Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 – Nature of Business and Significant Accounting Policies
Nature
of Business
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media
firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing,
cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under
ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the
quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing
lab in Nevada since 2015.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The
unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on
Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated
Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements,
and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The interim Condensed Consolidated Financial Statements should
be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative
of the results that might be expected for the entire fiscal year.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control
and ownership at March 31, 2023:
Schedule of Entities Under Common Control and Ownership
| | |
| Jurisdiction of | | |
| | |
| Name of Entity | |
| Incorporation | | |
| Relationship | |
| Digipath, Inc.(1) | |
| Nevada | | |
| Parent | |
| Digipath Labs, Inc. | |
| Nevada | | |
| Subsidiary | |
| Digipath Labs CA, Inc (2) | |
| California | | |
| Subsidiary | |
| Digipath Labs S.A.S.(3) | |
| Colombia | | |
| Subsidiary | |
| VSSL Enterprises, Ltd.(4) | |
| Canada | | |
| Subsidiary | |
| (1) |
Holding
company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent
company. |
| (2) |
Formed
during the second fiscal quarter of 2021, but has not yet commenced significant operations. |
| (3) |
Formed
during the first fiscal quarter of 2019, but has not yet commenced significant operations. |
| (4) |
Acquired
on March 11, 2020. |
The
consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company
transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries will be collectively
referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s headquarters are located
in Las Vegas, Nevada and substantially all of its customers are within the United States.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for
fair presentation of the information contained therein.
Correction
of an Error
Stock-based
compensation were reported in the six months ended June 30, 2022 as $202,143 in error. The error was corrected in the annual 2022 10-K
as a component of professional fees. In addition, the Company reported the exchange of Series A Preferred Stock for Series B Stock as
an exchange with equal value in error. The effect of the error corrections on the prior periods has been determined to be immaterial,
however, the Company has labeled the column headings for the prior periods as “revised.” For the six months ended March 31,
2022, the financial statements of the line items affected by the revision are as follows:
Schedule
of Correction of an Error
Consolidated
Statement of Operations
| Line items for Q2-2022 effected by the restatement | |
Previously Reported | | |
Correction of Error | | |
Effect of Discontinued operations | | |
Revised | |
| Professional Fees | |
$ | 554,861 | | |
$ | (12,722 | ) | |
$ | (71,317 | ) | |
$ | 470,822 | |
| Total operating expenses | |
| 1,029,172 | | |
| (12,722 | ) | |
| (463,493 | ) | |
| 552,957 | |
| Operating loss | |
| (543,485 | ) | |
| 12,722 | | |
| (22,194 | ) | |
| (552,957 | ) |
| Net Income (loss) | |
| (663,921 | ) | |
| 12,722 | | |
| (13,758 | ) | |
| (664,957 | ) |
| Deemed Dividend | |
| - | | |
| (192,154 | ) | |
| - | | |
| (192,154 | ) |
| Net Income (loss) to common shareholders | |
| (663,921 | ) | |
| (179,432 | ) | |
| - | | |
| (843,353 | ) |
Consolidated
Statement of Cash Flows
| Line items for Q2-2022 effected by the restatement | |
Previously Reported | | |
Correction of Error | | |
Effect of Discontinued operations | | |
Revised | |
| Net Loss | |
$ | (663,921 | ) | |
$ | 12,722 | | |
$ | (13,758 | ) | |
$ | (664,957 | ) |
| Stock-based compensation | |
| 202,143 | | |
| (12,722 | ) | |
| - | | |
| 189,421 | |
| | |
| | | |
| | | |
| | | |
| | |
| Non-cash Investing and Financing Activities | |
| | | |
| | | |
| | | |
| | |
| Conversion of Series A preferred into Series B preferred | |
| 278,000 | | |
| (192,154 | ) | |
| - | | |
| 85,846 | |
| Deemed dividend on preferred exchange | |
| | | |
| 192,154 | ) | |
| - | | |
| 192,154 | |
Fair
Value of Financial Instruments
The
Company adopted ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three
levels are defined as follows:
| |
- |
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| |
- |
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| |
- |
Level
3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
The
carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value
primarily due to the short term nature of the instruments.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following
steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance
obligation is satisfied.
Our
revenue is primarily generated through our subsidiary, Digipath Labs, Inc. (“Digipath Labs”), which recognizes revenue from
the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed
fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at
which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require
payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of
its receivables.
Discontinued
Operations
On
April 20, 2023, the Company and Digipath Labs entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DPL
NV, LLC (“Buyer”), pursuant to which Digipath Labs has agreed to sell substantially all of its assets to Buyer for a cash
purchase price of $2,300,000 (the “Purchase Price”). The business of an entity that is in the process of disposing its assets
by sale, or that intends to cease operations, is reported as discontinued operations if the transaction represents a strategic shift
that will have a major effect on an entity’s operations and financial results. As such, the Company’s lab testing business
is now reported as discontinued operations.
Assets
and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations
in the Consolidated Balance Sheets as of March 31, 2023 and September 30, 2022. The results of discontinued operations are aggregated
and presented separately in the Consolidated Statements of Operations as net income from discontinued operations for the periods ended
March 31, 2023 and 2022. The cash flows of the discontinued operations are reflected as cash flows of discontinued operations within
the Company’s Consolidated Statements of Cash Flows for the periods ended March 31, 2023 and 2022.
Amounts
presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical
basis of assets, liabilities, results of operations, and cash flows of Digipath Labs. The discontinued operations exclude general corporate
allocations.
Stock-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718)
and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided
in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair
value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete
or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently
large disincentives for nonperformance.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and
liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered.
The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more
likely than not.
Uncertain
Tax Positions
In
accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities
based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance
on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various
taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s
tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating
the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for
probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited
and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The
assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s
various filing positions.
Recently
Issued Accounting Pronouncements
There
are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its
financial position, results of operations, or cash flows.
Note
2 – Going Concern
As
shown in the accompanying consolidated financial statements, As of March 31, 2023, the Company had negative working capital of $2,993,815
an accumulated recurring losses of $20,316,599, and $115,868 of cash on hand, which may not be sufficient to sustain operations. These
factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new
customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short-term operations.
Management believes these factors will contribute toward achieving profitability.
The
consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s
ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company
be unable to continue as a going concern.
Note
3 – Fair Value of Financial Instruments
Under
FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates
a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures.
Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required
for items measured at fair value.
The
Company has certain financial instruments that must be measured under the new fair value standard. The following schedule summarizes
the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of March 31, 2023 and September 30,
2022, respectively:
Summary
of Financial Instruments at Fair Value on Recurring Basis
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| | |
Fair Value Measurements at March 31, 2023 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Assets | |
| | | |
| | | |
| | |
| Cash | |
$ | 115,868 | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| Liabilities | |
| | | |
| | | |
| | |
| Notes payable | |
| - | | |
| 665,000 | | |
| - | |
| Convertible notes payable, net of discounts of $81,752 | |
| - | | |
| - | | |
| 1,686,482 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| | |
Fair Value Measurements at September 30, 2022 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Assets | |
| | | |
| | | |
| | |
| Cash | |
$ | 56,168 | | |
$ | - | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| Liabilities | |
| | | |
| | | |
| | |
| Notes payable | |
| - | | |
| 665,000 | | |
| - | |
| Convertible notes payable, net of discounts of $84,767 | |
| - | | |
| - | | |
| 1,683,467 | |
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the six months ended March 31, 2023.
Note
4 – Related Party Transactions
During
the six months ended March 31, 2023 the Company incurred fees of $30,000 for services from its CFO. As of March 31, 2023 the Company
has accrued a total of $45,000 in fees related to past services to its CFO.
During
the six months ended March 31, 2023 the Company incurred fees of $42,000 for services from its Board of directors. As of March 31, 2022
the Company has accrued a total of $168,000 in fees related to past services to the Board of Directors.
During
the six months ended March 31, 2023, the Company granted 3,400,000 shares of its common stock to the officers and 1,000,000 shares of
its common stock to members of the board of directors as compensation for services performed with a fair value of $24,820 and $7,300,
respectively. As of March 31, 2023, the shares have not been issued and therefore has been recorded as a stock payable.
Note
5 – Note Receivable
On
various dates between December 28, 2018 and June 13, 2019, we loaned Northwest Analytical Labs, Inc. a total of $95,000. The loans bear
interest at an annual rate of 10%, are evidenced by secured demand notes, and are secured by a lien on the borrower’s assets. An
allowance for doubtful accounts for the full value of the notes has been recorded due to the uncertainty of collectability.
On
various dates between August 23, 2021 and September 30, 2022, we loaned C3 Labs, Inc. (“C3 Labs”) a total of $1,047,649.
The loans bore interest at an annual rate of 8%. These loans were evidenced by secured demand notes, and were secured by a lien on the
borrower’s assets and have a maturity date of August 23, 2022. The Company had recorded total accrued interest of $64,017 as of
September 30, 2022.
The
loans were made in connection with a potential acquisition of a controlling interest in C3 Labs pursuant to a letter of intent. On March
11, 2022, the Company notified the current owners of C3 Labs of its termination of the letter of intent and took possession of the equipment
of C3 Labs (“C3 Equipment”), which it is in the process of liquidating.
On
December 8, 2022, the Company entered into an Asset Purchase Agreement with Invictus Wealth Group (“Invictus”), whereby the
Company agreed to sell the C3 Equipment to Invictus for a total purchase price of $900,000. The purchase price consisted of an upfront
payment of $275,000, and a Note Receivable (“Invictus Note”) in the amount of $625,000. The Invictus Note has a maturity
date of December 31, 2023, accrues interest at a rate of 10% per annum, and provides for principal payments of $100,000 each due on June
30, 2023 and September 30, 2023, with the final payment of $425,000 due on December 31, 2023. The Company has recorded a full allowance
against the Invictus Note as collectability cannot be assured as of the date of this filing. As of March 31, 2023 the Company received
$235,000 of the initial $275,000, and the final $40,000 was received in May 2023. The Company is working to amend the Invictus Note to
reflect the delays of the initial closing conditions.
Note
6 – Fixed Assets
Fixed
assets consist of the following at March 31, 2023 and September 30, 2022:
Schedule of Fixed Assets
| | |
2023 | | |
2022 | |
| | |
As of | |
| | |
March 31, | | |
September 30, | |
| | |
2023 | | |
2022 | |
| Lab equipment | |
| - | | |
| 55,000 | |
| Fixed assets, gross | |
| - | | |
| 55,000 | |
| Less: accumulated depreciation | |
| - | | |
| - | |
| Total | |
$ | - | | |
$ | 55,000 | |
During
the six months ended March 31, 2023, the Company recorded impairment expense in the amount of $55,000 related to equipment acquired with
the anticipation of the C3 Labs acquisition. Upon the Company’s decision to terminate the acquisition, the equipment was deemed
to be impaired.
Note
7 –Notes Payable
Notes
payable consists of the following at March 31, 2023 and September 30, 2022, respectively:
Schedule of Notes Payable
| | |
March 31, 2023 | | |
September 30, 2022 | |
| | |
| | |
| |
| Notes payable | |
$ | - | | |
$ | - | |
| On September 10, 2021, the Company issued a Secured Promissory note in the principal amount of $675,000 to US Canna Lab I, LLC (the “Canna Lab Note”). The Canna Lab Note carries interest at 12% per annum and is due on September 10, 2024, with monthly principal and interest payments of $22,419.66 beginning on October 1, 2021. In addition, the Company was advanced an additional $115,000 of funds during the year ended September 30, 2022 under the same terms as the original note. During the year ended September 30, 2022, the Company repaid $125,000 of the principal balance on the note. As a result of the Company not meeting the monthly payment obligations, the CannaLab Note is in technical default, however, no default notice has been provided by CannaLab as of the date of this filing. There are no additional obligations of the Company under default with the exception of being due on demand. | |
$ | 665,000 | | |
$ | 665,000 | |
| | |
| | | |
| | |
| Total notes payable | |
| 665,000 | | |
| 665,000 | |
| Less: current maturities | |
| (665,000 | ) | |
| (665,000 | ) |
| Notes payable | |
$ | - | | |
$ | - | |
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $29,770
and $39,444 during the six months ended March 31, 2023 and 2022.
Notes
payable – discontinued operations
| On December 26, 2019, the Company financed the purchase of $377,124 of lab equipment, in part, with the proceeds of a bank loan in the amount of $291,931. The loan bears interest at the rate of 5.75% per annum and requires monthly payments of $5,622 over the five-year term of the loan ending on December 26, 2024. The Company’s obligations under this loan are secured by a lien on the purchased equipment. | |
| 111,325 | | |
| 141,348 | |
Note
8 – Convertible Notes Payable
Related
Party Convertible notes payable consist of the following at March 31, 2023 and September 30, 2022, respectively:
Schedule
of Related Party Convertible Notes Payable
| | |
March
31, | | |
September 30, | |
| | |
2023 | | |
2022 | |
| Convertible notes payable | |
$ | - | | |
$ | 310,272 | |
| On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000. The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $400,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share. On August 8, 2022, the note holder agreed to extend the maturity date of the note to February 11, 2024. In exchange for the extension the Company agreed to issue 4,550,000 common shares, which were recorded as debt discount with a relative fair value of $43,788. As a result of the shares issued upon the extension agreement, the lender now holds more the 5% of the total outstanding common shares, and is therefore considered a related party. | |
$ | 350,000 | | |
$ | 350,000 | |
| | |
| | | |
| | |
| Total related party convertible notes payable | |
| 350,000 | | |
| 350,000 | |
| Less: unamortized debt discounts | |
| (25,238 | ) | |
| (39,728 | ) |
| Total convertible debt | |
| 324,762 | | |
| 310,272 | |
| Less: current maturities | |
| (324,762 | ) | |
| - | |
| Related party convertible notes payable | |
$ | - | | |
$ | 310,272 | |
Convertible
notes payable consist of the following at March 31, 2023 and September 30, 2022, respectively:
Schedule of Convertible Notes Payable
| | |
March 31, | | |
September 30, | |
| | |
2023 | | |
2022 | |
| Convertible notes payable | |
$ | - | | |
$ | 174,726 | |
| On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $10,000 of proceeds and the promissory note was increased to $60,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $10,000 of principal into 333,334 shares of common stock at a conversion price of $0.03 per share. On August 8, 2022, the note holder agreed to extend the maturity date of the note to February 11, 2024. In exchange for the extension, the Company agreed to issue 650,000 common shares, which were recorded as debt discount, with a relative fair value of $6,989. | |
$ | 50,000 | | |
$ | 50,000 | |
| | |
| | | |
| | |
| On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $200,000. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share. On August 8, 2022, the note holder agreed to extend the maturity date of the note to February 11, 2024. In exchange for the extension the Company agreed to issue 1,950,000 common shares, which were recorded as debt discount, with a relative fair value of $20,968. | |
| 150,000 | | |
| 150,000 | |
| | |
| | | |
| | |
| On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On February 22, 2021, the noteholder converted $90,000 of principal into 3,000,000 shares of common stock at a conversion price of $0.03 per share. On September 30, 2021 the note was amended to add the outstanding short term notes and accrued interest into the principal balance, making the outstanding balance $355,470, as amended. As a result of the modification, the Company recorded an additional debt discount of $98,188, as a result of the beneficial conversion feature of the additional principal. On October 1, 2022, the Company further extended the maturity date to February 11, 2024. In connection with the modification, the Company issued warrants to purchase 4,621,105 shares of common stock, with a fair value of $32,166 which was recorded as a debt discount. | |
| 355,469 | | |
| 355,469 | |
| | |
| | | |
| | |
| On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On October 1, 2022, the Company further extended the maturity date to February 11, 2024. In connection with the modification, the Company issued warrants to purchase 4,550,000 shares of common stock, with a fair value of $31,671 which was recorded as a debt discount. | |
| 350,000 | | |
| 350,000 | |
| On October 1, 2022, The Company entered into a senior secured convertible note that carries an 8% interest rate, which matures on February 11, 2024. The Note documented the advances made during the year ended September 30, 2022 in the amount of $362,765. The principal and interest on the Note are convertible into common shares at a conversion price of $0.01. In connection with the note, the Company issued warrants to purchase 4,715,945 shares of common stock, with a fair value of $30,102 which was recorded as a debt discount. | |
| 362,765 | | |
| 362,765 | |
| | |
| | | |
| | |
| On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. | |
| 150,000 | | |
| 150,000 | |
| | |
| | | |
| | |
| Total convertible notes payable | |
| 1,418,234 | | |
| 1,418,234 | |
| Less: unamortized debt discounts | |
| (75,851 | ) | |
| (45,039 | ) |
| Total convertible debt | |
| 1,342,383 | | |
| 1,373,195 | |
| Less: current maturities | |
| (1,342,383 | ) | |
| (1,198,469 | ) |
| Convertible notes payable | |
$ | - | | |
$ | 174,726 | |
In
addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible notes by allocating
a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature
was calculated on the commitment date using the effective conversion price of the convertible notes. This intrinsic value is limited
to the portion of the proceeds allocated to the convertible debt.
The
aforementioned accounting treatment resulted in a total debt discount equal to $93,938 during the six months ended March 31, 2023. The
discount is amortized on a straight-line basis from the dates of issuance until the earlier of the stated redemption date of the debt,
as noted above, or the actual settlement date. The Company recorded debt amortization expense attributed to the aforementioned debt discount
in the amounts of $77,616 and $39,103, during the six months ended March 31, 2023 and 2022, respectively. Unamortized discount as of
March 31, 2023 is $101,089
All
of the convertible notes limit the maximum number of shares that can be owned by each note holder as a result of the conversions to common
stock to 4.99% of the Company’s issued and outstanding shares.
The
Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $72,473 and $58,128
for the six months ended March 31, 2023 and 2022, respectively.
The
Company recognized interest expense for the six months ended March 31, 2023 and 2022, respectively, as follows:
Schedule of Interest Expense
| | |
March 31, | | |
March 31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Interest on notes payable | |
| 29,770 | | |
| 39,444 | |
| Amortization of beneficial conversion features | |
| 77,616 | | |
| 39,103 | |
| Interest on convertible notes | |
| 72,473 | | |
| 58,128 | |
| Total interest expense | |
$ | 179,859 | | |
$ | 136,675 | |
Note
9 – Stockholders’ Equity
Preferred
Stock
The
Company is authorized to issue 10,000,000
shares of preferred stock with a par value of $0.001
per share, of which 6,000,000
have been designated as Series A Convertible Preferred Stock (“Series A Preferred”), 1,500,000
have been designated as Series B Convertible Preferred Stock (“Series B Preferred”), and 1,000
shares have been designated as Series C Preferred Stock (“Series C Preferred”) with the remaining 2,499,000
shares available for designation from time to time by the Board as set forth below. As of March 31, 2023, there were 1,047,942
shares of Series A Preferred issued and outstanding, 333,600
shares of Series B Preferred issued and outstanding and no shares of Series C Preferred issued and outstanding. The Board of
Directors is authorized to determine any number of series into which the undesignated shares of preferred stock may be divided and
to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Each share of Series
A Preferred is currently convertible into five shares of common stock and each share of Series B Preferred is currently convertible
into twenty-five shares of common stock.
Series
A
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event
of certain negative actions undertaken by the Company. At the current conversion price, the 1,047,942 shares of Series A Preferred outstanding
at March 31, 2023 are convertible into 5,239,710 shares of the common stock of the Company. No holder is permitted to convert its shares
of Series A Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common
stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.
Additional
terms of the Series A Preferred and include the following:
| ● |
The
shares of Series A Preferred are entitled to dividends when, as and if declared by the Board as to the shares of the common stock
of the Company into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described
above. |
| |
|
| ● |
Upon
the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, the shares of Series
A Preferred are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase price per share
of Series A Preferred plus all accrued but unpaid dividends. |
| |
|
| ● |
The
Series A Preferred plus all declared but unpaid dividends thereon automatically will be converted into common stock, at the then
applicable conversion rate, upon the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred. |
| ● |
Each
share of Series A Preferred will carry a number of votes equal to the number of shares of common stock into which such Series A Preferred
may then be converted, subject to the 4.99% beneficial ownership limitation described above. The Series A Preferred generally will
vote together with the common stock and not as a separate class, except as provided below. |
| |
|
| ● |
Consent
of the holders of the outstanding Series A Preferred is required in order for the Company to: (i) amend or change the rights, preferences,
privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred; (ii) authorize, create or issue
shares of any class of stock having rights, preferences, privileges or powers superior to the Series A Preferred; (iii) reclassify
any outstanding shares into shares having rights, preferences, privileges or powers superior to the Series A Preferred; or (iv) amend
the Company’s Articles of Incorporation or Bylaws in a manner that adversely affects the rights of the Series A Preferred. |
| |
|
| ● |
Pursuant
to the Securities Purchase Agreements, holders of Series A Preferred are entitled to unlimited “piggyback” registration
rights on registrations by the Company, subject to pro rata cutback at any underwriter’s discretion. |
Series
B
The
Series B Preferred were designated on December 29, 2021. Each share of Series B Preferred has a Stated Value of $1.00 and is currently
convertible into common stock at a conversion price equal to $0.04. The conversion price of the Series B Preferred is subject to equitable
adjustment in the event of a stock split, stock dividend or similar event with respect to the common stock, and in the event of the issuance
of common stock by the Company below the conversion price, subject to customary exceptions. At the current conversion price, the 333,600
shares of Series B Preferred outstanding at March 31, 2023 are convertible into 8,340,000 shares of the common stock of the Company.
No holder is permitted to convert its shares of Series B Preferred if such conversion would cause the holder to beneficially own more
than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder
by providing at least sixty-five days’ notice.
Additional
terms of the Series B Preferred and include the following:
| ● |
The
shares of Series B Preferred are not entitled to dividends, provided that if dividends are paid on the shares of common stock of
the Company, the Series B Preferred will be entitled to dividends based on the number shares of common stock which the Series B Preferred
may then be converted. |
| |
|
| ● |
Upon
the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, or upon a change
in control whereby a stockholder gains control of 50% or more of the outstanding shares of common stock, the shares of Series B Preferred
are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase price per share of Series
B Preferred plus all accrued but unpaid dividends. |
| |
|
| ● |
Each
share of Series B Preferred carries a number of votes equal to the number of shares of common stock into which such Series B Preferred
may then be converted. |
Due
to the change in control provision of the Series B Preferred, the Series B Preferred is classified as temporary equity on the balance
sheet.
Series
C
The
Series C Preferred were designated on July 20, 2022. The principal feature of the Series C Preferred Stock is that it provides the holder
thereof, so long as he or she is an executive officer of the Company, with the ability to vote with the holders of the Company’s
common stock on all matters presented to the holders of common stock, whether at a special or annual meeting, by written action in lieu
of a meeting or otherwise, on the basis of 200,000 votes for each share of Series C Preferred Stock. The shares of Series C Preferred
Stock are not convertible into common stock, are not entitled to dividends, are not subject to redemption, and have a stated value of
$0.10 per share payable on any liquidation of the Company in preference to any payment payable to the holders of common stock. As of
March 31, 2023, there we no shares of Series C Preferred outstanding.
Additional
terms of the Series C Preferred and include the following:
| ● |
The
shares of Series C Preferred are not entitled to dividends. |
| |
|
| ● |
Upon
the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, or upon a change
in control whereby a stockholder gains control of 50% or more of the outstanding shares of common stock, the shares of Series C Preferred
are entitled to receive, prior to any distribution to the holders of common stock, 100% of the stated value per share of Series C
Preferred. |
| |
|
| ● |
The
shares of Series C Preferred are not entitled to conversion rights. |
On
March 2, 2023, the Company entered into a Preferred Stock Repurchase Agreement with Todd Denkin, the Company’s president, pursuant
to which Mr. Denkin surrendered his Series C Preferred back to the Company for the purchase price of $100.
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 82,296,820 shares were issued and outstanding as of March
31, 2023.
During
the six months ended March 31, 2023, the Company issued 7,150,000 shares of its common stock in settlement of the common stock payable
in the amount of $71,745.
During
the six months ended March 31, 2023, the Company granted 3,400,000 shares
of its common stock to the officers and 1,000,000 shares of its common stock to members of the board of directors as compensation for
services performed with a fair value of $24,820 and $7,300, respectively. As of March 31, 2023, the shares have not been issued and as
therefore has been recorded as a stock payable.
Note
10 – Common Stock Options
Stock
Incentive Plan
On
June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted on March
5, 2012, and terminated on March 5, 2022. As amended, the 2012 Plan provides for the issuance of up to 11,500,000 shares of common stock
pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors of, and consultants to,
the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify as incentive stock options under
the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date
of grant.
During
the six months ended March 31, 2023, the Company issued to certain employees, options to purchase 2,100,000 shares of its common stock
in exchange for services rendered to the Company with a total fair value $10,446. The Company estimated the fair value using the Black-Scholes
Pricing Model, based on a volatility rate of 184% and call option values of $0.00497 and exercise prices of $0.0056. The options have
a term of 5.75 years and vest nine months after the grant date.
Amortization
of Stock-Based Compensation
A
total of $17,510 and $136,921 of stock-based compensation expense was recognized during the six months ended March 31, 2023 and 2022,
respectively, as a result of the vesting of common stock options issued. As of March 31, 2023 a total of $8,125 of unamortized expense
remains to be amortized over the vesting period.
The
following is a summary of information about the stock options outstanding at March 31, 2023.
Summary of Common Stock Options Outstanding
| | | |
Shares Underlying | |
| Shares Underlying Options Outstanding | | |
Options Exercisable | |
| | | |
| | |
Weighted | | |
| | |
| | |
| |
| | | |
Shares | | |
Average | | |
Weighted | | |
Shares | | |
Weighted | |
| Range of | | |
Underlying | | |
Remaining | | |
Average | | |
Underlying | | |
Average | |
| Exercise | | |
Options | | |
Contractual | | |
Exercise | | |
Options | | |
Exercise | |
| Prices | | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
| | | |
| | |
| | |
| | |
| | |
| |
| $ | 0.0056
– $0.13 | | |
| 8,120,000 | | |
| 5.53 years | | |
$ | 0.052 | | |
| 5,912,857 | | |
$ | 0.069 | |
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the six months ended March 31, 2023:
Schedule of Weighted-Average Assumptions Used for Grants
| | |
March 31, | |
| | |
2023 | |
| | |
| |
| Average risk-free interest rates | |
| 3.88 | % |
| Average expected life (in years) | |
| 2.90 | |
| Volatility | |
| 184 | % |
The
Black-Scholes option pricing model was developed for use in estimating the fair value of short-term traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company’s common stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s
opinion the existing models do not necessarily provide a reliable single measure of the fair value of its common stock options. During
the six months ended March 31, 2023, there were no options granted with an exercise price below the fair value of the underlying stock
at the grant date.
The
weighted average fair value of options granted with exercise prices at the current fair value of the underlying stock during the six
months ended March 31, 2023, was approximately $0.005 per option.
The
following is a summary of activity of outstanding common stock options:
Schedule of Activity of Outstanding Common Stock Options
| | |
| | |
Weighted | |
| | |
| | |
Average | |
| | |
Number | | |
Exercise | |
| | |
of Shares | | |
Price | |
| Balance, September 30, 2022 | |
| 6,020,000 | | |
$ | 0.069 | |
| Options issued | |
| 2,100,000 | | |
| 0.006 | |
| Options forfeited | |
| - | | |
| - | |
| | |
| | | |
| | |
| Balance, March 31, 2023 | |
| 8,120,000 | | |
$ | 0.052 | |
| | |
| | | |
| | |
| Exercisable, March 31, 2023 | |
| 5,912,857 | | |
$ | 0.069 | |
As
of March 31, 2023, these options in the aggregate had $4,830 and $0 of intrinsic value for the outstanding and exercisable options,
respectively, based on the per share market price of $0.008 of the Company’s common stock as of such date.
Note
11 – Common Stock Warrants
Warrants
to purchase a total of 15,387,050 shares of common stock were outstanding as of March 31, 2023.
The
following is a summary of information about our warrants to purchase common stock outstanding at March 31, 2023 (including those issued
to both investors and service providers).
Summary of Common Stock Warrants Outstanding
| | | |
Shares Underlying | |
| Shares Underlying Warrants Outstanding | | |
Warrants Exercisable | |
| | | |
| | |
Weighted | | |
| | |
| | |
| |
| | | |
Shares | | |
Average | | |
Weighted | | |
Shares | | |
Weighted | |
| Range of | | |
Underlying | | |
Remaining | | |
Average | | |
Underlying | | |
Average | |
| Exercise | | |
Warrants | | |
Contractual | | |
Exercise | | |
Warrants | | |
Exercise | |
| Prices | | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
| | | |
| | |
| | |
| | |
| | |
| |
| $ | 0.0074-0.10 | | |
| 15,387,050 | | |
| 9.26 years | | |
$ | 0.02 | | |
| 15,387,050 | | |
$ | 0.02 | |
The
following is a summary of activity of outstanding common stock warrants:
Schedule of Outstanding Common Stock Warrants Activity
| | |
| | |
Weighted | |
| | |
| | |
Average | |
| | |
Number | | |
Exercise | |
| | |
of Shares | | |
Price | |
| Balance, September 30, 2022 | |
| 1,500,000 | | |
$ | 0.10 | |
| Warrants granted | |
| 13,887,050 | | |
$ | 0.007 | |
| Warrants expired | |
| - | | |
| - | |
| | |
| | | |
| | |
| Balance, March 31, 2023 | |
| 15,387,050 | | |
$ | 0.016 | |
| | |
| | | |
| | |
| Exercisable, March 31, 2023 | |
| 15,387,050 | | |
$ | 0.016 | |
As
of March 31, 2023, these warrants in the aggregate had $6,944 of intrinsic value as the per share market price of $0.008 of the Company’s
common stock as of such date was greater than the exercise price of certain warrants.
Note
12 – Discontinued Operations
On
April 20, 2023, the Company, and Digipath Labs entered into the Purchase Agreement with DPL NV, LLC (“Buyer”), pursuant to
which Digipath Labs has agreed to sell substantially all of its assets to Buyer for a cash purchase price of $2,300,000 (the “Purchase
Price”) as described in Note 1 above. The Purchase Price is subject to adjustments at closing based on, among other things, the
amount by which the working capital of Digipath Labs at the closing is greater or less than $150,000.
The
Purchase Agreement includes a number of representations, warrantees, covenants and conditions to closing customary for this type of transaction.
In addition, the closing of the transaction is subject to the approval of the Nevada Cannabis Compliance Board (the “CCB”).
In the event CCB approval is not obtained by June 30, 2024, or any other condition to closing has not been satisfied by such date, either
party may terminate the Purchase Agreement.
Pursuant
to the Purchase Agreement, the Buyer deposited $230,000 into an escrow account upon the execution of the Purchase Agreement, and such
amount will continue to be held in escrow for a 12-month period following closing to satisfy any indemnification claims Buyer may have
against Digipath Labs.
The
balance sheets of Digipath Labs are summarized below:
Schedule
of Discontinued Operations Income Statement Balance Sheet and Additional Disclosures
| | |
March
31, 2023 | | |
September 30, 2022 | |
| Current assets: | |
| | | |
| | |
| Accounts receivable, net | |
$ | 315,625 | | |
$ | 335,085 | |
| Deposits | |
| 18,675 | | |
| 25,141 | |
| Other current assets | |
| 24,361 | | |
| 32,971 | |
| Total current assets | |
| 358,661 | | |
| 393,197 | |
| | |
| | | |
| | |
| Right-of-use asset | |
| 266,418 | | |
| 316,961 | |
| Fixed assets, net | |
| 360,630 | | |
| 405,823 | |
| Total long term assets | |
| 627,048 | | |
| 722,784 | |
| Total Assets | |
$ | 985,709 | | |
$ | 1,115,981 | |
| | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 337,758 | | |
$ | 334,909 | |
| Accrued expenses | |
| 34,964 | | |
| 32,571 | |
| Current portion of operating lease liabilities | |
| 121,748 | | |
| 100,685 | |
| Current maturities of notes payable | |
| 62,693 | | |
| 60,920 | |
| Total current liabilities | |
| 557,163 | | |
| 529,085 | |
| | |
| | | |
| | |
| Operating lease liabilities | |
| 158,233 | | |
| 229,825 | |
| Notes payable | |
| 48,632 | | |
| 80,428 | |
| Total long term liabilities | |
| 206,865 | | |
| 310,253 | |
| Total Liabilities | |
$ | 764,028 | | |
$ | 839,338 | |
The
statements of operations of Digipath Labs combined are summarized below:
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
For the Three Months Ended | | |
For the Six Months Ended | |
| | |
March 31, | | |
March 31 | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| | |
| | |
| | |
| | |
| |
| Revenues | |
$ | 760,710 | | |
$ | 604,735 | | |
$ | 1,487,465 | | |
$ | 1,304,320 | |
| Cost of sales | |
| 459,608 | | |
| 396,032 | | |
| 882,443 | | |
| 818,633 | |
| Gross profit | |
| 301,102 | | |
| 208,703 | | |
| 605,022 | | |
| 485,687 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| General and administrative | |
| 224,346 | | |
| 193,007 | | |
| 504,990 | | |
| 392,176 | |
| Professional fees | |
| 20,688 | | |
| 26,413 | | |
| 43,460 | | |
| 71,317 | |
| Total operating expenses | |
| 245,034 | | |
| 219,420 | | |
| 548,450 | | |
| 463,493 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating income(loss) | |
| 56,068 | | |
| (10,717 | ) | |
| 56,572 | | |
| 22,194 | |
| | |
| | | |
| | | |
| | | |
| | |
| Other income (expense): | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
| (1,745 | ) | |
| (4,904 | ) | |
| (3,706 | ) | |
| (8,436 | ) |
| Total other income (expense) | |
| (1,745 | ) | |
| (4,904 | ) | |
| (3,706 | ) | |
| (8,436 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Net income (loss) | |
$ | 54,323 | | |
$ | (15,621 | ) | |
$ | 52,866 | | |
$ | 13,758 | |
Note
13 – Commitments and Contingencies
Legal
Contingencies
There
are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such
proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding
adverse to our business or has a material interest adverse to our business.
Note
14 – Subsequent Events
On
April 20, 2023, the Company and Digipath Labs entered into the Purchase Agreement with DPL NV, LLC as described in Notes 1 and 12 above.
In
connection with the transactions contemplated by the Purchase Agreement, Digipath, Digipath Labs and Buyer entered into a Management
Services Agreement (the “Management Services Agreement”), dated as of April 30, 2023, pursuant to which Buyer has been engaged
to manage the operation of Digipath Labs’ cannabis testing laboratory (the “Lab”). The effectiveness of the Management
Services Agreement is subject to the approval of the CCB, which has not yet been obtained. Pursuant to the Management Services Agreement,
after the payment of expenses to third parties and a payment of 15% of cash collections to Digipath (but not less than $15,000) in each
month, Buyer will be entitled to a management fee of $10,000 per month. Any remaining cash generated from the operation of the Lab in
any month will be payable 45% to the Buyer and 55% to the Company.