NuZee (IMG) 10-Q 2024 Q1 Quarterly report

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, 2023

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)

2865 Scott St. Suite 107, Vista, California 92081

(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 April 26, 2024, the registrant had 1,298,414 shares of common stock outstanding.

Table of Contents

	Page
PART I
Item 1. Financial Statements	4
Consolidated Balance Sheets (unaudited)	4
Consolidated Statements of Operations (unaudited)	5
Consolidated Statements of Comprehensive Income (Loss) (unaudited)	6
Consolidated Statements of Stockholders’ Equity (unaudited)	7
Consolidated Statements of Cash Flows (unaudited)	8
Notes to Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
PART II	26
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	28
SIGNATURES	29

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, 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, provide our co-packing services, and to continue as a going concern;

● our expectation that our existing capital resources will be sufficient to fund our operations for at least the next three 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;

● 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 partners, as well as our manufacturing partners’ ability to successfully facilitate distribution efforts;

● 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;

● 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;

● our ability to develop and maintain our corporate infrastructure, including our internal control over financial reporting;

● the outcome of pending, threatened or future litigation;

● our financial performance; and

● our use of the net proceeds from our recent offering.

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 January 16, 2024, 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.

3

Item 1. Financial Statements

NuZee, Inc.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	December 31, 2023			September 30, 2023
ASSETS
Current assets:
Cash	$	432,154		$	1,373,101
Accounts receivable, net		1,129,500			586,878
Inventories, net		1,253,646			998,070
Prepaid expenses and other current assets		389,614			418,200
Total current assets		3,204,914			3,376,249
Property and equipment, net		584,119			309,555
Other assets:
Right-of-use asset - operating lease		440,711			403,258
Investment in unconsolidated affiliate		160,208			162,259
Intangible assets, net		102,500			110,000
Other assets		80,374			79,677
Total other assets		783,793			755,194
Total assets	$	4,572,826		$	4,440,998
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,534,408		$	1,903,923
Current portion of long-term loan payable		2,732			4,753
Current portion of lease liability - operating lease		345,045			216,128
Current portion of lease liability - finance lease		18,251			26,048
Deferred income		305,432			379,795
Other current liabilities		30,478			25,756
Total current liabilities		3,236,346			2,556,403
Non-current liabilities:
Lease liability - operating lease, net of current portion		34,831			162,301
Lease liability - finance lease, net of current portion		-			-
Loan payable - long term, net of current portion		-			-
Other noncurrent liabilities		315,210			47,937
Total Non-current liabilities		350,041			210,238
Total liabilities	$	3,586,387		$	2,766,641
Stockholders’ equity:
Common stock; 200,000,000 shares authorized, $0.00001 par value; 1,284,194 and 748,644 shares issued and outstanding as of December 31, 2023, and September 30, 2023, respectively		13			8
Additional paid in capital		76,344,123			74,925,843
Accumulated deficit		(75,520,598	)		(73,371,987	)
Accumulated other comprehensive income		162,901			120,493
Total stockholders’ equity		986,439			1,674,357
Total liabilities and stockholders’ equity	$	4,572,826		$	4,440,998

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, 2023			Three Months Ended December 31, 2022
Revenues, net	$	1,353,986		$	1,136,348
Cost of sales		1,178,707			1,060,816
Gross profit		175,279			75,532
Operating expenses		2,318,234			2,277,200
Loss from operations		(2,142,955	)		(2,201,668	)
Loss from equity method investment		(2,051	)		(1,823	)
Other income		47,011			50,737
Other expense		(50,100	)		(35,790	)
Interest income (expense), net		(516	)		5,338
Net loss	$	(2,148,611	)	$	(2,183,206	)
Basic and diluted loss per common share	$	(1.84	)	$	(3.23	)
Basic and diluted weighted average number of common stock outstanding		1,168,221			676,422

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

5

NuZee, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

For the three months ended December 31	2023			2022
	NuZee, Inc.
For the three months ended December 31	2023			2022
Net loss	$	(2,148,611	)	$	(2,183,206	)
Foreign currency translation		42,408			115,583
Total other comprehensive income net of tax		42,408			115,583
Comprehensive loss	$	(2,106,203	)	$	(2,067,623	)

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

6

NuZee, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

										Accumulated
					Additional					other
	Common stock				paid-in		Accumulated			comprehensive
	Shares		Amount		capital		deficit			Income		Total
Balance September 30, 2023		748,644	$	8	$	74,925,843	$	(73,371,987	)	$	120,493	$	1,674,357
Common Stock issued for cash		488,750		5		1,277,113		-			-		1,277,118
Stock option expense		-		-		11,505		-			-		11,505
Issued private placement		46,800		-		129,662		-			-		129,662
Other comprehensive income		-		-		-		-			42,408		42,408
Net loss		-		-		-		(2,148,611	)		-		(2,148,611	)
Balance December 31, 2023		1,284,194	$	13	$	76,344,123	$	(75,520,598	)	$	162,901	$	986,439

										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
Balance		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		685,088	$	7	$	74,541,365	$	(66,805,726	)	$	199,477	$	7,935,123

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

7

NuZee, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended			Three Months Ended
	December 31, 2023			December 31, 2022
Operating activities:
Net loss	$	(2,148,611	)	$	(2,183,206	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		39,980			73,805
Noncash lease expense		68,372			73,103
Stock option expense		11,505			197,108
Restricted stock compensation		-			62,839
Bad debt expense		-			65,608
Loss from equity method investment		2,051			1,823
Change in operating assets and liabilities:
Accounts receivable		(542,622	)		(374,253	)
Inventories		(255,576	)		(141,906	)
Prepaid expenses and other current assets		(88,033	)		171,509
Other assets		(697	)		(14,017	)
Accounts payable		702,295			348,947
Deferred income		(74,363	)		(21,684	)
Lease liability – operating lease		(104,378	)		(78,046	)
Accrued expenses and other current liabilities		(67,088	)		(105,931	)
Other non-current liabilities		120,999			10,855
Net cash used in operating activities		(2,336,166	)		(1,913,446	)
Investing activities:
Purchase of equipment		(307,044	)		(16,514	)
Net cash used in investing activities		(307,044	)		(16,514	)
Financing activities:
Repayment of loans		(2,021	)		(1,968	)
Repayment of finance lease		(7,797	)		(6,889	)
Proceeds from private placement		129,662			-
Proceeds from equipment finance		262,893			-
Proceeds from issuance of common stock, ATM offering, net of issuance cost		1,099,254			-
Proceeds from exercise of options		177,864			-
Net cash provided by (used in) financing activities		1,659,855			(8,857	)
Effect of foreign exchange on cash		42,408			115,583
Net change in cash		(940,947	)		(1,823,234	)
Cash, beginning of period		1,373,101			8,315,053
Cash, end of period	$	432,154		$	6,491,819
Supplemental disclosure of cash flow information:
Cash paid for interest	$	782		$	1,474
Cash paid for taxes		1,288			-
Non-cash transactions:
ROU assets and liabilities added during the period	$	105,825		$	-

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

8

NuZee, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2023

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, 2023 as filed with the SEC on January 16, 2024. 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, 2023, have been omitted.

Principles of Consolidation

The Company prepares its financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, balances and transactions have been eliminated upon consolidation.

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

2022 Reverse Stock Split

On December 9, 2022, our stockholders approved a proposal granting the board 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 common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s discretion. On December 21, 2022, the Board approved a 1-for-35 reverse stock split of our common 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 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 shares 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, 2023 and December 31, 2022, the total number of common stock equivalents was 1,284,194 and 262,030, respectively, and composed of stock options and warrants. The Company incurred a net loss for the three months ended December 31, 2023 and 2022, respectively and therefore, basic and diluted earnings per share for those periods are the same because all potential common equivalent shares would be antidilutive.

9

Going Concern and Capital Resources

Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, raising capital and the commercialization and manufacture of its single serve coffee products. The Company has grown revenues from its principal operations; however, there is no assurance of future revenue growth similar to historical levels. As of December 31, 2023, the Company had cash of $432,154 and working capital of $85,187. However, the Company has not attained profitable operations since inception. The accompanying 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 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.

Use of Estimates

In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents for the three months ended December 31, 2023 and 2022.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company places its cash with high quality banking institutions. From time to time, the Company may or may not maintain cash balances at certain institutions in excess of the Federal Deposit Insurance Corporation limit.

Accounts Receivable

Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. Bad debts expense or write offs of receivables are determined on the basis of loss experience, known and inherent risks in the receivable portfolio and current economic conditions. The Company had $58,636 of allowance for doubtful accounts as of December 31, 2023 and $58,636 allowance for doubtful accounts as of September 30, 2023.

Major Customers

In the three months ended December 31, 2023 and 2022, revenue was primarily derived from major customers disclosed below.

 SCHEDULE OF REVENUE BY MAJOR CUSTOMERS 

Three months ended December 31, 2023:

Customer Name	Sales Amount		% of Total Revenue			Accounts Receivable Amount		% of Total Accounts Receivable
Customer CL	$	577,420		43	%	$	552,587		49	%

10

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	%

Lease

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about leasing arrangements, specifically differentiating between different types of leases. The Company implemented ASU No. 2016-02 on October 1, 2019.

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

In May 2022, the Company renewed the office and manufacturing space in Vista, California which was scheduled to expire on January 31, 2023, through March 31, 2025. The lease has a monthly base rent of $8,451, plus common area expenses. Along with the extension, we leased an additional 1,796 square feet that has a monthly base rent of $2,514 through March 31, 2025. We extended our sub-leased property in Vista, California, through January 31, 2023. The lease has a monthly rent of $2,111 and has been calculated as a ROU Asset co-terminus with the direct-leased property. The Company leased a new larger office and manufacturing space in Seoul, Korea beginning November 15, 2021, through November 15, 2024. 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, 2023.

As of December 31, 2023, our operating leases had a weighted average remaining lease term of 0.8 year and a weighted-average discount rate of 5%. Other information related to our operating leases is as follows:

 SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE

ROU Asset – October 1, 2023	$	403,258
ROU Asset added during the period		105,825
Amortization during the period		(68,372	)
ROU Asset – December 31, 2023	$	440,711
Lease Liability – October 1, 2023	$	378,429
Lease Liability added during the period		105,825
Amortization during the period		(104,378	)
Lease Liability – December 31, 2023	$	379,876
Lease Liability – Short-Term	$	345,045
Lease Liability – Long-Term		34,831
Lease Liability – Total	$	379,876

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, 2023:

Amounts due within twelve months of December 31,

 SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES

2024	$	227,943
2025		88,430
Total Minimum Lease Payments		316,373
Less Effect of Discounting		63,503
Present Value of Future Minimum Lease Payments		379,876
Less Current Portion of Operating Lease Liabilities		345,045
Long-Term Operating Lease Liabilities	$	34,831

11

On October 9, 2019, the Company entered into a lease agreement with Alliance Funding Group which provided for a sale lease back on certain packing equipment. The terms of this agreement require us to pay $2,987 per month through June 2024. As part of this agreement, Alliance Funding Group provided our equipment supplier with $124,500 for the purchase of this equipment. This transaction was accounted for as a financing lease. As of December 31, 2023, our financing lease had a remaining lease term of 0.3 years and a discount rate of 12.75%. The interest expense on finance lease liabilities for the year ended December 31, 2023 was $782.

The table below summarizes future minimum finance lease payments at December 31, 2023 for the twelve months ended December 31:

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS FOR FINANCE LEASES

2024	$	19,315
2025		-
Total Minimum Lease Payments		19,315
Amount representing interest		(1,064	)
Present Value of Minimum Lease Payments		18,251
Current Portion of Finance Lease Obligations		18,251
Finance Lease Obligations, Less Current Portion	$	-

Lease expenses included in operating expense for the three months ended December 31, 2023, and 2022 was $43,756 and $91,119, respectively. Lease expense, which represents sublease expense included in other expense for the three months ended December 31, 2023 and 2022 was $49,195 and $31,956, respectively.

Cash and non-cash activities associated with the leases for the three months ended December 31, 2023, are as follows:

 SCHEDULE OF CASH AND NON-CASH ACTIVITIES OF LEASES

Operating cash outflows from operating leases:	$	80,761
Operating cash outflows from finance lease:	$	782
Financing cash outflows from finance lease:	$	7,797

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, 2023, we recognized sublease income of $46,832 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, 2023, for year ended December 31 are as follows:

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS OF SUBLEASE

2024	$	64,918
Total	$	64,918

Foreign Currency Translation

The financial position and results of operations of each of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. Revenues and expenses of each such subsidiary have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustment attributable to NuZee, Inc. recorded to other comprehensive income amounted to $42,408 and $115,583 for the three months ended December 31, 2023 and 2022, respectively.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

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Equity Method

Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and consolidated statements of operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption Gain (loss) from equity method investment in the consolidated statements of operations. The Company’s carrying value in an equity method investee company is reflected in the caption “Investment in unconsolidated affiliate in the Company’s consolidated balance sheets.

When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

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

The Company accounts for NLA using the equity method of accounting since the management of day-to-day operations at NLA ultimately lies with the Company’s joint venture partner as the operations of NLA are based in its partners facilities as well as our partner appoints the Chairman of the joint Board. As of December 31, 2023, the activity in NLA consisted of the contribution of two machines as described above and other start up and initial sales and marketing related activities. $2,051 and $1,823 of losses were recognized under the equity method of accounting for the three months ended December 31, 2023 and December 31, 2022, respectively.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605). The new standard’s core principle is that an entity will recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in the standard are applied in five steps: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations in the contract; and 5) Recognize revenue when (or as) the entity satisfies a performance obligation. We adopted Topic 606 as of October 1, 2018 on a modified retrospective basis. The adoption of Topic 606 did not have a material impact on our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.

Return and Exchange Policy

The Company provides a 30-day money-back guarantee if a buyer is not satisfied with a product. All products are thoroughly inspected and securely packaged before they are shipped to ensure buyers receive the best possible product. If for any reason buyers are unsatisfied with the products, they can return them and the Company will exchange or refund the purchase minus any shipping charges. For wholesale customers, return policies vary based on their specific agreements with customers. Under chargebacks agreements with the customers, the Company agrees to reimburse the seller for a portion of the costs incurred by the seller to advertise and promote certain of the Company’s products. The Company estimates, accrues and recognizes such chargebacks. These amounts are included in the determination of net sales.

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For the three months ended December 31, 2023 and 2022, the Company had no sales allowances for estimated chargebacks and returns, respectively. Revenue recognized is net of sales allowances.

Cost Recognition

Cost of products sold is primarily comprised of direct materials consumed in the manufacturing of co-packing arrangements or the production of our own products for resale. Cost of products sold also includes directly related labor salaries and other overhead cost including depreciation, temporary labor and shipping costs for shipment of raw materials to our facilities.

Selling, General and Administrative Expense

Selling, general and administrative expense (SG&A) is primarily comprised of personnel costs, sales and marketing expenses, depreciation and amortization, insurance expenses, legal and professional services fees, travel and office expenses, and facilities costs. In some situations, the Company covers shipping fees for delivering customer orders, and the shipping and handling expenses are recorded under operating expenses in the consolidated statements of operations.

Other Expense

Other expense of $ 50,100 and $ 35,790 for the three months ended December 31, 2023 and 2022, respectively, primarily includes write off of deferred financing costs and sublease expense.

Prepaid expenses and other current assets

Prepaid expenses and other current assets for the three months ended December 31, 2023 and September 30, 2023 is as follows:

SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS 

	December 31, 2023		September 30, 2023
Prepaid expenses and other current assets	$	389,614	$	418,200

The Prepaid expenses and other current assets balance of $389,614 as of December 31, 2023 primarily consists of prepaid rent, prepaid insurance, a retainer for professional services, and deferred offering costs. The balance of $418,200 as of September 30, 2023 primarily consists of prepaid insurance, deposits on inventory purchases, and rent.

Inventory

Inventory, consisting principally of raw materials, work in process and finished goods held for production and sale, is stated at the lower of cost or net realizable value, cost being determined using the weighted average cost method. The Company reviews inventory levels at least quarterly and records a valuation allowance when appropriate. At December 31, 2023 and September 30, 2023, the carrying value of inventory of $1,253,646 and $998,070 respectively, reflected on the consolidated balance sheets is net of this adjustment.

SCHEDULE OF INVENTORY

	December 31, 2023		September 30, 2023
Raw materials	$	1,225,534	$	982,626
Finished goods	$	28,112		15,444
Total	$	1,253,646	$	998,070

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Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation. The Company generally depreciates property and equipment on a straight-line basis over the estimated useful lives of the assets after the assets are placed in service except for NuZee KR which uses the declining balance method. Office equipment is depreciated over a 3-year life, furniture over a 7-year life, and other equipment over a 5-year life. Depreciation expense for the three months ended December 31, 2023 and 2022 was $ 32,480 and $ 66,305, respectively. Repair and maintenance costs are expensed as incurred. Expenditures associated with upgrades and enhancements that improve, add functionality, or otherwise extend the life of property and equipment that exceed $1,000 are capitalized. Property and equipment as of December 31, 2023 and September 30, 2023 consist of:

SCHEDULE OF PROPERTY AND EQUIPMENT 

	December 31, 2023			September 30, 2023
Machinery & Equipment		2,253,784			1,895,859
Vehicles		78,378			73,980
Leasehold Improvements		-			-
Less - Accumulated Depreciation		(1,748,043	)		(1,660,284	)
Net Property and Equipment	$	584,119		$	309,555

The Company is required to make deposits or prepayments and progress payments on equipment purchases before the Company receives possession and title. As a result, the Company accounts for such payments as Other Assets until it has possession at which time the equipment is recorded as Property and Equipment. There were no such deposits as of December 31, 2023 or September 30, 2023.

Loans

On April 1, 2019, the Company purchased a delivery van from Ford Motor Credit for $41,627. The Company paid $3,500 as a down payment and financed $38,127 for 60 months at a rate of 2.9%. The loan is secured by the van. The outstanding balance on the loan at December 31, 2023 and September 30, 2023 amounted to $2,732 and $4,753, respectively.

The remainder of the loan is due in fiscal year ending December 31, 2024 in the amount of $2,732.

Other noncurrent liabilities

On October 12, 2023, the Company entered into a finance agreement with a lender for the purchase of packaging equipment with future payments of $262,893 (net of deferred financing costs) which amount is included in other noncurrent liabilities. The packaging equipment is expected to be delivered in the third quarter of fiscal 2024 at which time it will be placed into service.

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 previously had a minimally staffed office in Japan that provided support for import and export of product and materials between the U.S. and Japan, as well as investor relations support to its stockholders based in 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, 2023, and 2022 are as follows:

SCHEDULE OF INFORMATION ABOUT THE COMPANY’S GEOGRAPHICAL OPERATIONS 

Geographic Concentration

	Three Months Ended December 31, 2023		Three Months Ended December 31, 2022
Net Revenue:
North America	$	965,932	$	665,741
South Korea		388,054		470,607
Net Revenue	$	1,353,986	$	1,136,348

Property and equipment, net:	As of December 31, 2023		As of September 30, 2023
North America	$	464,112	$	184,763
Japan		496		546
South Korea		119,511		124,246
Property and equipment, net	$	584,119	$	309,555

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3. INTANGIBLE ASSETS

Identifiable life intangible assets

As of December 31, 2023, the Company’s intangible assets consisted of unamortized tradename asset of $102,500 which is being amortized over five years from the date of acquisition at a rate of $30,000 per year.

Amortization expense was $7,500 and $7,500 for the three months ended December 31, 2023 and 2022.

Amortization expense for the next four fiscal years is as follows:

SCHEDULE OF AMORTIZATION EXPENSE 

	Tradename Amortization
2024		22,500
2025		30,000
2026		30,000
2027		20,000
Grand Total		102,500

4. ISSUANCE OF EQUITY SECURITIES

Registered Offering

The Company offered in an underwritten public offering (the “Offering”), 425,000 shares of common stock, par value $0.00001 per share (the “Common Stock”), at a price to the public of $3.00 per share of Common Stock (the “Offering Price”). The Offering was made pursuant to a shelf registration statement filed with and declared effective by the Securities and Exchange Commission (the “SEC”) (Registration No. 333-274818), a base prospectus, dated October 5, 2023, included as part of the registration statement, and a prospectus supplement, dated October 17, 2023.

On October 18, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim Group LLC, as the sole book-running manager and underwriter (the “Underwriter”), relating to the Offering. Pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to 63,750 additional shares of Common Stock at the Offering Price, less underwriting discounts and commissions. The Company received approximately $1.0 million in net proceeds from the Offering, after deducting underwriting discounts and commissions and other estimated Offering expenses payable by the Company. In addition, on December 5, 2023, the Underwriter utilized its option to purchase additional shares of Common Stock resulting in additional net proceeds of approximately $178,000 after deducting underwriting discounts and commissions.

Private Placement

On November 9, 2023, the Company issued in a private placement to an accredited investor (“Shareholder”) 46,800 shares of Common Stock, together with warrants to purchase a total of approximately 5,200 shares of Common Stock at an exercise price of $2.77 per share (collectively, the “Subscription Shares”) in accordance with the terms of a Subscription Agreement and common stock purchase warrant. The warrants have a five year term and are exercisable upon the six-month anniversary of the original issuance date. The Subscription Shares were issued with a purchase price of $129,662.

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Restricted Shares

On August 11, 2023, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors granted to Randell Weaver, the Company’s newly appointed Chief Financial Officer, in connection with his employment agreement, an award of 6,000 restricted shares (the “Restricted Shares”) of the Company’s common stock under the 2023 Stock Incentive Plan. These Restricted Shares vested as follows: (i) 2,000 Restricted Shares shall vest upon the first anniversary of the commencement date; (ii) 2,000 Restricted Shares shall vest upon the second anniversary of the commencement date; and (iii) 2,000 Restricted Shares shall vest upon the third anniversary of the commencement date. The Company recognized common stock compensation expense of $3,751 for the year ended September 30, 2023 related to these Restricted Shares.

On March 15, 2023, the Company granted 58,619 performance-based restricted shares to executive officers, employees and consultants as part of the 2013 Stock Incentive Plan and the 2019 Stock Incentive Plan. 50% of the Performance-Based Restricted Shares would vest, if at all, in Fiscal Year 2023, based on the Company’s achievement of a specified amount of cash on hand, sales growth, increased gross margin, and reduced operating losses in Fiscal Year 2023, and the other 50% of the Performance-Based Restricted Shares will vest, if at all, in Fiscal Year 2024, based on performance metrics to be set by the Board in its sole and absolute discretion.

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.

On March 22, 2023, the Company granted 4,398 Restricted Shares of the Company’s common stock to each of the Company’s five independent directors. 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 $11,505 and $ 62,839 in the three months ending December 31, 2023 and 2022, respectively.

The following table summarizes the restricted common shares activities for the three months ended December 31, 2023 and 2022:

 SCHEDULE OF RESTRICTED COMMON SHARES

	2023			2022
Number of shares outstanding at September, 2023 and 2022		50,056			3,370
Restricted shares granted		-			-
Restricted shares forfeited		(4,300	)		-
Restricted shares vested		-			-
Number of shares outstanding at December 31, 2023 and 2022		45,756			3,370

During the three months ended December 31, 2023, 4,300 restricted shares were forfeited because of the termination of employment or performance goals not achieved.

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5. STOCK OPTIONS AND WARRANTS

Options

During the three months ended December 31, 2023, the Company granted no new stock options.

During the three months ended December 31, 2023, 7,993 stock options were forfeited because of termination of employment, expiration of options and performance conditions not met.

The following table summarizes stock option activity for the three months ended December 31, 2023.

SCHEDULE OF STOCK OPTION ACTIVITY 

	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, 2023		96,458		$	150.39		5.84	$	-
Forfeited and expired		(7,993	)		107.93		.22		-
Outstanding at December 31, 2023		88,465		$	154.23		5.83	$	-
Exercisable at December 31, 2023		65,782		$	179.28		5.03	$	-

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 $11,505 and $197,108 for the three months ended December 31, 2023 and 2022, respectively. Unamortized option expense as of December 31, 2023, for all options outstanding amounted to $68,000. These costs are expected to be recognized over a weighted average period of 1.34 years.

A summary of the status of the Company’s nonvested options as of December 31, 2023, is presented below:

SCHEDULE OF NONVESTED OPTIONS 

Nonvested options

	Number of Nonvested Options			Weighted Average Grant Date Fair Value
Nonvested options at September 30, 2023		24,029		$	80.73
Granted		-			-
Forfeited		(1,334	)		48.35
Vested		(12	)		587.65
Nonvested options at December 31, 2023		22,683		$	82.37

Warrants

During the three months ended December 31, 2023, the Company granted no new warrants to purchase shares of common stock and did not issue any shares upon the exercise of outstanding warrants to purchase shares of common stock.

The following table summarizes warrant activity for the three months ended December 31, 2023:

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
Outstanding at September 30, 2023		152,398	$	158.24		2.65	$	-
Issued		-		-
Exercised		-		-
Expired		-		-
Outstanding at December 31, 2023		152,398	$	158.24		2.65		-
Exercisable at December 31, 2023		152,398	$	158.24		2.65	$	-

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6. CONTINGENCY

Steeped, Inc. Litigation

On January 27, 2023, Steeped, Inc. d/b/a Steeped Coffee (“Steeped”) filed a complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “Steeped Litigation”). The Steeped Litigation relates to Steeped’s claim that the Company breached a 2021 settlement agreement that resolved Steeped’s 2019 trademark infringement case against the Company. The earlier case involved Steeped’s purported trademark protection for “steeped coffee” and related phrases.

Steeped’s operative complaint in the pending Steeped Litigation alleges breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, and fraud in the inducement of contract. 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 violating packaging materials and/or finished goods; a final judgment for all profits derived from the Company’s allegedly unlawful conduct, actual damages, damages to the Plaintiff’s reputation and goodwill among its customers and partners; and reasonable attorneys’ fees and costs. NuZee answered Steeped’s complaint with a general denial and asserted twenty-five affirmative defenses.

On January 16, 2024, a mediation hearing was held. After the close of business, the mediator suggested a settlement amount of $500,000 which both parties agreed to accept. While the amount was agreed to, a payment schedule was not agreed on. Negotiations between the parties to establish an acceptable payment schedule are ongoing. The settlement amount is accrued in the financial statements as of December 31, 2023 and is included in current liabilities.

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 has responded to the complaint on behalf of the Company and Mr. Ramirez and prevailed on December 22, 2023, prevailed on its motion to compel. Arbitration proceedings have been initiated, and the parties have agreed on an arbitrator. A date for the arbitration hearing has not yet been scheduled. 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 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. Matters that are probable of unfavorable outcomes to us and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, our estimates of the outcomes of such matters and our experience in contesting, litigating and settling similar matters.

7. SUBSEQUENT EVENTS

New Operating Lease

Effective January 1, 2024, we entered into a new lease in Carlsbad, California for additional office space. The lease term is two years and initial monthly rents are approximately $5,760 per month plus common area expenses.

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Notice

On January 23, 2024, the Company received a notice (the “Notice”) from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that the Company’s stockholders’ equity as reported in its Annual Report on Form 10-K for the period ended September 30, 2023 (“Form 10-K”), did not satisfy the continued listing requirement under Nasdaq Listing Rule 5550(b)(1) for the Nasdaq Capital Market, which requires that a listed company’s stockholders’ equity be at least $2,500,000. In its Form 10-K, the Company reported stockholders’ equity of $1,674,357, and, as a result, does not currently satisfy Nasdaq Marketplace Rule 5550(b)(1). The Notice has no immediate effect on the Company’s listing on the Nasdaq Capital Market. In accordance with Nasdaq rules, the Company had 45 calendar days from the date of the notification to submit a plan to regain compliance with Nasdaq Listing Rule 5550(b)(1). The Company timely submitted a plan to regain compliance. On April 9, 2024 Nasdaq granted the Company an extension of time to regain compliance through June 14, 2024. The Company must furnish to the SEC and Nasdaq a publicly available report (e.g. a Form 8-K) which report, among other things must include a description of the completed transaction or event that enabled the Company to satisfy the stockholders’ equity requirement for continued listing. After filing the publicly available report described above, if the Company fails to evidence compliance upon filing its periodic report for June 30, 2024 (or the periodic report for September 30, 2024, if Nasdaq determines to provide a further extension), the Company may be subject to delisting. In the event the Company does not satisfy these terms, Nasdaq will provide written notification that its securities will be delisted. At that time, the Company may appeal Nasdaq’s determination to a Listing Qualifications Panel.

Private Placement

On January 30 2024, the Company issued in a private placement to an accredited investor 14,220 shares of Common Stock, together with warrants to purchase a total of approximately 1,279 shares of Common Stock at an exercise price of $2.11 per share (collectively, the “Subscription Shares”) in accordance with the terms of a Subscription Agreement and common stock purchase warrant. The warrants have a five year term and are exercisable upon the six-month anniversary of the original issuance date. The Subscription Shares were issued with a purchase price of $30,004.

On April 30, 2024, the Company issued convertible notes to two investors in the amount of $320,000. The notes are convertible into 221,147 shares of common stock at a conversion price of $1.447 and bear interest at an annual rate of 7%. In addition, the Company has authorized the issuance of warrants to purchase up to the number of securities into which the notes may be converted under terms spelled out in the note and warrant agreement.

Financing Agreement

On March 1, 2024 the Company entered into a financing agreement to sell future receipts in the amount of $246,000 in exchange for an immediate cash payment of $200,000. The future receipts are being repaid on a biweekly basis at the rate of $9,460 every two weeks with payment in full after 26 biweekly payments.

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

Overview

We are a specialty coffee and technologies 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 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. Recently, we further expanded our product offerings to include bagged coffees for existing single-serve customers as well as a new licensing relationship with Stone Brewing which will include both bagged and single-serve format coffee products. We believe this expansion will allow us to increase manufacturing efficiency and better serve our customers and the market. 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 single-serve pour over and brew bag coffee. We intend to leverage our position to become the commercial coffee producer of choice and aim to become the preeminent leader for coffee companies seeking to enter into and grow within the single-serve coffee market in North America. With our single-serve pour over and brew bag coffee we are paid per-package based on the number of single-serve coffee products produced by us. With our bagged coffee products, we will be paid based on the number of completed bags delivered. Accordingly, we consider a portion of 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. Under the single-1serve model, our risk related to owning and managing inventory is limited. With our bagged coffees and the Stone Brewing licensing relationship, we will manage the production and related inventory which will involve increased risk levels.

We may also consider co-packaging other products that are complementary to our current product offerings and provide us with 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.

2022 Reverse Stock Split

On December 9, 2022, our stockholders approved a proposal granting the board 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 common stock, at any ratio from 1-for-10 to 1-for-50 at the Board’s discretion. On December 21, 2022, the Board approved a 1-for-35 reverse stock split of our common 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 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.

Geographic Concentration

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

For the three months ended December 31, 2023, net revenues attributable to our operations in North America totaled $965,932 compared to $665,741 of net revenues attributable to our operations in North America during the three months ended December 31, 2022. Additionally, as of December 31, 2023, $464,112 of our property and equipment, net was attributable to our North American operations, compared to $184,763 attributable to our North American operations as of September 30, 2023.

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For the three months ended December 31, 2023, net revenues attributable to our operations in Asia totaled $388,054 compared to $470,607 of net revenues attributable to our operations in Asia during the three months ended December 31, 2022. Additionally, as of December 31, 2023, $120,007 of our property and equipment, net was attributable to our Asian operations, compared to $146,529 attributable to our Asian operations as of September 30, 2023.

Results of Operations

During the three months ended December 31, 2023, we began selling and shipping bagged coffee products for our largest customer in addition to the single-serve products we had been selling and shipping to them. Our results for this quarter were positively influenced by these shipments, many of which were initial pipeline fills for new distribution. We do not expect the quarterly revenues for the three months ended December 31, 2023 to be indicative of future quarters. It is too early to project the market acceptance of these products or the rates of reorder, if any, from our customer.

Our results of operations for the three months ended December 31, 2023 are influenced by the aforementioned transactions.

Comparison of three months ended December 31, 2023 and 2022

Revenue

	Three months ended December 31,				Change
	2023		2022		Dollars		%
Revenue	$	1,353,986	$	1,136,348	$	217,638		19	%

For the three months ended December 31, 2023, our revenue increased by $217,638, or approximately 19%, compared with the three months ended December 31, 2022. This increase was primarily related to increased revenue in the US, due to volume of sales increase with our major customers.

Cost of sales and gross margin

	Three months ended December 31,						Change
	2023			2022			Dollars		%
Cost of sales	$	1,178,707		$	1,060,816		$	117,891		11	%
Gross profit (loss)		175,279		$	75,532		$	99,747		132	%
Gross profit (loss) %		13	%		7	%

For the three months ended December 31, 2023, we generated a total gross profit of 175,279 from sales of our products and co-packing services, compared to a total gross profit of $75,532 for the three months ended December 31, 2022. The gross margin rate was 13% for the three months ended December 31, 2023, and 7% for the three months ended December 31, 2022. The increase is primarily attributable to a decrease in production salaries and temporary labor.

Operating Expenses

	Three months ended December 31,				Change
	2023		2022		Dollars		%
Operating Expenses	$	2,318,234	$	2,277,200	$	41,034		2	%

For the three months ended December 31, 2023, the Company’s operating expenses totaled $2,318,234 compared to $2,277,200 for the three months ended December 31, 2022, representing a 2% increase. This increase is primarily attributable to an increase of supply expense.

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Net Loss

	Three months ended December 31,				Change
	2023		2022		Dollars			%
Net Loss	$	2,148,611	$	2,183,206	$	(34,595	)		-2	%

For the three months ended December 31, 2023, we generated a net loss of $2,148,611 compared to a net loss of $2,183,206 for the three months ended December 31, 2022. This decrease in net loss is primarily attributable to lower stock-based compensation expense.

Liquidity and Capital Resources

Since our inception in 2011, we have incurred significant losses, and as of December 31, 2023, we had an accumulated deficit of approximately $76 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. 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, 2023, we had a cash balance of approximately $0.4 million. Considering our current cash resources and our current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least twelve months from January 12, 2024. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. A reduction in consumer demand for, or revenues from the sale of, our 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 coffee products, may change as a result of many factors currently unknown to us.

During the three months ended December 31, 2023, we issued no shares of common stock related to exercises of 2021 Warrants (as defined below) and received no proceeds from the exercise of warrants.

In the future, we may 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 “2021 Warrants”) that were sold by us in March 2021 in an underwritten registered public offering and the 2022 Warrants. The 2021 Warrant holders are obligated to pay the exercise price 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). For additional information regarding the 2021 Warrants, see “Note 9—Stock Options and Warrants” to the Consolidated Financial Statements.

We intend to seek to raise additional capital, 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. The timing and amount of funds that we will need to raise will depend on a number of factors, including our ability to generate a sufficient amount of revenues from the sale of our coffee products to fund our business operations and the timing and amount of funds received upon the exercise for cash of outstanding warrants by the warrant holders. 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.

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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. These conditions raise substantial doubt about our ability to continue as a going concern.

Contractual Obligations

Our significant contractual cash requirements as of December 31, 2023, 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, 2023, we had payments for lease and loan obligations of approximately $ 400,859 of which $ 366,028 are payable within 12 months as of December 31, 2023. We had no purchase obligations as of December 31, 2023.

Summary of Cash Flows

	Three Months Ended December 31,
	2023			2022
Cash used in operating activities	$	(2,336,166	)	$	(1,913,446	)
Cash used in investing activities	$	(307,044	)	$	(16,514	)
Cash provided by (used in) financing activities	$	1,659,855		$	(8,857	)
Effect of foreign exchange on cash	$	42,408		$	115,583
Net change in cash	$	(940,947	)	$	(1,823,234	)

Operating Activities

We used $2,336,166 and $1,913,446 of cash in operating activities during the three months ended December 31, 2023, and 2022, respectively, principally to fund our operations.

Investing Activities

We used $307,044 and $16,514 of cash in investing activities during the three months ended December 31, 2023 and 2022, respectively. Cash used in 2022 was principally for the purchase of equipment.

Financing Activities

Historically, we have funded our operations through the issuance of our equity securities.

Cash provided by financing activities of $1,659,855 for the three months ended December 31, 2023 was primarily related to the issuance of equity securities. Cash used in financing activities of $8,857 for the three months ended December 31, 2022 was primarily related to repayments on loans and leases.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that may have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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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.

There were no significant and material changes in our critical accounting policies and use of estimates during the three months ended December 31, 2023, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC on January 16, 2024.

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 by our Company 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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and 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, 2023 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

Next 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 “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 reverse stock splits effected by the Company on each of November 12, 2019 and December 28, 2022, vested stock options to acquire 667 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 667 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 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, which was continued to December 1, 2023. A new legal counsel was substituted for the Company.

On July 31, 2023, the parties entered into a settlement agreement and resolved the lawsuit. In exchange for a general release and dismissal of the lawsuit with prejudice, the Company paid the Consultant $5,000. The Plaintiff filed a Request for Dismissal on September 18, 2023, and on November 10, 2023, the case was dismissed.

Steeped, Inc. Litigation

As previously disclosed, on January 27, 2023, Steeped, Inc. d/b/a Steeped Coffee (“Steeped”) filed a complaint against the Company in the Superior Court of California, Santa Cruz County (Case No. 23CV00234) (the “Steeped Litigation”). The Steeped Litigation relates to Steeped’s claim that the Company breached a 2021 settlement agreement that resolved Steeped’s 2019 trademark infringement case against the Company. The earlier case involved Steeped’s purported trademark protection for “steeped coffee” and related phrases.

Steeped’s operative complaint in the pending Steeped Litigation alleges breach of contract, intentional interference with contractual relations, intentional interference with prospective economic advantage, and fraud in the inducement of contract. 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 violating packaging materials and/or finished goods; a final judgment for all profits derived from the Company’s allegedly unlawful conduct, actual damages, damages to the Plaintiff’s reputation and goodwill among its customers and partners; and reasonable attorneys’ fees and costs. NuZee answered Steeped’s complaint with a general denial and asserted twenty-five affirmative defenses.

On January 16, 2024, a mediation hearing was held. After the close of business, the mediator suggested a settlement amount of $500,000 which both parties agreed to accept. While the amount was agreed to, a payment schedule was not agreed on. Negotiations between the parties to establish an acceptable payment schedule are ongoing. The settlement amount is accrued in the financial statements as of December 31, 2023 and is included in current liabilities

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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 has responded to the complaint on behalf of the Company and Mr. Ramirez and prevailed on December 22, 2023, prevailed on its motion to compel. Arbitration proceedings have been initiated, and the parties have agreed on an arbitrator. A date for the arbitration hearing has not yet been scheduled. 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

Our 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 January 16, 2024, 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 January 16, 2024.

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

There were no unregistered sales of equity securities sold during the period covered by this Quarterly Report that were not previously included in a Current Report on Form 8-K.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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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 Annual Report on Form 10-K filed on December 23, 2022, SEC File Number 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	Certificate of Amendment to Articles of Incorporation of the Company, dated December 28, 2022 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 28, 2022 SEC File Number 001-39338)
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 8-K filed on March 23, 2022, SEC File Number 001-39338)
4.1	Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 15, 2023, SEC File Number 001-39338)
10.1	Subscription Agreement, dated November 9, 2023, by and between the Company and the purchaser named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 15, 2023, 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)

* 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:	May 6, 2024	NUZEE, INC.
		By:	/s/ Masateru Higashida
			Masateru Higashida, Chief Executive Officer (Principal Executive Officer), Secretary, Treasurer, and Director
		By:	/s/ Randell Weaver
			Randell Weaver, President & Chief Operating Officer, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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