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, 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 December 31, 2022:
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.
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.
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.
Basic
and Diluted Loss Per Share
The
basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted
net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average
number of common shares outstanding plus potential dilutive securities. For the three months ended December 31, 2022 and 2021, potential
dilutive securities of 91,161,317 and 50,368,696 shares issuable upon conversion of convertible notes payable, 6,020,000 and 6,020,000
shares issuable upon exercise of options, 15,387,050 and 2,535,001 shares issuable upon exercise of warrants, and 13,579,710 and 13,579,710
shares issuable upon conversion of Preferred A and Preferred B shares, respectively, had an anti-dilutive effect and were not included
in the calculation of diluted net loss per common share.
Recently
Issued Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible
preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with
current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash
or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts
in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective
for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years,
with early adoption permitted. The Company is evaluating the impact that this ASU may have on its consolidated financial statements.
Note
2 – Going Concern
As
shown in the accompanying condensed consolidated financial statements, as of December 31, 2022, the Company had negative working capital
of $1,465,347, accumulated recurring losses of $20,249,101, and only $155,832 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 following schedule summarizes
the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of December 31, 2022 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 December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Assets | |
| | |
| | |
| |
Cash | |
$ | 155,832 | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | |
Lease liabilities | |
| - | | |
| - | | |
| 305,246 | |
Notes payable | |
| - | | |
| 791,444 | | |
| - | |
Convertible notes payable, net of discounts of $97,387 | |
| - | | |
| - | | |
| 1,320,849 | |
Convertible notes payable – related parties, net of discounts of
$32,403 | |
| - | | |
| - | | |
| 317,597 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
|
|
Fair
Value Measurements at September 30, 2022 |
|
|
|
Level
1 |
|
|
Level
2 |
|
|
Level
3 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
56,168 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Lease
liabilities |
|
|
- |
|
|
|
- |
|
|
|
330,510 |
|
Notes
payable |
|
|
- |
|
|
|
806,348 |
|
|
|
- |
|
Convertible
notes payable, net of discounts of $45,039 |
|
|
- |
|
|
|
- |
|
|
|
1,373,195 |
|
Convertible notes payable – related parties, net of discounts of
$39,728 |
|
|
- |
|
|
|
- |
|
|
|
310,272 |
|
Convertible
notes payable, net |
|
|
- |
|
|
|
- |
|
|
|
1,373,195 |
|
Convertible notes payable – related parties, net |
|
|
- |
|
|
|
- |
|
|
|
310,272 |
|
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 three months ended December
31, 2022.
Note
4 – Related Party Transactions
During
the three months ended December 31, 2022 the Company incurred fees of $15,000 for services from its CFO. As of December 31, 2022 the
Company has accrued a total of $30,000 in fees related to past services to its CFO.
During
the three months ended December 31, 2022 the Company incurred fees of $21,000 for services from its Board of directors. As of December
31, 2022 the Company has accrued a total of $147,000 in fees related to past services to the Board of Directors.
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 being liquidated.
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 December 31, 2022 and through the
date of this filing, the Company has received $100,000 of the initial $275,000, and as a result the Company will continue to maintain
possession of the C3 Equipment until the remainder of the upfront payment has been received.
Note
6 – Fixed Assets
Fixed
assets consist of the following at December 31, 2022 and September 30, 2022:
Schedule of Fixed Assets
| |
December, | | |
September 30, | |
| |
2022 | | |
2022 | |
Software | |
$ | 125,903 | | |
$ | 125,903 | |
Office equipment | |
| 80,343 | | |
| 71,601 | |
Furniture and fixtures | |
| 29,879 | | |
| 29,879 | |
Lab equipment | |
| 1,400,479 | | |
| 1,455,479 | |
Leasehold improvements | |
| 510,076 | | |
| 510,076 | |
Lab equipment held under capital leases | |
| 99,193 | | |
| 99,193 | |
Fixed assets, gross | |
| 2,245,873 | | |
| 2,292,131 | |
Less: accumulated depreciation | |
| (1,867,067 | ) | |
| (1,831,308 | ) |
Total | |
$ | 378,806 | | |
$ | 460,823 | |
Depreciation
and amortization expense totaled $35,759 and $58,469 for the three months ended December 31, 2022 and 2021, respectively.
During
the three months ended December 31, 2022, 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 – 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 | | |
For the | |
| |
Three Months Ended | | |
Three Months Ended | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Operating lease cost | |
$ | 29,718 | | |
$ | 29,718 | |
Finance lease cost: | |
| | | |
| | |
Amortization of assets | |
| - | | |
| 8,467 | |
Interest on lease liabilities | |
| - | | |
| 809 | |
Total net lease cost | |
$ | 29,718 | | |
$ | 38,994 | |
Supplemental
balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information
| |
| | | |
| | |
| |
December 31, | | |
September 30, | |
| |
2022 | | |
2022 | |
Operating leases: | |
| | | |
| | |
Operating lease assets | |
$ | 291,869 | | |
$ | 316,961 | |
| |
| | | |
| | |
Current portion of operating lease liabilities | |
| 105,649 | | |
$ | 100,685 | |
Noncurrent operating lease liabilities | |
| 199,597 | | |
| 229,825 | |
Total operating lease liabilities | |
$ | 305,246 | | |
$ | 330,510 | |
Finance lease: | |
| | | |
| | |
Equipment, at cost | |
$ | 99,193 | | |
$ | 99,193 | |
Accumulated amortization | |
| (64,475 | ) | |
| (59,516 | ) |
Equipment, net | |
$ | 34,718 | | |
$ | 39,677 | |
| |
| | | |
| | |
Weighted average remaining lease term: | |
| | | |
| | |
Operating leases | |
| 2.67 years | | |
| 2.92 years | |
| |
| | | |
| | |
Weighted average discount rate: | |
| | | |
| | |
Operating leases | |
| 5.75 | % | |
| 5.75 | % |
Supplemental
cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information
| |
| | | |
| | |
| |
For the Three | | |
For the Three | |
| |
Months Ended | | |
Months Ended | |
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows used for operating leases | |
$ | 29,532 | | |
$ | 22,582 | |
Financing cash flows used for finance leases | |
$ | - | | |
$ | 8,467 | |
| |
| | | |
| | |
Leased assets obtained in exchange for lease liabilities: | |
| | | |
| | |
Total operating lease liabilities | |
$ | - | | |
$ | - | |
Total finance lease liabilities | |
$ | - | | |
$ | - | |
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 December 31, 2022:
Schedule of Future Minimum Annual Lease Commitments Under Operating Leases
| |
| | |
Fiscal Year Ending | |
Minimum Lease | |
September 30, | |
Commitments | |
2023 | |
$ | 89,936 | |
2024 | |
| 123,543 | |
2025 | |
| 116,891 | |
2026 | |
| - | |
2027 | |
| - | |
Total future undiscounted lease payments | |
| 330,370 | |
Less interest | |
| 25,124 | |
Present value of lease payments | |
| 305,246 | |
Less current portion | |
| 105,649 | |
Long-term operating lease liabilities | |
$ | 199,597 | |
Note
8 –Notes Payable
Notes
payable consists of the following at December 31, 2022 and September 30, 2022, respectively:
Schedule of Notes Payable
| |
December 31, 2022 | | |
September 30, 2022 | |
| |
| | |
| |
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 | |
| |
| | | |
| | |
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. | |
| 126,444 | | |
| 141,348 | |
| |
| | | |
| | |
Total notes payable | |
| 791,444 | | |
| 806,348 | |
Less: current maturities | |
| (726,800 | ) | |
| (725,920 | ) |
Notes payable | |
$ | 64,644 | | |
$ | 80,428 | |
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $13,961
and $11,836 during the three months ended December 31, 2022 and 2021.
Note
9 – Convertible Notes Payable
Related
Party Convertible notes payable consist of the following at December 31, 2022 and September 30, 2022, respectively:
Schedule
of Related Party Convertible Notes Payable
| |
December 31, | | |
September 30, | |
| |
2022 | | |
2022 | |
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 convertible notes payable | |
| 350,000 | | |
| 350,000 | |
Less: unamortized debt discounts | |
| (32,403 | ) | |
| (39,728 | ) |
Total convertible debt | |
| 317,597 | | |
| 310,272 | |
Less: current maturities | |
| - | | |
| - | |
Convertible notes payable | |
$ | 317,597 | | |
$ | 310,272 | |
Convertible
notes payable consist of the following at December 31, 2022 and September 30, 2022, respectively:
Schedule of Convertible Notes Payable
|
|
December
31, |
|
|
September
30, |
|
|
|
2022 |
|
|
2022 |
|
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
at an exercise price of $0.0074, with a fair value of $32,166 which was recorded as a debt discount. |
|
|
355,470 |
|
|
|
718,234 |
|
|
|
|
|
|
|
|
|
|
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 at an exercise price of $0.0074 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,
which were made under the terms of the September 23, 2019 note describe above. The principal and interest on the Note are
convertible into common shares at a conversion price of $0.01.
In connection with the issuance of the note, the Company issued warrants to purchase 4,715,945
shares of common stock at an exercise price of $0.0074
with a relative fair value of $30,102
which was recorded as a debt discount. |
|
|
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 |
|
|
1,418,235 |
|
|
|
1,418,234 |
|
Less:
unamortized debt discounts |
|
|
(97,386 |
) |
|
|
(45,039 |
) |
Total convertible debt |
|
|
1,320,849 |
|
|
|
1,373,195 |
|
Less:
current maturities |
|
|
150,000 |
|
|
|
1,198,469 |
|
Convertible
notes payable |
|
$ |
1,170,849 |
|
|
$ |
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 of $93,938 during the three months ended December 31,
2022. 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 $48,916 and $19,766, during the three months ended December 31, 2022 and 2021, respectively. Unamortized
discount as of December 31, 2022 is $129,790
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 $36,236 and $26,567
for the three months ended December 31, 2022 and 2021, respectively.
The
Company recognized interest expense for the three months ended December 31, 2022 and 2021, respectively, as follows:
Schedule of Interest Expense
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Interest on capital leases | |
$ | 1,961 | | |
$ | 3,601 | |
Interest on notes payable | |
| 12,000 | | |
| 17,753 | |
Amortization of beneficial conversion features | |
| 48,916 | | |
| 19,766 | |
Interest on convertible notes | |
| 36,236 | | |
| 28,273 | |
Total interest expense | |
$ | 99,113 | | |
$ | 69,393 | |
Note
10 – 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 December 31, 2022, there were 1,047,942 shares of Series A Preferred issued and outstanding, 333,600 shares of Series B Preferred
issued and outstanding and 1,000 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 December
31, 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. |
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 December 31, 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.
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.
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 December
31, 2022.
During
the three months ended December 31, 2022, the Company issued 7,150,000 shares of its common stock in settlement of a common stock payable
in the amount of $71,745.
Note
11 – 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.
Amortization
of Stock-Based Compensation
A
total of $8,306 and $33,457 of stock-based compensation expense was recognized during the three months ended December 30, 2022 and 2021,
respectively, as a result of the vesting of common stock options issued. As of December 31, 2022 a total of $6,876 of unamortized expense
remains to amortized over the vesting period.
The
following is a summary of information about the stock options outstanding at December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.02
– $0.13 |
|
|
|
6,020,000 |
|
|
5.76
years |
|
$ |
0.07 |
|
|
|
5,680,714 |
|
|
$ |
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, 2022 |
|
|
6,020,000 |
|
|
$ |
0.07 |
|
Options
issued |
|
|
- |
|
|
|
- |
|
Options
forfeited |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2022 |
|
|
6,020,000 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2022 |
|
|
5,680,714 |
|
|
$ |
0.07 |
|
As
of December 31, 2022, these options in the aggregate had no intrinsic value as the per share market price of $0.007 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
12 – Common Stock Warrants
Warrants
to purchase a total of 15,387,050 shares of common stock were outstanding as of December 31, 2022.
The
following is a summary of information about our warrants to purchase common stock outstanding at September 30, 2022 (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.10-0.007 |
|
|
|
15,387,050 |
|
|
9.51
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 | | |
$ | 0.01 | |
Warrants expired | |
| - | | |
| - | |
| |
| | | |
| | |
Balance, December 31, 2022 | |
| 15,387,050 | | |
$ | 0.02 | |
| |
| | | |
| | |
Exercisable, December 31, 2022 | |
| 15,387,050 | | |
$ | 0.02 | |
As
of December 31, 2022, these warrants in the aggregate had no intrinsic value as the per share market price of $0.007 of the Company’s
common stock as of such date was less than the weighted-average exercise price of these warrants of $0.02.
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
January 18, 2023, the Company issued 4,400,000 shares of common stock to the officers and directors of the Company for services rendered
with a fair value of $32,120 based on the common stock price on the date of issuance.
On
January 26, 2023, the Company issued 2,100,000 options to purchase shares of common stock to certain employees of the Company for services
rendered. The options have an exercise price of $0.0056, vest in nine months and have a term of 5.75 years from the date of issuance.