___________________________________________

 

HUMBOLDT BOTANICAL, LLC

 

A California Limited Liability Company

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OPERATING AGREEMENT

 

Dated as of August 31, 2017

 

 

 

 

HUMBOLDT BOTANICAL, LLC

 

OPERATING AGREEMENT

 

THIS OPERATING AGREEMENT (this “Agreement”) of HUMBOLDT BOTANICAL, LLC (the
“Company”), dated and effective as of August 31, 2017 is hereby agreed to by and
among Digipath, Inc., a Nevada corporation (“Digi”), and DON ASHLEY (“Ashley”
and, together with Digi, and any other Person hereafter admitted as a member of
the Company in accordance with this Agreement, the “Members”).

 

RECITALS

 

The Members have formed the Company as a California limited liability company
pursuant to and in accordance with the California Revised Uniform Limited
Liability Company Act and desire to enter into this Agreement to govern the
operations of the Company.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Members agree as follows:

 

ARTICLE 1
DEFINITIONS

 

As used in this Agreement, the following terms have the following meanings:

 

“Accounting Period” means (i) the Company’s Fiscal Year if there are no changes
in the Members’ respective interests in Company income, gain, loss or deductions
during such Fiscal Year except on the first day thereof or (ii) any other period
beginning on the first day of a Fiscal Year, or any other day during a Fiscal
Year, upon which occurs a change in such respective interests, and ending on the
last day of a Fiscal Year, or on the day preceding an earlier day upon which any
change in such respective interest shall occur.

 

“Act” means the California Revised Uniform Limited Liability Company Act, and
any successor statute, as amended from time to time.

 

“Adjusted Capital Account” means, with respect to any Member, the balance, if
any, in such Member’s Capital Account as of the end of the relevant Fiscal Year,
after giving effect to the following adjustments:

 

(i) Credit to the Capital Account any amount which such Member is obligated to
restore or is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i); and

 

 

 

 

(ii) Debit to such Capital Account the items described in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

 

“Affiliate” means, with respect to any Person (i) any Person directly or
indirectly controlling, controlled by, or under common control with such Person,
(ii) any Person owning or controlling ten percent or more of the outstanding
voting interests of such Person, (iii) any officer, director, general partner,
or manager of such Person, or (iv) any Person who is an officer, director,
general partner, manager, trustee or holder of ten percent or more of the voting
interests of any Person described in clauses (i) through (iii) of this sentence.
For purposes of this definition, “controls,” “is controlled by,” or “is under
common control with” shall mean the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract, or otherwise.

 

“Agreement” means this Operating Agreement, as executed and as it may be
amended, modified, supplemented or restated from time to time, as the context
requires.

 

“Articles” means the Articles of Organization of the Company filed with the
Secretary of State of the State of California on January 27, 2017.

 

“Available Cash” with respect to any period, the sum of money available at the
end of that period for distribution to the Members after (i) payment of all debt
service and other expenses (including, without limitation, payments due on or
with respect to Member Loans, operating and maintenance expenses, general and
administration expenses, insurance costs, taxes, assessments and other
expenses); (ii) satisfaction of the Company’s liabilities as they become due,
including, without limitation, to Digi with respect to the Digi Fees; and (iii)
establishment of such reserves as are deemed necessary or advisable by the
Members.

 

“Book Value” means, (i) with respect to property contributed by any Member, the
fair market value of such property at the time of contribution, or (ii) with
respect to property purchased or otherwise acquired by the Company, the
Company’s initial basis for U.S. federal income tax purposes, decreased in
either case by book depreciation allocable thereto and increased or decreased in
either case from time to time to reflect the adjustments required or permitted
by Treasury Regulation Section 1.704--1(b)(2)(iv)(f).

 

“Cannabis Data” means genotyping, chemoprofile and similar data obtained by Digi
or the Company with respect to cannabis tested by the Company.

 

“Capital Account” has the meaning given such term in Section 3.1.

 

“Capital Contribution” means the total amount of cash contributed to the Company
by a Member in its capacity as a Member pursuant to the terms of this Agreement.

 

“Code” means the Internal Revenue Code of 1986 and any successor statute, as
amended from time to time.

 

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“Company” means the limited liability company formed pursuant to the Articles
and this Agreement.

 

“Damages” has the meaning given such term in Section 7.2.2.

 

“Digi IP” means the name “Digipath” and all of Digi’s know-how and expertise in
the Testing Business, including, without limitation, with respect to applicable
standard operating procedures, testing protocols, proprietary genetic data,
software, licensing requirements, and the design and initial setup of cannabis
testing laboratories; in each case, as currently owned or hereafter developed or
acquired by Digi.

 

“Digi Fees” means the fees payable to Digi pursuant to Section 6.4.

 

“Dissolution” has the meaning given such term in Section 9.1.

 

“Fiscal Year” of the Company means the calendar year.

 

“Indemnitee” has the meaning given such term in Section 7.2.2.

 

“Member” means each Person who hereby or hereafter executes this Agreement as a
Member in accordance with the terms of this Agreement and the Act.

 

“Member Loan” means any loan made to the Company by a Member pursuant to Section
3.5.

 

“Member Approval” means the approval of both Digi and Ashley.

 

“Membership Interest” means all of the rights of a Member in the Company,
including a Member’s: (i) rights in distributions and allocations of the
profits, losses, gains, deductions, and credits of the Company, (ii) right to
inspect the Company’s books and records; and (iii) right to participate in the
management of and vote on matters coming before the Company.

 

“Net Profit” and “Net Loss” mean, for each Accounting Period, an amount equal to
the Company’s taxable income or loss for such Accounting Period, determined in
accordance with Section 703(a) of the Code, which for this purpose shall include
all items of income, gain, loss or deduction required to be stated separately
pursuant to Section 703(a)(1) of the Code, with the following adjustments:

 

(a) Any income of the Company that is exempt from U.S. federal income tax and
not otherwise taken into account in computing Net Profit or Net Loss pursuant to
this definition shall be added to such taxable income or subtracted from such
taxable loss;

 

(b) Any expenditures of the Company described in Section 705(a)(2)(B) of the
Code or treated as Section 705(a)(2)(B) expenditures pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(i)(2) or (3) (other than expenses in
respect of which an election is properly made under Section 709(b) of the Code),
and not otherwise taken into account in computing Net Profit or Net Loss
pursuant to this definition, shall be subtracted from such taxable income or
loss;

 

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(c) If the Book Value of any Company property is adjusted pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(e) (in connection with a distribution of
such property) or (f) (in connection with a revaluation of Capital Accounts),
the amount of such adjustment shall be taken into account as gain or loss from
the disposition of such property for purposes of computing Net Profit or Net
Loss;

 

(d) Gain or loss resulting from the disposition of Company property with respect
to which gain or loss is recognized for U.S. federal income tax purposes shall
be computed by reference to the Book Value of such property, notwithstanding
that the adjusted tax basis of such Company property may differ from its Book
Value; and

 

(e) With respect to Company property having a Book Value that differs from its
adjusted basis for tax purposes, in lieu of the depreciation, amortization and
other cost recovery deductions taken into account in computing taxable income or
loss, there shall be taken into account depreciation, amortization and cost
recovery deductions computed by reference to the property’s Book Value in
accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g).

 

“Percentage Interest” means, with respect to any Member, the percentage interest
of Membership Interests set forth opposite such Member’s name on Schedule I
attached hereto, as it may be modified or supplemented from time to time
pursuant to the terms hereof.

 

“Permitted Transferee” means an Affiliate of a Member.

 

“Person” means a natural person, partnership (whether general or limited),
limited liability company, trust, estate, association, corporation, custodian,
nominee or any other individual or entity in its own or any representative
capacity.

 

“Tax Matters Partner” has the meaning given such term in Section 8.1.

 

“Testing Business” means the business of testing of cannabis and cannabis
products for state regulatory requirements and other legal purposes.

 

“Testing Lab” means the cannabis testing laboratory to developed by the Company
and initially located at 220 Northwestern Avenue, Rio Dell, California 95562. In
the event the Company develops or operates more than one such testing
laboratory, “Testing Lab” shall refer to each such testing laboratory, as the
context requires.

 

“Transfer” means any sale (including, without limitation, a sale by a trustee or
debtor in bankruptcy or arising out of any manner of creditor’s proceeding),
assignment, transfer, exchange, mortgage, pledge, foreclosure, execution,
garnishment, attachment, sheriff’s sale, gift, or other disposition or
encumbrance (whether voluntarily or involuntarily or by operation of law) of, or
the granting of a security interest in, all or any portion of a Member’s
interests in the Company.

 

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“Treasury Regulations” means the final and temporary regulations promulgated
under the Code, as amended from time to time.

 

Terms not otherwise defined in this Article 1 have the meaning so given them
elsewhere in this Agreement.

 

ARTICLE 2
FORMATION OF LIMITED LIABILITY COMPANY

 

2.1 Formation and Tax Classification. The Company has been formed as a limited
liability company under and pursuant to the Act. Each Member represents and
warrants that such Member is duly authorized to join this Agreement and that the
person executing this Agreement on such Member’s behalf is duly authorized to do
so. The Members intend that the Company will be classified as a partnership for
U.S. federal, state and local income and franchise tax purposes and each Member
and the Company shall file all tax returns and shall otherwise take all tax and
financial reporting positions in a manner consistent with such treatment. The
Members intend that the Company shall not be a partnership (including, without
limitation, a limited partnership) for any other purpose.

 

2.2 Company Name. The name of the Company is HUMBOLDT BOTANICAL, LLC. However,
the business of the Company shall be conducted under the name “Digipath
Botanical Testing” or such other names containing “DIGIPATH” as the Members may
from time to time determine.

 

2.3 Term of Company. The term of the Company commenced on the date of the
initial filing of the Articles with the Secretary of State of the State of
California and shall continue until dissolved or otherwise terminated pursuant
to this Agreement or the laws of the State of California.

 

2.4 Purposes. The object and purpose of the Company is to (i) engage in the
Testing Business in the State of California, (ii) exercise all powers necessary
to or reasonably connected with the Company’s business under clause (i) above
which may be legally exercised by limited liability companies under the Act,
(iii) engage in all activities necessary, customary, convenient, or incident to
the foregoing purposes, and (iv) engage in any other lawful act for which
limited liabilities may be formed under the Act.

 

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ARTICLE 3
CAPITALIZATION

 

3.1 Percentage Interests and Determination of Capital Accounts. The names,
addresses, Capital Contributions and Percentage Interests of the Members are set
forth on Schedule I hereto. A capital account (“Capital Account”) representing
each Member’s interest in the capital of the Company has been established for
each Member on the books of the Company and shall be maintained in the manner
required by Treasury Regulations under Code Section 704(b). The Capital Accounts
of the Members shall be increased or decreased to reflect a revaluation of
Company property, if such increase or decrease is necessary to prevent a
distortion in the Members’ economic interests in the Company, upon each of the
following events: (A) a contribution of money or other property (other than a de
minimis amount) to the Company by a new or existing Member as consideration for
an interest in the Company (including the exercise of an option, warrant or
other convertible instrument); (B) a distribution of money or other property
(other than a de minimis amount) by the Company to a retiring or continuing
Member as consideration for an interest in the Company; or (C) the liquidation
of the Company.

 

3.2 Negative Capital Accounts. Except as otherwise provided by law, no Member
shall be required to pay to the Company or any other Member any deficit or
negative balance which may exist from time to time in such Member’s Capital
Account.

 

3.3 Company Capital. No Member shall be paid interest on any Capital
Contribution to the Company or on such Member’s Capital Account, and no Member
shall have any right (a) to demand the return of such Member’s Capital
Contribution or any other distribution from the Company (whether upon
resignation, withdrawal or otherwise), except upon Dissolution of the Company
pursuant to Article 9 hereof or (b) to cause a partition of the Company’s
assets.

 

3.4 Capital Contributions and Interests. Ashley hereby commits to make cash
Capital Contributions to the Company in an amount sufficient to fund the
build-out and equipping of the Testing Lab and the payment of the Digi Fees
under Section 6.4; provided, however, that in no event shall Ashley have any
obligation under this Section 3.4 to make Capital Contributions in excess of $2
million; provided further that Ashley may make Capital Contributions in excess
of $2 million in its discretion. Digi shall not be required to make any cash
Capital Contributions to the Company, and its Capital Contribution to the
Company shall be in the form of the license, property and services provided
under Sections 6.2 and 6.3. The Company may accept additional Capital
Contributions from Members and admit additional Members, on such terms as are
approved by the Members with Member Approval. Schedule I hereto shall be amended
to reflect any additional Capital Contributions.

 

3.5 Loans by Members.

 

3.5.1 If the Company’s funds are insufficient to meet its costs, expenses,
obligations, liabilities and charges, or to make any expenditure authorized by
this Agreement, any Member may advance such funds to the Company as a Member
Loan with Member Approval. Nothing herein shall be construed to obligate the any
Member to provide funds to the Company as a Member Loan.

 

3.5.2 The proceeds of a Member Loan shall not be added to or otherwise affect
the Capital Account of any Member and the making of a Member Loan shall not
result in any change in the Percentage Interests of the Members or the Members’
relative rights to distributions (excluding payments of principal of and
interest on Member Loans).

 

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3.6 Transfer Restrictions Generally.

 

3.6.1 Each Member agrees not to make any Transfer of all or any portion of its
Membership Interest unless it has obtained Member Approval, except (i) that
Transfers to a Permitted Transferee shall be permitted without compliance with
such Sections, and (ii) as permitted by Section 6.10.

 

3.6.2 Any attempted Transfer by any Person of its Membership Interest other than
in accordance with this Section 3.6 shall be, and is hereby declared, null and
void ab initio.

 

3.6.3 A Person to whom a Membership Interest is transferred in accordance with
this Agreement has the right to be admitted to the Company as a Member upon the
execution by the transferee of such instruments as the Members may deem
necessary or advisable to effect the admission of such transferee as a Member,
including, without limitation, the written acceptance and adoption by such
transferee of the provisions of this Agreement and any other agreement to which
the transferring Member is bound with respect to the transferred Membership
Interest.

 

3.6.4 The Member effecting a Transfer and any Person admitted to the Company as
a Member in connection therewith shall pay, or reimburse the Company for, all
costs incurred by the Company in connection with such Transfer or admission on
or before the thirtieth day after the receipt by that Person of the Company’s
invoice for the amount due.

 

ARTICLE 4
DISTRIBUTIONS; ALLOCATIONS OF PROFITS AND LOSSES

 

4.1.1 Tax Distributions.

 

4.1.1.1 Notwithstanding anything to the contrary herein, the Members shall use
commercially reasonable efforts to cause the Company to distribute, to each
Member with respect to each Fiscal Year, an amount of cash (taking into account
all other distributions the Member has received with respect to such Fiscal
Year) equal to the Tax Distribution with respect to that Member for that Fiscal
Year. Any distribution pursuant to this Section 4.1.1 shall be treated as
advance distributions of amounts to which the Member otherwise would be entitled
to pursuant to Sections 4.1.2 and 4.1.3.

 

4.1.1.2 The Tax Distribution, if any, with respect to any Member for any Fiscal
Year shall be made no later than March 31 following each Fiscal Year, and shall
be made more frequently if the Members determine that more frequent
distributions are necessary in order to correspond to the Members’ estimated tax
obligations.

 

4.1.1.3 “Tax Distribution” with respect to any Member for any Fiscal Year means
the net U.S. federal taxable income of the Company, if any, allocable to such
Member with respect to such Fiscal Year, multiplied by the maximum combined U.S.
federal, state and local, Medicare and non-U.S. income tax rate or rates
applicable to such income in the hands of the Member, as determined by the
Members in good faith, taking into account character of the income, applicable
foreign tax credits and the deductibility of state and other taxes for U.S.
federal income tax purposes.

 

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4.1.2 Operating Distributions. The Members shall cause the Company to make
distributions of Available Cash on a monthly basis, or at such other times as
the Members shall determine with Member Approval, pro rata to the Members in
accordance with their respective Percentage Interests; provided, however, that
until such time as Ashely has received aggregate distributions under this
Section 4.1.2 equal to its aggregate cash Capital Contributions to the Company,
distributions of Available Cash shall instead be made 75% to Ashley and 25% to
Digi.

 

4.1.3 Liquidating Distributions. In the event of any Dissolution of the Company,
the Members shall cause the Company to make distributions of cash and any
Company property in accordance with the provisions of Section 9.2.

 

4.1.4 Limitation on Distributions. Notwithstanding any other provision of this
Agreement, no distribution (including distributions upon Dissolution) shall be
made to any Member to the extent that, after giving effect to the distribution,
all liabilities of the Company would exceed the fair market value of the
Company’s assets.

 

4.1.5 Allocation of Profits and Losses. Except as otherwise provided in Section
4.3, Net Income and Net Loss, and items thereof, for any Accounting Period shall
be allocated among the Members in such manner that as of the end of such
Accounting Period, each Member’s Adjusted Capital Account shall be equal to the
respective net amounts, positive or negative, which would be distributed to them
or for which they would be liable to the Company under this Agreement,
determined as if the Company were to: (A) liquidate all of the assets of the
Company for an amount equal to their Book Value and (B) distribute the proceeds
of such liquidation in the manner described in Section 4.1.3.

 

4.2 Regulatory Allocations. Notwithstanding the allocations set forth in Section
4.2, Net Profit, Net Loss and items thereof shall be allocated to the Members in
the manner and to the extent required by the Treasury Regulations under Section
704 of the Code, including without limitation, the provisions thereof dealing
with minimum gain chargebacks, partner minimum gain chargebacks, qualified
income offsets, partnership nonrecourse deductions, partner nonrecourse
deductions, forfeiture allocations, and the provisions dealing with deficit
capital accounts in Sections 1.704-2(g)(1), 1.704-2(i)(5), and
1.704-1(b)(2)(ii)(d).

 

4.3 Tax Allocations; Code Section 704(c). The income, gains, losses, deductions
and expenses of the Company shall be allocated, for U.S. federal, state and
local income tax purposes, among the Members in accordance with the allocation
of such income, gains, losses, deductions and expenses among such Members for
computing their Capital Accounts, except that if any such allocation is not
permitted by the Code or other applicable law, the Company’s subsequent income,
gains, losses, deductions and expenses shall be allocated among the Members for
tax purposes to the extent permitted by the Code and other applicable law, so as
to reflect as nearly as possible the allocation set forth herein in computing
their Capital Accounts. Notwithstanding the previous sentence, such items shall
be allocated among the Members in a different manner to the extent required by
Code Section 704(c) and the Treasury Regulations thereunder (dealing with
contributed property), Treasury Regulations Sections 1.704-1(b)(2)(iv)(f)
(dealing with property having a book value different than its tax basis), and
1.704-1(b)(4)(ii) (dealing with tax credit items). Allocations pursuant to this
Section 4.3 are solely for U.S. federal, state and local tax purposes and shall
not affect, or in any way be taken into account in computing, any Member’s
Capital Account or share of profits, losses, other items or distributions
pursuant to any provisions of this Agreement.

 

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ARTICLE 5
MEMBERS

 

5.1 Number. The Company shall at all times have one or more Members, who shall
constitute the “members” of the Company for all purposes of the Act.

 

5.2 Required Vote. Except as otherwise provided in Section 6.2 below, in order
to constitute the action of or approval by the Members, any action requiring the
approval of the Members shall require Member Approval. Except as otherwise
provided by law, any action or vote of the Members may be taken by a consent in
writing setting forth the action or vote so taken and signed by Members holding
the requisite Percentage Interest entitled to vote necessary to authorize or
take such action. The Members agree that all significant actions involving the
Company outside the ordinary course of business shall require Member Approval,
including, without limitation, the following:

 

(a) Any material change in the business of the Company;

 

(b) A merger or other business combination of the Company with another entity;
or the sale, lease, license, exchange or other disposal by the Company of any
assets other than in the ordinary course of business;

 

(c) A dissolution, liquidation or a bankruptcy proceeding involving the Company;

 

(d) Granting a lien in any of the Company’s assets, or incurring indebtedness
for borrowed money; and

 

(e) Admitting new Members, accepting additional Capital Contributions from
existing Members or otherwise creating or issuing additional Membership
Interests or classes of Membership Interests or other equity in the Company.

 

5.3 Investment Opportunities. No Member shall have any obligation to offer
investment opportunities to the Company or any other Member.

 

 

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ARTICLE 6
MANAGEMENT; MEMBER SERVICES

 

6.1 Management by Members. Subject to the express requirements of the Act and
this Agreement, the power to determine the policies and procedures of the
Company and to manage and control the business and affairs of the Company shall
be vested in the Members of the Company. The Members shall have the sole right,
power and authority to do on behalf of the Company, directly or by delegation to
officers and agents of the Company, all things that are necessary, proper,
desirable, incidental or convenient to conduct the business and affairs of the
Company.

 

6.2 Digipath Services. Digi shall be primarily responsible for managing and
supervising the day-to-day operations of the Company, subject to the policies
and lawful directives of the Members holding a majority of the Percentage
Interests, and agrees to devote so much of the time of its employees as shall be
reasonably necessary for the performance of such services. In furtherance of the
foregoing, Digi will supervise and consult with the Company on

 

6.2.1 the development and construction of the Testing Lab to be operated by the
Company, including the equipment to be installed in the Testing Lab;

 

6.2.2 the hiring of technical and other personnel to be employed by the Company
at the Testing Lab;

 

6.2.3 obtaining all required licenses from State and local authorities and
regulators, and completing all required applications and forms necessary for the
operation of the Testing Lab.

 

6.3 Digipath License. Digi, on behalf of itself and its subsidiaries, hereby
grants to the Company, a non-exclusive right and license to use the Digi IP in
connection with the operation of the Testing Lab.

 

6.4 DigiPath Fees; Compensation of Members. The Company shall pay Digi (i) a
monthly fee in an amount sufficient to compensate it for its reasonable expenses
incurred in connection with performing its obligations under this Agreement,
including, without limitation, all out-of-pocket expenses incurred by Digi, and
an allocation for Digi’s compensation costs for employees other than its Chief
Executive Officer and President providing services to the Company under Section
6.2; and (ii) a monthly administrative fee equal to 10% of the amount due to
Digi under clause (i). The fees due under the preceding sentence shall be due
within 30 days from invoice by Digi. Unless otherwise approved of by the
Members, no Member or any of its Affiliates shall be entitled to compensation
from the Company for the performance of services to the Company under this
Agreement except as expressly set forth in this Section 6.4.

 

6.5 Cannabis Data. All Cannabis Data generated by the Company shall be the
property of the Company, and each Member shall have a non-exclusive royalty-free
right to use such data in its own business; provided, however, that in the event
Digi elects to partner with another Person to monetize such data, it shall first
negotiate in good faith with Ashley to provide it with the opportunity to
participate in such venture.

 

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6.6 Individual Authority of Members. No Member, acting individually in its
capacity as a Member, shall have any authority to bind the Company except to the
extent expressly provided in this Agreement or to the extent such authority is
expressly approved by Member Approval; provided, however, that the Members of
the Company, acting together, shall have the full authority to bind the Company,
and provided further that any acts by a Member may be subsequently ratified by
Member Approval.

 

6.7 Duty to Company. Subject to the terms of this Agreement, the Members may
have other business interests and may engage in other activities in addition to
those relating to the Company. Neither the Company nor any Member shall have any
right, by virtue of this Agreement, to share or participate in such other
investments or activities of the Members or to the income or proceeds derived
therefrom.

 

6.8 Exculpation of Members. Neither Member nor any Affiliate of any Member shall
be liable to the other Member for any act or failure to act pursuant to this
Agreement, except where such act or failure to act constitutes a breach of this
Agreement, gross negligence or willful misconduct and has not been expressly
authorized by Member Approval. The Members shall be entitled to rely upon the
advice of legal counsel, independent public accountants and other experts,
including financial advisors, and any act of or failure to act by the Members in
good faith reliance on such advice shall in no event subject any Members or any
such other person to liability to the Company or any other Member.

 

6.9 Member Deadlock; Dispute Resolution Procedures. If at any time the Members
reach an impasse on any decision requiring their action (a “Deadlock”), and they
are unable to resolve the issue or decide upon an alternative course of action,
the following procedures shall apply in the order as set forth hereunder:

 

6.9.1 Any Member may, upon five (5) days’ notice to the other Members, submit
the disagreement to mediation under the rules applicable in the State of
California. If the other Members agree to attempt to resolve the matter through
mediation within five (5) days after a Member requests such mediation, the
mediator shall then be jointly selected by the Members, but if they do not or
cannot agree upon a mutually acceptable mediator within five (5) days after
deciding to submit the matter to mediation, each Member shall select a candidate
for mediator, which candidates shall, by majority vote, appoint the mediator.
The mediator shall not have authority to impose a settlement upon the Members,
but will attempt to help them reach a satisfactory resolution of the
disagreement. The mediator shall end the mediation whenever, in the mediator’s
judgment, further efforts at mediation would not contribute to a resolution of
the Deadlock matter; provided that any of the Members may end the mediation at
any time after twenty (20) days from the date the mediator was selected. If none
of the Members elects to have the matter mediated, or if after the mediation
procedure terminates the Deadlock is still not resolved, any of the Members,
upon notice to the other Members, shall have the right to declare a “Deadlock
Impasse”.

 

6.9.2 Within three (3) days after a Deadlock Impasse, provided that Ashely has
at such time received aggregate distributions under Section 4.1.2 equal to its
aggregate cash Capital Contributions to the Company, the Members may follow the
procedure set forth in Section 6.10 below.

 

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6.10 Member Buyout. Following a Deadlock Impasse (to the extent Ashely has
previously received aggregate distributions under Section 4.1.2 equal to its
aggregate cash Capital Contributions to the Company), the Members shall have the
right to purchase from or sell to each of the other Members all, but not less
than all, of their Membership Interests in the manner set forth in this Section
6.10:

 

6.10.1 Any Member (the “Offeror”) may serve upon the other Members (each an
“Offeree”) a notice (the “Offering Notice”) which shall contain the following
terms:

 

(1) a statement of intent to rely on this Section 6.10.

 

(2) the price for the Membership Interests at which the Offeror is willing to
buy each Offeree’s Membership Interest (the “Specified Purchase Amount”) and
sell the Offeror’s Membership Interest (the “Specified Sale Amount”); provided
that the Specified Sale Amount and Specified Purchase Amount shall be in the
proportion as the Percentage Interests of the Members.

 

6.10.2 Each Offeree shall then have the option to elect to do one of the
following at any time within 30 days after his receipt of the Offering Notice:

 

(1) to sell all, but not less than all, of such Offeree’s Membership Interest to
the Offeror for a purchase price equal to the Specified Purchase Amount;

 

(2) to purchase all, but not less than all, of the Membership Interests of the
Offeror for a purchase price equal to the Specified Sale Amount;

 

6.10.3 If the Offeree does not exercise any of the options set forth above
within such 30-day period, then, as of the day following the expiration of such
period, the Offeree shall be conclusively deemed to have elected to sell its
Membership Interest. The closing of any purchase and sale contemplated hereunder
shall occur within thirty days of any such election to purchase and sell.

 

ARTICLE 7
LIABILITY; INDEMNIFICATION

 

7.1 Limited Liability. Except as otherwise provided by the Act, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or
otherwise, shall be solely the debts, obligations and liabilities of the
Company, and the Members of the Company shall not be obligated personally for
any such debt, obligation or liability of the Company solely by reason of being
a Member of the Company.

 

7.2 Indemnification.

 

7.2.1 No Member or officer of the Company shall be liable, in damages or
otherwise, to the Company or any Member for any act or omission performed or
omitted to be performed by it in good faith (except for intentional misconduct
or recklessness) pursuant to the authority granted to such Member or officer of
the Company by this Agreement or by the Act.

 

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7.2.2 To the fullest extent permitted by the laws of the State of California and
any other applicable laws, the Company shall indemnify and hold harmless each
Member of the Company, and may, at the discretion of the Members, indemnify and
hold harmless each officer and other agent of the Company (each, an
“Indemnitee”), from and against any and all losses, claims, demands, costs,
damages, liabilities (joint or several), expenses of any nature (including
reasonable attorneys’ fees and disbursements), judgments, fines, settlements and
other amounts (“Damages”) arising from any and all claims, demands, actions,
suits or proceedings, whether civil, criminal, administrative or investigative,
in which an Indemnitee may be involved, or threatened to be involved, as a party
or otherwise, arising out of or incidental to the business of the Company,
regardless of whether an Indemnitee continues to be a Member or an officer or
agent of the Company, at the time any such liability or expense is paid or
incurred, except for any Damages based upon, arising from or in connection with
any act or omission of an Indemnitee committed without authority granted
pursuant to this Agreement or in bad faith or otherwise constituting
recklessness or willful misconduct.

 

7.2.3 Expenses (including reasonable attorneys’ fees and disbursements) incurred
in defending any claim, demand, action, suit or proceeding, whether civil,
criminal, administrative or investigative, subject to Section 7.2.2 hereof, may
be paid (or caused to be paid) by the Company in advance of the final
disposition of such claim, demand, action, suit or proceeding upon receipt of an
undertaking by or on behalf of the Indemnitee to repay such amount if it shall
ultimately be determined, by a court of competent jurisdiction from which no
further appeal may be taken or the time for any appeal has lapsed (or otherwise,
as the case may be), that the Indemnitee is not entitled to be indemnified by
the Company as authorized hereunder or is not entitled to such expense
reimbursement.

 

7.2.4 Any indemnification hereunder shall be satisfied only out of the assets of
the Company, and the Members shall not be subject to personal liability by
reason of these indemnification provisions.

 

7.2.5 The indemnification provided by this Section 7.2 shall be in addition to
any other rights to which each Indemnitee may be entitled under any agreement or
vote of the Members, as a matter of law or otherwise, both as to action in the
Indemnitee’s capacity as a Member or as an officer, director, employee,
shareholder, member or partner of a Member or of an Affiliate, and shall inure
to the benefit of the heirs, successors, assigns, administrators and personal
representatives of the Indemnitee.

 

7.2.6 The Company may purchase and maintain insurance on behalf of one (1) or
more Indemnitees and other Persons against any liability which may be asserted
against, or expense which may be incurred by, any such Person in connection with
the Company’s activities, whether or not the Company would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.

 

7.2.7 An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.2 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.

 

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7.2.8 The provisions of this Section 7.2 are for the benefit of each Indemnitee
and its heirs, successors, assigns, administrators and personal representatives,
and shall not be deemed to create any rights for the benefit of any other
Persons.

 

ARTICLE 8
ACCOUNTING

 

8.1 “Tax Matters Partner.” Unless and until the Members shall otherwise agree,
Digi shall serve as the “Tax Matters Partner” for purposes of Section 6231 of
the Code. Promptly following the written request of the Tax Matters Partner, the
Company shall, to the fullest extent permitted by law, reimburse and indemnify
the Tax Matters Partner for all reasonable expenses, including reasonable legal
and accounting fees, claims, liabilities, losses and damages incurred by the Tax
Matters Partner in connection with any administrative or judicial proceeding
with respect to the tax liability of the Members. Without unanimous written
approval by the Members, the Tax Matters Partner shall not settle, choose the
forum of, or extend the statute of limitations related to, any administrative or
judicial proceeding with respect to the tax liability of the Members.

 

ARTICLE 9
DISSOLUTION; TERMINATION

 

9.1 Events of Dissolution. The Company shall survive in perpetuity and shall not
be dissolved except (i) upon Member Approval, (ii) the entering of a decree of
judicial dissolution under the Act or (iii) the sale of all or substantially all
of the assets of the Company (in each case, a “Dissolution”). Dissolution of the
Company shall be effective on the date of such event (unless otherwise specified
by the Members), but the Company shall not terminate until the assets of the
Company shall have been distributed as provided herein and a certificate of
dissolution of the Company has been filed with the Secretary of State of the
State of California.

 

9.2 Liquidation and Termination. On Dissolution of the Company, a Person shall
be designated by the Members to act as liquidator. The liquidator shall proceed
diligently to wind up the affairs of the Company and make final distributions as
provided herein and in the Act. The costs of liquidation shall be borne as a
Company expense. Until final distribution, the liquidator shall continue to
operate the Company properties with all of the power and authority of the
Members; provided, however, that such liquidator may be removed and replaced at
any time and for any reason by the Members. The steps to be accomplished by the
liquidator are as follows:

 

9.2.1 The liquidator shall pay, satisfy or discharge from Company funds all of
the debts, liabilities and obligations of the Company (including, without
limitation, any Member Loans, and all expenses incurred in liquidation) or
otherwise make adequate provision for payment and discharge thereof (including,
without limitation, the establishment of a cash fund for contingent liabilities
in such amount and for such term as the liquidator may reasonably determine).

 

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9.2.2 In the final Accounting Period of the Company, Net Profits and Net Losses
shall be credited or charged to Capital Accounts of the Members (which Capital
Accounts shall be first adjusted to take into account all distributions other
than liquidating distributions made during the Accounting Period) in the manner
provided in Article 4. If the fair market value of the assets to be distributed
in kind pursuant to Section 9.2.3 exceeds (“book gain”), or is less than (“book
loss”), the Company’s book basis (as determined for Capital Account purposes)
for such assets, such book gain or book loss shall be taken into account in the
calculation of Net Profit or Net Loss to be allocated under Article 4.

 

9.2.3 All remaining assets of the Company shall be distributed to the Members in
proportion to and accordance with their positive Capital Account balances.

 

9.3 Articles of Dissolution. On completion of the distribution of Company assets
as provided herein, the Company is terminated, and shall conduct only such
activities as are necessary to windup its affairs. The liquidator shall file
articles of dissolution with the Secretary of State of the State of California,
cancel any other relevant filings and take such other actions as may be
necessary to terminate the Company.

 

ARTICLE 10
MISCELLANEOUS

 

10.1 Notices. Any and all notices, consents, offers, elections and other
communications required or permitted under this Agreement shall be deemed
adequately given only if in writing and the same shall be delivered either (i)
by hand or facsimile, or (ii) by mail or Federal Express or similar expedited
commercial carrier, addressed to the recipient of the notice, postage prepaid
and registered or certified with return receipt requested (if by mail), or with
all freight charges prepaid (if by Federal Express or similar carrier). All
notices, demands, and requests to be sent hereunder shall be deemed to have been
given for all purposes of this Agreement upon the date of receipt or refusal.
All such notices, demands and requests shall be addressed, if to the Company, at
its principal executive offices, or if to a Member, at the address set forth on
Schedule I attached hereto or to such other address as such Member may have
designated for himself, herself or itself by written notice to the Company in
the manner herein prescribed.

 

10.2 Word Meanings; Construction. The singular shall include the plural and the
masculine gender shall include the feminine and neuter, and vice versa, unless
the context otherwise requires. Unless otherwise indicated, all references to
articles and Sections refer to articles and Sections of this Agreement, and all
references to Schedules are to schedules attached hereto, each of which is made
a part hereof for all purposes.

 

10.3 Binding Provisions. The covenants and agreements contained herein shall be
binding upon, and inure to the benefit of, the heirs, legal representatives,
successors and assigns of the respective parties hereto.

 

10.4 Applicable Law. This agreement is governed by and shall be construed in
accordance with the law of the State of California, excluding any
conflict-of-laws rule or principle that might refer the governance or the
construction of this agreement to the law of another jurisdiction. In the event
of a conflict between any provision of this Agreement and any non-mandatory
provision of the Act, the provision of this Agreement shall control and take
precedence.

 

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10.5 Severability of Provisions. Each paragraph of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
invalid, illegal or unenforceable in any respect under any applicable law, then
(i) all such provisions shall be deemed severed from this Agreement, (ii)every
other provision of this Agreement shall remain in full force and effect, and
(iii) in substitution for any such provision held invalid, illegal or
unenforceable, there shall be substituted a provision of similar import
reflecting the original intent of the parties hereto to the extent permissible
under applicable law.

 

10.6 Section Titles. Section titles are for descriptive purposes only and shall
not control or alter the meaning of this Agreement as set forth in the text.

 

10.7 Further Assurance. The Members shall execute and deliver such further
instruments and do such further acts and things as may be required to carry out
the intent and purposes of this Agreement.

 

10.8 Directly or Indirectly. Where any provision in this Agreement refers to
action to be taken by any person, or which such person is prohibited from
taking, such provision shall be applicable whether the action in question is
taken directly or indirectly by such person.

 

10.9 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original of this Agreement.

 

10.10 Effect of Waiver and Consent. A waiver or consent, express or implied, to
or of any breach or default by any person in the performance by that person of
its obligations hereunder or with respect to the Company is not a consent or
waiver to or of any other breach or default in the performance by that person of
the same or any other obligations of that person hereunder or with respect to
the Company. Failure on the part of a person to complain of any act of any
person or to declare any person in default hereunder or with respect to the
Company, irrespective of how long that failure continues, does not constitute a
waiver by that person of its rights with respect to that default until the
applicable statute-of-limitations period has run.

 

10.11 Entire Agreement. This Agreement together with the other agreements and
instruments entered into in connection herewith constitutes the entire agreement
among the parties hereto with respect to the transactions contemplated herein,
and supersedes all other prior understandings or agreements among the Members
with respect to such transactions.

 

10.12 Amendments. Except as otherwise provided herein, and subject to the Act,
the Articles and this Agreement may be amended only with the Member Approval.

 

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IN WITNESS WHEREOF, the undersigned Members have executed and delivered this
Agreement as of the day and year first above written, and agree to and
acknowledge all of its terms and those of the attached Schedules and Exhibits.

 

  MEMBERS:       DIGIPATH, INC.       By: /s/ Joseph J. Bianco   Name: Joseph J.
Bianco   Title: CEO & Chairman       /s/ Don Ashley    Don Ashley

 

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HUMBOLDT BOTANICAL, LLC

 

SCHEDULE I

 

MEMBERS AND PERCENTAGE INTERESTS

 

Member  Address  Capital
Contribution   Percentage
Interest               Digipath, Inc.  6450 Cameron Street, Suite 113
Las Vegas, Nevada 89118
Attention: Joseph J. Bianco   Services and Intellectual Property Under Sections
6.2 and 6.3    40%                Don Ashley  [Address Redacted]
Attention: Donald Ashley  $10,000.00    60%

 

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