See
accompanying notes to financial statements.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
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 and hopes to open labs in other states that have legalized the sale of cannabis, beginning with California or
Arizona.
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, 2021. 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 June 30, 2022:
Schedule of Entities Under Common Control and Ownership
|
|
Jurisdiction
of |
|
|
Name
of Entity(1) |
|
Incorporation |
|
Relationship |
Digipath,
Inc.(2) |
|
Nevada |
|
Parent |
Digipath
Labs, Inc. |
|
Nevada |
|
Subsidiary |
Digipath
Labs CA, Inc.(3) |
|
California |
|
Subsidiary |
Digipath
Labs S.A.S.(4) |
|
Colombia |
|
Subsidiary |
VSSL
Enterprises, Ltd.(5) |
|
Canada |
|
Subsidiary |
TNM
News Corp.(6) |
|
Nevada |
|
Subsidiary |
(1) |
All entities are in the form of a corporation. |
(2) |
Holding company, which owns each of the wholly-owned subsidiaries.
All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company. |
(3) |
Formed during the second fiscal quarter of 2021, but has not
yet commenced significant operations. |
(4) |
Formed during the first fiscal quarter of 2019, but has not
yet commenced significant operations. |
(5) |
Acquired on March 11, 2020. |
(6) |
Minimal activity, dissolved on July 28, 2021. |
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.
Fair
Value of Financial Instruments
Under
FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement
attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein.
The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the balance sheets 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.
Revenue
is primarily generated through our subsidiary, Digipath Labs, Inc., 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.
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 goods or services are the
consideration received for 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.
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 condensed consolidated financial statements, as of June 30, 2022, the Company had negative working capital
of $2,189,146, accumulated recurring losses of $19,192,307, and only $225,233 of cash on hand, which is not 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
The
Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC
820”). 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 Company’s financial assets
and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
at the measurement date.
Level
2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g.,
interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation
or other means (market corroborated inputs).
Level
3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or
liability.
The
following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of June
30, 2022 and September 30, 2021, respectively:
Summary of Financial Instruments at Fair Value on Recurring Basis
| |
Fair Value Measurements at June 30, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | |
Cash | |
$ | 225,233 | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | |
Lease liabilities | |
| - | | |
| - | | |
| 355,061 | |
Notes payable | |
| - | | |
| 946,068 | | |
| - | |
Convertible notes payable | |
| - | | |
| - | | |
| 1,728,701 | |
| |
Fair Value Measurements at September 30, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | | |
| | | |
| | |
Cash | |
$ | 295,932 | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | |
Lease liabilities | |
| - | | |
| - | | |
| 444,131 | |
Notes payable | |
| - | | |
| 598,941 | | |
| - | |
Convertible notes payable, net of discounts of $98,188 | |
| - | | |
| - | | |
| 1,307,282 | |
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by ASC Topic
820-10-35.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June 30, 2022
or the year ended September 30, 2021.
Note
4 – 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 June 30, 2021, we loaned C3 Labs, Inc. (“C3 Labs”) a total of $1,047,649. The loans
bear interest at an annual rate of 8%. These loans are evidenced by secured demand notes, and are secured by a lien on the borrower’s
assets and have a maturity date of August 23, 2022. The Company has recorded interest income of $37,061 during the nine months ended
June 30, 2022, with total accrued interest of $37,991 as of June 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. The Company is currently in
possession of equipment of C3 Labs, which it is in the process of liquidating. The Company anticipates that the proceeds of such liquidation
will be insufficient to repay the Company in full all amounts owed to it by C3 Labs, and as such has recorded an allowance of 358,670.
As of June 30, 2022, the company has sold equipment of C3 Labs for proceeds of $175,000, which it has applied to the outstanding balance
owed to it by C3 Labs.
Note
5 – Fixed Assets
Fixed
assets consist of the following at June 30, 2022 and September 30, 2021:
Schedule of Fixed Assets
| |
| | | |
| | |
| |
June 30, 2022 | | |
September 30, 2021 | |
Software | |
$ | 125,903 | | |
$ | 125,903 | |
Office equipment | |
| 71,601 | | |
| 71,601 | |
Furniture and fixtures | |
| 29,879 | | |
| 29,879 | |
Lab equipment | |
| 1,455,479 | | |
| 1,453,716 | |
Leasehold improvements | |
| 496,600 | | |
| 494,117 | |
Lab equipment held under capital leases | |
| 99,193 | | |
| 99,193 | |
Fixed assets, gross | |
| 2,278,655 | | |
| 2,274,409 | |
Less: accumulated depreciation | |
| (1,797,116 | ) | |
| (1,627,157 | ) |
Total | |
$ | 481,539 | | |
$ | 647,252 | |
Depreciation
and amortization expense totaled $169,959 and $233,663 for the nine months ended June 30, 2022 and 2021, respectively.
Note
6 – Leases
The
Company leases its operating and office facility under a non-cancelable real property lease agreement that expires on August 31, 2025.
The Company also has a financing lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is
economically feasible to continue to operate, management expects to enter into a new lease upon expiration. The real property lease contains
provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased
premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on
the information available at the commencement date in determining the present value of lease payments.
The
components of lease expense were as follows:
Schedule of Components of Lease Expense
| |
| | | |
| | |
| |
For the Nine | | |
For the Nine | |
| |
Months Ended | | |
Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | |
Operating lease cost | |
$ | 89,155 | | |
$ | 6,477 | |
Finance lease cost: | |
| | | |
| | |
Amortization of assets | |
| 72,187 | | |
| 68,408 | |
Interest on lease liabilities | |
| 1,266 | | |
| 20,747 | |
Total net lease cost | |
$ | 162,608 | | |
$ | 95,632 | |
Supplemental
balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information
| |
| | | |
| | |
| |
June 30, 2022 | | |
September 30, 2021 | |
Operating leases: | |
| | | |
| | |
Operating lease assets | |
$ | 341,734 | | |
$ | 413,884 | |
| |
| | | |
| | |
Current portion of operating lease liabilities | |
| 100,685 | | |
$ | 93,601 | |
Noncurrent operating lease liabilities | |
| 254,376 | | |
| 330,151 | |
Total operating lease liabilities | |
$ | 355,061 | | |
$ | 423,752 | |
Finance lease: | |
| | | |
| | |
Equipment, at cost | |
$ | 99,193 | | |
$ | 99,193 | |
Accumulated amortization | |
| (54,556 | ) | |
| (39,677 | ) |
Equipment, net | |
$ | 44,637 | | |
$ | 59,516 | |
| |
| | | |
| | |
Current portion of finance lease liabilities | |
$ | - | | |
$ | 20,379 | |
Noncurrent finance lease liabilities | |
| - | | |
| - | |
Total finance lease liabilities | |
$ | - | | |
$ | 20,379 | |
| |
| | | |
| | |
Weighted average remaining lease term: | |
| | | |
| | |
Operating leases | |
| 3.17 years | | |
| 3.92 years | |
Finance leases | |
| 0.00 years | | |
| .55 years | |
| |
| | | |
| | |
Weighted average discount rate: | |
| | | |
| | |
Operating leases | |
| 5.75 | % | |
| 5.75 | % |
Finance lease | |
| 18.41 | % | |
| 18.41 | % |
Supplemental
cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information
| |
| | | |
| | |
| |
For the Nine | | |
For the Nine | |
| |
Months Ended | | |
Months Ended | |
| |
June 30, 2022 | | |
June 30, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows used for operating leases | |
$ | 45,490 | | |
$ | 62,471 | |
Financing cash flows used for finance leases | |
$ | 20,379 | | |
$ | 24,443 | |
| |
| | | |
| | |
Leased assets obtained in exchange for lease liabilities: | |
| | | |
| | |
Total operating lease liabilities | |
$ | - | | |
$ | 528,616 | |
Total finance lease liabilities | |
$ | - | | |
$ | 99,193 | |
The
following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including
common area maintenance fees, under non-cancelable operating leases as of June 30, 2022:
Schedule of Future Minimum Annual Lease Commitments Under Operating Leases
| |
| | |
Fiscal Year Ending | |
Minimum Lease | |
September 30, | |
Commitments | |
2022 (for the three months remaining) | |
$ | 29,532 | |
2023 | |
| 119,468 | |
2024 | |
| 123,543 | |
2025 | |
| 116,891 | |
2026 | |
| - | |
Total future undiscounted lease payments | |
| 389,434 | |
Less interest | |
| 34,373 | |
Present value of lease payments | |
| 355,061 | |
Less current portion | |
| 100,685 | |
Long-term operating lease liabilities | |
$ | 254,376 | |
There
Company does not have any obligations under finance leases as of June 30, 2022:
Note
7 –Notes Payable
Notes
payable consists of the following at June 30, 2022 and September 30, 2021, respectively:
Schedule of Notes Payable
| |
| | | |
| | |
| |
June 30, 2022 | | |
September 30, 2021 | |
On September 10, 2021, the Company, entered into a Secured Promissory note for $675,000 from US Canna Lab I, LLC, (the “Company Canna Lab Note”). The Company 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. As of June 30, 2022, a total $675,000 of the funds have been advanced to the Company. In addition, the Company was advanced an additional $115,000 of funds under the same terms as the original note. | |
$ | 790,000 | | |
$ | 400,000 | |
| |
| | | |
| | |
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. | |
| 156,068 | | |
| 198,941 | |
| |
| | | |
| | |
Total notes payable | |
| 946,068 | | |
| 598,941 | |
Less: current maturities | |
| (545,880 | ) | |
| (259,425 | ) |
Notes payable | |
$ | 400,188 | | |
$ | 339,516 | |
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $65,061
and $11,609 during the nine months ended June 30, 2022 and 2021, respectively.
Note
8 – Convertible Notes Payable
Convertible
notes payable consists of the following at June 30, 2022 and September 30, 2021, respectively:
Schedule of Convertible Notes Payable
| |
| | | |
| | |
| |
June 30, 2022 | | |
September 30, 2021 | |
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. | |
$ | 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. | |
| 150,000 | | |
| 150,000 | |
| |
| | | |
| | |
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. | |
| 350,000 | | |
| 350,000 | |
| |
| | | |
| | |
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 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. During the nine months ended June 30, 2022, the Company repaid $40,000 of the balance of this note. In addition, during the nine months ended June, 2022, the Company was advanced additional loans of $362,765 from the lender under the same terms. | |
| 718,235 | | |
| 355,470 | |
| |
| | | |
| | |
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. | |
| 350,000 | | |
| 350,000 | |
| |
| | | |
| | |
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 | |
| 1,768,235 | | |
| 1,405,470 | |
Less: unamortized debt discounts | |
| (39,533 | ) | |
| (98,188 | ) |
Total convertible debt | |
| 1,728,702 | | |
| 1,307,282 | |
Less: current maturities | |
| 1,728,702 | | |
| 1,050,000 | |
Convertible notes payable | |
$ | - | | |
$ | 257,282 | |
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 $98,188. The discount is amortized on a straight-line
basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement
date. The Company recorded debt amortization expense on the aforementioned debt discount in the amount of $58,654 for the nine months
ended June 30, 2022. Unamortized discount as of June 30, 2022 is $39,533
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 $79,795 and $61,099
for the nine months ended June 30, 2022 and 2021, respectively.
The
Company recognized interest expense for the nine months ended June 30, 2022 and 2021, respectively, as follows:
Schedule of Interest Expense
| |
| | | |
| | |
| |
June 30, 2022 | | |
June 30, 2021 | |
| |
| | |
| |
Interest on short term loans | |
$ | - | | |
$ | 3,123 | |
Interest on lease liabilities | |
| 13,106 | | |
| 6,477 | |
Interest on notes payable | |
| 65,785 | | |
| 11,609 | |
Amortization of beneficial conversion features | |
| 58,654 | | |
| 8,322 | |
Interest on convertible notes | |
| 79,796 | | |
| 76,309 | |
Total interest expense | |
$ | 217,341 | | |
$ | 105,840 | |
Note
9 - Changes in Stockholders’ Deficit
Convertible
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”) and 1,500,000 have been designated as
Series B Convertible Preferred Stock (“Series B Preferred”), with the remaining 2,500,000 shares available for
designation from time to time by the Board as set forth below. As of June 30, 2022, there were 1,047,942 shares of Series A
Preferred issued and outstanding and 333,600 shares of Series B 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 June 30, 2022 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. |
During
the nine months ended June 30, 2022, the Company offered to the Series A Preferred shareholders the ability to convert their Preferred
A shares into Preferred B shares for an additional investment of 20% of their initial Series A investment. One Series A shareholder invested
additional cash proceeds of $55,600 for 55,600 Series B shares and converted 278,000 of its Series A into Series B.
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 June 30, 2022 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.
On
December 30, 2021, the Company entered into an Exchange Agreement with one of the Company’s institutional investors (the “Investor”),
pursuant to which the Investor exchanged 278,000 shares of the Series A Preferred for 278,000 shares of the Series B Preferred. In addition,
on December 30, 2021, the Investor purchased 55,600 shares of Series B Preferred Stock at a price of $1.00 per share, resulting in gross
proceeds to the Company of $55,600.
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 75,146,820 shares were issued and outstanding as of June
30, 2022.
During
the nine months ended June 30, 2022, the Company issued 1,500,000 shares of its common stock in exchange for services rendered to the
Company, by the chairman of the board of directors, with a total fair value $52,500 based on the closing price of the Company’s
common stock on the dates of grant.
During
the nine months ended June 30, 2022, the Company issued 2,166,667 shares of its common stock in exchange for services rendered to the
Company, by third party consultants, with a total fair value $91,000 based on the closing price of the Company’s common stock on
the dates of grant.
During
the nine months ended June 30, 2022, the Company issued 250,000 shares of its common stock to settle outstanding payables in the amount
of $7,500.
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 previously amended on May 20, 2014. 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. Options to purchase a total of 6,020,000 shares of common stock were outstanding as of June 30, 2022.
During
the nine months ended June 30, 2022, the Company issued to an unrelated third party, options to purchase 1,000,000 shares of its common
stock in exchange for services rendered to the Company with a total fair value $33,716. The Company estimated the fair value using the
Black-Scholes Pricing Model, based on a volatility rate of 186% and call option values of $0.0337 and exercise prices of $0.035.
Amortization
of Stock-Based Compensation
A
total of $66,949 and $63,768 of stock-based compensation expense was recognized during the nine months ended June 30, 2022 and 2021,
respectively, as a result of the vesting of common stock options issued. As of June 30, 2022 a total of $23,488 of unamortized expense
remains to amortized over the vesting period.
The
following is a summary of information about the stock options outstanding at June 30, 2022.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.05
– $0.13 |
|
|
|
6,020,000 |
|
|
6.26
years |
|
$ |
0.07 |
|
|
|
5,466,428 |
|
|
$ |
0.07 |
|
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, 2021 | |
| 5,620,000 | | |
$ | 0.08 | |
Options
issued | |
| 1,000,000 | | |
$ | 0.04 | |
Options
forfeited | |
| (600,000 | ) | |
$ | 0.11 | |
| |
| | | |
| | |
Balance,
June 30, 2022 | |
| 6,020,000 | | |
$ | 0.07 | |
| |
| | | |
| | |
Exercisable,
June 30, 2022 | |
| 5,466,428 | | |
$ | 0.07 | |
As
of June 30, 2022, these options in the aggregate had no intrinsic value as the per share market price of $0.0125 of the Company’s
common stock as of such date was less than the weighted-average exercise price of these options of $0.07.
Note
11 – Common Stock Warrants
Warrants
to purchase a total of 2,368,334 shares of common stock were outstanding as of June 30, 2022.
The
following is a summary of information about our warrants to purchase common stock outstanding at June 30, 2022.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.10
- 0.26 |
|
|
|
2,368,334 |
|
|
4.91
years |
|
$ |
0.16 |
|
|
|
2,368,334 |
|
|
$ |
0.16 |
|
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, 2021 | |
| 2,535,001 | | |
$ | 0.17 | |
Warrants
granted | |
| - | | |
| - | |
Warrants
expired | |
| (166,667 | ) | |
| 0.26 | |
| |
| | | |
| | |
Balance, June 30, 2022 | |
| 2,368,334 | | |
$ | 0.16 | |
| |
| | | |
| | |
Exercisable, June 30, 2022 | |
| 2,368,334 | | |
$ | 0.16 | |
As
of June 30, 2022, these warrants in the aggregate had no intrinsic value as the per share market price of $0.0125 of the Company’s
common stock as of such date was less than the weighted-average exercise price of these warrants of $0.16.
Note
12 – 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
13 – Subsequent Events
On
July 25, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Todd Denkin, the
Company’s President, pursuant to which Mr. Denkin purchased 1,000 shares of the Company’s newly designated Series C Preferred
Stock (“Series C Preferred Stock”) for a purchase price of $0.10 per share of Series C Preferred Stock.
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.