,418  $(64,622,520) $83,894  $9,742,799 
                         
Stock option expense  -   -   197,108   -   -   197,108 
Restricted stock compensation  -   

-

   62,839   -   -   62,839 
Round-up shares issued in reverse split  8,859   -   -   -   -   - 
Other comprehensive income  -   -   -   -   115,583   115,583 
Net loss  -   -   -   (2,183,206)  -   (2,183,206)
Balance December 31, 2022  685,088  $    7  $74,541,365  $(66,805,726) $199,477  $7,935,123 
                         
Balance September 30, 2021  509,154  $5  $64,839,427  $(52,824,808) $197,823  $12,212,447 
                         
Exercise of warrants, net of issuance costs  10,984   -   1,721,018   -   -   1,721,018 
Stock option expense  -   -   1,124,187   -   -   1,124,187 
Other comprehensive income  -   -   -   -   32,688   32,688 
Net loss  -   -   -   (2,804,203)  -   (2,804,203)
Balance December 31, 2021  520,138  $5  $67,684,632  $(55,629,011) $230,511  $12,286,137 

 

The accompanying notes are an integral part of these unaudited consolidated financial statementsstatements.

 

8

 

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

  

Three Months

Ended

  

Three Months

Ended

 
  December 31, 2022  December 31, 2021 
       
Operating activities:        
Net loss $(2,183,206) $(2,804,203)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  73,805   36,711 
Noncash lease expense  73,103   36,822 
Stock option expense  197,108   1,124,187 
Restricted stock compensation  62,839   - 
Bad debt expense  65,608   - 
Loss from equity method investment  1,823   1,157 
Change in operating assets and liabilities:        
Accounts receivable  (374,253)  (240,063)
Inventories  (141,906)  189,266 
Prepaid expenses and other current assets  171,509   66,527 
Other assets  (14,017)  231 
Accounts payable  348,947   81,507 
Deferred income  (21,684)  151,397 
Lease liability – operating lease  (78,046)  (36,949)
Accrued expenses and other current liabilities  (105,931)  (188,084)
Other non-current liabilities  10,855   1,763 
Net cash used in operating activities  (1,913,446)  (1,579,731)
         
Investing activities:        
Purchase of equipment  (16,514)  (3,009)
Net cash used in investing activities  (16,514)  (3,009)
         
Financing activities:        
Repayment of loans  (1,968)  (13,975)
Repayment of finance lease  (6,889)  (5,841)
Proceeds from exercise of warrants, net of issuance costs  -   1,721,018 
Net cash provided by (used in) financing activities  (8,857)  1,701,202 
         
Effect of foreign exchange on cash  115,583   32,688 
Net change in cash  (1,823,234)  151,150 
Cash, beginning of period  8,315,053   10,815,954 
Cash, end of period $6,491,819  $10,967,104 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $1,474  $2,808 
         
Non-cash transactions:        
ROU assets and liabilities added during the period $-  $192,397 
Deferred offering costs accrued $-  $257,234 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

9

NuZee, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 20212022

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, 20212022 as filed with the SEC on December 22, 2021.23, 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, 20212022, 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 reclassificationsWe reclassified lease expenses associated with subleased property from operating expenses to other expenses totaling $41,604 for the three months ended December 31, 2021. This reclassification 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 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.

 

10

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 December 31, 20212022, and December 31, 2020,2021, the total number of common stock equivalents was 8,766,493262,030 and 2,314,053250,471, respectively, comprised of stock options and warrants as of December 31, 20212022 and December 30, 2020.31, 2021. The Company incurred a net loss for the three months ended December 31, 20212022, and 2020,2021, respectively, and therefore basic and diluted earnings per share for thosethese 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.products. The Company has generated limitedgrown revenues from its principal operations, andoperations; however, there is no assurance of future revenues.revenue growth similar to historical levels.

9

 

As of December 31, 2021,2022, the Company had cash of $10,967,1046,491,819 and working capital of $6,781,959. However, theThe 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.

11

Major Customers

In the three months ended December 31, 20212022 and 2020,2021, revenue was primarily derived from major customers disclosed below.

SCHEDULE OF REVENUE BY MAJOR CUSTOMERS

Three months ended December 31, 2022:

Customer Name

 

Sales

Amount

  

% of Total

Revenue

  

Accounts

Receivable

Amount

  % of Total Accounts Receivable 
Customer CL $331,211   29% $340,534   52%

 

Three months ended December 31, 2021:

 SCHEDULE OF REVENUE BY MAJOR CUSTOMERS

Customer Name Sales Amount  % of Total Revenue  

Accounts Receivable

Amount

  % of Total Accounts Receivable  

Sales

Amount

  

% of Total

Revenue

  

Accounts

Receivable

Amount

  

% of Total Accounts

Receivable

 
Customer WP $310,551   30% $279,273   35% $310,551   30% $279,273   35%
Customer CU $199,936   20% $137,566   17%  199,936   20%  137,566   17%

 

Three months ended December 31, 2020:

Customer 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%

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 one significanta 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 inIn May 2022, the three months ended December 31, 2021, we determined to renewCompany renewed the office and manufacturing space in Vista, California which was originally scheduled to expire on January 31, 2022, for an additional year2023, through JanuaryMarch 31, 2023.2025. The lease has a monthly lease expensebase 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 which. 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, 2023.2023. The lease has a monthly expense of $7,040. Accordingly, we have added ROU assets and lease liabilities related to those leases at December 31, 2021.2022.

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.

 

1012

 

As of December 31, 2021,2022, our operating leases had a weighted average remaining lease term of 1.71.5 years and a weighted-average discount rate of 55.0%. Other information related to our operating leases is as follows:

 

SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE

   1 
ROU Asset – October 1, 2021 $386,587 
ROU Asset added during the period  192,397 
Amortization during the period  (36,822)
ROU Asset –December 31, 2021 $542,162 
Lease Liability – October 1, 2021 $398,587 
Lease Liability added during the period  192,397 
Amortization during the period  (36,949)
Lease Liability – December 31, 2021 $554,035 

 

    
ROU Asset – October 1, 2022 $642,624 
ROU Asset added during the period  - 
Amortization during the period  (73,103)
ROU Asset – December 31, 2022 $569,521 
Lease Liability – October 1, 2022 $656,111 
Lease Liability added during the period  - 
Amortization during the period  (78,046)
Lease Liability – December 31, 2022 $578,065 
    
Lease Liability – Short-Term $205,098  $392,714 
Lease Liability – Long-Term  348,937   185,351 
Lease Liability – Total $554,035  $578,065 

 

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, 2021:2022:

 

Amounts due within 12twelve months of December 31,

 

SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES

   2021 
2022 $335,586 
2023  220,913 
2024  64,936 
2025  - 
2026  - 
Total Minimum Lease Payments  621,435 
Less Effect of Discounting  (67,400)
Present Value of Future Minimum Lease Payments  554,035 
Less Current Portion of Operating Lease Obligations  205,098 
Long-Term Operating Lease Obligations $348,937 

     
2023 $379,603 
2024  217,301 
2025  33,908 
Total Minimum Lease Payments  630,812 
Less Effect of Discounting  (52,747)
Present Value of Future Minimum Lease Payments  578,065 
Less Current Portion of Operating Lease Liabilities  392,714 
Long-Term Operating Lease Liabilities $185,351 

 

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 $2,987per month through July 2024. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,500for the purchase of this equipment. This transaction was accounted for as a financingfinance lease. As of December 31, 2021,2022, our financingfinance lease had a remaining lease term of 2.5 1.5years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the three months ended December 31, 20212022 was $2,4371,474.

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 December 31, 20212022 for the 12twelve months ended December 31:

 

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES

   2021 
2022 $33,113 
2023  33,113 
2024  19,316 
2025  - 
2026  - 
Total Minimum Lease Payments  85,542 
Amount representing interest  (12,983)
Present Value of Minimum Lease Payments  72,559 
Current Portion of Finance Lease Obligations  28,729 
Finance Lease Obligations, Less Current Portion $43,830 

     
2023 $33,113 
2024  19,315 
Total Minimum Lease Payments  52,428 
Amount representing interest  (5,177)
Present Value of Minimum Lease Payments  47,251 
Current Portion of Finance Lease Obligations  28,729 
Finance Lease Obligations, Less Current Portion $18,522 

RentLease expense included in general and administrativeOperating expense for the three months ended December 31, 20212022 and 20202021 was $90,52591,119 and $93,75048,921, respectively. Lease expense, which represents sublease expense included in Other expense for the three months ended December 31, 2022 and 2021 was $35,790 and $41,604, respectively.

11

 

Cash and non-cash activities associated with the leases for the three months ended December 31, 20212022 are as follows:

 

SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES

Operating cash outflows from operating leases: $36,949 
Operating cash outflows from finance lease: $2,437 
Financing cash outflows from finance lease: $5,841 

     
Operating cash outflows from operating leases: $114,131 
Operating cash outflows from finance lease: $1,474 
Financing cash outflows from finance lease: $6,889 

13

 

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 three months ended December 31, 2021,2022, we recognized sublease income of $42,75750,738 pursuant to the sublease included in Other income on our financial statements. Future minimum lease payments to be received under that sublease as of December 31, 2021,2022, for each of the twelve months ended December 31 are as follows:

 

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE

   2021 
2022 $

124,190

 
2023  

127,926

 
2024  

64,918

 
2025  - 
2026  - 
Total $317,034 

     
2023 $127,926 
2024  64,918 
Total $192,844 

 

Loans

 

On April 1, 2019, we purchased a delivery van from Ford Motor Credit for $41,627. The Company paid $3,500as a down payment and financed $38,127for 60months at a rate of 2.9%. The loan is secured by the van. The outstanding balance on the loan at December 31, 20212022 and September 30, 20212022 amounted to $18,506 10,724and $20,41612,692, 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 December 31, 2021 and September 30, 2021 amounted to $23,833 and $35,898, respectively.

 

The remaining loan payments are as follows:for each of the twelve months ended December 31:

 

SCHEDULE OF LOAN PAYMENTS

  Ford Motor Credit  ShinHan Bank  Total 
2022 (Jan 2022 - Sep 2022) $5,812  $13,248  $19,060 
2023 (Oct 2022 - Dec 2022)  1,965   10,585   12,550 
Total Current Portion $7,777  $23,833  $31,610 
             
2023 (Jan 2023 - Sep 2023) $8,005   -  $8,005 
2024  2,724   -   2,724 
Total Long-Term Portion $10,729  $-  $10,729 
Grand Total $18,506  $23,833  $42,339 
  

Ford Motor

Credit

 
2023 $8,005 
2024  2,719 
Grand Total $10,724 

 

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.

 

12

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 gainincome amounted to $32,688115,583 and $1,65632,688 for the three months ended December 31, 20212022 and 2020,2021, 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.

14

 

Prepaid expenses and other current assets

Prepaid expenses and other current assets at December 31, 2022 and September 30, 2022, were as follows:

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS

  December 31, 2022  September 30, 2022 
Prepaid expenses and other current assets $376,264  $547,773 

The prepaid expenses and other current assets balance of $376,264 as of December 31, 2022 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 December 31, 20212022 and September 30, 2021,2022, the carrying value of inventory was $384,1981,089,901 and $573,464947,995, respectively.

 

SCHEDULE OF INVENTORY

  December 31, 2021  September 30, 2021 
Raw materials $366,639  $552,621 
Finished goods  17,559   20,843 
Less – Inventory reserve  -   - 
Total $384,198  $573,464 

  December 31, 2022  September 30, 2022 
Raw materials $1,086,761  $887,632 
Finished goods  3,140   60,363 
Less – Inventory reserve  -   - 
Total $1,089,901  $947,995 

 

Joint VentureEquity 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 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 December 31, 2021,2022, the only activityactivities in NLA waswere the contribution of two machines, as described above, and other start up relatedand initial marketing and sales activities. $1,823 and $1,157 of a loss and $2,056 of a loss waslosses were recognized under the equity method of accounting during the three months ended December 31, 2021,2022 and December 31, 20202021, respectively.

 

2. GEOGRAPHIC CONCENTRATION

 

The Company is organized based on fundamentally one business segment although it does sell its products on a world-wide basis. The Company is organized in three geographical segments. The Company co-packs product for customers and produces and sells its products directly in North America and Korea. The Company haspreviously had a minimally staffed office in Japan that providesprovided support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to our shareholdersits stockholders based in Japan.Japan; these functions are now supported by the Company’s personnel residing in the United States. Information about the Company’s geographic operations for the three months ended December 31, 20212022 and 20202021 are as follows:

 

1315

Geographic Concentrations

SCHEDULE OF GEOGRAPHIC OPERATIONS

  Three Months
Ended		  Three Months
Ended		 
  December 31, 2021  December 30, 2020 
Net Revenue:        
North America $817,341  $406,488 
South Korea  201,912   111,499 
Net Revenue $1,019,253  $517,987 

Property and equipment, net: As of
December 31, 2021		  As of
September 30, 2021		 
North America $462,389  $517,966 
South Korea  176,810   154,562 
Japan  1,123   1,496 
Property and equipment, net $640,322  $674,024 

3. RELATED PARTY TRANSACTIONSConcentration

 

ForSCHEDULE OF GEOGRAPHICAL OPERATIONS

  Three Months
Ended		  Three Months
Ended		 
  December 31, 2022  December 31, 2021 
Net Revenue:        
North America $665,741  $817,341 
South Korea  470,607   201,912 
Net Revenue $1,136,348  $1,019,253 

Property and equipment, net: As of
December 31, 2022		  As of
September 30, 2022		 
North America $303,835  $378,546 
South Korea  170,033   144,865 
Japan  1,416   1,664 
Property and equipment, net $475,284  $525,075 

3. BUSINESS COMBINATIONS

As described in Note 1, on February 25, 2022, the Company acquired substantially all the assets and certain specified liabilities of Dripkit pursuant to the Asset Purchase Agreement, dated as of February 21, 2022, by and among the Company, Dripkit, and Dripkit’s existing investors 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, consisting of cash paid by the Company to Dripkit and the Company’s issuance to the Stock Recipients of shares of the Company’s common stock, plus the assumption of certain assumed liabilities, including a $13,000 bridge loan and approximately $3,176 of payables, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement resulting in an acquisition accounting purchase price of $876,176. The Company analyzed the Acquisition under ASC 805 and concluded that it should be accounted for as a business combination.

Pursuant to the terms of the Asset Purchase Agreement, on the Closing Date, the cash portion of the purchase price was reduced by the following amounts: (a) $22,000, in satisfaction of a bridge loan made from the Company to Dripkit in February 2022 to provide Dripkit with operational financing prior to the Closing Date, (b) $35,500, as an indemnity holdback for the purpose of satisfying any indemnification claims made by the Company pursuant to the Asset Purchase Agreement, and (c) $40,000, as a cash bulk sales holdback (the “Cash Bulk Sales Holdback Amount”). In addition, on the Closing Date, the Company held back $40,000 worth of stock consideration as the Stock Bulk Sales Holdback Amount (together with the Cash Bulk Sales Holdback Amount, the “Bulk Sales Holdback Amount”).

On the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of 5,105 shares of the Company’s common stock. The Company repaid the entire outstanding principal amount of Dripkit’s Small Business Association Economic Injury Disaster Loan in the amount of $78,656. In addition, the Company recorded a liability on its balance sheet in Accounts Payable of $115,500 related to potential future amounts due related to the Bulk Sales Holdback of $80,000 and the indemnity holdback of $35,500.

In the year ended September 30, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) 528 shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.

16

Dripkit was acquired for purposes of supplementing our current product offerings. Dripkit operates as a new Dripkit Coffee business division that is wholly-owned by NuZee, Inc.

The following table presents the allocation of the aggregate purchase price paid by the Company for the Acquisition of $860,000, plus the assumption of certain assumed liabilities, including a $13,000 bridge loan and approximately $3,176 of payables, resulting in an acquisition accounting purchase price of $876,176, to the assets acquired for the acquisition of Dripkit:

SCHEDULE OF ALLOCATION OF AGGREGATE PURCHASE PRICE

     
Total purchase price $876,176 
Assets acquired:    
Inventory $9,664 
Property and equipment  5,100 
Identifiable intangible assets  330,000 
Total assets acquired $344,764 
     
Estimated fair value of net assets acquired $344,764 
Goodwill $531,412 

Identified Intangibles

The Company identified tradename and customer relationships as intangible assets in connection with the Acquisition. Any tradename and customer relationship intangible assets will be amortized on a straight-line basis over their respective estimated useful lives. The goodwill recognized resulted from such factors as an assembled workforce and management’s industry know-how. During the year ended September 30, 2022, we recorded a non-cash impairment charge of $531,412 related to goodwill, resulting in a $0 goodwill balance as of September 30, 2022. During the year ended September 30, 2022, we also recorded non-cash impairment charges for the Dripkit tradename and acquired customer relationships of $80,555 and $63,167, respectively. See Note 4—Intangible Assets for additional information on our tradename intangible assets, which were the only intangible assets remaining as of December 31, 2022.

The consolidated statement of operations for the three months ended December 31, 2022 includes revenues of $42,159, net loss of $101,806, and amortization expense of $7,500, contributed by Dripkit.

Unaudited Pro forma Financial Information

The following unaudited proforma financial information presents the combined results of operations of the Company and gives effect to the Dripkit Acquisition for the three months ended December 31, 2021, as if the Acquisition had occurred on October 1, 2021 instead of on February 25, 2022.

The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the Acquisition had been completed on October 1, 2021, nor does it purport to project the results of operations of the combined company in future periods. The pro forma financial information does not give effect to any anticipated integration costs related to the acquired company.

17

The following is the proforma financial information for the Company and Dripkit:

SCHEDULE OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

Description 2021 
  

For the three
months ended

December 31,

 
Description 2021 
Revenues $1,039,258 
Net loss $2,840,383 

For purposes of the pro forma disclosures above, the primary adjustments for the three months ended December 31, 2020, respectively,2021 include the Company had saleselimination of transaction costs of $016,939 and $15,998 of materials to NLA..

 

4.INTANGIBLE ASSETS

As of December 31, 2022, the Company’s intangible assets consisted of the following:

SCHEDULE OF INTANGIBLE ASSETS

  Amortization  December 31, 2022 
  Period
(Years)		  Gross  Accumulated
Amortization		  Net 
Tradenames  5  $140,000  $7,500  $132,500 

Amortization expense of intangible assets was $7,500 for the three months ended December 31, 2022.

5. ISSUANCE OF EQUITY SECURITIES

 

Restricted Stock Awards

On March 17, 2022, pursuant to the Company’s non-employee director compensation policy, the Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”) granted 674 restricted shares (the “Restricted Shares”) of the Company’s common stock to each of the Company’s five independent directors pursuant to the NuZee, Inc. 2013 Stock Incentive Plan, totaling 3,370 Restricted Shares. The Restricted Shares are scheduled to vest in full on the one-year anniversary of the grant date, subject to each independent director’s continued service as a director of the Company. The Company recognized common stock compensation expense of $62,839 for the three months ended December 31, 2022, related to these Restricted Shares. The Restricted Shares are valued using the closing stock price on the grant date and the Company is expensing these stock option awards on a straight-line basis over the requisite service period.

Exercise of Warrants

In the three months ended December 31, 2021, wethe Company issued 384,44710,984 shares of common stock related to exercisesthe exercise of warrants, including 380,44710,870 shares of common stock issued upon exercise of 380,44710,870 Series A Warrantswarrants (the “Series A Warrants”) and 4,000114 shares of common stock issued upon exercise of 8,000228 Series B Warrants.warrants (the “Series B Warrants” and, collectively with the Series A Warrants, the “2021 Warrants”) that were issued by us in March 2021 in an underwritten registered public offering. In connection with such exercises, in the three months ended December 31, 2021, we received aggregate net proceeds of $1,721,018.

ATM Offering

On December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC, as agent (the “Agent”), pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3 (the “ATM Offering”). Pursuant to the Equity Distribution Agreement, we will pay the Agent a commission rate, in cash, equal to 3.0% of the aggregate gross proceeds from each sale of shares of our common stock under the Equity Distribution Agreement. The offer and sale of shares of our common stock will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-248531) initially filed by us with the SEC on September 1, 2020, and declared effective by the SEC on October 2, 2020, under the Securities Act. We are not obligated to make any sales of shares of our common stock under the Equity Distribution Agreement. As of December 31, 2021, no sales had occurred under the Equity Distribution Agreement. For information regarding sales made under the Equity Distribution Agreement following the quarter ended December 31, 2021, see Note 6—Subsequent Events.

 

5.6. STOCK OPTIONS AND WARRANTS

Options

 

During the three months ended December 31, 2021,2022, the Company granted no new stock options, did not issue any shares upon the exercise of outstanding stock options, and had 192,6663,732 of stock options that were forfeited because of the termination of employment and issued no shares upon the exercise of outstanding286 stock options.options that expired.

 

1418

 

The following table summarizes stock option activity for the three months ended December 31, 2021:2022:

 

SUMMARY OF STOCK OPTION ACTIVITY

  Number of Shares  Weighted Average
Exercise Price		  Weighted Average Remaining Contractual Life (years)  Aggregate Intrinsic Value 
Outstanding at September 30, 2021  4,511,691  $4.73   8.4  $452,206 
Granted  -   -         
Exercised  -   -         
Expired  -   -         
Forfeited  (192,666)  14.11         
Outstanding at December 31, 2021  4,319,025  $4.31   8.2  $4,320,497 
Exercisable at December 31, 2021  1,704,638  $4.82   7.1  $1,953,581 

  

Number

of

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life (years)

  

Aggregate Intrinsic

Value

 
Outstanding at October 1, 2022  113,650  $149.88      7.4  $1,207 
Expired  (286)  109.55         
Forfeited  (3,732)  114.37   -      
Outstanding at December 31, 2022  109,632  $151.19   7.2  $- 
Exercisable at December 31, 2022  66,761  $171.55   6.4  $- 

 

The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expense of $197,108 and $1,124,187for the three months ended December 31, 2021.2022 and December 31, 2021, respectively. Unamortized option expense as of December 31, 20212022, for all options outstanding amounted to $3,603,243655,073. These costs are expected to be recognized over a weighted average period of 1.3 1.09years. The Company recognized stock option expense of $4,507,298 for the three months ended December 31, 2020.

 

A summary of the status of the Company’s nonvested options as of December 31, 20212022, is presented below:

 

SUMMARY OF UNVESTED SHARES

Nonvested options

 

 Number of
Nonvested Options		  Weighted Average
Grant Date Fair Value		  

Number of

Nonvested

Options

  

Weighted

Average

Grant Date

Fair Value

 
Nonvested options at September 30, 2021  2,870,799  $5.02 
Nonvested options at October 1, 2022  50,009  $154.24 
Granted  -   -   -   - 
Forfeited  (26,000)  2.60   (3,732)  114.90 
Vested  (230,412)  6.09   (3,406)  368.19 
Nonvested options at December 31, 2021  2,614,387  $4.95 
Nonvested options at December 31, 2022  42,871  $140.67 

Warrants

 

On June 23, 2020, as part of our agreement with Benchmark

During the three months ended December 31, 2022, the Company LLC, the underwriter of the Company’s June 2020 registered public offeringgranted no new warrants to purchase shares of common stock we issued 40,250 warrants to purchase our common stock at an exercise price of $9.00 a share. These warrants are exercisable on December 23, 2020and expire on June 18, 2025.

On March 19, 2021, we entered into an underwriting agreement in connection with our registered public offering (the “Offering”) of (i) 2,777,777 units (the “Units”), at a price to the public of $4.50 per Unit, with each Unit consisting of (a) one share of our common stock, (b) one Series A Warrant, and (c) one Series B Warrant (together with the Series A Warrants, the “Warrants”), and (ii) 416,666 Series A Warrants and 416,666 Series B Warrants, each pursuant to the underwriter’s full exercise of their overallotment option with respect to such warrants.

Each Series A Warrant entitles the registered holder to purchase one share of our common stock at an exercise price of $4.50 per share. Each Series B Warrant entitles the registered holder thereof to purchase one-half of a share of our common stock at an exercise price of $5.85 per whole share. These warrants have a term of 5 years.

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The Series A and Series B Warrant holders are obligated to pay the exercise price in cash upon exercise of the Warrants unless we fail to maintain a current prospectus relating to the common stock issuabledid not issue any shares upon the exercise of the Warrants (in which case, the Warrants may only be exercised via a “cashless” exercise provision).outstanding warrants to purchase shares of common stock.

The following table summarizes warrant activity for the three months ended December 31, 2021:2022:

 

SCHEDULE OF WARRANT ACTIVITY

 Number of Shares Issuable Upon Exercise of Warrants  Weighted Average Exercise Price  Weighted Average Remaining Contractual Life (years)   Aggregate Intrinsic Value  

Number

of Shares

Issuable Upon

Exercise of

Warrants

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life (years)

  

Aggregate

Intrinsic

Value

 
Outstanding at September 30, 2021  4,831,915  $4.98   4.5  $- 
Outstanding at September 30, 2022  152,398  $158.24       3.7  $- 
Issued  -   -           -   -                 
Exercised  (384,447)  4.51                         -   -         
Expired  -   -           -   -         
Outstanding at December 31, 2021  4,447,468  $5.02   4.2   - 
Exercisable at December 31, 2021  4,447,468  $5.02   4.2  $- 
Outstanding at December 31, 2022  152,398  $158.24   3.4   - 
Exercisable at December 31, 2022  152,398  $158.24   3.4  $- 

In the three months ended December 31, 2021, we issued 384,4477. SUBSEQUENT EVENTS shares of common stock related to exercises of warrants, including 380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants and 4,000 shares of common stock issued upon exercise of 8,000 Series B Warrants. In connection with such exercises, in the three months ended December 31, 2021, we received aggregate net proceeds of $1,721,018.

 

6. SUBSEQUENT EVENTSIssuance of Common Stock to a Professional Services Provider

 

ATM Offering—Sales under Equity Distribution AgreementOn January 6, 2023, the Company issued 6,000 shares of common stock to a third-party unaffiliated professional services provider in exchange for certain consulting advice to be provided to the Company.

 

During the period from January 1, 2022 through February 4, 2022, we issued and sold 4,860 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $12,542. In connection with such sales, we paid compensation to the Agent in the amount of $388. See Note 4—Issuance of Equity Securities for additional information related to the Equity Distribution Agreement and the ATM Offering.

Agreement with Farmer Bros. Co.

As previously disclosed in 2020, we entered into an Equipment Bailment and Contract Manufacturing Agreement (the “FBC Agreement”) with Farmer Bros. Co. (“FBC”), pursuant to which FBC agreed to provide us with access to manufacturing capacity and was obligated to manufacture finished products for us. On January 27, 2022, we and FBC mutually agreed to terminate the FBC Agreement, effective immediately. Prior to its termination, the Company had placed one machine with FBC under the FBC Agreement. The Company plans to pick up the machine within 60 days of the termination date and redeploy the machine to one of its two manufacturing locations in the United States.

Director Compensation Policy

On January 11, 2022, the Company’s Board of Directors (the “Board”) adopted and approved a new director compensation policy pursuant to which the Company will provide the following compensation to its non-employee Board members: (i) annual cash compensation of $50,000, effective as of October 1, 2021 and payable quarterly in advance; (ii) payment to each Board member of reasonable out-of-pocket expenses for travel costs to attend Board meetings; (iii) beginning with the Company’s 2022 Annual Meeting of Stockholders, pursuant to the NuZee, Inc. 2019 Stock Incentive Plan, annual grants of restricted shares of common stock with an aggregate grant date fair value of $50,000 to each Board member upon such Board member’s election or re-election, as applicable, to the Board at each annual meeting of stockholders, and (iv) annual payments to the Audit Committee Chair, Compensation Committee Chair and Nominating and Corporate Governance Committee Chair of $10,000, $7,500 and $5,000, respectively.

Amended Non-Binding Letter of Intent for Potential Asset Acquisition; Bridge Loan

As previously disclosed in the Company’s Current Report on Form 8-K filed on December 29, 2021, the Company announced it entered into a non-binding letter of intent (the “Letter of Intent”) affording the Company an exclusivity period lasting until January 31, 2022, to negotiate a definitive agreement (the “Definitive Agreement”) to acquire substantially all the assets (the “Potential Transaction”) of an unaffiliated, privately held company in the coffee industry (the “Third Party”). On February 3, 2022, the Company and the Third Party amended the Letter of Intent to extend the exclusivity period to March 1, 2022 (the “Extension”). In consideration of the Extension, the Company agreed to loan the Third Party up to $35,000 in the aggregate in two tranches, as follows: (i) $13,000 was loaned to the Third Party on February 3, 2022 and is intended to provide the Third Party with operational financing while the parties continue negotiations to enter into a Definitive Agreement; and (ii) $22,000 is expected to be loaned to the Third Party, if at all, in the event that a Definitive Agreement is entered into between the parties, which is expected to be an advance on the purchase price set forth in the Definitive Agreement and is intended to provide the Third Party with operational financing as the parties work to close the Potential Transaction following signing of the Definitive Agreement. Upon closing of the Potential Transaction (if any), the first tranche of $13,000 is expected to be designated as an assumed liability under the Definitive Agreement for the benefit of the Third Party and the second tranche of $22,000 is expected to be offset and reduce the purchase price to be paid by the Company. Except in certain limited circumstances, the amounts loaned are expected to become due and payable on the later of the closing of the Potential Transaction (if any) and March 31, 2022. The amounts loaned will accrue interest at the rate of 1% per annum, subject to increase upon certain events of default.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a specialty coffee company and, we believe, a leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of coffee brew bags, which is also referred to as tea-bag style coffee. In addition to our single serve pour over and coffee brew bag coffee products, we have recently expanded our product portfolio to offer a third type of single serve coffee format, DRIPKIT pour over products, as a result of our acquisition of substantially all of the assets of Dripkit, Inc. (“Dripkit”). Our DRIPKIT pour over format features a large-size single serve pour over pack that sits on top of the cup and delivers in our view a barista-quality coffee experience to customers in the United States, Canada, and Mexico. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.

 

We believe we are the only commercial-scale producer within the North American market that has the dual capacity to pack both single serve pour over coffee and tea-bag style coffee within the North American market.brew bag coffee. We intend to leverage our position to bebecome the commercial coffee manufacturer of choice and aim to become the preeminent leader for majorcoffee companies seeking to enter into and grow within the single serve pour over and tea-bag style coffee marketsmarket in North America. We target existing high-margin companies and are paid per-package based on the number of single serve coffee products produced by us. Accordingly, we consider our business model to be a form of tolling arrangement, as we receive a fee for almost every single serve coffee product our co-packing customers sell in the North American and Korean markets. While we financially benefit from the success of our co-packing customers through the sales of their respective single serve pour over and tea-bag style coffee products, we believe we are also able to avoid the risks associated with owning and managing the product and its related inventory.

 

We have also developed and sell NuZee branded single serve coffee products, including our flagship Coffee Blenders line of both single serve pour over coffee and tea-bag style coffee brew bag coffee products, which we believe offers consumers some of the best coffee available in a single serve application in the world. We have recently expanded our Coffee Blenders offerings to include a new Coldpresso latte product line that is available to purchase in Korea and online. We offer DRIPKIT pour over packs direct to consumers through our website, wholesale business-to-business to hospitality customers, and co-pack for coffee roasters.

 

We may also consider co-packaging other products that are complementary to our current product offerings and provide us with a deeper access to our customers. In addition, we are continually exploring potential strategic partnerships, co-ventures, and mergers, acquisitions, or other transactions with existing and future business partners to generate additional business, drive growth, reduce manufacturing costs, expand our product portfolio, enter into new markets, and further penetrate the markets in which we currently operate. Our goal is to continue to expand our product portfolio to raise our visibility, consumer awareness and brand profile.

 

Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time, we have developed expertise in

20

2022 Reverse Stock Split

On December 9, 2022, our stockholders approved a proposal granting the operationboard of directors of the Company (the “Board”) discretionary authority to file an amendment (the “Certificate of Amendment”) to our Articles of Incorporation, as amended (the “Articles”), which amends the Articles to add a Section 1A to effect a reverse stock split of our sophisticated packing equipment andcommon stock, at any ratio from 1-for-10 to 1-for-50 at the related productionBoard’s discretion. On December 21, 2022, the Board approved a 1-for-35 reverse stock split of our single serve pour over coffee products at bothcommon stock (the “Reverse Stock Split”). The Certificate of Amendment was filed by the Company on December 28, 2022 and became effective upon acceptance of the Company’s filing of the Certificate of Amendment with the Secretary of State of Nevada. Accordingly, each holder of our Vista, California facility and at our production operations in Seoul, Korea. In addition, our manufacturing facility and corporate headquarters in Plano, Texas is now operational. We have also expanded our co-packing expertisecommon stock received one share of common stock for every 35 shares such stockholder held immediately prior to tea bag style coffee products, which we believe are gaining traction in the United States.effectiveness of the Reverse Stock Split.

 

Impact of the COVID-19 Pandemic

 

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies, financial markets and financial markets. In the three months ended December 31, 2021, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or single serve coffee products, and we also believe that potential sales of our single serve coffee products to new or potential customers in the hospitality industry were adversely impacted. We have also experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. In addition, we incurred lost production time due to employee absences.supply chains. We do not believe, however, that these delays and disruptions had a significant effect on our business or results of operations to date, and in some cases, we have been able to mitigate theseany adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

 

17

Geographic Concentration

Geographic Concentration

Our operations are primarily split between two geographic areas: North America and Asia.South Korea.

 

For the three months ended December 31, 2021,2022, net revenues attributable to our operations in North America totaled $817,341$665,741 compared to $406,488$817,341 of net revenues attributable to our operations in North America for the three months ended December 31, 2020.2021. Additionally, as of December 31, 2021, $462,3892022, $303,835 of our property and equipment, net was attributable to our North American operations, compared to $517,966$378,546 attributable to our North American operations as of September 30, 2021.2022.

 

For the three months ended December 31, 2021,2022, net revenues attributable to our operations in AsiaSouth Korea totaled $201,912$470,607 compared to $111,499$201,912 of net revenues attributable to our operations in AsiaSouth Korea during the three months ended December 31, 2020.2021. Additionally, as of December 31, 2021, $177,9332022, $170,033 of our property and equipment, net was attributable to our AsianKorean operations, compared to $156,058$144,865 attributable to our AsianKorean operations as of September 30, 2021.2022.

 

Results of Operations

On February 25, 2022, we acquired substantially all of the assets and certain specified liabilities of Dripkit (the “Acquisition”). Our results of operations for the three months ended December 31, 2022 includes the operations of Dripkit. The Acquisition of Dripkit did not contribute to the periods prior to its acquisition in our financial statements, which therefore impacts comparisons to 2021 for our results of operations in the discussion that follows.

21

 

Comparison of three months ended December 31, 20212022 and 2020:2021:

Revenue

 

  Three months ended
December 31,		  Change 
  2021  2020  Dollars  % 
Revenue $1,019,253  $517,987  $501,266   97%
  Three months ended
December 31,		  Change 
  2022  2021  Dollars  % 
Revenue $1,136,348  $1,019,253  $117,095   11%

For the three months ended December 31, 2021,2022, our revenue increased by $501,266,$117,095, or approximately 97%11%, compared with the three months ended December 31, 2020.2021. This increase was primarily related to increased revenue in South Korea, driven by a new co-packing revenue to existingarrangement with a new customer in South Korea and new customers. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunitiesfrom an existing significant customer in South Korea in the three months ended December 31, 20212022.

 

Cost of sales and gross margin

 

 Three months ended    Three months ended   
 December 31, Change  December 31, Change 
 2021 2020 Dollars %  2022 2021 Dollars % 
Cost of sales $1,003,882  $516,284  $487,598   94% $1,060,816  $1,003,882  $56,934   6%
Gross profit  15,371  $1,703  $13,668   803%  75,532  $15,371  $60,161   391%
Gross profit %  2%  0%          7%  2%        

 

For the three months ended December 31, 2021,2022, we generated a total gross profit of $15,371,$75,532 from sales of our products and co-packing services, compared to a total gross profit of $1,703$15,371 for the three months ended December 31, 2020.2021. The gross margin rate was 7% for the three months ended December 31, 2022, and 2% for the three months ended December 31, 2021, and 0% for the three months ended December 30, 2020.2021. This increase in gross profit was driven primarily by greater scaledecreased material and labor costs. As discussed above, sales attributable to our operations in our manufacturing operations dueSouth Korea for the period ended December 31, 2022 increased as compared to increased production during the current quarter versus the same period in 2021 and, as a result, in the prior year, combined with increased sales offset by increased materialsthree months ended December 31, 2022 we utilized more material and labor costs.generated in South Korea where the costs for those services are lower than in North America.

 

18

Operating Expenses

 

  Three months ended       
  December 31,  Change 
  2021  2020  Dollars  % 
Operating Expenses $2,852,793  $5,903,826  $(3,051,033)  (52)%
  Three months ended       
  December 31,  Change 
  2022  2021  Dollars  % 
Operating Expenses $2,277,200  $2,811,189  $(533,989)  (19)%

 

For the three months ended December 31, 2021,2022, the Company’s operating expenses totaled $2,852,793$2,277,200 compared to $5,903,826$2,811,189 for the three months ended December 31, 2020,2021, representing a 52%19% decrease. This decrease is primarily attributable to a decrease of $864,240 in stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels and marketing activities.expense.

 

Net Loss

 

  Three months ended    
  December 31,  Change 
  2021  2020  Dollars  % 
Net Loss $2,804,203  $5,896,072  $(3,091,869)  (52)%
  Three months ended    
  December 31,  Change 
  2022  2021  Dollars  % 
Net Loss $2,183,206  $2,804,203  $(620,997)  (22)%

 

For the three months ended December 31, 2021,2022, we generated a net loss of $2,183,206 compared to a net loss of $2,804,203 versus $5,896,072 for the three months ended December 31, 2020.2021. This decrease in net loss is primarily attributable to increased revenues and lower stockstock-based compensation expense offset by an increase in operating expenses associated with greater staffing levels and marketing activities.as discussed above.

22

 

Liquidity and Capital Resources

Since our inception in 2011, we have incurred significant losses, and as of December 31, 2021,2022, we had an accumulated deficit of approximately $55.6$67 million. We have not yet achieved profitability and anticipate that we will continue to incur significant sales and marketing expenses prior to recording sufficient revenue from our operations to offset these expenses. In the United States, we expect to incur additional losses because of the costs associated with operating as an exchange-listed public company. We are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

To date, we have funded our operations primarily with proceeds from registered public offerings and private placements of shares of our common stock.stock and other equity securities. Our principal use of cash is to fund our operations, which includes the commercialization of our single serve coffee products, the continuation of efforts to improve our products, administrative support of our operations and other working capital requirements.

 

As of December 31, 2021,2022, we had a cash balance of $10,967,104. We$6,491,819. Considering our current cash resources and our current and expected levels of operating expenses, we believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least 12nine months from February 4, 2022.13, 2023 but expect to need additional capital to fund our planned operations beyond that. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and aA reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.

 

On December 28, 2021, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC (“Maxim”), as agent (the “Agent”), pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3 (the “ATM Offering”). During the period from January 1, 2022 through February 4, 2022, we issued and sold 4,860 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $12,542.

19

In the future, we may seek to raise additional capital through sales of our common stock under the Equity Distribution Agreement. We also expect to receive additional funds upon the exercise for cash of outstanding warrants, if and when exercised for cash at the election of the warrant holders, including the Series A warrants (the “Series A Warrants”) and Series B warrants (the “Series B Warrants” and, collectively with the Series A Warrants, the “Warrants”“2021 Warrants”) that were soldissued by us in March 2021 in an underwritten registered public offering. For additional information regardingoffering and the 2022 warrants (the “2022 Warrants”) that were issued by us in an April 2022 offering pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act. The 2021 Warrant holders are obligated to pay the exercise price ($157.46 in the case of the Series A Warrants including net proceeds receivedand $204.69 in the case of the Series B Warrants) in cash upon exercise of the 2021 Warrants unless we fail to maintain a current prospectus relating to the common stock issuable upon the exercise of the 2021 Warrants (in which case, the 2021 Warrants may only be exercised via a “cashless” exercise provision). Each 2022 Warrant entitles the holder to purchase one share of our common stock at an exercise price of $69.98. The 2022 Warrant holders may exercise their 2022 Warrants on a “cashless” basis pursuant to a formula set forth in the quarter ended December 31, 2021, see “—Summaryform of Cash Flows—Financing Activities” and Note 5—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.2022 Warrant.

 

In the long-term, we may needWe intend to seek to raise additional fundscapital, including through public or private equity offerings, to support our operating activities for the next twelve months and beyond, and such funding may not be available to us on acceptable terms, or at all. OurThe timing and amount of funds that we will need to raise funds will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our single serve coffee products to fund our business operations the timing and amount of proceeds from sales of our common stock under the Equity Distribution Agreement, and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. Until we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.

 

While we believe our plans to raise additional funds will alleviate the conditions that raise substantial doubt about our ability to continue as a going concern, these plans are not entirely within our control and cannot be assessed as being probable of occurring at this time. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.

If we are unsuccessful in our efforts to raise additional capital, based on our current and expected levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months from February 13, 2023. These conditions raise substantial doubt about our ability to continue as a going concern.

23

Contractual Obligations

Our significant contractual cash requirements as of December 31, 20212022, primarily include payments for operating and finance lease liabilities and principal and interest on loans. Additionally, we may incur purchase obligations in the ordinary course of business that are enforceable and legally binding and enter into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. As of December 31, 2021,2022, we had payments for lease and loan obligations of approximately $668,933,$636,040, of which $265,437$429,448 are payable within 12 months as of December 31, 2021.2022. We had no purchase obligations as of December 31, 2021.2022.

Summary of Cash Flows

 

 Three Months
Ended		  Three Months Ended 
 December 31,  December 31, 
 2021 2020  2022 2021 
Cash used in operating activities $(1,579,731) $(1,699,073) $(1,913,446) $(1,579,731)
Cash used in investing activities $(3,009) $(58,990) $(16,514) $(3,009)
Cash provided by financing activities $1,701,202  $2,679,420 
Cash provided by (used in) financing activities $(8,857) $1,701,202 
Effect of foreign exchange on cash $32,688  $1,656  $115,583  $32,688 
Net increase in cash $151,150  $923,013 
Net change in cash $(1,823,234) $151,150 

Operating Activities

 

We used $1,579,731$1,913,446 and $1,699,073$1,579,731 of cash in operating activities during the three months ended December 31, 20212022, and 2020,2021, respectively, principally to fund our operating losses.operations.

 

Investing Activities

We used $3,009$16,514 and $58,990$3,009 of cash in investing activities during the three months ended December 31, 20212022 and 2020,2021, respectively. Cash used in both periods was to fundfor the purchase of equipment.

 

Financing Activities

Historically, we have funded our operations primarily through the issuance of our common stock.

 

Cash used in financing activities of $8,857 for the three months ended December 31, 2022 was primarily related to repayments on loans and an equipment lease, and cash provided by financing activities of $1,701,202 and $2,679,420 for the three months ended December 31, 2021 and 2020, respectively, iswas primarily related to proceeds received upon the exercise of outstanding 2021 Warrants by the 2021 Warrant holders, in the three months ended December 31, 2021, as further described below, and issuancein “Note 5—Issuance of equity securities inEquity Securities” to the three months ended December 31, 2020.unaudited Consolidated Financial Statements.

 

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In the three months ended December 31, 2021, we issued 384,447 shares of common stock related to exercises of warrants, including 380,447 shares of common stock issued upon exercise of 380,447 Series A Warrants and 4,000 shares of common stock issued upon exercise of 8,000 Series B Warrants. In connection with such exercises, in the three months ended December 31, 2021, we received aggregate net proceeds of $1,721,018. For additional information regarding the Series A Warrants and Series B Warrants, see Note 5—Stock Options and Warrants to the Unaudited Consolidated Financial Statements.

ATM Offering

On December 28, 2021, we entered into the Equity Distribution Agreement with Maxim, as Agent, pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3. The offer and sale of shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus (File No. 333-248531) initially filed by us with the SEC on September 1, 2020, and declared effective by the SEC on October 2, 2020, under the Securities Act. We are not obligated to make any sales of shares of our common stock under the Equity Distribution Agreement. As of December 31, 2021, no sales had occurred under the Equity Distribution Agreement. During the period from January 1, 2022 through February 4, 2022, we issued and sold 4,860 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $12,542.

Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Unaudited Consolidated Financial Statements for a summary of our accounting policies.

 

There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended December 31, 2021,2022, as compared to those disclosed in “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates”Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021,2022, filed with the SEC on December 22, 2021.23, 2022.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is collected and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Interim Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company. In designing and evaluating our disclosure controls and procedures, management recognizes that no matter how well conceived and operated, disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

 

Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

Item 1. Legal Proceedings

 

OnNext Vision Litigation

As previously disclosed, on November 23, 2021, Next Vision, Inc. (the “Consultant”) filed a complaint against the Company in the Superior Court of California, County of San Diego Central Division (Case No. 37-2021-00049557-CU-BC-CTL) (the “Complaint”“Next Vision Complaint”). The Next Vision Complaint alleges that the Company’s delay in issuing shares of the Company’s common stock (the “Shares”) to the Consultant after receiving due notice from the Consultant of its intent to exercise vested stock options to acquire 70,000 Shares, as initially granted in 2018 (or, as adjusted to account for the Company’s reverse stock splitsplits effected by the Company on each of November 12, 2019 and December 28, 2022, vested stock options to acquire 23,334667 Shares) (the “Options”), which had previously been issued to the Consultant as compensation for consulting services provided in 2018, breached express and implied contractual obligations to the Consultant and resulted in the Company reporting an overstated amount of income on the IRS Form 1099-B that was issued to the Consultant for U.S. federal tax purposes. In addition, the Next Vision Complaint alleges that the 23,334667 Shares issued to the Consultant upon exercise of the Options improperly contained a six-month restriction on resale and that such restriction prevented the Consultant from selling the Shares at the desired time. The Next Vision Complaint seeks equitable relief requiring the Company to issue an IRS Form 1099-NEC to reflect the correct amount of compensation. The Complaint also seeks compensatory damages, including to recover for alleged lost profits due to the alleged improper six-month restriction on resale for the Shares, as well as punitive damages, costs of suit, attorney’s fees and interest.

On January 20, 2022, the Company filed its general denial and answer in which it raised affirmative defenses and disputed the claims contained in the Next Vision Complaint. On November 29, 2022, the parties engaged in Court-ordered mediation but did not resolve the matter. The Court has set a trial date for August 11, 2023.

 

We believe the allegations set forth in the Next Vision Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.

Steeped, Inc. Litigation

As previously disclosed, on June 27, 2019, Steeped, Inc. d/b/a Steeped Coffee (the “Plaintiff”) filed a complaint (the “First Steeped Complaint”) against the Company in the United States District Court for the Northern District of California (the “District Court”), alleging that the Company’s promotion of certain coffee products and services during a trade show in 2019 constituted an infringement upon the Plaintiff’s registered trademark. In May 2021, the Company entered into a settlement agreement with the Plaintiff, pursuant to which the Company denied the allegations in the First Steeped Complaint, denied any liability arising therefrom, and agreed to pay $35,000 to resolve all claims asserted by the Plaintiff (the “Settlement Agreement”). As a result, a Joint Stipulation and Order for Dismissal was filed with the District Court on May 21, 2021, and the Order of the Court dismissing the case was entered on the same day. On January 27, 2023, the Plaintiff filed a new complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “New Steeped Complaint”). The New Steeped Complaint alleges causes of action for breach of contract and intentional interference with contractual relations related to the Company’s alleged breach of the Settlement Agreement. Plaintiff seeks a trial by jury and relief in the form of a permanent injunction for use of “Steep Coffee” or any confusingly similar variant of “STEEPED COFFEE”; the impoundment and destruction of allegedly infringing goods; a final judgment for all profits derived from the Company’s allegedly unlawful conduct, actual damages, treble damages for alleged willful infringement; damages to the Plaintiff’s reputation and goodwill; damages due to the Company’s alleged destabilization of the market and price erosion; and reasonable attorneys’ fees and costs. The Company has not yet been served or filed a responsive pleading. The Company believes the claims are defensible, and that the damages do not align with the asserted causes of action or are otherwise not sustainable. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in any defense or counterclaim.

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Curtin Litigation

On January 6, 2023, a former employee of the Company, Rosaline Curtin (“Ms. Curtin”), filed a complaint against the Company and another former employee of the Company, Jose Ramirez (“Mr. Ramirez”), in the Superior Court of California, County of San Diego (Case No. 37-2023-00000841-CU-WT-NC) (the “Curtin Complaint”). The Curtin Complaint alleges that Ms. Curtin was subject to harassment by her supervisor, Mr. Ramirez, and gender discrimination throughout her employment, that she reported this discrimination and harassment to the Company, and that the Company retaliated against her and wrongfully terminated her for whistleblowing and failed to prevent discrimination, harassment, and retaliation. The Curtin Complaint seeks compensatory damages, including loss of past, present and future earnings, and benefits, as well as punitive damages, penalties, attorney’s fees and costs and interest. The Company’s deadline to respond or remove the case to federal court is February 23, 2023. We believe the allegations set forth in the Curtin Complaint are without merit and intend to defend vigorously against the allegations. However, the Company is not able to predict the outcome, and there is no assurance that the Company will be successful in its defense.

 

From time to time, we may be subject to other legal proceedings and claims in the ordinary course of business. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

Item 1A. Risk Factors

Except as set forth below, thereOur operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on December 23, 2022, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K filed with the SEC on December 22, 2021.23, 2022.

A significant portion of our total outstanding shares of common stock are eligible to be sold into the market in the near future, including pursuant to Rule 144, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We have also registered all shares of common stock that are reserved for issuance under the NuZee, Inc. 2019 Stock Incentive Plan and all shares of common stock currently reserved for issuance under the NuZee, Inc. 2013 Stock Incentive Plan. As a result, these shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in our filings with the SEC. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop. We believe that a significant portion of our total outstanding shares of common stock may be sold in the public market without restriction by non-affiliates pursuant to Rule 144.

We have also entered into the Equity Distribution Agreement with Maxim, as Agent, pursuant to which we may offer and sell, from time to time, shares of our common stock through the Agent in “at-the-market-offerings”, as defined in Rule 415 under the Securities Act, having an aggregate offering price of up to $20,000,000, subject to any applicable limits when using Form S-3. Sales of a substantial number of shares of common stock under the Equity Distribution Agreement, or the perception that those sales may occur, could cause the market price of our common stock to decline.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

 

EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of the Company, dated July 15, 2011 (incorporated by reference to Exhibit 3.1 to the Company’s Registration StatementAnnual Report on Form S-110-K filed on September 6, 2011,December 23, 2022, SEC File Number 333-176684)001-39338)
3.2 Certificate of Amendment to Articles of Incorporation of the Company, dated May 6, 2013 (incorporated by reference to Exhibit 3.01(b) to the Company’s Current Report on Form 8-K filed on April 25, 2013, SEC File Number 333-176684)
3.3 Certificate of Amendment to Articles of Incorporation of the Company, dated October 28, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 28, 2019, SEC File Number 000-55157)
3.4 Second Amended and Restated BylawsCertificate of Amendment to Articles of Incorporation of the Company, dated April 22, 2016December 28, 2022 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 28, 2016, SEC File Number 000-55157)
10.1Equity Distribution Agreement by and between the Company and Maxim Group LLC dated as of December 28, 2021 (incorporated by reference to Exhibit 1.13.1 to the Company’s Current Report on Form 8-K filed on December 29, 2021,28, 2022 SEC File Number 001-39338)
10.2*†3.5 Third Amended and Restated Bylaws of the Company, effective March 17, 2022 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form of Stock Option Agreement under NuZee, Inc. 2013 Stock Incentive Plan (Time-Based)8-K filed on March 23, 2022, SEC File Number 001-39338)
10.3*†10.1 FormSecond Amended and Restated Employment Agreement, dated as of Stock Option Agreement underNovember 4, 2022, by and between NuZee, Inc. 2013 Stock Incentive Plan (Performance-Based)
10.4*†and Shana Bowman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form of Restricted Stock Award Agreement under the NuZee, Inc. 2013 Stock Incentive Plan8-K filed on November 4, 2022, SEC File Number 001-39338)
31.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS Inline XBRL Instance Document***
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

† Indicates management contract or compensatory plan.

* Filed herewith.

** Furnished herewith.

*** The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Date:February 11, 202213, 2023 NUZEE, INC.
     
   By:/s/ Masateru Higashida
    Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director
     
   By:/s/ Patrick ShearerShana Bowman
    Patrick Shearer,Shana Bowman, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

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