NuZee(NUZE) - 2023 Q1 - Quarterly Report

Filing Information This section details the filing specifics for NuZee, Inc.'s Form 10-Q, including its period, registrant information, and filer status Form 10-Q Details This Quarterly Report (Form 10-Q) for NuZee, Inc. covers the period ended December 31, 2022, under Commission File No. 001-39338 - Filing Type: Quarterly Report (Form 10-Q)[2] - Period Ended: December 31, 2022[2] - Registrant: NUZEE, INC.[2] Registrant Details and Filer Status NuZee, Inc., incorporated in Nevada with offices in Richardson, Texas, is a Non-accelerated and Smaller reporting company, with 691,088 shares outstanding as of February 7, 2023 - State of Incorporation: Nevada[2] - Principal Executive Offices: 1350 East Arapaho Road, Suite 230, Richardson, Texas 75081[3] Filer Status | Filer Status | Status | | :-------------------- | :-------- | | Large accelerated filer | ☐ | | Accelerated Filer | ☐ | | Non-accelerated filer | ☒ | | Smaller reporting company | ☒ | | Emerging growth company | ☐ | - Common Stock Outstanding (as of Feb 7, 2023): 691,088 shares[5] Special Note Regarding Forward-Looking Statements This section clarifies the nature and scope of forward-looking statements within the report, emphasizing their inherent uncertainties and the company's non-obligation to update them Nature of Forward-Looking Statements Forward-looking statements in this report reflect NuZee, Inc.'s future views, are subject to material uncertainties, and the company disclaims any obligation to update them - Forward-looking statements are included within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934[11] - Such statements reflect the Company's views on future events and financial performance, but are subject to uncertainties that could cause actual results to differ materially[11] - The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise[11] Key Areas of Forward-Looking Statements Forward-looking statements encompass future funding, capital, financial estimates, Nasdaq compliance, economic impacts, market trends, competition, strategic outcomes, revenues, innovation, manufacturing, third-party reliance, regulatory developments, personnel, intellectual property, infrastructure, litigation, and overall financial performance - Plans to obtain funding for operations and continue as a going concern[12] - Expectation that existing capital resources will be sufficient for the next nine months, with additional capital needed beyond that[12] - Accuracy of estimates regarding expenses, future revenue, capital requirements, and needs for additional financing[12] - Ability to maintain compliance with Nasdaq Capital Market listing requirements[12] - Impact of general economic, business, and political conditions, including macroeconomic conditions from pandemics like COVID-19[12] - Evolving coffee preferences in North America and East Asia[12] - Size and growth of markets for products and co-packing services[12] - Ability to compete with companies producing similar products or providing similar co-packing services[12] - Ability to successfully achieve anticipated results of strategic transactions[12] - Expectation regarding future co-packing revenues[12] - Ability to develop or offer innovative new products and services, and expand co-packing services[12] - Expectations regarding additional manufacturing, coffee roasting, and co-packing capabilities through manufacturing partners[12] - Reliance on third-party roasters or manufacturing partners[12] - Regulatory developments in the U.S. and non-U.S. countries[12] - Ability to retain key management, sales, and marketing personnel[12] - Scope of protection for intellectual property rights[12] - Ability to develop and maintain corporate infrastructure, including internal control over financial reporting[12] - Outcome of pending, threatened, or future litigation[12] - Financial performance[15] PART I - Financial Information This section presents NuZee, Inc.'s unaudited consolidated financial statements and management's discussion and analysis for the quarter ended December 31, 2022 Item 1. Financial Statements This section presents NuZee, Inc.'s unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, with detailed notes for the period ended December 31, 2022 Consolidated Balance Sheets (unaudited) The unaudited consolidated balance sheets show a decrease in total assets and stockholders' equity for NuZee, Inc. from September 30, 2022, to December 31, 2022 Consolidated Balance Sheet Highlights | Metric | December 31, 2022 | September 30, 2022 | | :---------------------- | :---------------- | :----------------- | | Cash | $6,491,819 | $8,315,053 | | Total current assets | $8,611,887 | $10,156,079 | | Total assets | $10,048,982 | $11,711,374 | | Total current liabilities | $1,829,928 | $1,599,938 | | Total liabilities | $2,113,859 | $1,968,575 | | Total stockholders' equity | $7,935,123 | $9,742,799 | - Total assets decreased by approximately $1.66 million from September 30, 2022, to December 31, 2022[17] - Total stockholders' equity decreased by approximately $1.81 million over the quarter[17] Consolidated Statements of Operations (unaudited) NuZee, Inc. reported an 11.5% increase in net revenues and a 391.4% increase in gross profit, leading to a 22.1% reduction in net loss for the three months ended December 31, 2022, compared to the prior year Consolidated Statements of Operations Highlights (Three Months Ended December 31) | Metric | 2022 | 2021 | Change (YoY) | % Change (YoY) | | :-------------------------- | :------------ | :------------ | :------------ | :------------- | | Revenues, net | $1,136,348 | $1,019,253 | $117,095 | 11.5% | | Cost of sales | $1,060,816 | $1,003,882 | $56,934 | 5.7% | | Gross profit | $75,532 | $15,371 | $60,161 | 391.4% | | Operating expenses | $2,277,200 | $2,811,189 | $(533,989) | (19.0)% | | Loss from operations | $(2,201,668) | $(2,795,818) | $594,150 | (21.2)% | | Net loss | $(2,183,206) | $(2,804,203) | $620,997 | (22.1)% | | Basic and diluted loss per common share | $(3.23) | $(5.45) | $2.22 | (40.7)% | - Net loss decreased by 22.1% year-over-year, primarily due to a significant reduction in operating expenses[19] - Gross profit saw a substantial increase of 391.4% year-over-year, indicating improved efficiency or pricing[19] Consolidated Statements of Comprehensive Income (Loss) (unaudited) NuZee, Inc.'s comprehensive loss decreased to $(2,067,623) for the three months ended December 31, 2022, aided by increased foreign currency translation gains Consolidated Statements of Comprehensive Income (Loss) Highlights (Three Months Ended December 31) | Metric | 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 comprehensive loss for the three months ended December 31, 2022, was $(2,067,623), a reduction from $(2,771,515) in the prior year[22] - Foreign currency translation contributed $115,583 to other comprehensive income in 2022, a significant increase from $32,688 in 2021[22] Consolidated Statements of Stockholders' Equity (unaudited) NuZee, Inc.'s total stockholders' equity decreased by approximately $1.81 million, and the accumulated deficit increased by $2.18 million for the quarter ended December 31, 2022 Consolidated Statements of Stockholders' Equity Highlights | Metric | December 31, 2022 | September 30, 2022 | | :-------------------------- | :---------------- | :----------------- | | Common stock shares outstanding | 685,088 | 676,229 | | 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 stockholders' equity decreased by approximately $1.81 million from September 30, 2022, to December 31, 2022[25] - The accumulated deficit increased by approximately $2.18 million during the quarter, reflecting the net loss[25] Consolidated Statements of Cash Flows (unaudited) NuZee, Inc. experienced a net cash decrease of $1.82 million for the three months ended December 31, 2022, driven by increased cash used in operations and a shift from cash inflow to outflow in financing activities Consolidated Statements of Cash Flows Highlights (Three Months Ended December 31) | Activity | 2022 | 2021 | | :-------------------------- | :------------ | :------------ | | Net cash used in operating activities | $(1,913,446) | $(1,579,731) | | Net cash used in investing activities | $(16,514) | $(3,009) | | 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, end of period | $6,491,819 | $10,967,104 | - The company experienced a net decrease in cash of $1,823,234 for the three months ended December 31, 2022, a significant shift from a net increase of $151,150 in the prior year[27] - Cash used in operating activities increased to $1,913,446 in 2022 from $1,579,731 in 2021[27] - Financing activities shifted from providing $1,701,202 in cash in 2021 (due to warrant exercises) to using $8,857 in 2022[27] Notes to Consolidated Financial Statements (unaudited) This section provides detailed explanations of NuZee, Inc.'s significant accounting policies, business combinations, equity activities, and other financial details supporting the unaudited consolidated financial statements 1. Basis of Presentation and Summary of Significant Accounting Policies This note details the GAAP and SEC basis for NuZee, Inc.'s unaudited interim financial statements, including reclassifications, consolidation principles, the 1-for-35 reverse stock split, earnings per share, and the company's going concern status - The financial statements are prepared in accordance with GAAP and SEC rules, with all significant intercompany accounts eliminated upon consolidation[29][31] - The Company completed a 1-for-35 reverse stock split on December 28, 2022, retroactively adjusting all share and per share information[34][35] - The Company has an accumulated deficit of approximately $67 million as of December 31, 2022, and recurring losses, which raise substantial doubt about its ability to continue as a going concern[38][39] Major Customers NuZee, Inc.'s revenue for the three months ended December 31, 2022, was highly concentrated, with Customer CL accounting for 29% of total revenue and 52% of accounts receivable Major Customer Concentration (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% | Major Customer Concentration (Three Months Ended December 31, 2021) | Customer Name | Sales Amount | % of Total Revenue | Accounts Receivable Amount | % of Total Accounts Receivable | | :------------ | :----------- | :----------------- | :------------------------- | :----------------------------- | | Customer WP | $310,551 | 30% | $279,273 | 35% | | Customer CU | $199,936 | 20% | $137,566 | 17% | Lease Obligations NuZee, Inc. holds various operating and finance lease obligations, with a weighted average remaining term of 1.5 years for both, and recognized $50,738 in sublease income for the quarter ended December 31, 2022 - Operating leases have a weighted average remaining lease term of 1.5 years and a weighted-average discount rate of 5.0% as of December 31, 2022[46] - The finance lease has a remaining lease term of 1.5 years and a discount rate of 12.75% as of December 31, 2022[46] - Sublease income of $50,738 was recognized for the three months ended December 31, 2022[49] Loans NuZee, Inc. had an outstanding loan balance of $10,724 for a delivery van as of December 31, 2022, with remaining payments scheduled through 2024 - Outstanding loan balance for a delivery van was $10,724 as of December 31, 2022, down from $12,692 on September 30, 2022[50] Remaining Loan Payments (as of December 31, 2022) | Year | Ford Motor Credit | | :--- | :---------------- | | 2023 | $8,005 | | 2024 | $2,719 | | Total | $10,724 | Revenue Recognition NuZee, Inc. adopted Topic 606, "Revenue from Contracts with Customers," on October 1, 2018, with no material impact on its consolidated financial statements - Topic 606, "Revenue from Contracts with Customers," was adopted on October 1, 2018, on a modified retrospective basis[52] - The adoption of Topic 606 did not have a material impact on the consolidated financial statements[52] Foreign Currency Translation NuZee, Inc. recorded a foreign currency translation gain of $115,583 for the three months ended December 31, 2022, as a component of stockholders' equity - Foreign currency translation adjustments recorded to other comprehensive income amounted to $115,583 for the three months ended December 31, 2022, compared to $32,688 in the prior year[53] Prepaid Expenses and Other Current Assets NuZee, Inc.'s prepaid expenses and other current assets decreased to $376,264 as of December 31, 2022, primarily comprising deposits, prepaid insurance, and rent Prepaid Expenses and Other Current Assets | Date | Amount | | :---------------- | :--------- | | December 31, 2022 | $376,264 | | September 30, 2022 | $547,773 | - The balance primarily consists of deposits on inventory purchases and facilities, prepaid insurance, and rent[55] Inventories NuZee, Inc.'s inventory, mainly raw materials, increased by $141,906 to $1,089,901 as of December 31, 2022, valued at the lower of cost or net realizable value Inventory Breakdown | Category | December 31, 2022 | September 30, 2022 | | :-------------- | :---------------- | :----------------- | | Raw materials | $1,086,761 | $887,632 | | Finished goods | $3,140 | $60,363 | | Inventory reserve | $- | $- | | Total | $1,089,901 | $947,995 | - Inventory increased by $141,906 from September 30, 2022, to December 31, 2022, primarily driven by raw materials[56][57] Equity Method Investment NuZee, Inc. holds a 50% equity method investment in NuZee LATIN AMERICA (NLA), recognizing a loss of $1,823 from this joint venture for the three months ended December 31, 2022 - The Company has a 50% equity method investment in NuZee LATIN AMERICA (NLA), a joint venture formed on January 9, 2020[58] - Losses recognized under the equity method of accounting were $1,823 for the three months ended December 31, 2022, compared to $1,157 in the prior year[59] 2. Geographic Concentration NuZee, Inc.'s net revenue for the three months ended December 31, 2022, saw an 18.5% decrease in North America and a 133.1% increase in South Korea, reflecting shifting operational focus Net Revenue by Geographic Segment (Three Months Ended December 31) | Segment | 2022 | 2021 | Change (YoY) | % Change (YoY) | | :------------ | :----------- | :----------- | :----------- | :------------- | | North America | $665,741 | $817,341 | $(151,600) | (18.5)% | | South Korea | $470,607 | $201,912 | $268,695 | 133.1% | | Total | $1,136,348 | $1,019,253 | $117,095 | 11.5% | Property and Equipment, Net by Geographic Segment | Segment | December 31, 2022 | September 30, 2022 | | :------------ | :---------------- | :----------------- | | North America | $303,835 | $378,546 | | South Korea | $170,033 | $144,865 | | Japan | $1,416 | $1,664 | | Total | $475,284 | $525,075 | - South Korea's net revenue more than doubled year-over-year, while North America's net revenue declined[61] 3. Business Combinations (Dripkit Acquisition) NuZee, Inc. acquired Dripkit, Inc. on February 25, 2022, for $876,176, recognizing goodwill that was fully impaired by September 30, 2022, with Dripkit contributing $42,159 in revenue and a net loss of $101,806 for the quarter - NuZee acquired Dripkit, Inc. on February 25, 2022, for an acquisition accounting purchase price of $876,176[62] Dripkit Acquisition Purchase Price Allocation | Category | Amount | | :------------------------ | :--------- | | 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 | | Goodwill | $531,412 | - Goodwill of $531,412 was recognized but subsequently impaired to $0 by September 30, 2022, along with impairment charges for Dripkit tradename and customer relationships[69] - Dripkit contributed $42,159 in revenue and a net loss of $101,806 for the three months ended December 31, 2022[70] 4. Intangible Assets As of December 31, 2022, NuZee, Inc.'s intangible assets consisted solely of tradenames with a net value of $132,500, after $7,500 in amortization expense for the quarter Intangible Assets (as of December 31, 2022) | Category | Amortization Period (Years) | Gross Amount | Accumulated Amortization | Net Amount | | :-------- | :-------------------------- | :----------- | :----------------------- | :--------- | | Tradenames | 5 | $140,000 | $7,500 | $132,500 | - Amortization expense for intangible assets was $7,500 for the three months ended December 31, 2022[75] 5. Issuance of Equity Securities NuZee, Inc. granted 3,370 restricted shares to independent directors, resulting in $62,839 in compensation expense for the three months ended December 31, 2022, while the prior year saw $1,721,018 from warrant exercises - 3,370 restricted shares were granted to five independent directors on March 17, 2022, leading to $62,839 in common stock compensation expense for the three months ended December 31, 2022[76] - In the three months ended December 31, 2021, 10,984 shares of common stock were issued from warrant exercises, generating aggregate net proceeds of $1,721,018[77] 6. Stock Options and Warrants NuZee, Inc.'s stock option expense significantly decreased to $197,108 for the three months ended December 31, 2022, with 109,632 stock options and 152,398 warrants outstanding - Stock option expense for the three months ended December 31, 2022, was $197,108, a decrease from $1,124,187 in the prior year[79] - As of December 31, 2022, 109,632 stock options were outstanding with a weighted average exercise price of $151.19 and a remaining contractual life of 7.2 years[79] - As of December 31, 2022, 152,398 warrants were outstanding with a weighted average exercise price of $158.24 and a remaining contractual life of 3.4 years[82] 7. Subsequent Events On January 6, 2023, NuZee, Inc. issued 6,000 shares of common stock to a third-party professional services provider for consulting advice - On January 6, 2023, 6,000 shares of common stock were issued to a professional services provider[83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of NuZee, Inc.'s financial condition and operational results for the three months ended December 31, 2022, covering business overview, Dripkit impact, geographic performance, detailed financial analysis, liquidity, and critical accounting policies Overview NuZee, Inc. is a specialty coffee company and leading co-packer of single-serve pour-over and coffee brew bag products, expanding its portfolio with DRIPKIT and pursuing strategic growth initiatives - NuZee is a specialty coffee company and a leading co-packer of single-serve pour-over and coffee brew bags in the United States[84] - The company expanded its product portfolio to include DRIPKIT pour-over products through the acquisition of Dripkit, Inc[84] - NuZee operates on a tolling arrangement business model, receiving a fee for almost every single-serve coffee product co-packed for customers[85] - The company also develops and sells NuZee branded single-serve coffee products, including Coffee Blenders and a new Coldpresso latte line[86] 2022 Reverse Stock Split NuZee, Inc. completed a 1-for-35 reverse stock split on December 28, 2022, following stockholder and Board approval, to adjust its common stock structure - A 1-for-35 reverse stock split of common stock was approved by stockholders on December 9, 2022, and became effective on December 28, 2022[89] Impact of the COVID-19 Pandemic The COVID-19 pandemic has not significantly impacted NuZee, Inc.'s business to date, with mitigation efforts in place, though potential future adverse effects on customer payments are acknowledged - The COVID-19 pandemic has not had a significant effect on the company's business or results of operations to date[90] - Adverse effects have been mitigated in part by sourcing coffee and other supplies from alternative suppliers in the United States[90] - The COVID-19 crisis may adversely affect the ability of customers to pay for goods on a timely basis, potentially impacting cash flows and results of operations[90] Geographic Concentration (MD&A) NuZee, Inc.'s North American net revenues decreased by 18.5%, while South Korean net revenues significantly increased by 133.1% for the three months ended December 31, 2022 Net Revenues by Geographic Operation (Three Months Ended December 31) | Geographic Area | 2022 | 2021 | Change (YoY) | % Change (YoY) | | :-------------- | :----------- | :----------- | :----------- | :------------- | | North America | $665,741 | $817,341 | $(151,600) | (18.5)% | | South Korea | $470,607 | $201,912 | $268,695 | 133.1% | Property and Equipment, Net by Geographic Operation | Geographic Area | December 31, 2022 | September 30, 2022 | | :-------------- | :---------------- | :----------------- | | North America | $303,835 | $378,546 | | South Korea | $170,033 | $144,865 | Results of Operations NuZee, Inc. achieved an 11% revenue increase, a 391% gross profit surge, and a 19% operating expense reduction, leading to a 22% lower net loss for the three months ended December 31, 2022 Revenue NuZee, Inc.'s revenue increased by 11% to $1,136,348 for the three months ended December 31, 2022, primarily due to increased South Korean co-packing arrangements and customer orders Revenue (Three Months Ended December 31) | Metric | 2022 | 2021 | Change (Dollars) | Change (%) | | :------ | :----------- | :----------- | :--------------- | :--------- | | Revenue | $1,136,348 | $1,019,253 | $117,095 | 11% | - The increase in revenue was primarily related to increased revenue in South Korea, driven by a new co-packing arrangement and increased orders from an existing significant customer[96] Cost of Sales and Gross Margin NuZee, Inc.'s gross profit significantly increased by 391% to $75,532 for the three months ended December 31, 2022, driven by decreased material and labor costs, particularly in South Korea Cost of Sales and Gross Margin (Three Months Ended December 31) | Metric | 2022 | 2021 | Change (Dollars) | Change (%) | | :------------ | :----------- | :----------- | :--------------- | :--------- | | Cost of sales | $1,060,816 | $1,003,882 | $56,934 | 6% | | Gross profit | $75,532 | $15,371 | $60,161 | 391% | | Gross profit % | 7% | 2% | | | - The significant increase in gross profit was primarily driven by decreased material and labor costs, particularly due to increased utilization of lower-cost services in South Korea[97] Operating Expenses NuZee, Inc.'s operating expenses decreased by 19% to $2,277,200 for the three months ended December 31, 2022, primarily due to an $864,240 reduction in stock-based compensation expense Operating Expenses (Three Months Ended December 31) | Metric | 2022 | 2021 | Change (Dollars) | Change (%) | | :--------------- | :----------- | :----------- | :--------------- | :--------- | | Operating Expenses | $2,277,200 | $2,811,189 | $(533,989) | (19)% | - The 19% decrease in operating expenses was primarily attributable to an $864,240 decrease in stock-based compensation expense[98] Net Loss NuZee, Inc.'s net loss decreased by 22% to $(2,183,206) for the three months ended December 31, 2022, primarily due to lower stock-based compensation expense Net Loss (Three Months Ended December 31) | Metric | 2022 | 2021 | Change (Dollars) | Change (%) | | :------- | :------------ | :------------ | :--------------- | :--------- | | Net Loss | $(2,183,206) | $(2,804,203) | $620,997 | (22)% | - The 22% decrease in net loss was primarily attributable to lower stock-based compensation expense[99] Liquidity and Capital Resources NuZee, Inc. has an accumulated deficit of $67 million and $6.49 million in cash, sufficient for nine months, but requires additional capital to continue as a going concern beyond that period - As of December 31, 2022, the company had an accumulated deficit of approximately $67 million and has not yet achieved profitability[100] - Cash balance as of December 31, 2022, was $6,491,819, expected to fund operations for at least nine months from February 13, 2023[102] - The company expects to need additional capital to fund planned operations beyond the next nine months and intends to seek additional funds through public or private equity offerings or debt financings[102][104] - If unable to raise additional funds, current capital is not expected to be sufficient for the next twelve months, raising substantial doubt about the company's ability to continue as a going concern[106] Contractual Obligations NuZee, Inc.'s contractual cash requirements totaled approximately $636,040 as of December 31, 2022, primarily for lease and loan obligations, with $429,448 due within 12 months, and no purchase obligations - Total payments for lease and loan obligations amounted to approximately $636,040 as of December 31, 2022[108] - Of the total contractual obligations, $429,448 is payable within 12 months as of December 31, 2022[108] - The company had no purchase obligations as of December 31, 2022[108] Summary of Cash Flows NuZee, Inc. experienced a net cash decrease of $1.82 million for the three months ended December 31, 2022, due to increased operating cash usage and a shift in financing activities from inflow to outflow Summary of Cash Flows (Three Months Ended December 31) | Activity | 2022 | 2021 | | :-------------------------------------- | :------------ | :------------ | | Cash used in operating activities | $(1,913,446) | $(1,579,731) | | Cash used in investing activities | $(16,514) | $(3,009) | | 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 | - Net cash used in operating activities increased by $333,715 year-over-year[109][110] - Financing activities shifted from a net cash inflow of $1,701,202 in 2021 (due to warrant exercises) to a net cash outflow of $8,857 in 2022[109][112] Critical Accounting Policies and Estimates NuZee, Inc.'s financial statements adhere to US GAAP, relying on management estimates, with no significant material changes in critical accounting policies or estimates during the quarter ended December 31, 2022 - Financial statements are prepared in accordance with US GAAP, requiring management to make estimates and assumptions[113] - No significant and material changes in critical accounting policies and estimates occurred during the three months ended December 31, 2022[114] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, NuZee, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - NuZee, Inc. is a smaller reporting company and is not required to provide information under this item[115] Item 4. Controls and Procedures NuZee, Inc.'s management, including the CEO and Interim CFO, concluded that disclosure controls and procedures were effective as of December 31, 2022, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and concluded to be effective as of December 31, 2022, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[116][117] - There were no changes in internal control over financial reporting during the quarter ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[118] PART II - Other Information This section covers other required information for NuZee, Inc.'s Form 10-Q, including legal proceedings, risk factors, equity sales, defaults, mine safety, and a list of exhibits Item 1. Legal Proceedings NuZee, Inc. is actively defending against three legal proceedings: Next Vision Litigation (breach of contract), Steeped, Inc. Litigation (breach of settlement, trademark infringement), and Curtin Litigation (harassment, discrimination, retaliation), believing all allegations lack merit Next Vision Litigation Next Vision, Inc. alleges NuZee, Inc. breached contract by delaying share issuance and imposing improper resale restrictions, with a trial set for August 11, 2023, which the company intends to vigorously defend - Next Vision, Inc. filed a complaint on November 23, 2021, alleging breach of contract due to delayed share issuance and improper six-month resale restriction on shares issued from exercised stock options[121] - The complaint also alleges an overstated income amount on the IRS Form 1099-B issued to the Consultant[121] - A trial date is set for August 11, 2023, and the company believes the allegations are without merit and intends to defend vigorously[122][123] Steeped, Inc. Litigation Steeped, Inc. filed a new complaint on January 27, 2023, alleging NuZee, Inc. breached a prior settlement agreement and intentionally interfered with contractual relations related to trademark infringement, seeking injunctions and damages - Steeped, Inc. filed a new complaint on January 27, 2023, alleging breach of a prior settlement agreement and intentional interference with contractual relations related to trademark infringement[124] - Plaintiff seeks a permanent injunction, impoundment of infringing goods, profits, actual damages, treble damages for willful infringement, and attorneys' fees[124] - The company believes the claims are defensible and that the damages sought are not aligned with the asserted causes of action[124] Curtin Litigation A former employee, Rosaline Curtin, filed a complaint on January 6, 2023, alleging harassment, gender discrimination, retaliation, and wrongful termination against NuZee, Inc., seeking various damages, which the company intends to vigorously defend - A former employee, Rosaline Curtin, filed a complaint on January 6, 2023, alleging harassment, gender discrimination, retaliation, and wrongful termination[126] - The complaint seeks compensatory damages, punitive damages, penalties, attorney's fees, and costs[126] - The company believes the allegations are without merit and intends to defend vigorously[126] Item 1A. Risk Factors NuZee, Inc. reports no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K filed on December 23, 2022 - No material changes to risk factors from those disclosed in the Annual Report on Form 10-K filed on December 23, 2022[128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds NuZee, Inc. had no unregistered sales of equity securities or use of proceeds to report for this period - None[129] Item 3. Defaults Upon Senior Securities NuZee, Inc. reported no defaults upon senior securities for this period - None[130] Item 4. Mine Safety Disclosures NuZee, Inc. had no mine safety disclosures to report for this period - None[131] Item 5. Other Information NuZee, Inc. had no other information to report for this period - None[132] Item 6. Exhibits This section lists all exhibits filed with NuZee, Inc.'s Form 10-Q, including corporate documents, an employment agreement, and Sarbanes-Oxley Act certifications - Exhibit 3.1-3.5: Articles of Incorporation and Bylaws[134] - Exhibit 10.1: Second Amended and Restated Employment Agreement with Shana Bowman[134] - Exhibit 31.1-31.2: Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act[134] - Exhibit 32.1-32.2: Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act[134] - Exhibit 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE: Inline XBRL Taxonomy Extension Documents[134] - Exhibit 104: Cover Page Interactive Data File[134] Signatures This section confirms the signing of NuZee, Inc.'s Form 10-Q on February 13, 2023, by the Chief Executive Officer and Interim Chief Financial Officer Report Signatories NuZee, Inc.'s Form 10-Q was signed on February 13, 2023, by Masateru Higashida, CEO, and Shana Bowman, Interim CFO - Date of Signing: February 13, 2023[139] - Signed by: Masateru Higashida, Chief Executive Officer and President (Principal Executive Officer), Secretary, Treasurer, and Director[139] - Signed by: Shana Bowman, Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)[139]