UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For Quarterly Period Ended December 31, 20172018

 

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)

 

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 [X][X]No[  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes [X][X]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 (Do not check if a smaller reporting company)[  ] Smaller reporting company[  ]
   Emerging growth company[X]

 

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[X] [X]

 

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 9, 201810, 2019 was 39,268,133.46,932,277.

 

 

 

 

 

TABLE OF CONTENTS

 

 Page
No.
PART I - FINANCIAL INFORMATION 
ITEM 1.FINANCIAL STATEMENTS (Unaudited)2
 Condensed Consolidated Balance Sheets as of December 31, 20172018 (Unaudited) and September 30, 201720182
 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended December 31, 20172018 and 20162017 (Unaudited)3
 Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 20172018 and 20162017 (Unaudited)4
 Notes to the Condensed Consolidated Financial Statements (Unaudited)5
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1213
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK1617
ITEM 4.CONTROLS AND PROCEDURES1617
PART II - OTHER INFORMATION 
ITEM 1.Legal Proceedings1718
ITEM 1A.RISK FACTORS1718
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1718
ITEM 3.DEFAULTS UPON SENIOR SECURITIES1718
ITEM 4.MINE SAFETY DISCLOSURES1718
ITEM 5.OTHER INFORMATION1718
ITEM 6.EXHIBITS1819
 SIGNATURES1920

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

ITEM 1.FINANCIAL STATEMENTS.

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 December 31, September 30,  December 31, 2018 September 30, 2018 
 2017  2017  (Unaudited)   
Assets  (Unaudited)             
                
Current assets:                
Cash $360,827  $178,177  $259,790  $176,027 
Accounts receivable  454,471   266,613 
Accounts receivable, net  250,745   167,734 
Prepaid expenses  52,975   73,750   57,258   72,690 
Note receivable  50,000   - 
Deposits  25,647   25,647   25,647   25,647 
Total current assets  893,920   544,187   643,440   442,098 
                
Fixed assets, net  1,100,472   1,027,049   892,727   957,108 
                
Total Assets $1,994,392  $1,571,236  $1,536,167  $1,399,206 
                
Liabilities and Stockholders’ Equity                
                
Current liabilities:                
Accounts payable $105,810  $121,994  $278,409  $325,864 
Accrued expenses  70,914   42,004   42,922   58,238 
Deferred revenues  1,750   525 
Total current liabilities  176,724   163,998   323,081   384,627 
        
Convertible notes payable, net of discounts of $66,118 and $-0- at December 31, 2018 and September 30, 2018, respectively  433,882   - 
                
Total Liabilities  176,724   163,998   756,963   384,627 
                
Stockholders’ Equity:                
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,747,942 and 1,897,942 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively  1,748   1,898 
Common stock, $0.001 par value, 90,000,000 shares authorized; 37,285,676 and 35,027,118 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively  37,286   35,027 
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 and 1,425,942 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively  1,326   1,426 
Common stock, $0.001 par value, 90,000,000 shares authorized; 43,757,277 and 42,245,364 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively  43,757   42,245 
Additional paid-in capital  13,454,322   12,866,984   14,346,623   14,121,236 
Accumulated (deficit)  (11,675,688)  (11,496,671)  (13,612,502)  (13,150,328)
                
Total Stockholders’ Equity  1,817,668   1,407,238   779,204   1,014,579 
                
Total Liabilities and Stockholders’ Equity $1,994,392  $1,571,236  $1,536,167  $1,399,206 

 

See accompanying notes to financial statements.

2

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 For the Three Months Ended  For the Three Months Ended 
 December 31,  December 31, 
 2017  2016  2018  2017 
          
Revenues $1,118,785  $409,751  $642,115  $1,118,785 
Cost of sales  376,772   

204,132

   482,320   376,772 
Gross profit  742,013   

205,619

   159,795   742,013 
                
Operating expenses:                
General and administrative  399,114   

279,686

   390,471   399,114 
Professional fees  486,676   191,643   246,580   486,676 
Bad debts expense  55,940   14,450   24,565   55,940 
Total operating expenses  941,730   

485,779

   661,616   941,730 
                
Operating loss  (199,717)  (280,160)  (501,821)  (199,717)
                
Other income:                
Other income  20,700   154,000   50,400   20,700 
Interest expense  (10,753)  - 
Total other income  20,700   154,000   39,647   20,700 
                
Net loss $(179,017) $(126,160) $(462,174) $(179,017)
Other comprehensive loss        
Available-for-sale investments:        
Change in net unrealized loss (net of tax effect)  -   6,800 
        
Comprehensive loss $(179,017) $(119,360)
                
Weighted average number of common shares outstanding - basic and fully diluted  35,413,602   23,947,563   42,708,641   35,413,602 
                
Net (loss) per share - basic and fully diluted $(0.01) $(0.01)
Net loss per share - basic and fully diluted $(0.01) $(0.01)

 

See accompanying notes to financial statements.

 

3

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 For the Three Months Ended  For the Three Months Ended 
 December 31,  December 31, 
 2017  2016  2018  2017 
Cash flows from operating activities                
Net loss $(179,017) $(126,160) $(462,174) $(179,017)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Bad debts expense  55,940   14,450 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Change in allowance for doubtful accounts  24,565   55,940 
Depreciation and amortization expense  69,091   61,653   64,381   69,091 
Stock issued for services  187,704   17,500   149,276   187,704 
Options and warrants granted for services  258,735   99,920   6,559   258,735 
Amortization of debt discounts  4,846   - 
Decrease (increase) in assets:                
Accounts receivable  (243,798)  (23,343)  (107,576)  (243,798)
Prepaid expenses  20,775   8,357   15,432   20,775 
Increase (decrease) in liabilities:                
Accounts payable  (16,184)  (13,139)  (47,455)  (16,184)
Accrued expenses  28,910   (9,201)  (15,316)  28,910 
Net cash provided by operating activities  182,156   30,037 
Deferred revenues  1,225   - 
Net cash provided by (used in) operating activities  (366,237)  182,156 
                
Cash flows from investing activities                
Purchase of fixed assets  (142,514)  (2,089)  -   (142,514)
Advanceof note receivable  (50,000)  - 
Net cash used in investing activities  (142,514)  (2,089)  (50,000)  (142,514)
                
Cash flows from financing activities                
Proceeds from convertible notes  500,000   - 
Proceeds from sale of common stock  143,008   -   -   143,008 
Net cash provided by financing activities  143,008   -   500,000   143,008 
                
Net increase in cash  182,650   27,948   83,763   182,650 
Cash - beginning  178,177   135,390   176,027   178,177 
Cash - ending $360,827  $163,338  $259,790  $360,827 
                
Supplemental disclosures:                
Interest paid $-  $-  $-  $- 
Income taxes paid $-  $-  $-  $- 
                
Non-cash investing and financing activities:                
Value of preferred stock converted to common stock $150,000  $500,000  $100,000  $150,000 
Beneficial conversion feature of convertible notes payable $70,964  $- 

 

See accompanying notes to financial statements.

4

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization, Basis of Presentation and Significant Accounting Policies

 

Organization

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing, cannabis education and training, and brings unbiased cannabis news coverage to the cannabis industry.training. Our business units are described below.

 

 Digipath Labs, IncInc.. Digipath Labs’ 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. We haveDigipath has been operating a cannabis testingcannabis-testing lab in Nevada since 2015 and havehas plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
   
 The National Marijuana News Corp. provides a balanced and unbiased approach to cannabis news, interviews and education with a news/talk radio show, app,podcast, national marijuana news website and social media presence focusing on the political, economic, medicinal, scientific, and cultural dimensions of the rapidly evolving—and profoundly controversial—medicinal and recreational marijuana industry.
GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry.

 

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, 2017.2018. 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 September 30, 2017:December 31, 2018:

 

State of
Name of Entity(1) State of
Incorporation
 Relationship
Digipath, Inc.(2) Nevada Parent
Digipath Labs, Inc. Nevada Subsidiary
TNM News, Inc. Nevada Subsidiary
GroSciences, Inc.(3) Colorado Subsidiary

 

(1)All entities are in the form of a corporation.

(2)Holding company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company.

(3)Entity formed for prospective purposes, Commenced operations during the first fiscal quarter of 2019, but has not incurred any income or expenses to date.

 

The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.

Reclassifications

Prior period interest income in the amount of $2,500 has been reclassified to net against the related $2,500 of bad debt expense to conform to the current period presentation, along with the reclassification of $37,877 of equipment service contract expenses and $61,653 of depreciation expense from operating expenses to cost of sales. These reclassifications had no impact on net earnings, financial position or cash flows.

5

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Segment Reporting

 

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

 

Fair Value of Financial Instruments

 

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

 

Revenue Recognition

 

TheEffective January 1, 2018, the Company adoptedAccounting Standards Update No. 2014-09, ASC 606 — Revenue from Contracts with Customers (Topic 606) on October 1, 2017. This updateprovides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue from contracts with customers to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new update does not affect howCustomers. 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 accordance withthe 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. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605,606 — Revenue Recognition. Under ASC 605 requires that four basic606, revenue is recognized when the following criteria must be met before revenue can be recognized:are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery of product has met the criteria established in the arrangement or services rendered;occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. With respect

There was no impact on the Company’s financial statements as a result of adopting ASC 606 for the three months ended December 31, 2018, or the twelve months ended September 30, 2018.

Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products to our cannabis lab testing revenues, we sell our serviceslicensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis, and offer a discounted price for customers that agreebasis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to exclusive or predetermined quantitiesthe customer, provided collectability of tests.the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. RevenuesManagement estimates an allowance for doubtful accounts based on the aging of its receivables.

The Company also recognizes revenue through our subsidiary, TNM News Corp., which primarily recognizes revenue from advertisements through partnered merchants. Payment for ad revenues are received prior to the distribution of the ad campaign, and the revenues are recognized uponratably over the substantial completioncampaign. The Company defers any revenue for which the term of the tests when collectability is reasonably assured, which is usually upon delivery of results to the customer.

campaign has not yet been realized. To date, these revenues have not been materially significant.

 

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 505-50 (ASC 505-50). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.

 

Recent Accounting Pronouncements

 

In May 2017,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,2018-13,Compensation-Stock CompensationFair Measurement (Topic 718)820): Scope of Modification AccountingDisclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which clarifies when a change tomodify the terms or conditionsdisclosure requirements of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award.Topic 820. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017,2019, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and does not plan to early adopt the ASU.

In May 2014 the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers. Since ASU 2014-09 was issued, several additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard to be effective with our first interim reporting period for the three months ended December 31, 2017. We use the modified retrospective method of adoption. We have completed an initial evaluation of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material revenue streams. Based on this initial evaluation, adoption does not have a material impact on our financial position, results of operations, or cash flows. Related disclosures have been expanded in line with the requirements of the standard.statements.

 

There are no other 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.

6

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 2 – Going Concern

 

As shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of ($11,675,688),$13,612,502, and as of December 31, 2017,2018, the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable 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 – Related Party Transactions

 

Stock Based Compensation for Services

 

On December 22, 2017,25, 2018, the Company issued 300,00046,261 shares of common stock to its CFO as a bonusPresident and CEO for services rendered.rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $78,828$6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.over the requisite service period.

 

On December 22, 2017,25, 2018, the Company issued 100,000115,652 shares of common stock to Dr. Alfredo Axtmayerits CFO for services rendered pursuant to his service on our Board of Directors.employment agreement. The aggregate fair value of the common stock was $26,276$15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.

On December 22, 2017, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to our President and COO. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.2094, was $104,698. The options were expensed over the vesting period, resulting in $104,698 of stock based compensation expense during the three months ended December 31, 2017.requisite service period.

 

Note 4 – 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 Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

7

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of December 31, 20172018 and September 30, 2017,2018, respectively:

 

 Fair Value Measurements at December 31, 2017  Fair Value Measurements at December 31, 2018 
 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Assets                        
Cash $360,827  $-  $-  $259,790  $-  $- 
Total assets  360,827   -   -   259,790   -   - 
Liabilities                        
Convertible notes payable, net of discounts of $66,118  -   -   433,882 
Total liabilities  -   -   -   -   -   433,882 
 $360,827  $-  $-  $259,790  $-  $(433,882)

 

 Fair Value Measurements at September 30, 2017  Fair Value Measurements at September 30, 2018 
 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Assets                   
Cash $178,177  $-  $-  $176,027  $-  $- 
Total assets  178,177   -   -   176,027   -   - 
Liabilities                        
Total liabilities  -   -   -   -   -   - 
 $178,177  $-  $-  $176,027  $-  $- 

 

The fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by ASC Topic 820-10-35.

 

Level 3 liabilities consist of a total of $433,882 of convertible debentures, net of discounts of $66,118 as of December 31, 2018.

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, 20172018 or the year ended September 30, 2017.2018.

Note 5 – Note Receivable

On December 28, 2018, we loaned Northwest Analytical Labs, Inc. $50,000. The loan bears interest at an annual rate of 10%, is evidenced by a secured demand note, and is secured by a lien on the borrower’s assets.

 

Note 56 – Accounts Receivable

 

Accounts receivable was $454,471$250,745 and $266,613$167,734 at December 31, 20172018 and September 30, 2017,2018, respectively, net of allowance for doubtful accounts of $88,120$39,465 and $32,180$14,900 at December 31, 20172018 and September 30, 2017,2018, respectively.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 67 – Fixed Assets

 

Fixed assets consist of the following at December 31, 20172018 and September 30, 2017:2018:

 

 December 31, September 30, 
 2017 2017  December 31, 2018 September 30, 2018 
Software $123,492  $121,617  $123,492  $123,492 
Office equipment  41,603   36,080   54,877   54,877 
Furniture and fixtures  14,285   14,285   28,486   28,486 
Lab equipment  1,073,566   938,450   1,110,930   1,110,930 
Leasehold improvements  489,147   489,147   489,147   489,147 
  1,742,093   1,599,579   1,806,932   1,806,932 
Less: accumulated depreciation  (641,621)  (572,530)  (914,205)  (849,824)
Total $1,100,472  $1,027,049  $892,727  $957,108 

 

Depreciation and amortization expense totaled $69,091$64,381 and $61,653$69,091 for the three months ended December 31, 20172018 and 2016,2017, respectively.

 

8

Note 8 – Convertible Notes Payable

 

Convertible notes payable consist of the following at December 31, 2018 and September 30, 2018, respectively:

  December 31, 2018  September 30, 2018 
       

On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share.The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.

 $350,000  $       - 
         

On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 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   - 
         
Total convertible notes payable  500,000   - 
Less: unamortized debt discounts  (66,118)  - 
Convertible notes payable $433,882  $- 

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 $70,964 during the three months ended December 31, 2018. The discount is amortized on a straight line basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date. During the three months ended December 31, 2018, the Company recorded debt amortization expense in the amount of $4,846, attributed to the aforementioned debt discount.

All of the convertible notes limit the maximum number of shares that can be owned by each note holder as a result of the conversions to common stock to 4.99% of the Company’s issued and outstanding shares.

The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $10,753 for the three months ended December 31, 2018.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 79 - Changes in Stockholders’ Equity

 

Convertible Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares available for designation from time to time by the Board as set forth below. As of December 31, 2017,2018, there were 1,747,9421,325,942 shares of Series A Preferred issued and outstanding. The Board of Directors is authorized to determine any number of series into which the undesignated shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. SharesEach share of Series A Preferred areis currently convertible into five shares of common stock at a fixed conversion rate of $0.20 per share.stock.

 

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 1,747,9421,325,942 shares of Series A Preferred outstanding at December 31, 20172018 are convertible into 8,739,7106,629,710 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.

 

Preferred Stock Conversions

 

During the three months endedOn December 31, 2017,2018, a total of 150,000100,000 Series A Preferred shares were converted into 750,000500,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

 

Common Stock

 

Common stock consists of $0.001 par value, 90,000,000 shares authorized, of which 37,285,67643,757,277 shares were issued and outstanding as of December 31, 2017.

Common Stock Sales

On December 20, 2017, the Company sold 10 units, consisting of 100,000 shares of its common stock and warrants to purchase 50,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds of $18,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.

On December 14, 2017, the Company sold 13.89 units, consisting of 138,889 shares of its common stock and warrants to purchase 69,445 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds of $25,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.

On December 14, 2017, the Company sold 55.56 units, consisting of 555,600 shares of its common stock and warrants to purchase 277,800 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds of $100,008. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.2018.

 

Common Stock Issued for Services

 

On December 22, 2017,25, 2018, the Company issued 300,00046,261 shares of common stock to its CFO as a bonusPresident and CEO for services rendered.rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $78,828$6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.over the requisite service period.

 

On December 22, 2017,25, 2018, the Company issued 100,000115,652 shares of common stock to Dr. Alfredo Axtmayerits CFO for services rendered pursuant to his service on our Board of Directors.employment agreement. The aggregate fair value of the common stock was $26,276$15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.over the requisite service period.

 

On November 29, 2017,December 25, 2018, a total of 314,069150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $82,600$19,455 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on December 31, 2017.period.

 

On November 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $24,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

On October 30, 2018, the Company issued 400,000 shares of common stock to another consultant for business development services to be performed from November 1, 2018 through April 30, 2019. The fair value of the common stock was $54,120 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

On October 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $23,250 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

Amortization of Stock OptionsStock-Based Compensation

 

A total of $258,735$7,451 of stock-based compensation expense was recognized during the three months ended December 31, 2018 as a result of the issuance of 200,000 shares of common stock to one of our directors, Bruce Raben, on September 12, 2018, as amortized over the requisite service period. As of December 31, 2018, a total of $22,111 of unamortized expenses are expected to be expensed during the fiscal year ended September 30, 2019.

A total of $6,559 of stock-based compensation expense was recognized from the amortization of options over their vesting period during the three months ended December 31, 2017.2018.

 

9

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 810 – Common Stock Options

 

Stock Incentive Plan

 

On June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted on March 5, 2012 and previously amended on May 20, 2014. As amended, the 2012 Plan provides for the issuance of up to 11,500,000 shares of common stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant.

 

A total of 8,985,0008,855,000 options were outstanding as of December 31, 2017. On2018. During the three months ended December 31, 2017,2018, options to purchase aan aggregate total of 1,010,00027,500 shares of common stock at $0.40 per share expired, and on November 7, 2017, options to purchase 100,000 sharesa weighted average exercise price of common stock at $0.85$0.26 per share expired.

 

On December 22, 2017,25, 2018, we granted fully vested options to purchase 500,000an aggregate of 345,000 shares of common stock as compensation for services to a total of fourteen of our President and COO.employees. The options are exercisable over a ten yearten-year period at an exercise price of $0.27$0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%107% and a call option value of $0.2094,$0.1017, was $104,698.$35,078. The options wereare being expensed over the vesting period, resulting in $104,698$577 of stock basedstock-based compensation expense during the three months ended December 31, 2017.

On November 29, 2017, we granted fully vested options2018. As of December 31, 2018, a total of $34,501 of unamortized expenses are expected to purchase 100,000 shares of common stock as compensation for services to our Chief Scientist. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.21, was $21,004. The options werebe expensed over the vesting period, resulting in $21,004 of stock based compensation expense during the three months ended December 31, 2017.period.

On November 29, 2017, we granted fully vested options to purchase 205,000 shares of common stock as compensation for services to a total of ten of our employees. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.21, was $43,057. The options were expensed over the vesting period, resulting in $43,057 of stock based compensation expense during the three months ended December 31, 2017.

 

Note 911 – Common Stock Warrants

 

Warrants to purchase a total of 5,839,6676,183,795 shares of common stock were outstanding as of December 31, 2017. No warrants were exercised during the three months ended December 31, 2017. 2018.

On December 31, 2017,21, 2018, warrants to purchase 200,000166,667 shares of common stock at $0.30 per share expired, and on December 30, 2017,November 23, 2018, warrants to purchase 300,000another 100,000 shares of common stock at $0.45$0.40 per share also expired.

Warrants to purchase 50,000 shares of common stock at $0.26 per share over a 36 month period were issued on December 20, 2017 pursuant to a unit offering for the sale of 100,000 shares of common stock in exchange for proceeds of $18,000, and warrants to purchase a total of 347,245 shares of common stock at $0.26 per share over a 36 month period were issued on December 14, 2017 pursuant to two unit offerings for the sale of an aggregate 694,489 shares of common stock in exchange for total proceeds of $125,008.

 

Note 1012 – Other Income

 

Other income for the three months ended December 31, 20172018 and 20162017 consisted of the following:

 

 December 31,  December 31, 
 2017 2016  2018 2017 
Settlement income on license agreement $-  $150,000 
Settlement income on note receivable $30,000  $- 
Rental income on subleases  19,200   -   20,400   19,200 
Restitution income  1,500   4,000   -   1,500 
 $20,700  $154,000  $50,400  $20,700 

 

10

On December 1, 2018, we received $30,000 as full settlement of a Note dated December 17, 2014, consisting of $250,000 of principal and approximately $58,125 of unpaid interest that was previously written off as uncollectible.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1113 - Income Tax

 

The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.

 

For the three months ended December 31, 20172018 and the year ended September 30, 2017,2018, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At December 31, 2017,2018, the Company had approximately $7,025,500$8,262,000 of federal net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2031.

 

Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 20172018 and September 30, 2017,2018, respectively.

 

In accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.

 

Note 1214 – Subsequent Events

 

PreferredCommon Stock ConversionsSales

On February 7, 2019, the Company sold 1,000,000 shares of its common stock in exchange for proceeds of $200,000.

On February 1, 2019, the Company sold 250,000 shares of its common stock in exchange for proceeds of $50,000.

On January 31, 2019, the Company sold 625,000 shares of its common stock in exchange for proceeds of $125,000.

On January 24, 2019, the Company sold 1,250,000 shares of its common stock in exchange for proceeds of $250,000.

Common Stock Issued for Services

 

On January 22, 2018,25, 2019, a shareholder convertedtotal of 50,000 shares of Series A Preferred into 250,000common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $10,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

Options Issued to Officers and Directors for Services

On January 7, 2019, we granted options to purchase 500,000 shares of common stock.stock as compensation for services to our Chief Science Officer as a bonus. The options vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share, based on the most recent closing stock price. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was converted in accordance with$50,934. The options are being expensed over the conversion terms; therefore no gain or loss has been recognized.vesting period.

 

On January 17, 2018, a shareholder converted 272,000 shares of Series A Preferred into 1,360,0007, 2019, we granted options to purchase 500,000 shares of common stock.stock as compensation for services to one of our board Members, Bruce Raben, as a bonus. The stockoptions vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was converted in accordance with$50,934. The options are being expensed over the conversion terms; therefore no gain or loss has been recognized.vesting period.

 

Exercise ofRe-Priced Options Issued to Officers and Directors for Services

 

On January 3, 2018, two option holders exercised7, 2019, the board amended the following options to purchase a total of 500,000 shares of common stock at $0.181reduce their exercise price to $0.13 per share, based on a cashless basis, resultingthe most recent closing stock price. All other terms were unchanged. The modification of these equity awards resulted in the issuancean additional expense of 317,172 shares of common stock.$36,764.

 

On January 2, 2018, an option holder exercised options to purchase 37,500 shares of common stock at $0.22 per share on a cashless basis, resulting in the issuance of 21,000 shares of common stock.

Exercise of Warrants

On January 3, 2018, a warrant holder exercised warrants to purchase 71,428 shares of common stock at $0.26 per share on a cashless basis, resulting in the issuance of 34,285 shares of common stock.

11

Original Recipient’s Option # of  Term  Original  New 
Grant Date Name Type Options  In Mos.  Exercise$  Exercise$ 
6/1/2015 Cindy Orser NSO Options  200,000   120  $0.40  $0.13 
6/19/2015 Todd Peterson ISO Options  100,000   120  $0.33  $0.13 
6/21/2016 Todd Denkin ISO Options  2,500,000   120  $0.20  $0.13 
11/29/2017 Cindy Orser NSO Options  100,000   120  $0.27  $0.13 
12/22/2017 Todd Denkin ISO Options  500,000   120  $0.27  $0.13 
                     
       3,400,000             

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

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, 20172018 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, 20172018 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”)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, and brings unbiased cannabis news coverage to the cannabis industry.training. Our business units as of December 31, 20172018 are described below.

 

 Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry 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. We have been operating a cannabis testing lab in Nevada since 2015 and have plans to open labs in other states that have legalized the sale of cannabis, beginning with California.
   
 The National Marijuana News Corp. provides a balanced and unbiased approach to cannabis news, interviews and education with a news/talk radio show, app, national marijuana news website and social media presence focusing on the political, economic, medicinal, scientific, and cultural dimensions of the rapidly evolving—and profoundly controversial—medicinal and recreational marijuana industry.

GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry.

 

Our cannabis testing and business licenses were briefly suspendedrevenues improved slightly over the previous fiscal quarter, but was substantially lower than our comparative fiscal quarter ending December 31, 2017. This decrease was primarily the result of the temporary suspension by Nevada regulators for an eight business day periodof two of our competitors in the prior year’s quarter, resulting in a significant increase in our sales during that quarter. Our revenues stabilized subsequent to December 31, 2017 when these competitors were reinstated. During the first fiscal quarter ending December 31, 2018, we received ISO 17025:2017 accreditation. We believe that we are now well positioned to handle future growth in full compliance with Nevada’s regulations applicable to our operations and are poised to expand to other jurisdictions.

We are currently seeking to expand our lab testing services to Colombia, and to that end have retained Colombian counsel and hired two local employees. Our goal is to launch a testing lab in Colombia by the end of the quarter ended December 31, 2017, commencingfiscal year, although there can be no assurance that we will be successful in that regard.

In January 2019, we entered into an agreement to provide potency testing laboratories for hemp production at sites owned by Hemp, Inc. in North Carolina, Oregon and Arizona.Under the endterms of business on Friday, January 19, 2018the agreement, we will oversee and reinstated on January 31, 2018. This had no impact on our financial resultsmanage the construction and build out of a hemp potency-testing laboratory in three of Hemp Inc.’s locations and Hemp. Inc. will provide the space for the periods presented in this report, but will be reflected in our results for our quarter ending March 31, 2018.testing laboratories at no cost to us.

 

12

We are alsoexploring opportunities to capitalize on the extensive data we have collected from our cannabis testing activities. Through our wholly-owned subsidiary, GroSciences, Inc., we intend to license specific formulations and intellectual property developed from our experience in the cannabis industry. We have not yet commenced operations for this initiative, other than minimal research and development activities.

Results of Operations for the Three Months Ended December 31, 20172018 and 2016:2017:

 

The following table summarizes selected items from the statement of operations for the three months ended December 31, 20172018 and 2016.2017.

 

 Three Months Ended December 31, Increase /  Three Months Ended December 31, Increase / 
 2017 2016 (Decrease)  2018 2017 (Decrease) 
Revenues $1,118,785  $409,751  $709,034  $642,115  $1,118,785  $(476,670)
Cost of sales  376,772   

204,132

   

172,640

   482,320   376,772   105,548 
Gross profit  742,013   

205,619

   536,394   159,795   742,013   (582,218)
                        
Operating expenses:                        
General and administrative  399,114   

279,686

   

119,428

   390,471   399,114   (8,643)
Professional fees  486,676   191,643   295,033   246,580   486,676   (240,096)
Bad debts expense  55,940   14,450   41,490   24,565   55,940   (31,375)
Total operating expenses:  941,730   

485,779

   

455,951

   661,616   941,730   (280,114)
                        
Operating loss  (199,717)  (280,160)  (80,443)  (501,821)  (199,717)  302,104 
                        
Total other income  20,700   154,000   (133,300)  39,647   20,700   18,947 
                        
Net loss $(179,017) $(126,160) $52,857  $(462,174) $(179,017) $283,157 

 

Revenues

 

Revenues were generated by our cannabis testing lab and to a de minimis extent, from advertising on TNM News’ media outlets. Aggregate revenues for the three months ended December 31, 20172018 were $1,118,785,$642,115, compared to revenues of $409,751$1,118,785 during the three months ended December 31, 2016, an increase2017, a decrease of $709,034,$476,670, or 173%43%. The increasedecrease in revenue was due to a spike in revenues inthe continued growthcomparative fiscal quarter ending December 31, 2017 due to regulators’ temporary suspension of two of our testing lab operations in Nevada as our customer base, consisting of productioncompetitors during that period.Our revenues stabilized and cultivation facilities, increased their operations, particularly following the implementation of the Nevada law permitting the recreational use of marijuana, which went into effect on July 1, 2017.declined subsequent to December 31, 2017 when these competitors were reinstated.

 

Cost of Sales

 

Cost of sales for the three months ended December 31, 20172018 were $376,772,$482,320, compared to $204,132$376,772 during the three months ended December 31, 2016,2017, an increase of $172,640,$105,548, or 85%28%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The increased cost of sales in the current period was primarily due to thea 41% increase in revenues overlabor as we implementedISO 17025:2017standards for the comparative period.competence of testing and calibration laboratories. Our gross margins of approximately 66%25%, increaseddecreased during the three months ended December 31, 2018, compared to gross margins of approximately 66% during the three months ended December 31, 2017, compared to gross margins of approximately 50% during the three months ended December 31, 2016, as we realizeddevoted significant resources to the improvement of operations and compliance with regulations, including the ISO 17025:2017 requirement. We are actively working to improve efficiencies and economies of scale from our increased revenues. We expect cost of salesincrease prices to increase andimprove gross margins to decrease as we implement ISO/IEC 17025 standards for the competence of testing and calibration laboratories, which is now being required by the State of Nevada for all licensed cannabis laboratories.margins.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended December 31, 20172018 were $399,114,$390,471, compared to $279,686$399,114 during the three months ended December 31, 2016, an increase2017, a decrease of $119,428,$8,643, or 43%2%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses.

 

Professional Fees

 

Professional fees for the three months ended December 31, 20172018 were $486,676,$246,580, compared to $191,643$486,676 during the three months ended December 31, 2016, an increase2017, a decrease of $295,033,$240,096, or 154%49%. Professional fees increasedincluded non-cash, stock-based compensation of $155,835 and $446,439 during the three months ended December 31, 2018 and December 31, 2017, respectively, including the amortization of $6,559 and $258,735, respectively. Professional fees decreased primarily due to increaseddecreased stock-based compensation paid to employees and consultants during the current period.

13

Bad Debts Expense

 

Bad debts expense for the three months ended December 31, 20172018 was $55,940,$24,565, compared to $14,450$55,940 during the three months ended December 31, 2016, an increase2017, a decrease of $41,490,$31,375, or 287%56%. Bad debts expense increaseddecreased during the current period as our allowance for doubtful accounts increaseddecreased with greater resources devoted to collection efforts during the growth inquarter. Our bad debts allowance was 6% and 8% of sales for the three months ended December 31, 2018 and accounts receivables.2017, respectively.

 

Operating Loss

 

Our operating loss for the three months ended December 31, 20172018 was $199,717$501,821 compared to $280,160$199,717 during the three months ended December 31, 2016, a decrease2017, an increase of $80,443,$302,104, or 29%151%. Our operating loss decreasedincreased primarily due to our increaseddecreased revenues, as offset in part by increased operating expenses, includingdecreased stock-based compensation, during the three months ended December 31, 2017,2018, compared to the three months ended December 31, 2016.2017.

 

Other Income

 

Other income for the three months ended December 31, 20172018 was $20,700,$39,647, compared to other income of $154,000$20,700 during the three months ended December 31, 2016, a decrease2017, an increase of $133,300.$18,947, or 92%. Other income consisted of $19,200$20,400 of subleased storage spacesublease rents and $1,500 related to restitution payments received from a former employee$30,000 gain on settlement of a previously written off note receivable, as offset by $10,753 of interest expense for the three months ended December 31, 2017.2018. Other income during the three months ended December 31, 20162017 consisted of $150,000 received pursuant to the settlement under a license agreement with GB Sciences, Inc.$19,200 of subleased rents and $4,000$1,500 of restitution payments received from a former employee.

 

Net Loss

 

Net loss for the three months ended December 31, 20172018 was $179,017,$462,174, compared to $126,160$179,017 during the three months ended December 31, 2016,2017, an increase of $52,857,$283,157, or 42%158%. The increased net loss was due primarily to increased non-cash,decreased revenues, as offset in part by decreased stock-based compensation of $329,019and increased other income, over the comparative three month period.

period, as we revamped operations to better position ourselves for anticipated increased demand in the recreational cannabis market and complied with the ISO 17025:2017 regulation.

 

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 month periods ended December 31, 20172018 and 2016:2017:

 

 2017  2016  2018  2017 
Operating Activities $182,156  $30,037  $(366,237) $182,156 
Investing Activities  (142,514)  (2,089)  (50,000)  (142,514)
Financing Activities  143,008   -   500,000   143,008 
Net Increase in Cash $182,650  $27,948  $83,763  $182,650 

 

Net Cash Provided inby (Used in) Operating Activities

 

During the three months ended December 31, 2017,2018, net cash providedused in operating activities was $182,156,$366,237, compared to net cash provided inby operating activities of $30,037$182,156 for the same period ended December 31, 2016.2017. The increase in cash provided byused in operating activities is primarily attributable to our $498,517, or 205% increase in gross profitincreased net loss as we continued to develop ourdidn’t benefit from the decreased competition from the suspension of two competing cannabis testing lab operations.labs in the current quarter, as we did in the prior period.

 

Net Cash Used in Investing Activities

 

During the three months ended December 31, 2017,2018, net cash used in investing activities was $142,514,$50,000, compared to $2,089$142,514 for the same period ended December 31, 2016.2017. The increasedecrease is attributable to greater investments made for cannabis testing equipment in the currentprior period thanthat was not necessary in the comparativecurrent period, in addition to the payment of a short term loan during the current period.

 

Net Cash Provided by Financing Activities

 

During the three months ended December 31, 2017,2018, net cash provided by financing activities was $143,008,$500,000, compared to $-0-$143,008 for the same period ended December 31, 2016.

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2017. The current period consisted of proceeds received on fixed convertible debt financing at $0.14 per share, while the comparative period consisted of proceeds received from the sale of stock and warrants.

 

Ability to Continue as a Going Concern

 

As of December 31, 2017,2018, our balance of cash on hand was $360,827.$259,790. We currently may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial capital expenditure and working capital needs.

 

The Company has incurred recurring losses from operations resulting in an accumulated deficit, and, as set forth above, the Company’s cash on hand is not sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. 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 has adoptedAccounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) on October 1, 2017.. This updateprovides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue from contracts with customers to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new update does not affect how the Company recognizes revenue in accordance with ASC 605,606, Revenue Recognition. ASC 605606 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery of product has met the criteria established in the arrangement or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. With respect to our cannabis lab testing revenues, we sell our services on a determinable fixed fee per test, or panel of tests basis, and offer a discounted price for customers that agree to exclusive or predetermined quantities of tests. We typically require payment within thirty days of the delivery of results. Revenues are recognized upon the substantial completion of the tests when collectability is reasonably assured, which is usually upon delivery of results to the customer.

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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 505-50 (ASC 505-50). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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.

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, 2017.2018. 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, 2017,2018, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were 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.

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.

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.

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

 

The following issuances of equity securities by the Company were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of the Securities Act of 1933 during the three month period ended December 31, 2017:2018:

 

On December 22, 2017,25, 2018, we issued 300,00046,261 shares of common stock, restricted in accordance with Rule 144, to Todd Peterson as a bonusour President and CEO for his services rendered as our CFO.pursuant to his employment agreement.

 

On December 22, 2017,25, 2018, we issued 100,000115,652 shares of common stock, restricted in accordance with Rule 144, to Dr. Alfredo Axtmayerour CFO for services rendered pursuant to his services on our Board of Directors.employment agreement.

 

The followingOn December 25, 2018, we issued a total of 150,000 shares of common stock, and warrants are restricted securities as defined in accordance with Rule 144, promulgated underto three consultants that were engaged to assist the Securities Act of 1933 during the three month period ended December 31, 2017. The issuances were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited investors, familiarCompany with our operations, and there was no general solicitation.acquisition activities.

 

On December 20, 2017,November 25, 2018, we sold 10 units, consistingissued a total of 100,000 shares of its common stock and warrants to purchase 50,000150,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period,restricted in exchange for total proceeds of $18,000.accordance with Rule 144, to three consultants that were engaged to assist the Company with acquisition activities.

 

On December 14, 2017,October 30, 2018, we sold 13.89 units, consisting of 138,889 shares of its common stock and warrants to purchase 69,445issued 400,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period,restricted in exchangeaccordance with Rule 144, to another consultant for total proceeds of $25,000.business development services to be performed from November 1, 2018 through April 30, 2019.

 

On December 14, 2017,October 25, 2018, we sold 55.56 units, consistingissued a total of 555,600 shares of its common stock and 277,800 warrants to purchase 277,800150,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period,restricted in exchange for total proceeds of $100,008.accordance with Rule 144, to three consultants that were engaged to assist the Company with acquisition activities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

None.

ITEM 4. MINE SAFETY DISCLOSURES.

ITEM 4.MINE SAFETY DISCLOSURES.

 

Not applicable.

ITEM 5. OTHER INFORMATION.

ITEM 5.OTHER INFORMATION.

 

None.

17ITEM 6.EXHIBITS.

ITEM 6. EXHIBITS.

 

Exhibit Description
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 Current Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on May 26, 2015)
4.1Form of 8% Senior Secured Convertible Notes due December 31, 2020 (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on November 21, 2018)
10.1Security Agreement between Digipath Labs, Inc. and collateral agent for the holders of the 8% Senior Secured Convertible Notes due December 31, 2020 (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 November 21, 2018)
31.1* Section 302 Certification of Chief Executive Officer
31.2* Section 302 Certification of Chief Financial Officer
32.1* Section 906 Certification of Chief Executive Officer
32.2* Section 906 Certification of Chief Financial Officer
101.INS* XBRL Instance Document
101.SCH* XBRL Schema Document
101.CAL* XBRL Calculation Linkbase Document
101.DEF* XBRL Definition Linkbase Document
101.LAB* XBRL Labels Linkbase Document
101.PRE* XBRL Presentation Linkbase Document

 

* Filed herewith.

 

1819

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 12, 201814, 2019

 

DIGIPATH, INC. 
   
By:/s/ Joseph J. BiancoTodd Denkin 
Name:Joseph J. BiancoTodd Denkin 
Title:Chief Executive Officer and Director 
   
By:/s/ Todd Peterson 
Name:Todd Peterson 
Title:Chief Financial Officer and Secretary 

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