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, 2017June 30, 2020
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-54239
Digipath, Inc.
(Exact name of registrant issuer as specified in its charter)
Nevada | 27-3601979 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
6450 Cameron St Suite 113 Las Vegas, NV | 89118 | |
(Address of principal executive offices) | (zip code) |
(702) 527-2060
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [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] | 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 | [ | X] | 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 |
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, 2018August 11, 2020 was 39,268,133.57,612,672.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, | September 30, | |||||||
2017 | 2017 | |||||||
Assets | (Unaudited) | |||||||
Current assets: | ||||||||
Cash | $ | 360,827 | $ | 178,177 | ||||
Accounts receivable | 454,471 | 266,613 | ||||||
Prepaid expenses | 52,975 | 73,750 | ||||||
Deposits | 25,647 | 25,647 | ||||||
Total current assets | 893,920 | 544,187 | ||||||
Fixed assets, net | 1,100,472 | 1,027,049 | ||||||
Total Assets | $ | 1,994,392 | $ | 1,571,236 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 105,810 | $ | 121,994 | ||||
Accrued expenses | 70,914 | 42,004 | ||||||
Total current liabilities | 176,724 | 163,998 | ||||||
Total Liabilities | 176,724 | 163,998 | ||||||
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 | ||||||
Additional paid-in capital | 13,454,322 | 12,866,984 | ||||||
Accumulated (deficit) | (11,675,688 | ) | (11,496,671 | ) | ||||
Total Stockholders’ Equity | 1,817,668 | 1,407,238 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 1,994,392 | $ | 1,571,236 |
See accompanying notes to financial statements.
2 |
PART I – FINANCIAL INFORMATION
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)BALANCE SHEETS
For the Three Months Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Revenues | $ | 1,118,785 | $ | 409,751 | ||||
Cost of sales | 376,772 | 204,132 | ||||||
Gross profit | 742,013 | 205,619 | ||||||
Operating expenses: | ||||||||
General and administrative | 399,114 | 279,686 | ||||||
Professional fees | 486,676 | 191,643 | ||||||
Bad debts expense | 55,940 | 14,450 | ||||||
Total operating expenses | 941,730 | 485,779 | ||||||
Operating loss | (199,717 | ) | (280,160 | ) | ||||
Other income: | ||||||||
Other income | 20,700 | 154,000 | ||||||
Total other income | 20,700 | 154,000 | ||||||
Net loss | $ | (179,017 | ) | $ | (126,160 | ) | ||
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 | ||||||
Net (loss) per share - basic and fully diluted | $ | (0.01 | ) | $ | (0.01 | ) |
June 30, | September 30, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Assets | �� | |||||||
Current assets: | ||||||||
Cash | $ | 126,862 | $ | 323,739 | ||||
Accounts receivable, net | 171,126 | 179,256 | ||||||
Other current assets | 122,694 | 74,620 | ||||||
Inventory | 37,900 | - | ||||||
Deposits | 25,647 | 51,704 | ||||||
Total current assets | 484,229 | 629,319 | ||||||
Goodwill from affiliate | 592,621 | - | ||||||
Right-of-use asset | 193,094 | - | ||||||
Fixed assets, net | 988,444 | 726,614 | ||||||
Total Assets | $ | 2,258,388 | $ | 1,355,933 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 369,675 | $ | 136,612 | ||||
Accrued expenses | 138,328 | 134,881 | ||||||
Short term advances | 20,000 | - | ||||||
Current portion of operating lease liabilities | 195,739 | - | ||||||
Current portion of finance lease liabilities | 28,901 | - | ||||||
Current maturities of notes payable | 53,544 | - | ||||||
Convertible notes payable, net of discounts of $16,643 and $-0- at June 30, 2020 and September 30, 2019, respectively | 683,357 | 200,000 | ||||||
Total current liabilities | 1,489,544 | 471,493 | ||||||
Finance lease liabilities | 28,468 | - | ||||||
Notes payable | 432,779 | - | ||||||
Convertible notes payable, net of discounts of $-0- and $41,426 at June 30, 2020 and September 30, 2019, respectively | 550,000 | 458,574 | ||||||
Total Liabilities | 2,500,791 | 930,067 | ||||||
Stockholders’ Equity: | ||||||||
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 shares issued and outstanding | 1,326 | 1,326 | ||||||
Common stock, $0.001 par value, 250,000,000 shares authorized; 57,612,672 and 48,361,433 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively | 57,613 | 48,361 | ||||||
Additional paid-in capital | 16,004,575 | 15,331,839 | ||||||
Accumulated (deficit) | (16,305,917 | ) | (14,955,660 | ) | ||||
Total Stockholders’ Equity | (242,403 | ) | 425,866 | |||||
Total Liabilities and Stockholders’ Equity | $ | 2,258,388 | $ | 1,355,933 |
See accompanying notes to financial statements.
3 |
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
(Unaudited)
For the Three Months Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (179,017 | ) | $ | (126,160 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Bad debts expense | 55,940 | 14,450 | ||||||
Depreciation and amortization expense | 69,091 | 61,653 | ||||||
Stock issued for services | 187,704 | 17,500 | ||||||
Options and warrants granted for services | 258,735 | 99,920 | ||||||
Decrease (increase) in assets: | ||||||||
Accounts receivable | (243,798 | ) | (23,343 | ) | ||||
Prepaid expenses | 20,775 | 8,357 | ||||||
Increase (decrease) in liabilities: | ||||||||
Accounts payable | (16,184 | ) | (13,139 | ) | ||||
Accrued expenses | 28,910 | (9,201 | ) | |||||
Net cash provided by operating activities | 182,156 | 30,037 | ||||||
Cash flows from investing activities | ||||||||
Purchase of fixed assets | (142,514 | ) | (2,089 | ) | ||||
Net cash used in investing activities | (142,514 | ) | (2,089 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from sale of common stock | 143,008 | - | ||||||
Net cash provided by financing activities | 143,008 | - | ||||||
Net increase in cash | 182,650 | 27,948 | ||||||
Cash - beginning | 178,177 | 135,390 | ||||||
Cash - ending | $ | 360,827 | $ | 163,338 | ||||
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 |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 407,229 | $ | 652,920 | $ | 1,971,141 | $ | 1,946,590 | ||||||||
Cost of sales | 347,724 | 424,067 | 1,250,234 | 1,334,217 | ||||||||||||
Gross profit | 59,505 | 228,853 | 720,907 | 612,373 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 328,128 | 431,636 | 1,123,479 | 1,240,612 | ||||||||||||
Professional fees | 177,835 | 195,052 | 688,902 | 677,299 | ||||||||||||
Bad debts expense | 25,420 | 93,340 | 186,540 | 143,170 | ||||||||||||
Total operating expenses | 531,383 | 720,028 | 1,998,921 | 2,061,081 | ||||||||||||
Operating loss | (471,878 | ) | (491,175 | ) | (1,278,014 | ) | (1,448,708 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Other income | 21,000 | 19,750 | 63,000 | 92,400 | ||||||||||||
Loss on disposal of fixed assets | (28,238 | ) | - | (28,238 | ) | - | ||||||||||
Interest expense | (41,571 | ) | (18,203 | ) | (107,005 | ) | (46,959 | ) | ||||||||
Total other income (expense) | (48,809 | ) | 1,547 | (72,243 | ) | 45,441 | ||||||||||
Net loss | $ | (520,687 | ) | $ | (489,628 | ) | $ | (1,350,257 | ) | $ | (1,403,267 | ) | ||||
Weighted average number of common shares outstanding - basic and fully diluted | 57,225,309 | 47,934,212 | 52,048,121 | 45,509,076 | ||||||||||||
Net loss per share - basic and fully diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.03 | ) |
See accompanying notes to financial statements.
4 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
For the Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Series A Convertible | Additional | Total | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | Equity | |||||||||||||||||||||||||
Balance, March 31, 2019 | 1,325,942 | $ | 1,326 | 47,609,716 | $ | 47,610 | $ | 15,111,344 | $ | - | $ | (14,063,967 | ) | $ | 1,096,313 | |||||||||||||||||
Common stock issued for services | - | - | 545,834 | 546 | 64,854 | - | - | 65,400 | ||||||||||||||||||||||||
Common stock options issued for services | - | - | - | - | 48,618 | - | - | 48,618 | ||||||||||||||||||||||||
Net loss for the three months ended June 30, 2019 | - | - | - | - | - | - | (489,628 | ) | (489,628 | ) | ||||||||||||||||||||||
Balance, June 30, 2019 | 1,325,942 | $ | 1,326 | 48,155,550 | $ | 48,156 | $ | 15,224,816 | $ | - | $ | (14,553,595 | ) | $ | 720,703 |
For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
Series A Convertible | Additional | Total | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | Equity | |||||||||||||||||||||||||
Balance, March 31, 2020 | 1,325,942 | $ | 1,326 | 56,737,672 | $ | 56,738 | $ | 15,879,225 | $ | 37,500 | $ | (15,785,230 | ) | $ | 189,559 | |||||||||||||||||
Common stock issued for services | - | - | 875,000 | 875 | 97,318 | (37,500 | ) | - | 60,693 | |||||||||||||||||||||||
Common stock options issued for services | - | - | - | - | 28,032 | - | - | 28,032 | ||||||||||||||||||||||||
Net loss for the three months ended June 30, 2020 | - | - | - | - | - | - | (520,687 | ) | (520,687 | ) | ||||||||||||||||||||||
Balance, June 30, 2020 | 1,325,942 | $ | 1,326 | 57,612,672 | $ | 57,613 | $ | 16,004,575 | $ | - | $ | (16,305,917 | ) | $ | (242,403 | ) |
5 |
For the Nine Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Series A Convertible | Additional | Total | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | Equity | |||||||||||||||||||||||||
Balance, September 30, 2018 | 1,425,942 | $ | 1,426 | 42,245,364 | $ | 42,245 | $ | 14,121,236 | $ | - | $ | (13,150,328 | ) | $ | 1,014,579 | |||||||||||||||||
Common stock sold for cash | - | - | 3,125,000 | 3,125 | 621,875 | - | - | 625,000 | ||||||||||||||||||||||||
Common stock issued for services | - | - | 1,810,186 | 1,811 | 274,204 | - | - | 276,015 | ||||||||||||||||||||||||
Common stock issued in exchange for termination of options | - | - | 475,000 | 475 | (475 | ) | - | - | - | |||||||||||||||||||||||
Common stock options issued for services | - | - | - | - | 137,412 | - | - | 137,412 | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | (100,000 | ) | (100 | ) | 500,000 | 500 | (400 | ) | - | - | - | |||||||||||||||||||||
Beneficial conversion feature of convertible debts | - | - | - | - | 70,964 | - | - | 70,964 | ||||||||||||||||||||||||
Net loss for the nine months ended June 30, 2019 | - | - | - | - | - | - | (1,403,267 | ) | (1,403,267 | ) | ||||||||||||||||||||||
Balance, June 30, 2019 | 1,325,942 | $ | 1,326 | 48,155,550 | $ | 48,156 | $ | 15,224,816 | $ | - | $ | (14,553,595 | ) | $ | 720,703 |
For the Nine Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
Series A Convertible | Additional | Total | ||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | Equity | |||||||||||||||||||||||||
Balance, September 30, 2019 | 1,325,942 | $ | 1,326 | 48,361,433 | $ | 48,361 | $ | 15,331,839 | $ | - | $ | (14,955,660 | ) | $ | 425,866 | |||||||||||||||||
Common stock sold for cash | - | - | 706,250 | 706 | 55,794 | - | - | 56,500 | ||||||||||||||||||||||||
Common stock issued for acquisition of VSSL Enterprises, Ltd. | - | - | 6,500,000 | 6,500 | 367,250 | - | - | 373,750 | ||||||||||||||||||||||||
Common stock issued for services | - | - | 2,044,989 | 2,046 | 113,360 | - | - | 115,406 | ||||||||||||||||||||||||
Common stock options issued for services | - | - | - | - | 66,320 | - | - | 66,320 | ||||||||||||||||||||||||
Common stock warrants issued for services | - | - | - | - | 70,012 | - | - | 70,012 | ||||||||||||||||||||||||
Net loss for the nine months ended June 30, 2020 | - | - | - | - | - | - | (1,350,257 | ) | (1,350,257 | ) | ||||||||||||||||||||||
Balance, June 30, 2020 | 1,325,942 | $ | 1,326 | 57,612,672 | $ | 57,613 | $ | 16,004,575 | $ | - | $ | (16,305,917 | ) | $ | (242,403 | ) |
See accompanying notes to financial statements.
6 |
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended | ||||||||
June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (1,350,257 | ) | $ | (1,403,267 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Change in allowance for doubtful accounts | 186,540 | 143,170 | ||||||
Depreciation and amortization expense | 242,207 | 194,588 | ||||||
Loss on disposal of fixed assets | 28,238 | - | ||||||
Stock issued for services | 115,406 | 276,015 | ||||||
Options and warrants granted for services | 136,332 | 137,412 | ||||||
Amortization of debt discounts | 24,783 | 21,217 | ||||||
Decrease (increase) in assets: | ||||||||
Accounts receivable | (176,825 | ) | (66,265 | ) | ||||
Other current assets | (42,815 | ) | (25,648 | ) | ||||
Inventory | (37,900 | ) | - | |||||
Deposits | 26,057 | - | ||||||
Right-of-use assets | 144,149 | - | ||||||
Increase (decrease) in liabilities: | ||||||||
Accounts payable | 230,483 | (163,947 | ) | |||||
Accrued expenses | 169 | (2,151 | ) | |||||
Lease liabilities | (141,504 | ) | - | |||||
Deferred revenues | - | (525 | ) | |||||
Net cash used in operating activities | (614,937 | ) | (889,401 | ) | ||||
Cash flows from investing activities | ||||||||
Cash acquired from affiliate in acquisition of VSSL | 143 | - | ||||||
Cash paid for purchase of VSSL Enterprises, Ltd. | (200,000 | ) | - | |||||
Purchase of fixed assets | (141,151 | ) | (30,261 | ) | ||||
Advance of note receivable | - | (95,000 | ) | |||||
Net cash used in investing activities | (341,008 | ) | (125,261 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from short term advances | 25,000 | - | ||||||
Repayments of short term advances | (25,000 | ) | - | |||||
Principal payments on finance lease | (41,824 | ) | - | |||||
Principal payments on note payable, equipment financing | (25,642 | ) | - | |||||
Proceeds from notes payable | 220,034 | - | ||||||
Proceeds from convertible notes | 550,000 | 500,000 | ||||||
Proceeds from sale of common stock | 56,500 | 625,000 | ||||||
Net cash provided by financing activities | 759,068 | 1,125,000 | ||||||
Net increase (decrease) in cash | (196,877 | ) | 110,338 | |||||
Cash - beginning | 323,739 | 176,027 | ||||||
Cash - ending | $ | 126,862 | $ | 286,365 | ||||
Supplemental disclosures: | ||||||||
Interest paid | $ | 35,869 | $ | 4,066 | ||||
Income taxes paid | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Fair value of net assets acquired in business combination from affiliate | $ | 18,871 | $ | - | ||||
Fair value of common stock paid in business combination from affiliate | $ | 373,750 | $ | - | ||||
Fixed assets acquired with capitalized finance lease | $ | 99,193 | $ | - | ||||
Fixed assets acquired with note payable, equipment financing | $ | 291,931 | $ | - | ||||
Value of preferred stock converted to common stock | $ | - | $ | 100,000 | ||||
Beneficial conversion feature of convertible notes payable | $ | - | $ | 70,964 |
See accompanying notes to financial statements.
7 |
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, Inc. 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. | ||
Ø | VSSL Enterprises, Ltd. Acquired in March 2020, and based in British Colombia, Canada, VSSL is a cannabis genomics, plant sciences and consulting firm that builds predictive tools for the cannabis industry, and uses molecular and bioinformatics tools to deliver unique solutions suited to its customers’ business models. |
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, 2017.2019. 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 SeptemberJune 30, 2017:2020:
Name of Entity(1) | Incorporation | Relationship | ||||||
Digipath, Inc.(2) | Nevada | Parent | ||||||
Digipath Labs, Inc. | Nevada | Subsidiary | ||||||
TNM News, Inc. | Nevada | Subsidiary | ||||||
GroSciences, Inc.(3) | Colorado | Subsidiary | ||||||
Digipath Labs S.A.S.(4) | Colombia | Subsidiary | ||||||
VSSL Enterprises, Ltd.(5) | Canada | 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, but has not incurred any income or expenses to date.
(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) | Commenced operations during the first fiscal quarter of 2019, but has not incurred income to date. |
(4) | Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations. |
(5) | Acquired on March 11, 2020. |
The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.
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.
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 termshort-term nature of the instruments.
Revenue Recognition
The Company 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.from Contracts with Customers. Under ASC 605 requires that four basic criteria must be met before606, the Company recognizes revenue can be recognized: (1) persuasive evidencefrom the sale 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 sellservices through our servicessubsidiary Digipath Labs, Inc.
Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis, 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.
Inventory
Inventories are recognized uponstated at the substantial completionlower of cost or market. Cost is determined on a standard cost basis that approximates the tests when collectabilityfirst-in, first-out (FIFO) method. Market is reasonably assured, whichdetermined based on net realizable value. Appropriate consideration is usually upon deliverygiven to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Our products consist of resultshandheld devices used to the customer.
test cannabis for THC, CBD and CBG levels under our GroSciences, Inc. subsidiary. We have not yet commenced sales of this product.
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 505-502018-07 (ASC 505-50)2018-07). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
RecentAdoption of New Accounting Standards and Recently Issued Accounting Pronouncements
In May 2017,June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,2018-07, Compensation-Stock Compensation (Topic 718): Scope of ModificationImprovements to Nonemployee Share-Based Payment Accounting, which clarifies when a changeexpands the scope of Topic 718 to the terms or conditions of ainclude share-based payment award must be accountedtransactions for as a modification. The newacquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance requires modification accounting ifon inputs to an option pricing model and the fair value, vesting condition orattribution of cost (that is, the classificationperiod of time over which share-based payment awards vest and the award is not the same immediately before and after a change to the terms and conditionspattern of the award.cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017,2018, with early adoption permitted. There was no impact on the Company’s financial statements as a result of adopting this ASU for the nine-month period ending June 30, 2020 or the year ended September 30, 2019.
9 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The new standard became effective for fiscal years beginning after December 15, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on October 1, 2019 using the modified retrospective transition approach as of the effective date of the initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before October 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.
The most significant effects of 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 relate to be effective withthe recognition of new ROU assets and lease labilities on our first interim reporting periodbalance sheet 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 theoffice operating leases and providing significant new disclosures about our leasing activities.
The new standard including a detailed review of performance obligationsalso provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term leases recognition exemption for all material revenue streams. Based onleases that qualify. This means that the Company will not recognize ROU assets or lease liabilities, and this initial evaluation, adoption doesincludes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases. The new standard did 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.impact.
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.
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),$16,305,917, negative working capital of $1,005,315, and as of December 31, 2017,June 30, 2020, 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.
10 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 – Related Party Transactions
Stock Based Compensation for ServicesAcquisition from Affiliate
On December 22, 2017,March 9, 2020, the Company issued 300,000entered into a Stock Purchase Agreement (the “Purchase Agreement”) with VSSL Enterprises Ltd (“VSSL”), Kyle Joseph Remenda (“Remenda”), Philippe Olivier Henry, PhD (“Henry”), Audim Ventures Ltd. (“Audim”), and Britt Ash Enterprises Ltd. (“Britt Ash” and, together with Remenda, Henry and Audim, the “VSSL Stockholders”), pursuant to which the Company acquired all of VSSL’s outstanding shares of capital stock from the VSSL Stockholders for consideration consisting of 6,500,000 shares of Digipath’s common stock to its CFO asand a bonus for services rendered.cash payment of $200,000. The closing of the acquisition occurred on March 11, 2020. The aggregate fair value of the common stock was $78,828$373,750 based on the closing price of the Company’s common stock on the date of grant,closing.
Mr. Remenda, who held 45% of the VSSL’s shares prior to its acquisition by the Company, is the CEO of VSSL and was expensedappointed as Digipath’s Chief Executive Officer in full.September 2019 in connection with the execution of the binding letter of intent with respect to the Company’s acquisition of VSSL. In addition, Mr. Henry, who also held 45% of VSSL’s shares prior to its acquisition by the Company, was engaged as a consultant by Digipath in September 2019.
On December 22, 2017,This acquisition was accounted for as a business combination under the purchase method of accounting. The purchase resulted in the recognition of $592,621 of goodwill reflected on the Company’s balance sheet. According to the purchase method of accounting, the Company issued 100,000 sharesrecognized the identifiable assets acquired and liabilities assumed as follows:
March 11, | ||||
2020 | ||||
Consideration: | ||||
Cash | $ | 200,000 | ||
Fair value of 6,500,000 shares of common stock | 373,750 | |||
Liabilities assumed | 20,600 | |||
Total consideration | $ | 594,350 | ||
Fair value of identifiable assets acquired assumed: | ||||
Cash | $ | 143 | ||
Accounts receivable | 1,585 | |||
Total fair value of assets assumed | 1,729 | |||
Consideration paid in excess of fair value (Goodwill)(1) | $ | 592,621 |
(1)The consideration paid in excess of common stock to Dr. Alfredo Axtmayer for his service on our Board of Directors. The aggregatethe net fair value of assets acquired and liabilities assumed has been recognized as goodwill.
Pro Forma Results
The following table sets forth the common stockunaudited pro forma results of the Company as if the acquisition of the VSSL was $26,276 basedeffective on the closing pricefirst day of each of the Company’s common stock onthree and nine month periods presented. These combined results are not necessarily indicative of the date of grant, and was expensed in full.results that may have been achieved had the companies always been combined.
Three Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues | $ | 407,229 | $ | 666,699 | ||||
Net loss | $ | (520,687 | ) | $ | (488,772 | ) | ||
Basic and diluted net loss per share | $ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average number of common shares outstanding - basic and fully diluted | 57,225,309 | 54,434,212 |
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.
Nine Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues | $ | 1,979,633 | $ | 2,000,085 | ||||
Net loss | $ | (1,367,478 | ) | $ | (1,393,789 | ) | ||
Basic and diluted net loss per share | $ | (0.02 | ) | $ | (0.03 | ) | ||
Weighted average number of common shares outstanding - basic and fully diluted | 55,914,909 | 52,009,076 |
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.
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, 2017June 30, 2020 and September 30, 2017,2019, respectively:
Fair Value Measurements at December 31, 2017 | Fair Value Measurements at June 30, 2020 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash | $ | 360,827 | $ | - | $ | - | $ | 126,862 | $ | - | $ | - | ||||||||||||
Goodwill | - | - | 592,621 | |||||||||||||||||||||
Total assets | 360,827 | - | - | 126,862 | - | 592,621 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Short term advances | - | 20,000 | - | |||||||||||||||||||||
Lease liabilities | - | - | 253,108 | |||||||||||||||||||||
Notes payable | - | 486,323 | - | |||||||||||||||||||||
Convertible notes payable, net of discounts of $16,643 | - | - | 1,233,357 | |||||||||||||||||||||
Total liabilities | - | - | - | - | 506,323 | 1,486,465 | ||||||||||||||||||
$ | 360,827 | $ | - | $ | - | $ | 126,862 | $ | (506,323 | ) | $ | (893,844 | ) |
Fair Value Measurements at September 30, 2017 | Fair Value Measurements at September 30, 2019 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash | $ | 178,177 | $ | - | $ | - | $ | 323,739 | $ | - | $ | - | ||||||||||||
Total assets | 178,177 | - | - | 323,739 | - | - | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Convertible notes payable, net of discounts of $41,426 | - | - | 658,574 | |||||||||||||||||||||
Total liabilities | - | - | - | - | - | 658,574 | ||||||||||||||||||
$ | 178,177 | $ | - | $ | - | $ | 323,739 | $ | - | $ | (658,574 | ) |
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 $1,250,000 of convertible debentures, net of discounts of $16,643 and $41,426 as of June 30, 2020 and September 30, 2019, respectively.
There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the threenine months ended December 31, 2017June 30, 2020 or the year ended September 30, 2017.2019.
Note 5 – Accounts Receivable
Accounts receivable was $454,471$171,126 and $266,613$179,256 at December 31, 2017June 30, 2020 and September 30, 2017,2019, respectively, net of allowance for doubtfuluncollectible accounts of $88,120$239,731 and $32,180$50,540 at December 31, 2017June 30, 2020 and September 30, 2017,2019, respectively.
12 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Fixed Assets
Fixed assets consist of the following at December 31, 2017June 30, 2020 and September 30, 2017:2019:
December 31, | September 30, | June 30, | September 30, | |||||||||||||
2017 | 2017 | 2020 | 2019 | |||||||||||||
Software | $ | 123,492 | $ | 121,617 | $ | 124,697 | $ | 123,492 | ||||||||
Office equipment | 41,603 | 36,080 | 74,777 | 55,061 | ||||||||||||
Furniture and fixtures | 14,285 | 14,285 | 29,879 | 29,115 | ||||||||||||
Lab equipment | 1,073,566 | 938,450 | 1,428,667 | 1,118,942 | ||||||||||||
Leasehold improvements | 489,147 | 489,147 | 494,117 | 494,117 | ||||||||||||
Lab equipment held under capital leases | 99,193 | - | ||||||||||||||
1,742,093 | 1,599,579 | 2,251,331 | 1,820,727 | |||||||||||||
Less: accumulated depreciation | (641,621 | ) | (572,530 | ) | (1,262,887 | ) | (1,094,113 | ) | ||||||||
Total | $ | 1,100,472 | $ | 1,027,049 | $ | 988,444 | $ | 726,614 |
During the three-months ended June 30, 2020, the Company disposed of lab equipment no longer in service. No proceeds were received on the disposal of the equipment, resulting in a loss on disposal of fixed assets of $28,238, which represented the net book value at the time of disposal.
Depreciation and amortization expense totaled $69,091$242,207 and $61,653$194,588 for the threenine months ended DecemberJune 30, 2020 and 2019, respectively.
Note 7 – Leases
The Company’s leases its operating and office facilities, and sub-leases one of the units, under non-cancelable real property lease agreements that expire on May 31, 20172021 and 2016, respectively.June 30, 2021. The Company also has a financing lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is economically feasible to continue to operate, management expects to enter into a new lease upon expiration. The operating and office facility leases contain provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.
The components of lease expense were as follows:
For the Nine | ||||
Months Ended | ||||
June 30, | ||||
2020 | ||||
Operating lease cost | $ | 156,008 | ||
Finance lease cost: | ||||
Amortization of assets | 15,767 | |||
Interest on lease liabilities | 8,970 | |||
Sublease income | (63,000 | ) | ||
Total net lease cost | $ | 117,745 |
13 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Supplemental balance sheet information related to leases was as follows:
June 30, | ||||
2020 | ||||
Operating leases: | ||||
Operating lease assets | $ | 193,094 | ||
Current portion of operating lease liabilities | $ | 195,739 | ||
Noncurrent operating lease liabilities | - | |||
Total operating lease liabilities | $ | 195,739 | ||
Finance lease: | ||||
Equipment, at cost | $ | 99,193 | ||
Accumulated amortization | (14,879 | ) | ||
Equipment, net | $ | 84,314 | ||
Current portion of finance lease liability | $ | 28,901 | ||
Noncurrent finance lease liability | 28,468 | |||
Total finance lease liability | $ | 57,369 | ||
Weighted average remaining lease term: | ||||
Operating leases | 1.00 year | |||
Finance leases | 1.80 years | |||
Weighted average discount rate: | ||||
Operating leases | 5.75 | % | ||
Finance lease | 18.41 | % |
Supplemental cash flow and other information related to leases was as follows:
For the Nine | ||||
Months Ended | ||||
June 30, | ||||
2020 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows provided by sublet operating leases | $ | 63,000 | ||
Operating cash flows used for operating leases | $ | 141,504 | ||
Financing cash flows used for finance leases | $ | 41,824 | ||
Leased assets obtained in exchange for lease liabilities: | ||||
Total operating lease liabilities | $ | - | ||
Total finance lease liabilities | $ | 99,193 |
Future minimum annual lease commitments under non-cancelable operating leases are as follows at June 30, 2020:
Fiscal Year Ending | Minimum Lease | Sublease | Net Lease | |||||||||
September 30, | Commitments | Income | Commitments | |||||||||
2020* | $ | 52,693 | $ | - | $ | 52,693 | ||||||
2021 | 148,957 | - | 148,957 | |||||||||
$ | 201,650 | $ | - | $ | 201,650 |
* Liability pertains to the remaining three month period from July 1, 2020 through September 30, 2020.
14 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Future minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows at June 30, 2020:
Finance | ||||
Leases | ||||
2020* | $ | 9,276 | ||
2021 | 37,105 | |||
2022 | 21,644 | |||
Total minimum lease payments | 68,025 | |||
Less interest | 10,656 | |||
Present value of lease liabilities | 57,369 | |||
Less current portion | 28,901 | |||
Long-term lease liabilities | $ | 28,468 |
* Liability pertains to the remaining three month period from July 1, 2020 through September 30, 2020.
Note 8 – Short Term Advances
Short term advances consist of the following at June 30, 2020 and September 30, 2019, respectively:
June 30, | September 30, | |||||||
2020 | 2019 | |||||||
On December 26, 2019, a total of $25,000 was received as a short-term loan from one of our convertible noteholders. The advance was subsequently repaid on February 6, 2020. No interest expense was recognized. | $ | - | $ | - | ||||
On January 21, 2020, a total of $20,000 was received as a short-term loan from one of our convertible noteholders. No interest expense was recognized. | 20,000 | - | ||||||
Less: current maturities | (20,000 | ) | - | |||||
Note payable | $ | - | $ | - |
15 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 –Notes Payable
Notes payable consists of the following at June 30, 2020 and September 30, 2019, respectively:
June 30, | September 30, | |||||||
2020 | 2019 | |||||||
On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note bears interest at 1.00% per annum, payable monthly beginning December 22, 2020, and is due on June 22, 2025. The Company PPP Note may be repaid at any time without penalty. Under the Payroll Protection Program, the Company will be eligible for loan forgiveness up to the full amount of the Company PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning June 22, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 40% of the amount of the Company PPP Note. No assurance is provided that the Company will obtain forgiveness under the Company PPP Note in whole or in part. | $ | 40,114 | $ | - | ||||
On May 13, 2020, the Company, through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $179,920 from WebBank Corp, pursuant to a Promissory Note issued by Labs to WebBank Corp (the “Labs PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the CRES Act. The Labs PPP Note bears interest at 1.00% per annum, payable monthly beginning December 13, 2020, and is due on May 13, 2022. The Labs PPP Note may be repaid at any time without penalty. Under the Payroll Protection Program, Labs will be eligible for loan forgiveness up to the full amount of the Labs PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that Labs spends during the 8-week period beginning May 13, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the PPP Note. No assurance is provided that Labs will obtain forgiveness under the Labs PPP Note in whole or in part. | 179,920 | - | ||||||
On December 26, 2019, the Company financed the purchase of $377,124 of lab equipment, in part, with the proceeds of a bank loan in the amount of $291,931. The loan bears interest at the rate of 5.75% per annum and requires monthly payments of $5,622 over the five-year term of the loan ending on December 26, 2024. The Company’s obligations under this loan are secured by a lien on the purchased equipment. | 266,289 | - | ||||||
Total notes payable | 486,323 | - | ||||||
Less: current maturities | (53,544 | ) | - | |||||
Notes payable | $ | 432,779 | $ | - |
The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $12,153 during the nine months ended June 30, 2020.
16 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10 – Convertible Notes Payable
Convertible notes payable consists of the following at June 30, 2020 and September 30, 2019, respectively:
June 30, | September 30, | |||||||
2020 | 2019 | |||||||
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. | $ | 50,000 | $ | - | ||||
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. | 150,000 | - | ||||||
On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000. The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. | 350,000 | - | ||||||
On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on September 23, 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 $0.11 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. | 200,000 | 200,000 | ||||||
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. A total of $4,066 of interest was repaid during the nine months ended June 30, 2019. | 350,000 | 350,000 | ||||||
On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on 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 | 150,000 | ||||||
Total convertible notes payable | 1,250,000 | 700,000 | ||||||
Less: unamortized debt discounts | (16,643 | ) | (41,426 | ) | ||||
1,233,357 | 658,574 | |||||||
Less: current maturities | (683,357 | ) | (200,000 | ) | ||||
Convertible notes payable | $ | 550,000 | $ | 458,574 |
17 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. The discount is amortized on a straight-line basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date. The Company recorded debt amortization expense on the aforementioned debt discount in the amount of $24,783 and $21,217 during the nine months ended June 30, 2020 and 2019, respectively.
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 $61,099 and $25,742 for the nine months ended June 30, 2020 and 2019, respectively.
The Company recognized interest expense for the nine months ended June 30, 2020 and 2019, respectively, as follows:
June 30, | June 30, | |||||||
2020 | 2019 | |||||||
Interest on capital leases | $ | 8,970 | $ | - | ||||
Interest on notes payable | 12,153 | - | ||||||
Amortization of beneficial conversion features | 24,783 | 21,217 | ||||||
Interest on convertible notes | 61,099 | 25,742 | ||||||
Total interest expense | $ | 107,005 | $ | 46,959 |
Note 711 - 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,June 30, 2020, 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, 2017June 30, 2020 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 ended December 31, 2017, a total of 150,000 Series A Preferred shares were converted into 750,000 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, 90,000,000250,000,000 shares authorized, of which 37,285,67657,612,672 shares were issued and outstanding as of December 31, 2017.August 14, 2020.
Common Stock Sales
On December 20, 2017,February 10, 2020, the Company sold 10 units, consisting of 100,00081,250 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.$6,500.
On December 14, 2017,January 16, 2020, the Company sold 13.89 units, consistinga total of 138,889625,000 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$50,000.
Common Stock Issued to Affiliate for Acquisition
On March 11, 2020, the Company acquired all of VSSL’s outstanding shares of capital stock from the VSSL’s stockholders for consideration consisting of 6,500,000 shares of the Company’s common stock and warrants on a relativecash payment of $200,000. The aggregate fair value basis.of the Company’s common stock was $373,750 based on the closing price of the Company’s common stock on the closing date.
18 |
On December 14, 2017, the Company sold 55.56 units, consisting of 555,600 shares of its common stock and warrants
DIGIPATH, INC. AND SUBSIDIARIES
Notes 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.Condensed Consolidated Financial Statements
(Unaudited)
Common Stock Issued for Services
On December 22, 2017,June 25, 2020, the Company issued 300,000375,000 shares of common stock to its CFO as a bonus for services rendered.rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $78,828 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, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer for his service on our Board of Directors. The aggregate fair value of the common stock was $26,276 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.
On November 29, 2017, a total of 314,069 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$15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that endedperiod.
On March 25, 2020, the Company issued 248,756 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 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 March 25, 2020, the Company issued 750,000 shares of common stock to a consultant for investor relations services to be performed from March 25, 2020 through August 25, 2020. The fair value of the common stock was $45,300 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 January 27, 2020, the Company issued 500,000 shares of common stock to a consultant for investor relations services to be performed from February 1, 2020 through July 31, 2020. The fair value of the common stock was $37,500 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. The shares were subsequently issued on April 6, 2020.
On December 31, 2017.25, 2019, the Company issued 171,233 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.
Amortization of Stock OptionsStock-Based Compensation
A total of $258,735$28,719 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 750,000 shares of common stock to a consultant on March 25, 2020, as amortized over the requisite service period. A total of $16,581 of unamortized expenses are to be expensed during the remaining requisite service period.
A total of $31,937 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 500,000 shares of common stock to a consultant on January 27, 2020, as amortized over the requisite service period. A total of $5,563 of unamortized expenses are to be expensed during the remaining requisite service period.
A total of $9,750 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 300,000 shares of common stock to a consultant on June 25, 2019, as amortized over the requisite service period. No further unamortized expenses are to be expensed during the remaining requisite service period.
A total of $128,304 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting period during the threenine months ended December 31, 2017.June 30, 2020.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 812 – 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 8,985,000 options were outstanding as of December 31, 2017. On December 31, 2017, options to purchase a total of 1,010,000 shares of common stock at $0.40 per share expired, and on November 7, 2017, options to purchase 100,000 shares of common stock at $0.85 per share expired.Common Stock Option Issuances
On December 22, 2017,March 25, 2020, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to our President and COO.former Chief Financial Officer. The options vested immediately as to 166,667 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable overfor a ten yearten-year period at an exercise price of $0.27$0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%110% and a call option value of $0.2094,$0.0468, was $104,698.$23,425. The options wereare being expensed over the vesting period, resulting in $104,698$3,113 of stock basedstock-based compensation expense during the threenine months ended December 31, 2017.June 30, 2020. As of June 30, 2020, a total of $20,312 of unamortized expenses are expected to be expensed over the vesting period.
19 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On November 29, 2017,March 9, 2020, we granted fully vested options to purchase 100,000750,000 shares of common stock as compensation for services to our Chief Scientist.Executive Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable overfor a ten yearten-year period at an exercise price of $0.27$0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%110% and a call option value of $0.21,$0.0499, was $21,004.$37,420. The options wereare being expensed over the vesting period, resulting in $21,004$5,793 of stock basedstock-based compensation expense during the threenine months ended December 31, 2017.June 30, 2020. As of June 30, 2020, a total of $31,627 of unamortized expenses are expected to be expensed over the vesting period.
On November 29, 2017,March 9, 2020, we granted fully vested options to purchase 205,000750,000 shares of common stock as compensation for services to a total of ten of our employees.Chief Operating Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable overfor a ten yearten-year period at an exercise price of $0.27$0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%110% and a call option value of $0.21,$0.0499, was $43,057.$37,420. The options wereare being expensed over the vesting period, resulting in $43,057$5,793 of stock basedstock-based compensation expense during the threenine months ended DecemberJune 30, 2020. As of June 30, 2020, a total of $31,627 of unamortized expenses are expected to be expensed over the vesting period.
On March 9, 2020, we granted options to purchase 1,000,000 shares of common stock as compensation for services to our Chairman of the Board of Directors. The options vested immediately as to 333,333 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0499, was $49,894. The options are being expensed over the vesting period, resulting in $7,724 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $42,170 of unamortized expenses are expected to be expensed over the vesting period.
On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to a consultant. The options vested immediately, and are exercisable for a five-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 108% and a call option value of $0.0403, was $4,031.
On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to another consultant. The options vested immediately, and are exercisable for a five-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 108% and a call option value of $0.0403, was $4,031.
On January 31, 2017.2020, we granted options to purchase 250,000 shares of common stock as compensation for Director services to Dennis Hartmann. The options vested immediately as to 62,500 shares and as to an additional 62,500 shares on each of January 31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $2,353 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $14,725 of unamortized expenses are expected to be expensed over the vesting period.
On January 29, 2020, Edmond A. DeFrank was appointed to the Company’s Board of Directors, filling the vacancy resulting from the resignation of Dr. Cindy Orser on January 20, 2020. On January 31, 2020, we granted Mr. DeFrank options to purchase 250,000 shares of common stock as compensation for Director services. The options vested immediately as to 62,500 shares and as to an additional 62,500 shares on each of January 31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $2,353 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $14,725 of unamortized expenses are expected to be expensed over the vesting period.
A total of 5,625,000 options were outstanding as of June 30, 2020. During the nine months ended June 30, 2020, options to purchase an aggregate total of 4,160,000 shares of common stock at a weighted average exercise price of $0.14 per share expired.
Note 913 – Common Stock Warrants
Warrants to purchase a total of 5,839,6674,274,269 shares of common stock were outstanding as of December 31, 2017. No warrants were exercised during the three months ended December 31, 2017. June 30, 2020.
On December 31, 2017, warrantsMarch 9, 2020, we granted a ten-year warrant to purchase 200,0001,500,000 shares of common stock at $0.30a price of $0.10 per share expired,to a consultant as compensation for services. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and on December 30, 2017,a call option value of $0.0467, was $70,012.
On February 21, 2020, warrants to purchase 300,000 shares of common stock at $0.45 per share expired.
Warrants to purchase 50,000642,857 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.expired.
Note 10 – Other Income
Other income for the three months ended December 31, 2017 and 2016 consisted of the following:
December 31, | ||||||||
2017 | 2016 | |||||||
Settlement income on license agreement | $ | - | $ | 150,000 | ||||
Rental income on subleases | 19,200 | - | ||||||
Restitution income | 1,500 | 4,000 | ||||||
$ | 20,700 | $ | 154,000 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 14 – Other Income (Expense)
Other income (expense) for the nine months ended June 30, 2020 and 2019 consisted of the following:
June 30, | ||||||||
2020 | 2019 | |||||||
Settlement income on note receivable | $ | - | $ | 30,000 | ||||
Rental income on subleases | 63,000 | 62,400 | ||||||
Loss on disposal of fixed assets | (28,238 | ) | - | |||||
Interest expense | (107,005 | ) | (46,959 | ) | ||||
$ | (72,243 | ) | $ | 45,441 |
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.
Note 1115 - 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 threenine months ended December 31, 2017June 30, 2020 and the year ended September 30, 2017,2019, 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,June 30, 2020, the Company had approximately $7,025,500$13,800,000 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, 2017June 30, 2020 and September 30, 2017,2019, respectively.
In accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note 1216 – Subsequent Events
Preferred Stock Conversions
On January 22, 2018, a shareholder converted 50,000 shares of Series A Preferred into 250,000 shares of common stock. The stock was converted in accordance withCompany evaluates events that have occurred after the conversion terms; thereforebalance sheet date through the date these financial statements were issued. There were no gain or loss has been recognized.
On January 17, 2018, a shareholder converted 272,000 shares of Series A Preferred into 1,360,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Exercise of Options
On January 3, 2018, two option holders exercised optionssubsequent events to purchase a total of 500,000 shares of common stock at $0.181 per share on a cashless basis, resulting in the issuance of 317,172 shares of common stock.
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.report.
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, 20172019 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, 20172019 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, 2017June 30, 2020 are described below.
Ø | Digipath Labs, Inc. 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. | |
Ø | VSSL Enterprises, Ltd. Acquired in March 2020, and based in British Colombia, Canada, VSSL is a cannabis genomics, plant sciences and consulting firm that builds predictive tools for the cannabis industry, and uses molecular and bioinformatics tools to deliver unique solutions suited to its customers’ business models. The acquisition resulted in $592,621 of goodwill, which will be evaluated for impairment at year-end. The operations did not have significant impact on the |
Our cannabis testing
The Company’s financial performance was negatively impacted by the COVID-19 coronavirus pandemic during the three and business licenses were briefly suspended by Nevada regulators for an eight business day period subsequentnine month periods ended June 30, 2020. This is due to the end ofdecline in the quarter ended December 31, 2017, commencing atNevada cannabis markets resulting in turn from the end of business on Friday, January 19, 2018 and reinstated on January 31, 2018. This had no impact on our financial results forsubstantial decline in Nevada tourism resulting from COVID-19. While the periods presented in this report, butCompany’s testing operations have recently begun to increase, management is unable to predict when testing operations will be reflected in our results for our quarter ending March 31, 2018.revert to historical levels.
Results of Operations for the Three Months Ended December 31, 2017June 30, 2020 and 2016:2019:
The following table summarizes selected items from the statement of operations for the three months ended December 31, 2017June 30, 2020 and 2016.2019.
Three Months Ended December 31, | Increase / | Three Months Ended June 30, | Increase / | |||||||||||||||||||||
2017 | 2016 | (Decrease) | 2020 | 2019 | (Decrease) | |||||||||||||||||||
Revenues | $ | 1,118,785 | $ | 409,751 | $ | 709,034 | $ | 407,229 | $ | 652,920 | $ | (245,691 | ) | |||||||||||
Cost of sales | 376,772 | 204,132 | 172,640 | 347,724 | 424,067 | (76,343 | ) | |||||||||||||||||
Gross profit | 742,013 | 205,619 | 536,394 | |||||||||||||||||||||
Gross profit (loss) | 59,505 | 228,853 | (169,348 | ) | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
General and administrative | 399,114 | 279,686 | 119,428 | 328,128 | 431,636 | (103,508 | ) | |||||||||||||||||
Professional fees | 486,676 | 191,643 | 295,033 | 177,835 | 195,052 | (17,217 | ) | |||||||||||||||||
Bad debts expense | 55,940 | 14,450 | 41,490 | 25,420 | 93,340 | (67,920 | ) | |||||||||||||||||
Total operating expenses: | 941,730 | 485,779 | 455,951 | 531,383 | 720,028 | (188,645 | ) | |||||||||||||||||
Operating loss | (199,717 | ) | (280,160 | ) | (80,443 | ) | (471,878 | ) | (491,175 | ) | (19,297 | ) | ||||||||||||
Total other income | 20,700 | 154,000 | (133,300 | ) | ||||||||||||||||||||
Total other income (expense) | (48,809 | ) | 1,547 | (50,356 | ) | |||||||||||||||||||
Net loss | $ | (179,017 | ) | $ | (126,160 | ) | $ | 52,857 | $ | (520,687 | ) | $ | (489,628 | ) | $ | 31,059 |
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, 2017June 30, 2020 were $1,118,785,$407,229, compared to revenues of $409,751$652,920 during the three months ended December 31, 2016, an increaseJune 30, 2019, a decrease of $709,034,$245,691, or 173%38%. The increasedecrease in revenue was due to the continued growth of our testing lab operationseffects the COVID-19 coronavirus pandemic had on the tourism industry in Nevada as our customer base, consisting of production and cultivation facilities, increased their operations, particularly followingduring the implementation of the Nevada law permitting the recreational use of marijuana, which went into effect on July 1, 2017.current period.
Cost of Sales
Cost of sales for the three months ended December 31, 2017June 30, 2020 were $376,772,$347,724, compared to $204,132$424,067 during the three months ended December 31, 2016, an increaseJune 30, 2019, a decrease of $172,640,$76,343, or 85%18%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The increaseddecreased cost of sales in the current period waswere primarily due to decreased labor and reduced consumption of lab supplies related to the increase in revenues overeffects of the comparative period.COVID-19 pandemic. Our gross margins of approximately 66%, increased15% and 35% during the three months ended December 31, 2017, comparedboth June 30, 2020 and 2019, respectively, translated to $169,348 of decreased gross profit in the current period. Our margins of approximately 50% during the three months ended December 31, 2016, as we realized efficiencies and economies of scale from our increased revenues. We expect cost of sales to increase and gross margins to decrease as we implement ISO/IEC 17025 standards for the competence of testing and calibration laboratories, which is now being requiredwere significantly affected by the State of Nevada for all licensed cannabis laboratories.decline in revenues, given our inability to cut fixed costs, including rent, depreciation and maintenance contracts on our lab equipment.
General and Administrative Expenses
General and administrative expenses for the three months ended December 31, 2017June 30, 2020 were $399,114,$328,128, compared to $279,686$431,636 during the three months ended December 31, 2016, an increaseJune 30, 2019, a decrease of $119,428,$103,508, or 43%24%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses.General and administrative expenses included non-cash, stock-based compensation of $33,976 and $28,370 during the three months ended June 30, 2020 and 2019, respectively.
Professional Fees
Professional fees for the three months ended December 31, 2017June 30, 2020 were $486,676,$177,835, compared to $191,643$195,052 during the three months ended December 31, 2016, an increaseJune 30, 2019, a decrease of $295,033,$17,217, or 154%9%. Professional fees increasedincluded non-cash, stock-based compensation of $54,749 and $85,648 during the three months ended June 30, 2020 and June 30, 2019, respectively. Professional fees decreased primarily due to increaseddecreased stock-based compensation paid to employees and consultants during the current period.
Bad Debts Expense
Bad debts expense for the three months ended December 31, 2017June 30, 2020 was $55,940,$25,420, compared to $14,450$93,340 during the three months ended December 31, 2016,June 30, 2019, a decrease of $67,920, or 73%. Bad debts expense decreased during the current period as our allowance for doubtful accounts increased slightly, from $214,311 to $239,731 during the quarter.
Operating Loss
Our operating loss for the three months ended June 30, 2020 was $471,878, compared to $491,175 during the three months ended June 30, 2019, a decrease of $19,297, or 4%. Our operating loss decreased primarily due to improvements in collection efforts and reductions in corporate overhead and professional fees that offset our decreased gross profits due to the effects of Covid-19 during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.
Other Income (Expense)
Other expense, on a net basis, for the three months ended June 30, 2020 was $48,809, compared to other income, on a net basis, of $1,547 during the three months ended June 30, 2019, a net decrease of $50,356. Other expense consisted of $41,571 of interest expense and a loss on disposal of fixed assets of $28,238, as partially offset by other income, consisting of $21,000 of subleased rental income for the three months ended June 30, 2020. Other income during the three months ended June 30, 2019 consisted of $19,750 of subleased rents, as offset by $18,203 of interest expense.
Net Loss
Net loss for the three months ended June 30, 2020 was $520,687, compared to $489,628 during the three months ended June 30, 2019, an increase of $41,490,$31,059, or 287%6%. The increased net loss was due primarily to reductions in gross profits due to Covid-19, as offset by improved collection efforts that reduced bad debts expense and reductions in corporate expenses as described above, in addition to increased interest on debt financing.
24 |
Results of Operations for the Nine Months Ended June 30, 2020 and 2019:
The following table summarizes selected items from the statement of operations for the nine months ended June 30, 2020 and 2019.
Nine Months Ended June 30, | Increase / | |||||||||||
2020 | 2019 | (Decrease) | ||||||||||
Revenues | $ | 1,971,141 | $ | 1,946,590 | $ | 24,551 | ||||||
Cost of sales | 1,250,234 | 1,334,217 | (83,983 | ) | ||||||||
Gross profit (loss) | 720,907 | 612,373 | 108,534 | |||||||||
Operating expenses: | ||||||||||||
General and administrative | 1,123,479 | 1,240,612 | (117,133 | ) | ||||||||
Professional fees | 688,902 | 677,299 | 11,603 | |||||||||
Bad debts expense | 186,540 | 143,170 | 43,370 | |||||||||
Total operating expenses: | 1,998,921 | 2,061,081 | (62,160 | ) | ||||||||
Operating loss | (1,278,014 | ) | (1,448,708 | ) | (170,694 | ) | ||||||
Total other income (expense) | (72,243 | ) | 45,441 | (117,684 | ) | |||||||
Net loss | $ | (1,350,257 | ) | $ | (1,403,267 | ) | $ | (53,010 | ) |
Revenues
Aggregate revenues for the nine months ended June 30, 2020 were $1,971,141, compared to revenues of $1,946,590 during the nine months ended June 30, 2019, an increase of $24,551, or 1%. The increase in revenue was due to a strong first fiscal quarter, as offset by the negative effects the COVID-19 coronavirus pandemic had on the tourism industry in Nevada during the current period.
Cost of Sales
Cost of sales for the nine months ended June 30, 2020 were $1,250,234, compared to $1,334,217 during the nine months ended June 30, 2019, a decrease of $83,983, or 6%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. Our gross margins of approximately 37%, increased during the nine months ended June 30, 2020, compared to gross margins of approximately 31% during the nine months ended June 30, 2019, due primarily to increased revenues of $24,551 and $83,983 of decreased cost of sales in the current period. We intend to continue to automate processes through equipment enhancements to improve our margins, and implemented a new lab management system, purchased a new triple quad machine and are experimenting with a new microbiology testing system that we expect will help increase our testing capacity and decrease our variable costs.
General and Administrative Expenses
General and administrative expenses for the nine months ended June 30, 2020 were $1,123,479, compared to $1,240,612 during the nine months ended June 30, 2019, a decrease of $117,133, or 9%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $72,060 and $85,110 during the nine months ended June 30, 2020 and 2019, respectively. General and administrative expenses decreased primarily due to decreased corporate overhead as we responded to the effects of Covid-19 during the current period.
Professional Fees
Professional fees for the nine months ended June 30, 2020 were $688,902, compared to $677,299 during the nine months ended June 30, 2019, an increase of $11,603, or 2%. Professional fees included non-cash, stock-based compensation of $179,678 and $328,317 during the nine months ended June 30, 2020 and June 30, 2019, respectively. Professional fees increased primarily due to increased legal fees associated with our acquisition of VSSL during the current period.
25 |
Bad Debts Expense
Bad debts expense for the nine months ended June 30, 2020 were $186,540, compared to $143,170 during the nine months ended June 30, 2019, an increase of $43,370, or 30%. Bad debts expense increased during the current period as our allowance for doubtful accounts increased withto $239,731 during the growth in sales and accounts receivables.period due to the effects of COVID-19.
Operating Loss
Our operating loss for the threenine months ended December 31, 2017June 30, 2020 was $199,717$1,278,014, compared to $280,160$1,448,708 during the threenine months ended December 31, 2016,June 30, 2019, a decrease of $80,443,$170,694, or 29%12%. Our operating loss decreased primarily due to our increased revenues, offsetgross profits and reductions in part by increased operating expenses, including stock-based compensation,corporate overhead as we responded to the effects of Covid-19 during the threenine months ended December 31, 2017,June 30, 2020, compared to the threenine months ended December 31, 2016.June 30, 2019.
Other Income (Expense)
Other incomeexpense, on a net basis, for the threenine months ended December 31, 2017June 30, 2020 was $20,700,$72,243, compared to other income, on a net basis, of $154,000$45,441 during the threenine months ended December 31, 2016,June 30, 2019, a net decrease of $133,300.$117,684. Other incomeexpense consisted of $19,200$107,005 of interest expense and a loss on disposal of fixed assets of $28,238, as partially offset by other income, consisting of $63,000 of subleased storage space and $1,500 related to restitution payments received from a former employeerental income for the threenine months ended December 31, 2017.June 30, 2020. Other income during the threenine months ended December 31, 2016June 30, 2019 consisted of $150,000 received pursuant to the$62,400 of sublease rents and a $30,000 gain on settlement underof a license agreement with GB Sciences, Inc. and $4,000previously written off note receivable, as offset by $46,959 of restitution payments received from a former employee.interest expense.
Net Loss
Net loss for the threenine months ended December 31, 2017June 30, 2020 was $179,017,$1,350,257, compared to $126,160$1,403,267 during the threenine months ended December 31, 2016, an increaseJune 30, 2019, a decrease of $52,857,$53,010, or 42%4%. The increaseddecreased net loss was due primarily to increased non-cash, stock-based compensationgross profits, as partially offset by increased legal fees and bad debts expense as described above, in addition to a loss on disposal of $329,019 over the comparative three month period.
fixed assets and increased interest on debt financing.
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 monthnine-month periods ended December 31, 2017June 30, 2020 and 2016:2019:
2017 | 2016 | 2020 | 2019 | |||||||||||||
Operating Activities | $ | 182,156 | $ | 30,037 | $ | (614,937 | ) | $ | (889,401 | ) | ||||||
Investing Activities | (142,514 | ) | (2,089 | ) | (341,008 | ) | (125,261 | ) | ||||||||
Financing Activities | 143,008 | - | 759,068 | 1,125,000 | ||||||||||||
Net Increase in Cash | $ | 182,650 | $ | 27,948 | ||||||||||||
Net Increase (Decrease) in Cash | $ | (196,877 | ) | $ | 110,338 |
Net Cash ProvidedUsed in Operating Activities
During the threenine months ended December 31, 2017,June 30, 2020, net cash providedused in operating activities was $182,156,$614,937, compared to net cash providedused in operating activities of $30,037$889,401 for the same period ended December 31, 2016.June 30, 2019. The increasedecrease in cash provided byused in operating activities iswas primarily attributable to our $498,517, or 205% increase in gross profit as we continued to develop our cannabis testing lab operations.decreased net loss.
Net Cash Used in Investing Activities
During the threenine months ended December 31, 2017,June 30, 2020, net cash used in investing activities was $142,514,$341,008, compared to $2,089$125,261 for the same period ended December 31, 2016.June 30, 2019. The increase is attributable to greater investments made for cannabis testing equipment and the purchase of VSSL Enterprises, Ltd. in the current period than was necessary in the comparative period.
Net Cash Provided by Financing Activities
During the threenine months ended December 31, 2017,June 30, 2020, net cash provided by financing activities was $143,008,$759,068, compared to $-0-net cash provided by financing activities of $1,125,000 for the same period ended December 31, 2016.June 30, 2019. The current period consisted primarily of $550,000 of proceeds received on convertible note financing, proceeds of $220,034 received on PPP notes payable and proceeds of $56,500 from the sale of stock, as offset by $41,824 of principal payments on an equipment lease and $25,642 of principal payments on an equipment loan, compared to $500,000 of proceeds received on convertible debt financing and $625,000 received from the sale of stock in the comparative period.
Ability to Continue as a Going Concern
As of December 31, 2017,June 30, 2020, our balance of cash on hand was $360,827.$126,862. 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.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 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 howUnder 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 — Revenue Recognition. Under ASC 605, requires that four basicrevenue was recognized when the following criteria must be met before revenue can be recognized:had been 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 to
27 |
Our revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis lab testing revenues, we sell our services products for licensed 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 agree. 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. Wethe fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Revenues are recognized uponManagement estimates an allowance for doubtful accounts based on the substantial completionaging of the tests when collectability is reasonably assured, which is usually upon delivery of results to the customer.its receivables.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 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.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive OfficerInterim President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017.June 30, 2020. 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,June 30, 2020, our Chief Executive OfficerInterim President 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.
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.
As a “smaller reporting company” as definedWe have identified the following risk factor in addition to those included in Part I, Item 1A of our Form 10-K for the fiscal year ended September 30, 2019. Additional risks not presently known to us or other factors not perceived by Item 10us to present significant risks to our business at this time also may impair our business, financial condition and results of Regulation S-K,operations.
The outbreak of the CompanyCOVID-19 coronavirus has negatively impacted and could continue to negatively impact our business and the global economy. In addition, the COVID-19 pandemic could negatively impact our ability to obtain financing when required.
The recent outbreak of the COVID-19 coronavirus has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that we or our employees, customers, and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. While it is not requiredpossible at this time to provideestimate the information required by this Item.full impact that COVID-19 will have on our business, following the end of our most recent quarter ended June 30, 2020, the Company’s cannabis testing operations significantly declined due to the decline in the Nevada cannabis markets resulting in turn from the substantial decline in Nevada tourism resulting from COVID-19. COVID-19 has also had an adverse impact on global economic conditions, which could impair our ability to raise capital when needed.
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 monththree-month period ended December 31, 2017:June 30, 2020:
Common Stock Issued for Services
On December 22, 2017,June 25, 2020, we issued 300,000375,000 shares of common stock, restricted in accordance with Rule 144, to Todd Peterson as a bonusour CFO for his services rendered as our CFO.pursuant to his employment agreement.
On December 22, 2017,April 6, 2020, we issued 100,000500,000 shares of common stock, restricted in accordance with Rule 144, to Dr. Alfredo Axtmayera consultant for hisinvestor relations services on our Board of Directors.
The following shares of common stock and warrants are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933 during the three month period ended December 31, 2017. The issuances were exemptto be performed 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, familiar with our operations, and there was no general solicitation.January 27, 2020 through July 27, 2020.
On December 20, 2017, we 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.
On December 14, 2017, we 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.
On December 14, 2017, we sold 55.56 units, consisting of 555,600 shares of its common stock and 277,800 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
Appointment of Interim President
On August 12, 2020, the Company appointed one of our Directors, Dennis Hartman as the Interim President of the Company. Mr. Hartmann was previously appointed to our Board of Directors on September 25, 2019. Mr. Hartmann, age 63, had been an attorney engaged in private practice in the State of California for over 35 years. Mr. Hartmann holds a B.S. from the University of Alabama and a J.D. from the University of Texas School of Law. Mr. Hartmann is not a party to an employment agreement with the Company and is not being compensated for his service as Interim President.
Debt Financing
On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note bears interest at 1.00% per annum, payable monthly beginning December 22, 2020, and is due on June 22, 2025. The PPP Note may be repaid at any time without penalty.
Under the Payroll Protection Program, the Company will be eligible for loan forgiveness up to the full amount of the Company PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning June 22, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 40% of the amount of the Company PPP Note. No assurance is provided that the Company will obtain forgiveness under the Company PPP Note in whole or in part.
The Company PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the Company PPP Note.
* Filed herewith.
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, 2018August 14, 2020
DIGIPATH, INC. | ||
By: | /s/ | |
Name: | ||
Title: | ||
By: | /s/ Todd Peterson | |
Name: | Todd Peterson | |
Title: | Chief Financial Officer and Secretary |