We are a specialty coffee company and, we believe, a leading co-packer of single serve pour over coffee in the United States, as well as a preeminent co-packer of coffee brew bags, which is also referred to as tea-bag style coffee. In addition to our portfolio of innovative single serve pour over and coffee brew bag coffee products, we have recently expanded our product portfolio to offer a third type of single serve coffee format, DRIPKIT pour over products, as a result of our acquisition of substantially all of the assets of Dripkit, Inc. ("Dripkit") in February 2022, as further described below. Our new, premium 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 coffee drinkers in the United States. Our mission is to leverage our position as a co-packer at the forefront of the North American single serve coffee market to revolutionize the way single serve coffee is enjoyed in the United States. While the United States is our core market, we also have manufacturing and sales operations in Korea and a joint venture in Latin America.

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

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

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

Since 2016, we have been primarily focused on single serve pour over coffee production. Over this time, we have developed expertise in the operation of our sophisticated packing equipment and the related production of our single serve pour over coffee products at our manufacturing facilities. We have also expanded our co-packing expertise to coffee brew bag coffee products, which we believe are gaining traction in the United States, as well as our DRIPKIT pour over products, which is our innovative new product offering that we believe has significant growth potential.

Operational Capacity and Recent Developments

We currently lease manufacturing facilities in Vista, California and Seoul, Korea to produce our single serve pour over or coffee brew bag coffee products. In November 2021, we entered into a new lease in Seoul, Korea for a larger office and manufacturing space. In addition, we have recently expanded our office and manufacturing space in Vista, California by approximately 2,000 square feet and also extended our current lease through March 2025 and our sub-leased property through January 2023.

As a result of our capital investments since 2015, including our acquisition of packing equipment from manufacturers whom we believe are the global leaders for supplying such machines, we presently have the annual capacity to produce up to 150 million single serve coffee products (pour over or coffee brew bags) at our two manufacturing facilities, which we believe is sufficient to meet our current and anticipated manufacturing requirements. In addition, in May 2022 we announced a new partnership pursuant to which a manufacturing partner in Knoxville, Tennessee has agreed to provide us with additional manufacturing, coffee roasting and co-packing capabilities, and facilitate distribution efforts to the Eastern United States. In connection with the foregoing operational developments and following our strategic analysis of our current and anticipated facility requirements, we have determined to transition our manufacturing operations away from the facility we previously operated in Plano, Texas. However, we intend to retain our executive office and administrative operations in Plano, Texas.

On February 25, 2022 (the "Closing Date"), the Company acquired substantially all of the assets and certain specified liabilities of Dripkit (the "Acquisition") pursuant to the Asset Purchase Agreement, dated as of February 21, 2022 (the "Asset Purchase Agreement"), by and among the Company, Dripkit, and Dripkit's existing investors (the "Stock Recipients") who executed joinders to the Asset Purchase Agreement as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the aggregate purchase price paid by the Company for the Acquisition was $860,000, plus the assumption of certain assumed liabilities, subject to certain adjustments and holdbacks as provided in the Asset Purchase Agreement.

On the Closing Date, after adjustments and holdbacks under the Asset Purchase Agreement, the Company paid the aggregate purchase price as follows: (i) cash paid by the Company to Dripkit was $257,000, and (ii) the Company issued to the Stock Recipients an aggregate of 178,681 shares of the Company's common stock. In addition, the Company repaid the entire outstanding principal amount of Dripkit's Small Business Association Economic Injury Disaster Loan in the amount of $78,656.

On May 2, 2022, pursuant to the terms of the Asset Purchase Agreement, the Bulk Sales Holdback Amount was used to satisfy sales and use taxes owed by Dripkit to the State of New York as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the amounts remaining after offsetting the cost of these sales and use taxes were distributed as follows: (i) $39,237 was distributed to Dripkit on May 9, 2022, in connection with the Cash Bulk Sales Holdback Amount, and (ii) 18,475 shares of common stock were issued to the Stock Recipients on April 25, 2022, in connection with the Stock Bulk Sales Holdback Amount.

For additional information regarding the Acquisition and the Asset Purchase Agreement, see Note 4-Business Combinations to the Unaudited Consolidated Financial Statements.

Dripkit operates as a new Dripkit Coffee business division that is wholly owned by NuZee, Inc.

Impact of the COVID-19 Pandemic

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In the nine months ended June 30, 2022, as a result of the COVID-19 pandemic and responses to the outbreak, certain of our customers slowed or delayed purchases of our co-packing services or single serve coffee products, and we also believe that potential sales of our single serve coffee products to new or potential customers in the hospitality industry were adversely impacted. We have also experienced delays in the submission and approval of custom artwork and packaging as well as the shipment to us of coffee for co-packing. In addition, we incurred lost production time due to employee absences. We do not believe, however, that these delays and disruptions had a significant effect on our business or results of operations to date, and in some cases, we have been able to mitigate these adverse effects in part by sourcing coffee and other supplies from alternative suppliers in the United States. The COVID-19 crisis may have an adverse impact on our business and financial results going forward that we are not currently able to fully determine or quantify. The COVID-19 crisis may adversely affect the ability of our customers to pay for goods delivered on a timely basis, or at all. Any increase in the amount or deterioration in the collectability of accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital.

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

For the three months ended June 30, 2022, net revenues attributable to our operations in North America totaled $630,496 compared to $419,648 of net revenues attributable to our operations in North America for the three months ended June 30, 2021. For the nine months ended June 30, 2022, net revenues attributable to our operations in North America totaled $2,031,781 compared to $1,077,986 of net revenues attributable to our operations in North America for the nine months ended June 30, 2021. Additionally, as of June 30, 2022, $400,842 of our property and equipment, net was attributable to our North American operations, compared to $517,966 attributable to our North American operations as of September 30, 2021.

For the three months ended June 30, 2022, net revenues attributable to our operations in Asia totaled $143,523 compared to $90,383 of net revenues attributable to our operations in Asia during the three months ended June 30, 2021. For the nine months ended June 30, 2022, net revenues attributable to our operations in Asia totaled $476,564 compared to $364,097 of net revenues attributable to our operations in Asia during the nine months ended June 30, 2021. Additionally, as of June 30, 2022, $211,454 of our property and equipment, net was attributable to our Asian operations, compared to $156,058 attributable to our Asian operations as of September 30, 2021.

Our results of operations for the three and nine months ended June 30, 2022 includes the operations of Dripkit for the period from February 25, 2022, the date of the Acquisition, to June 30, 2022. The Acquisition of Dripkit did not contribute to the periods prior to its acquisition in our financial statements, which therefore impacts comparisons to 2021 for our results of operations in the discussion that follows.

Comparison of three months ended June 30, 2022 and 2021:

For the three months ended June 30, 2022, our revenue increased by $263,987, or approximately 52%, compared with the three months ended June 30, 2021. This increase was primarily related to increased co-packing revenue to existing and new customers. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the three months ended June 30, 2022.

Cost of sales and gross margin

For the three months ended June 30, 2022, we generated a total gross loss of ($83,653) from sales of our products and co-packing services, compared to a total gross profit of $96,586 for the three months ended June 30, 2021. The gross margin rate was (11%) for the three months ended June 30, 2022, and 19% for the three months ended June 30, 2021. This decrease in gross profit was driven primarily by increased materials and labor costs as compared to the same period in the prior year.

For the three months ended June 30, 2022, the Company's operating expenses totaled $2,546,608 compared to $3,165,840 for the three months ended June 30, 2021, representing a 20% decrease. This decrease is primarily attributable to a decrease in stock-based compensation expense, offset by an increase in operating expenses associated with greater staffing levels, marketing activities, and administrative costs.

For the three months ended June 30, 2022, we generated a net loss of $2,633,892 versus $3,067,042 for the three months ended June 30, 2021. This decrease in net loss is primarily attributable to lower stock-based compensation expense, offset by an increase in cost of sales, and an increase in operating expenses associated with greater staffing levels, marketing activities, and administrative costs.

Comparison of nine months ended June 30, 2022 and 2021:

For the nine months ended June 30, 2022, our revenue increased by $1,066,262, or approximately 74% compared with the nine months ended June 30, 2021. This increase was primarily related to increased co-packing revenue to existing and new customers. In the third and fourth quarters of fiscal year 2021, we expanded our U.S. sales and support operations, which resulted in increased orders and increased co-packing opportunities in the nine months ended June 30, 2022.

Cost of sales and gross margin

For the nine months ended June 30, 2022, we generated a total gross loss of ($67,301), from sales of our products and co-packing services, compared to a total gross profit of $89,240 for the nine months ended June 30, 2021. The gross margin rate was (3%) for the nine months ended June 30, 2022, and 6% for the nine months ended June 30, 2021. This decrease in gross profit was driven primarily by increased materials and labor costs as compared to the same period in the prior year.

For the nine months ended June 30, 2022, the Company's operating expenses totaled $8,554,276 compared to $15,103,252 for the nine months ended June 30, 2021, representing a 43% decrease. This decrease is primarily attributable to a decrease in stock-based compensation expense and professional services costs, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs.

For the nine months ended June 30, 2022, we generated a net loss of $8,661,792 versus $15,048,722 for the nine months ended June 30, 2021. This decrease in net loss is primarily attributable to lower stock-based compensation expense, impairment charges and professional services costs, offset by an increase in operating expenses associated with greater staffing levels, marketing activities and administrative costs.

Since our inception in 2011, we have incurred significant losses, and as of June 30, 2022, we had an accumulated deficit of approximately $61.5 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 June 30, 2022, we had a cash balance of $7,523,099. We believe that our cash and cash equivalents will be sufficient to fund our planned operations and capital expenditure requirements for at least twelve months from August 11, 2022. This evaluation is based on relevant conditions and events that are currently known or reasonably knowable. As a result, we could deplete our available capital resources sooner than we currently expect, and a reduction in consumer demand for, or revenues from the sale of, our single serve coffee products could further constrain our cash resources. We have based these estimates on assumptions that may prove to be wrong, and our operating projections, including our projected revenues from sales of our single serve coffee products, may change as a result of many factors currently unknown to us.

On April 13, 2022, pursuant to Securities Act registration exemptions under Regulation S and/or Section 4(a)(2) of the Securities Act, we sold 884,778 units (the "2022 Units"), at a price of $2.00 per 2022 Unit for aggregate net proceeds of approximately $1.65 million, with each 2022 Unit consisting of (a) one share of our common stock and (b) one warrant (each, a "2022 Warrant" and collectively, the "2022 Warrants") to purchase one whole share of our common stock with an initial exercise price of $2.00 per share. For additional information regarding the 2022 Warrants, see Note 7- Stock Options and Warrants to the Unaudited Consolidated Financial Statements.

On August 5, 2022, we terminated our Equity Distribution Agreement, dated December 28, 2021(the "Equity Distribution Agreement"), with Maxim Group LLC, as agent (the "Agent"), pursuant to which we could from time to time offer and sell up to an aggregate of $20.0 million of shares of our common stock, subject to any applicable limits when using Form S-3, through the Agent in "at-the-market-offerings" (the "ATM Program"), as defined in Rule 415 under the Securities Act. Prior to termination, we issued and sold 49,326 shares of our common stock under the Equity Distribution Agreement, raising net proceeds of $95,256. We terminated the Equity Distribution Agreement because we do not intend to raise additional capital through the ATM Program.

On August 10, 2022, we completed an underwritten public offering (the "Offering") of 4,200,000 shares of our common stock, pursuant to an Underwriting Agreement dated as of August 7, 2022 and a prospectus supplement to the Company's effective shelf registration statement on Form S-3 (Registration No. 333-248531). The aggregate gross proceeds from the Offering were approximately $3.4 million. We received proceeds of approximately $3.2 million, after deducting underwriting discounts and before deducting Offering costs payable by us.

In the future, we expect to seek to raise additional capital through public or private equity offerings. We also 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. For additional information regarding the 2021 Warrants, see Note 7-Stock Options and Warrants to the Unaudited Consolidated Financial Statements.

In the long term, we expect we will need to raise additional funds to support our operating activities, 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 single serve 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. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. Until we can generate a sufficient amount of revenue, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders.

Our significant contractual cash requirements as of June 30, 2022, 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 June 30, 2022, we had payments for lease and loan obligations of approximately $821,713, of which $219,439 are payable within 12 months as of June 30, 2022. We had no purchase obligations as of June 30, 2022.

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