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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended December 31, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number 000-54239

 

 

Digipath, Inc.

(Exact name of registrant issuer as specified in its charter)

 

Nevada   27-3601979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

6450 Cameron St Suite 113 Las Vegas, NV   89118
(Address of principal executive offices)   (zip code)

 

(702) 527-2060

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
    N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes   No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   No  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

The number of shares of registrant’s common stock outstanding as of February 14, 2024 was 87,096,820.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
  No.
PART I - FINANCIAL INFORMATION 3
ITEM 1.   FINANCIAL STATEMENTS (Unaudited) 3
    Consolidated Balance Sheets as of December 31, 2023 (Unaudited) and September 30, 2023 3
    Consolidated Statements of Operations for the Three Months Ended December 31, 2023 and 2022 (Unaudited) 4
    Consolidated Statements of Stockholders’ Deficit for the Three Months Ended December 31, 2023 and 2022 (Unaudited) 5
    Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2023 and 2022 (Unaudited) 6
    Notes to the Consolidated Financial Statements (Unaudited) 7
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 4.   CONTROLS AND PROCEDURES 22
PART II - OTHER INFORMATION 23
ITEM 1.   Legal Proceedings 23
ITEM 1A.   RISK FACTORS 23
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 23
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4.   MINE SAFETY DISCLOSURES 23
ITEM 5.   OTHER INFORMATION 23
ITEM 6.   EXHIBITS 23
    SIGNATURES 25

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31, 2023   September 30, 2023 
   (Unaudited)     
Assets          
           
Current assets:          
Cash  $308,252   $271,006 
Note receivable, net of allowance of $625,000   -    - 
Other current assets   8,090    8,570 
Assets held for sale - current   556,023    486,222 
Total current assets   872,365    765,798 
           
Assets held for sale – long term   648,498    643,666 
Total non-current assets   648,498    643,666 
           
Total Assets  $1,520,863   $1,409,464 
           
Liabilities and Stockholders’ Deficit          
           
Current liabilities:          
Accounts payable  $92,220   $122,094 
Accrued expenses   320,235    328,491 
Accrued expenses – related party   17,760    12,390 
Current maturities of notes payable   595,965    565,000 
Current maturities of convertible notes payable, net of discounts   1,407,945    1,385,932 
Current maturities of convertible notes payable related parties, net of discounts   346,577    339,252 
Liabilities held for sale - current   308,532    368,655 
Total current liabilities   3,089,234    3,121,814 
           
Non-current liabilities:          
Liabilities held for sale – long term   150,336    159,156 
Total non-current liabilities   150,336    159,156 
           
Total Liabilities   3,239,570    3,280,970 
           
Series B convertible preferred stock, $0.001 par value, 1,500,000 shares authorized; 333,600 shares issued and outstanding as of December 31, 2023 and September 30, 2023   333,600    333,600 
           
Commitments and Contingencies   -    - 
           
Stockholders’ Deficit:          
Series A convertible preferred stock, $0.001 par value, 6,000,000 shares authorized; 1,047,942 shares issued and outstanding as of December 31, 2023 and September 30, 2023   1,048    1,048 
Series C convertible preferred stock, $0.001 par value, 1,000 shares authorized; 0 shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively   -    - 
Common stock, $0.001 par value, 250,000,000 shares authorized; 87,096,820 shares issued and outstanding at December 31, 2023 and September 30, 2023, respectively   87,097    87,097 
Additional paid-in capital   17,469,899    17,468,746 
Accumulated deficit   (19,610,351)   (19,761,997)
           
Total Stockholders’ Deficit   (2,052,307)   (2,205,106)
           
Total Liabilities and Stockholders’ Deficit  $1,520,863   $1,409,464 

 

See accompanying notes to unaudited consolidated financial statements.

 

3
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   2023   2022 
   For the Three Months Ended 
   December 31, 
   2023   2022 
         
Revenues  $-   $- 
Cost of sales   -    - 
Gross profit   -    - 
           
Operating expenses:          
General and administrative   14,743    39,524 
Professional fees   55,821    67,812 
Total operating expenses   70,564    107,336 
           
Operating loss   (70,564)   (107,336)
           
Other income (expense):          
Other Expense   -    (55,000)
Other income   13,896    - 
Interest expense   (84,313)   (97,152)
Total other expense   (70,417)   (152,152)
           
Net loss from continuing operations   (140,981)   (259,488)
Net income from discontinued operations   292,627    19,158 
Net income (loss)  $151,646   $(240,330)
           
Weighted average number of common shares outstanding – basic   87,096,820    82,219,103 
Weighted average number of common shares outstanding – fully diluted   87,096,820    82,219,103 
           
Net loss per share from continuing operations – basic  $(0.00)  $(0.00)
Net income per share from discontinued operations – basic  $0.00   $0.00 
Net income (loss) per share – basic  $0.00   $(0.00)
           
Net loss per share from continuing operations – diluted  $(0.00)  $(0.00)
Net income per share from discontinued operations – diluted  $0.00   $0.00 
Net income (loss) per share – diluted  $0.00   $(0.00)

 

See accompanying notes to unaudited consolidated financial statements.

 

4
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

                                                 
   Series B Convertible
Preferred Stock
   Series A Convertible
Preferred Stock
   Series C
Preferred Stock
   Common Stock   Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Payable   Capital   Deficit   Deficit 
                                                 
Balance, September 30, 2023   333,600   $333,600    1,047,942   $1,048    -   $-    87,096,820   $87,097   $-   $17,468,746   $(19,761,997)  $(2,205,106)
                                                             
Stock-based compensation   -    -    -    -    -    -    -    -    -    1,153    -    1,153 
                                                             
Net income   -    -    -    -    -    -    -    -    -    -    151,646    151,646 
                                                             
Balance, December 31, 2023   333,600   $333,600    1,047,942   $1,048    -   $-    87,096,820   $87,097    -   $17,469,899   $(19,610,351)  $(2,052,307)

 

   Series B Convertible
Preferred Stock
   Series A Convertible
Preferred Stock
   Series C
Preferred Stock
   Common Stock   Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Payable   Capital   Deficit   Deficit 
                                                 
Balance, September 30, 2022   333,600   $333,600    1,047,942   $1,048    1,000   $1    75,146,820   $75,147   $71,745   $17,117,958   $(20,008,771)  $(2,742,872)
                                                             
Issuance of common shares to settle stock payable   -    -    -    -    -    -    7,150,000    7,150    (71,745)   64,595    -    - 
                                                             
Warrants issued as debt financing costs   -    -    -    -    -    -    -    -    -    93,938    -    93,938 
                                                             
Stock-based compensation   -    -    -    -    -    -    -    -    -    8,306    -    8,306 
                                                             
Net loss   -    -    -    -    -    -    -    -    -    -    (240,330)   (240,330)
                                                             
Balance, December 31, 2022   333,600   $333,600    1,047,942   $1,048    1,000   $1    82,296,820   $82,297    -   $17,284,797   $(20,249,101)  $(2,880,958)

 

See accompanying notes to unaudited consolidated financial statements.

 

5
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   2023   2022 Revised 
   For the Three Months Ended 
   December 31, 
   2023   2022 
Cash flows from operating activities          
Net loss from continuing operations  $(140,981)  $(259,488)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation   1,153    8,306 
Amortization of debt discounts   29,338    48,916 
Impairment of fixed assets   -    55,000 
Decrease (increase) in assets:          
Other current assets   480    4,904 
Increase (decrease) in liabilities:          
Accounts payable   (24,082)   33,087 
Accrued expenses   17,286    (34,508)
Accrued expenses – related parties   5,000    12,000 
Net cash used in operating activities from continuing operations   (111,806)   (131,784)
Net cash provided by operating activities from discontinued operations   176,503    149,017 
Net cash provided by operating activities   64,697    17,233 
           
Cash flows from investing activities          
Proceeds from sale of collateralized assets   -    100,000 
Net cash provided by (used in) investing activities from continuing operations   -    100,000 
Net cash used in investing activities from discontinued operations   (11,667)   (2,666)
Net cash provided by (used in) investing activities   (11,667)   97,334 
           
Cash flows from financing activities          
Net cash used in financing activities from continuing operations   -    - 
Net cash used in financing activities from discontinued operations   (15,784)   (14,904)
Net cash used in financing activities   (15,784)   (14,904)
           
Net increase (decrease) in cash   37,246    99,664 
Cash – beginning   271,006    56,168 
Cash – ending  $308,252   $155,832 
           
Supplemental disclosures:          
Interest paid  $40,018   $26,166 
Income taxes paid  $-   $- 
           
Non-cash investing and financing activities:          
Common stock issued for settlement of stock payable  $-   $71,745 
Warrants issued for debt financing  $-   $93,938 
Receipt of assets on deposit  $-   $6,076 
Accounts payable and accrued interest added to note principal balance  $30,965   $- 

 

See accompanying notes to unaudited consolidated financial statements.

 

6
 

 

DIGIPATH, INC. AND SUBSIDIARIES

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, 2023. 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, 2023:

 

   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.

 

7
 

 

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.

 

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.

 

For the three months ended December 31, 2023 and 2022, all revenues are classified as part of Net income from discontinued operations in the accompanying consolidated statement of operations

 

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 December 31, 2023 and September 30, 2023. 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 December 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 December 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.

 

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, 2023 and 2022, potential dilutive securities of 83,125,488 shares issuable upon conversion of convertible notes payable, 8,120,000 and 6,020,000, respectively, shares issuable upon exercise of options, 15,387,050 shares issuable upon exercise of warrants, and 13,579,710 shares issuable upon conversion of our 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.

 

8
 

 

Reclassifications

 

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications had no effect on our previously reported results of operations or accumulated deficit.

 

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 December 31, 2023, the Company had negative working capital of $2,216,869, and accumulated recurring losses of $19,610,351, and $308,252 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.

 

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 December 31, 2023 and September 30, 2023, respectively:

 

   Level 1   Level 2   Level 3 
   Fair Value Measurements at December 31, 2023 
   Level 1   Level 2   Level 3 
Assets            
Cash  $308,252   $-   $- 
                
Liabilities               
Notes payable   -    595,965    - 
Convertible notes payable, net of discounts of $13,713   -    -    1,754,522 

 

   Level 1   Level 2   Level 3 
   Fair Value Measurements at September 30, 2023 
   Level 1   Level 2   Level 3 
Assets               
Cash  $271,006   $-   $- 
                
Liabilities               
Notes payable   -    565,000    - 
Convertible notes payable, net of discounts of $43,051   -    -    1,725,184 

 

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, 2023.

 

9
 

 

Note 4 – Related Party Transactions

 

During the three months ended December 31, 2023 the Company incurred compensation expense of $15,000 for services provided by its CFO. As of December 31, 2023, no amounts were owed to the CFO for services provided.

 

During the three months ended December 31, 2023 the Company accrued fees of $5,000 for services provided by its directors. As of December 31, 2023, the Company has accrued a total of $15,000 in fees for services provided by its directors.

 

As of December 31, 2023, the Company has accrued a total of $2,760 in reimbursable expenses owed to the officers and 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 $1,056,570. 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 had a maturity date of August 23, 2022. The Company had recorded total accrued interest of $64,017 as of September 30, 2022. As of September 30, 2022, the Company recorded a full allowance against the loans and related accrued interest.

 

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”).

 

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. As of June 30, 2023 the Company received the full down payment of $275,000. In April 2023, the Invictus Note was amended and restated to extend the maturity date to March 31, 2024, with principal payments of $100,000 each due on September 30, 2023 and December 31, 2023, with the final payment of $425,000 due on March 31, 2024. Subsequent to December 31, 2023, the Company amended the Invictus Note for a second time to extend the maturity date to December 31, 2025, with principal payments of $50,000 each due on June 30, 2024, September 30, 2024 and December 31, 2024, $100,000 due on March 31, 2025 and June 30, 2025, $125,000 due on September 30, 2025 with the final payment of $216,780 due on December 31, 2025.

 

The Company recorded a full allowance against the Invictus Note, as of the transaction date, as collectability was not reasonably assured at of the transaction date.

 

10
 

 

Note 6 –Notes Payable

 

Notes payable consists of the following at December 31, 2023 and September 30, 2023, respectively:

 

   December 31,
2023
   September 30,
2023
 
         
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 years ended September 30, 2023 and 2022, the Company repaid $100,000 and $125,000, respectively of the principal balance on the Canna Lab Note. However, as a result of the Company not meeting the monthly payment obligations, the Canna Lab Note is in technical default, however, no default notice has been provided by Canna Lab 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. During the three months ended December 31, 2023, $35,965 of accrued interest and outstanding payables were transferred to the principal balance of the Canna Lab Note  $595,965   $565,000 
           
Total notes payable   595,965    565,000 
Less: current maturities   (595,965)   (565,000)
Notes payable  $-   $- 
           
The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $18,026 and $12,000 during the three months ended December 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.   79,548    80,428 

 

Note 7 – Convertible Notes Payable

 

Related party convertible notes payable consist of the following at December 31, 2023 and September 30, 2023, respectively:

 

   December 31,   September 30, 
   2023   2023 
         
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 matured 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   (3,423)   (10,748)
Total convertible debt   346,577    339,252 
Less: current maturities   (346,577)   (339,252)
Related party convertible notes payable  $-   $- 

 

11
 

 

Convertible notes payable consist of the following at December 31, 2023 and September 30, 2023, respectively:

 

   December 31,   September 30, 
   2023   2023 
         
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 matured on August 11, 2022, as amended, 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 matured on August 11, 2022, as amended, 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 matured 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 $355,469, 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 matured 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 matured 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   (10,289)   (32,302)
Total convertible debt   1,407,945    1,385,932 
Less: current maturities   (1,407,945)   (1,385,932)
Convertible notes payable  $-   $- 

 

12
 

 

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 year ended September 30, 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 $29,338 and $48,916, during the three months ended December 31, 2023 and 2022, respectively. Unamortized discount as of December 31, 2023 is $13,712.

 

All of the convertible notes (except the related party convertible note) 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 $37,527 and $36,236 for the three months ended December 31, 2023 and 2022, respectively.

 

The Company recognized interest expense for the three months ended December 31, 2023 and 2022, respectively, as follows:

 

   December 31,   December 31, 
   2023   2022 
         
Interest on notes payable   18,026    12,000 
Amortization of beneficial conversion features   29,338    48,916 
Interest on convertible notes   36,949    36,236 
Total interest expense  $84,313   $97,152 

 

Note 8 – 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, 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 the 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, 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.

 

13
 

 

Additional terms of the Series A Preferred 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 , voting separately as a class, 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 various 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 C

 

The shares of Series C Preferred were designated on July 20, 2022 and each share has a Stated Value of $1. The principal feature of the Series C Preferred Stock is that it provides each 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 December 31, 2023, there we no shares of Series C Preferred outstanding .

 

Additional terms of the Series C Preferred 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 have no conversion rights.

 

14
 

 

Common Stock

 

The Company has 250,000,000 shares of common stock, par value $0.001 per share, authorized of which 87,096,820 shares were issued and outstanding as of December 31, 2023.

 

Note 9 – Mezzanine Equity

 

Series B

 

The shares of 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, 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 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 of shares of common stock into 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 and Series A Preferred, 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 shares of 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.

 

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.

 

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Amortization of Stock-Based Compensation

 

A total of $1,153 and $8,306 of stock-based compensation expense was recognized during the three months ended December 31, 2023 and 2022, respectively, as a result of the vesting of common stock options issued in prior periods. As of December 31, 2023 no additional amounts of unamortized expense remains to be amortized over the vesting period.

 

The following is a summary of information about the stock options outstanding at December 31, 2023.

 

Shares Underlying Options Outstanding   Shares Underlying 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   4.78 years  $0.052    8,120,000   $0.052 

 

The following is a summary of activity of outstanding common stock options:

 

       Weighted 
       Average 
   Number   Exercise 
   of Shares   Price 
Balance, September 30, 2023   8,120,000   $0.052 
Options issued   -    - 
Options forfeited   -    - 
           
Balance, December 31, 2023   8,120,000   $0.052 
           
Exercisable, December 31, 2023   8,120,000   $0.052 

 

As of December 31, 2023, these options in the aggregate had $88,740 of intrinsic value for the outstanding and exercisable options, based on the per share market price of $0.04 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 December 31, 2023.

 

The following is a summary of information about our warrants to purchase common stock outstanding at December 31, 2023 (including those issued to both investors and service providers).

 

    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   8.21 years  $0.016    15,387,050   $0.016 

 

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The following is a summary of activity of outstanding common stock warrants:

 

       Weighted 
       Average 
   Number   Exercise 
   of Shares   Price 
Balance, September 30, 2023   15,387,050   $0.016 
Warrants granted   -    - 
Warrants expired   -    - 
           
Balance, December 31, 2023   15,387,050   $0.016 
           
Exercisable, December 31, 2023   15,387,050   $0.016 

 

As of December 31, 2023, these warrants in the aggregate had $630,198 of intrinsic value as the per share market price of $0.04 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”). Subsequent to December 31, 2023, the Company received approval from the CCB. See Note 14.

 

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.

 

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 was engaged to manage the operation of Digipath Labs’ cannabis testing laboratory (the “Lab”). The effectiveness of the Management Services Agreement was subject to the approval of the CCB, which was obtained on October 17, 2023. 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 was entitled to a management fee of $10,000 per month. Any remaining cash generated from the operation of the Lab in any month was payable 45% to the Buyer and 55% to the Company.

 

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The balance sheets of Digipath Labs are summarized below:

 

   December 31, 2023   September 30, 2023 
Current assets:          
Accounts receivable, net  $509,535   $447,410 
Deposits   18,675    18,675 
Other current assets   27,813    20,137 
Total current assets   556,023    486,222 
           
Right-of-use asset   274,985    274,985 
Fixed assets, net   373,513    368,681 
Total long term assets   648,498    643,666 
Total Assets  $1,204,521   $1,129,888 
           
Current liabilities:          
Accounts payable  $132,669   $158,869 
Accrued expenses   60,358    61,512 
Current portion of operating lease liabilities   66,772    83,757 
Current maturities of notes payable   48,733    64,517 
Total current liabilities   308,532    368,655 
           
Operating lease liabilities   134,425    143,245 
Notes payable   15,911    15,911 
Total long term liabilities   150,336    159,156 
Total Liabilities  $458,868   $527,811 

 

The statements of operations of Digipath Labs combined are summarized below:

 

   2023   2022 
   For the Three Months Ended 
   December 31, 
   2023   2022 
         
Revenues  $923,154   $726,755 
Cost of sales   421,511    422,835 
Gross profit   501,643    303,920 
           
Operating expenses:          
General and administrative   203,185    280,644 
Professional fees   4,750    2,157 
Total operating expenses   207,935    282,801 
           
Operating income   293,708    21,119 
           
Other income (expense):          
Interest expense   (1,081)   (1,961)
Total other income (expense)   (1,081)   (1,961)
           
Net income  $292,627   $19,158 

 

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 3, 2024, the Company amended the Invictus Note for a second time to extend the maturity date to December 31, 2025, with principal payments of $50,000 each due on June 30, 2024, September 30, 2024 and December 31, 2024, $100,000 due on March 31, 2025 and June 30, 2025, $125,000 due on September 30, 2025 with the final payment of $216,780 due on December 31, 2025.

 

On January 18, 2024, the Company received approval from the CCB to transfer the assets pursuant to the Purchase Agreement. The Company expects the transaction to close by the end of February 2024.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 2023 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 2023 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

 

Overview

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) 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.

 

Results of Operations for the Three Months Ended December 31, 2023 and 2022:

 

The following table summarizes selected items from the statement of operations for the three months ended December 31, 2023 and 2022.

 

   Three Months Ended December 31,   Increase / 
   2023   2022   (Decrease) 
Revenues  $-   $-   $- 
Cost of sales   -    -    - 
Gross profit   -    -    - 
                
Operating expenses:               
General and administrative   14,743    39,524    (24,781)
Professional fees   55,821    67,812    (11,991)
Total operating expenses:   70,564    107,336    (36,772)
                
Operating loss   (70,564)   (107,336)   36,772 
                
Total other income (expense)   (70,417)   (152,152)   81,735 
                
Net loss from continuing operations   (140,981)   (259,488)   118,507 
Net income from discontinued operations   292,627    19,158    273,469 
Net income (loss)  $151,646   $(240,330)  $391,976 

 

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General and Administrative Expenses

 

General and administrative expenses for the three months ended December 31, 2023 were $14,743, compared to $39,524 during the three months ended December 31, 2022, a decrease of $24,781, or 63%. The expenses consisted primarily of salaries and wages and included $1,153 and $6,171 of non-cash stock-based compensation, respectively. General and administrative expenses decreased primarily due to decreased corporate overhead activities.

 

Professional Fees

 

Professional fees for the three months ended December 31, 2023 were $55,821, compared to $67,812 during the three months ended December 31, 2022, a decrease of $11,991, or 18%. Professional fees included non-cash, stock-based compensation of $0 and $2,135 during the three months ended December 31, 2023 and 2022, respectively. Professional fees decreased primarily due to decreased consulting and accounting fees.

 

Operating Loss

 

Our operating loss for the three months ended December 31, 2023 was $70,564, compared to an operating loss of $107,336 during the three months ended December 31, 2022, a decrease of $36,772, or 34%. Our operating loss decreased primarily due to our decreased general and administrative expenses.

 

Other Income (Expense)

 

Other expense, on a net basis, for the three months ended December 31, 2023 was $70,417, compared to other expense, on a net basis, of $152,152 during the three months ended December 31, 2022, a net decrease of $81,735. Other expense consisted of interest expense of $84,313 and an insurance claim received for the three months ended December 31, 2023.

 

Liquidity and Capital Resources

 

The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the three months ended December 31, 2023 and 2022:

 

   2023   2022 
Operating Activities  $64,697   $17,234 
Investing Activities   (11,667)   97,334 
Financing Activities   (15,784)   (14,904)
Net increase in Cash  $37,246   $99,664 

 

Net Cash Provided by Operating Activities

 

During the three months ended December 31, 2023, net cash provided by operating activities was $64,697, compared to net cash provided by operating activities of $17,234 for the same period ended December 31, 2022, including cash provided by operating activities from discontinued operations of $176,503 for the three months ended December 31, 2023 compared to cash provided by operating activities from discontinued operations of $149,017 for the three months ended December 31, 2022. The increase in cash provided by operating activities was primarily attributable to our increase in cash provided by discontinued operations.

 

Net Cash Provided by (Used in) Investing Activities

 

During the three months ended December 31, 2023, net cash used in investing activities was $11,667, compared to $97,334 provided by investing activities for the same period ended December 31, 2022, including cash used in investing activities from discontinued operations of $11,667 for the three months ended December 31, 2023 compared to cash used in investing activities from discontinued operations of $2,666 for the three months ended December 31, 2022. The cash provided by investing activities in the previous period was a result of the sale of the collateralized assets from the note receivable.

 

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Net Cash Used in Financing Activities

 

During the three months ended December 31, 2023, net cash used in financing activities was $15,784, compared to net cash used in financing activities of $14,904 for the same period ended December 31, 2022, including cash used in financing activities from discontinued operations of $15,784 for the three months ended December 31, 2023 compared to cash used in financing activities from discontinued operations of $14,904 for the three months ended December 31, 2022.

 

Ability to Continue as a Going Concern

 

As of December 31, 2023, our balance of cash on hand was $308,252, and we had negative working capital of $2,216,869 and an accumulated deficit of $19,610,351 resulting from recurring losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Until the agreement to sell the assets of the lab testing business, management was actively pursuing new customers to increase revenues. In addition, the Company was seeking additional sources of capital to fund short term operations. The Company is currently evaluating future investments into potential acquisition targets. There can be no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution to existing stockholders.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations and require management’s subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. 

 

While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.

 

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 sale of lab testing services through our subsidiary Digipath Labs, Inc.

 

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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 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level. 

 

Changes in Internal Control over Financial Reporting

 

There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not a party to any legal or administrative proceedings that we believe, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations.

 

ITEM 1A. RISK FACTORS.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit   Description
2.1   Stock Purchase Agreement between Digipath, Inc., VSSL Enterprises Ltd., Kyle Joseph Remenda, Philippe Olivier Henry, PhD, Audim Ventures Ltd. and Britt Ash Enterprises Ltd., dated March 9, 2020 (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on March 16, 2020)
3.1   Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.2   Bylaws (incorporated by reference to Exhibit 3.2 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.3   Certificate of Amendment to Articles of Incorporation dated April 4, 2014 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.4   Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock dated April 9, 2014 (incorporated by reference to Exhibit 3.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.5   Certificate of Amendment to Articles of Incorporation dated May 22, 2015 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on May 26, 2015)
3.6   Certificate of Amendment to Articles of Incorporation dated May 14, 2019 (incorporated by reference to Exhibit 3.6 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on August 13, 2019)
3.7   Certificate of Designation of the Series B Preferred Stock of Digipath, Inc., filed December 29, 2021 (incorporated by reference to Exhibit 3.1 of the Report on 8-K filed with the Securities and Exchange Commission by Digipath, Inc on January 6, 2022)
3.8   Certificate of Designation of the Series C Preferred Stock of Digipath, Inc., filed with the Secretary of State of the State of Nevada on July 20, 2022. (incorporated by reference to Exhibit 3.1 of the Report on 8-K filed with the Securities and Exchange Commission by Digipath, Inc on July 26, 2022)

 

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4.1   Form of 8% Senior Secured Convertible Notes due December 31, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on November 21, 2018)
4.2   Form of 8% Senior Secured Convertible Notes due September 23, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 26, 2019)
4.3   9% Secured Convertible Note, between Digipath, Inc. and holder, due August 10, 2022 (incorporated by reference to Exhibit 4.3 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.4   9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.4 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.5   9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.5 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on May 15, 2020)
4.6   Form of Amendment to 9% Secured Convertible Note, between Digipath, Inc. and holder, due August 10, 2022 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on January 6, 2021)
4.7*   Description of Securities
10.1   2012 Stock Incentive Plan (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on March 9, 2012)
10.2   Digipath, Inc. Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.3   Form of Stock Option Grant Notice for grants under the Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.4   Asset Purchase Agreement between Digipath, Inc., Digipath Labs, Inc. and IHE Holdings, LLC, dated April 20, 2023 (incorporated by reference to Exhibit 2.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on May 2, 2023)
10.5   Management Services Agreement between Digipath, Inc., Digipath Labs, Inc. and IHE Holdings, LLC, dated April 20, 2023(incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on May 2, 2023)
10.6   Amended and Restated Secured Promissory Noted in the principal amount of $625,000, dated April 11, 2023, made by Invictus Wealth Group, LLC in favor of Digipath, Inc. (incorporated by reference to Exhibit 10.2 of the Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on August 18, 2023
10.7*   Second Amended and Restated Secured Promissory Noted in the principal amount of $625,000, dated January 3, 2024, made by Invictus Wealth Group, LLC in favor of Digipath, Inc.
31.1*   Section 302 Certification of Principal Executive Officer
31.2*   Section 302 Certification of Principal Financial Officer
32.1*   Section 906 Certification of Principal Executive Officer
32.2*   Section 906 Certification of Principal Financial Officer
101.INS*   Inline XBRL Instance Document
101.SCH*   Inline XBRL Schema Document
101.CAL*   Inline XBRL Calculation Linkbase Document
101.DEF*   Inline XBRL Definition Linkbase Document
101.LAB*   Inline XBRL Labels Linkbase Document
101.PRE*   Inline XBRL Presentation Linkbase Document
104   Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

 

* Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: February 14, 2024

 

DIGIPATH, INC.  
     
By: /s/ Todd Denkin  
Name: Todd Denkin  
Title: Chief Executive Officer  
     
By: /s/ A. Stone Douglass  
Name: A. Stone Douglass  
Title: Chief Financial Officer  

 

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