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 June 30, 2018March 31, 2019

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)

(702) 527-2060

(Registrant’s telephone number, including area code)

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

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).

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.

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).

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 AugustMay 13, 20182019 was 41,564,235.47,659,716.

Securities registered pursuant to Section 12(b) of the Act: None

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS

(Unaudited)STOCKHOLDERS’ EQUITY

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to financial statements.

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.

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.

The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2018. The interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control and ownership at June 30, 2018:March 31, 2019:

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

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

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

⁽⁴⁾Formed during the first fiscal quarter of 2019, but has not yet commenced operations.

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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 $7,500 has been reclassified to net against the related $7,500 of bad debt expense to conform to the current period presentation. 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 Companyoperates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.operations.

Fair Value of Financial Instruments

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

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605606 — Revenue Recognition. Under ASC 605,606, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has 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.

There was no impact on the Company’s financial statements as a result of adopting ASC 606 for the ninesix months ended June 30, 2018 and 2017,March 31, 2019, or the twelve months ended September 30, 2017.2018.

Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products to licensed producers and cultivators within the state of Nevadaon a determinable fixed fee per test, or panel of tests basis.basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured.We We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.

The Company also recognizes revenue through our subsidiary, TNM News Corp., which primarily recognizes revenue from advertisements through partnered merchants. Payment for ad revenues are received prior to the distribution of the ad campaign, and the revenues are recognized ratably over the campaign. The Company defers any revenue for which the term of the campaign has not yet been realized. To date, these revenues have not been materially significant.

Stock-Based Compensation

The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 505-50 (ASC 505-50). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.

Recent Accounting Pronouncements

In JuneAugust 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07,2018-13,Compensation-Stock CompensationFair Measurement (Topic 718)820): ImprovementsDisclosure Framework – Changes to Nonemployee Share-Based Payment Accountingthe Disclosure Requirements for Fair Value Measurement, which expandsmodify the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply thedisclosure requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).820. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017,2019, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In March 2018,February 2016, the FASB issued ASU No. 2018-05,2016-02,Income TaxesLeases (Topic 740) - Amendments842). ASU 2016-02 requires lessees to SEC Paragraphs Pursuantrecognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU 2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions that would provide us with the option to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting foradopt the impactprovisions of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to completenew guidance using a modified retrospective transition approach, without adjusting the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986.comparative periods presented. The Company does not expect the adoption of thisis currently evaluating ASU to have a material2016-02 and its impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02,Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09,Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

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

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.

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 ($12,876,159),$14,063,967, and as of June 30, 2018,March 31, 2019, the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 3 – Related Party Transactions

Stock Based Compensation for Services

On June 25, 2018, the Company issued 118,421 shares of common stock to its then CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $22,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On June 25, 2018, the Company issued 31,579 shares of common stock to its then President and COO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 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 ended on June 30, 2018.

On June 25, 2018, the Company issued 78,947 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 that ended on June 30, 2018.

On March 26, 2018, the Company issued 207,852 shares of common stock to its then CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $45,000 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 ended on June 30, 2018.

On March 26, 2018, the Company issued 55,427 shares of common stock to its then President and COO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $12,000 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 ended on June 30, 2018.

On March 26, 2018, the Company issued 138,568 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $30,000 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 ended on June 30, 2018.

On December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. 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 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 nine months ended June 30, 2018.

Note 43 – 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 June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively:

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 $442,022 of convertible debentures, net of discounts of $57,978 as of March 31, 2019.

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the ninesix months ended June 30, 2018March 31, 2019 or the year ended September 30, 2017.2018.

Note 4 – Note Receivable

On March 8, 2019 and February 15, 2019, we loaned Big Valley Analytical Labs, Inc. $25,000 and $20,000, respectively. The loans bear interest at an annual rate of 15%, are evidenced by secured demand notes, and are secured by a lien on the borrower’s assets. The principal was subsequently repaid in full on April 1, 2019.

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

Note 5 – Accounts Receivable

Accounts receivable was $200,867$190,450 and $266,613$167,734 at June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively, net of allowance for doubtful accounts of $85,221$64,730 and $32,180$14,900 at June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6 – Fixed Assets

Fixed assets consist of the following at June 30, 2018March 31, 2019 and September 30, 2017:2018:

Depreciation and amortization expense totaled $213,225$128,771 and $186,922$141,696 for the ninesix months ended JuneMarch 31, 2019 and 2018, respectively.

Note 7 – Convertible Notes Payable

Convertible notes payable consist of the following at March 31, 2019 and September 30, 2018, and 2017, respectively.respectively:

In addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible notes by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the convertible notes. This intrinsic value is limited to the portion of the proceeds allocated to the convertible debt.

The aforementioned accounting treatment resulted in a total debt discount equal to $70,964 during the six months ended March 31, 2019. The discount is amortized on a straight-line basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date. During the six months ended March 31, 2019, the Company recorded debt amortization expense in the amount of $12,986, attributed to the aforementioned debt discount.

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

The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $15,770 for the six months ended March 31, 2019.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 78 - 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 June 30, 2018,March 31, 2019, there were 1,425,9421,325,942 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 1,425,9421,325,942 shares of Series A Preferred outstanding at June 30, 2018March 31, 2019 are convertible into 7,129,7106,629,710 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 MarchOn December 31, 2018, a total of 322,000100,000 Series A Preferred shares were converted into 1,610,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

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

Common Stock

Common stock consists of $0.001 par value, 90,000,000 shares authorized, of which 40,897,56847,609,716 shares were issued and outstanding as of June 30, 2018.March 31, 2019.

Common Stock Sales

On April 13, 2018,February 7, 2019, the Company sold 14 units, consisting of an aggregate of 140,0001,000,000 shares of its common stock and warrants to purchase 70,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $25,200. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.$200,000.

On April 12, 2018,February 1, 2019, the Company sold 28 units, consisting of an aggregate of 280,000250,000 shares of its common stock and warrants to purchase 140,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $50,400. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.$50,000.

On April 10, 2018,January 31, 2019, the Company sold 27.78 units, consisting of an aggregate of 277,778625,000 shares of its common stock and warrants to purchase 138,889 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $50,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.$125,000.

On December 20, 2017,January 24, 2019, the Company sold 10 units, consisting of an aggregate of 100,0001,250,000 shares of its common stock and warrants to purchase 50,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds of $18,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.

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

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

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Exercise of Options

On January 3, 2018, two option holders exercised options 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.$250,000.

Common Stock Issued for Services

On June 25, 2018,March 29, 2019, the Company issued 118,421475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance, therefore there was no additional expense as a result of the modification of the equity awards.

On March 25, 2019, the Company issued 29,268 shares of common stock to its then CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $22,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.

On June 25, 2018, the Company issued 31,579 shares of common stock to its then President and COOCEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 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 ended on June 30, 2018.period.

On JuneMarch 25, 2018,2019, the Company issued 78,94773,171 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 that ended on June 30, 2018.period.

On JuneMarch 25, 2018, the Company issued 131,5792019, a total of 50,000 shares of common stock were issued to a consultant for business development services.that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $25,000$10,250 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.period.

On JuneFebruary 25, 2018, the Company issued 100,0002019, a total of 50,000 shares of common stock were issued to anothera consultant for business development services.that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $19,000$12,300 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.period.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 26, 2018, the Company issued 207,852January 25, 2019, a total of 50,000 shares of common stock were issued to its then CEO for services rendered pursuanta consultant that was engaged to his employment agreement.assist the Company with acquisition activities. The aggregate fair value of the common stock was $45,000$10,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on March 31, 2018.period.

On March 26,December 25, 2018, the Company issued 55,42746,261 shares of common stock to its then President and COOCEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $12,000$6,000 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 ended on March 31, 2018.period.

On March 26,December 25, 2018, the Company issued 138,568115,652 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $30,000 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 ended on March 31, 2018.

On March 26, 2018, the Company issued 69,284 shares of common stock to a consultant for business development services. The 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 that ended on March 31, 2018.period.

On December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. 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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

On November 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that endedwere engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $24,000 based on December 31, 2017.the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

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

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

Amortization of Stock OptionsStock-Based Compensation

A total of $438,683$14,740 of stock-based compensation expense was recognized during the six months ended March 31, 2019 as a result of the issuance of 200,000 shares of common stock to one of our directors, Bruce Raben, on September 12, 2018, as amortized over the requisite service period. As of March 31, 2019, a total of $14,822 of unamortized expenses are expected to be expensed during the remaining fiscal year ended September 30, 2019.

A total of $88,794 of stock-based compensation expense was recognized from the amortization of options over their vesting period during the ninesix months ended June 30, 2018.March 31, 2019.

Note 89 – 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 8,352,5005,105,000 options were outstanding as of June 30, 2018.March 31, 2019. During the threesix months ended June 30, 2018,March 31, 2019, options to purchase an aggregate total of 40,00027,500 shares of common stock at a weighted average exercise price of $0.27$0.26 per share expired, during the three months ended March 31, 2018, optionsexpired.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to purchase an aggregate total of 55,000 shares of common stock at a weighted average exercise price of $0.24 per share expired,Condensed Consolidated Financial Statements

(Unaudited)

Options Issued to Officers and during the three months ended December 31, 2017, options to purchase an aggregate total of 1,110,000 shares of common stock at a weighted average exercise price of $0.40 per share also expired.Directors for Services

On January 3, 2018, two option holders exercised options 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.

On December 22, 2017,7, 2019, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to our then President and COO.Chief Science Officer. The options vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable overfor a ten yearten-year period at an exercise price of $0.27$0.13 per share, based on the most recent closing stock price. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $15,485 of stock-based compensation expense during the six months ended March 31, 2019. As of March 31, 2019, a total of $35,449 of unamortized expenses are expected to be expensed over the vesting period.

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to Bruce Raben, one of our directors. The options vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%107% and a call option value of $0.2094,$0.1019, was $104,698.$50,934. The options wereare being expensed over the vesting period, resulting in $104,698$15,485 of stock basedstock-based compensation expense during the ninesix months ended June 30, 2018.March 31, 2019. As of March 31, 2019, a total of $35,449 of unamortized expenses are expected to be expensed over the vesting period.

Options Exchanged for Common Stock

On NovemberMarch 29, 2017,2019, the Company issued 475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance, therefore there was no additional expense as a result of the modification of the equity awards.

Re-Priced Options Issued to Officers and Directors for Services

On January 7, 2019, the board amended the following options to reduce their exercise price to $0.13 per share, based on the most recent closing stock price. All other terms were unchanged. The modification of these equity awards resulted in an additional expense of $36,764.

Options Issued to Employees for Services

On December 25, 2018, we granted fully vested options to purchase 100,000an aggregate of 345,000 shares of common stock as compensation for services to a total of fourteen of our Chief Scientist.employees. The options are exercisable over a ten yearten-year period at an exercise price of $0.27$0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112%107% and a call option value of $0.21,$0.1017, was $21,004.$35,078. The options wereare being expensed over the vesting period, resulting in $21,004$9,226 of stock basedstock-based compensation expense during the ninesix months ended June 30, 2018.

On November 29, 2017, we granted fully vested options to purchase an aggregateMarch 31, 2019. As of 205,000 shares of common stock as compensation for services toMarch 31, 2019, a total of ten$25,852 of our employees. The optionsunamortized expenses are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.21, was $43,057. The options wereexpected to be expensed over the vesting period, resulting in $43,057 of stock based compensation expense during the nine months ended June 30, 2018.period.

Note 910 – Common Stock Warrants

Warrants to purchase a total of 6,117,1284,100,461 shares of common stock were outstanding as of June 30, 2018. March 31, 2019.

On January 3,various dates from December 21, 2018 a warrant holder exercisedto March 15, 2019, warrants to purchase 71,428 sharesan aggregate of common stock at $0.26 per share on a cashless basis, resulting in the issuance of 34,285 shares of common stock.

On December 31, 2017, warrants to purchase 200,0002,250,001 shares of common stock at $0.30 per share expired, and on December 30, 2017,November 23, 2018, warrants to purchase another 300,000100,000 shares of common stock at $0.45$0.40 per share also expired.

Note 11 – Other Income

Other income for the six months ended March 31, 2019 and 2018 consisted of the following:

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

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Warrants to purchase an aggregate 348,889 shares of common stock at $0.30 per share over a 36 month period were issued at various dates in April of 2018 pursuant to unit offerings for the sale of an aggregate of 697,778 shares of common stock in exchange for total proceeds of $125,600.

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

Note 10 – Other Income

Other income for the nine months ended June 30, 2018 and 2017 consisted of the following:

Note 1112 - 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 ninesix months ended June 30, 2018March 31, 2019 and the year ended September 30, 2017,2018, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At June 30, 2018,March 31, 2019, the Company had approximately $7,787,000$8,560,000 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 June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively.

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

Note 1213 – Subsequent Events

Common Stock SalesNote Receivable Repayment

On July 11, 2018,April 1, 2019, Big Valley Analytical Labs, Inc. repaid $45,000 owed to us under the Company sold 66.67 units, consistingpromissory notes.

Common Stock Issued for Services

On April 25, 2019, a total of 666,667 shares of its common stock and warrants to purchase 333,33450,000 shares of common stock exercisable at $0.30 per share overwere issued to a thirty six month period, in exchange for total proceedsconsultant that was engaged to assist the Company with acquisition activities. The fair value of $100,000. The proceeds received were allocated between the common stock was $9,500 based on the closing price of the Company’s common stock on the date of grant, and warrants on a relative fair value basis.was expensed over the requisite service period.

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

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 20172018 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 20172018 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

Overview

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”)is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, andsupports 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 June 30, 2018March 31, 2019 are described below.

	Ø	Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. We have been operating a cannabis testing lab in Nevada since 2015 and have plans to open labs in other states that have legalized the sale of cannabis, beginning with California.
	Ø	The National Marijuana News Corp. provides a balanced and unbiased approach to cannabis news, interviews and education with a news/talk radio show, app, national marijuana news website and social media presence focusing on the political, economic, medicinal, scientific, and cultural dimensions of the rapidly evolving—and profoundly controversial—medicinal and recreational marijuana industry.
	Ø	GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry.

Our cannabis testing and business licenses were briefly suspendedrevenues improved slightly over the previous fiscal quarter, but was substantially lower than our comparative six month period ending March 31, 2018. This decrease was primarily the result of the temporary suspension by Nevada regulators for an eight business day periodof two of our competitors in the prior year’s quarter, resulting in a significant increase in our sales during that quarter. Our revenues stabilized subsequent to the end of the quarter ended December 31, 2017, commencing at the end of business on Friday, January 19, 2018, andprior period when these competitors were reinstated on January 31, 2018. This significantly affected our financial results for the second and third fiscal quarter due to the lack of revenue for the eight day period, followed by the need to outsource our pesticide analyses to another lab while we re-validated our testing method. In response to the temporary suspension, we accelerated the implementation ofreinstated. As an ISO 17025:2017 standards and increased our staffing to better support an ISO-accredited laboratory and be able to service the level of demandaccredited lab, we experienced during the first fiscal quarter. At the end of June 2018, our pesticide methods were certified by the State of Nevada, which enabled us to end our outsourcing of pesticide testing. We believe that we are now well positioned to handle future growth in full compliance with Nevada’s regulations applicable to our operations and get backare actively working to operatingexpand to other jurisdictions.

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

In January 2019, we entered into an agreement to provide potency testing laboratories for hemp production at sites owned by Hemp, Inc. in North Carolina, Oregon and Arizona. Under the terms of the agreement, we will oversee and manage the construction and build out of a gross margin consistent with other analyticalhemp potency-testing laboratory in three of Hemp Inc.’s locations and Hemp. Inc. will provide the space for the testing labslaboratories at no cost to us. Construction has not yet commenced.

We are also exploring opportunities to capitalize on the extensive data we have collected from our cannabis testing activities. Through our wholly-owned subsidiary, GroSciences, Inc., we intend to license specific formulations and intellectual property developed from our experience in the cannabis industry.

On July 3, 2018, following the untimely passing of Joseph Bianco, who had served as our Chief Executive Officer, our Board appointed Todd Denkin as Chief Executive Officer We have not yet commenced operations for this initiative, other than minimal research and Chairman of the Board, succeeding Mr. Bianco. At the time of such appointment, Mr. Denkin was serving as the Company’s Presidentdevelopment activities and Chief Operating Officer, and as the President of the Company’s wholly-owned subsidiaries, Digipath Labs, Inc. and TNM News Corp., and he will continue to serve in such capacities.

patent filings.

Results of Operations for the Three Months Ended June 30, 2018March 31, 2019 and 2017:2018:

The following table summarizes selected items from the statement of operations for the three months ended June 30, 2018March 31, 2019 and 2017.2018.

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 June 30, 2018March 31, 2019 were $521,772,$651,555, compared to revenues of $389,315$583,073 during the three months ended June 30, 2017,March 31, 2018, an increase of $132,457,$68,482, or 34%12%. The increase in revenue was due to industry growth and expansion to hemp testingduring the continued growth of our testing lab operations in Nevada as our customer base, consisting of production and cultivation facilities, increased their operations, particularly following the implementation of the Nevada law permitting the recreational use of marijuana, which went into effect on July 1, 2017.current period.

Cost of Sales

Cost of sales for the three months ended June 30, 2018March 31, 2019 were $520,888,$427,830, compared to $215,729$665,858 during the three months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $305,159,$238,028, or 141%36%. 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 was primarily due to the cost of outsourcingbetter pricing on our pesticide analysis,consumable supplies, and increased labor and supplies as we revampedimproved efficiencies with respect to our operations to comply with regulators’ requirements and gear up for increased demand. During the three months ended June 30, 2018, we continued to implement ISO/IEC 17025 standards for the competence of testing and calibration laboratories, and outsourced our pesticide testing to a third party while we repaired and upgraded instrumentation and developed State approved assays. At the end of June, our pesticide methods were certified by the State of Nevada and were able to resume our own pesticide testing, which is expected to significantly reduce our cost of sales in future periods.labor. Our gross margins of approximately 0%34%, decreasedincreased during the three months ended June 30, 2018,March 31, 2019, compared to gross margins of approximately 45%negative 14% during the three months ended June 30, 2017, asMarch 31, 2018, due primarily to decreased cost of sales in the current quarter and increased costs in the prior quarter when we devoted significant resources to the improvement of operations in response toand compliance with regulations, including the temporary suspension of our Nevada licenses. We expect cost of sales to decrease and gross margins to increase as we continue to grow, and for gross margins to be in the neighborhood of 50% as we now perform our own pesticide tests.ISO 17025:2017 requirement.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2018March 31, 2019 were $360,689,$418,505, compared to $300,924$348,399 during the three months ended June 30, 2017,March 31, 2018, an increase of $59,765,$70,106, or 20%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expense increased during the current period due to increased travel expenses.

Professional Fees

Professional feesfor the three months ended June 30, 2018March 31, 2019 were $228,482,$235,667, compared to $279,843$249,111 during the three months ended June 30, 2017,March 31, 2018, a decrease of $51,361,$13,444, or 18%5%. Professional fees included non-cash, stock-based compensation of $177,472$143,574 and $201,185$191,976 during the three months ended June 30,March 31, 2019 and March 31, 2018, and June 30, 2017, respectively, including the amortization of $89,972 and $99,920, respectively, of stock options expense that is now fully amortized.respectively. Professional fees decreased primarily due to decreased legal and consulting feesstock-based compensation during the current period.

Bad Debts Expense (Recoveries)

Bad debts expense (recoveries) for the three months ended June 30, 2018March 31, 2019 was $(45,200),$25,265, compared to $4,396$42,301 during the three months ended June 30, 2017,March 31, 2018, a net decrease of $49,596.$17,036, or 40%. Bad debts expense (recoveries) decreased during the current period as our allowance for doubtful accounts decreased with greater resources devoted to collection efforts during the quarter. Our bad debts expense due to the change in our allowance for doubtful accounts was 8.7%4% and 1.1%7% of sales for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively.

Operating Loss

Our operating loss for the three months ended June 30, 2018March 31, 2019 was $543,087$455,712, compared to $411,577$722,596 during the three months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $131,510,$266,884, or 32%37%. Our operating loss increaseddecreased primarily due to the costs of outsourced pesticide analysis,increased margins, as offset in part by our increased revenuesinvestor relations expenses, during the three months ended June 30, 2018,March 31, 2019, compared to the three months ended June 30, 2017.March 31, 2018.

Other Income

Other income for the three months ended June 30, 2018March 31, 2019 was $43,012,$4,247, compared to other income of $3,000$22,200 during the three months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $40,012.$17,953, or 81%. Other income consisted of $19,200$1,250 of subleased storage spaceinterest income and $23,812 related to restitution payments received from a former employee$21,000 of sublease rents, as offset by $18,003 of interest expense for the three months ended June 30, 2018.March 31, 2019. Other income during the three months ended June 30, 2017March 31, 2018 consisted of $1,500$19,200 of subleased storage spacerents and $1,500$3,000 of restitution payments received from a former employee.

Net Loss

Net loss for the three months ended June 30, 2018March 31, 2019 was $500,075,$451,465, compared to $408,577$700,396 during the three months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $91,498,$248,931, or 22%36%. The increaseddecreased net loss was due primarily to increased staffing and outsourced pesticide testing costs over the comparative three month period,gross profits, as we revamped operations to better position ourselves for anticipated increased demanddescribed above, as offset in the recreational cannabis market and addressed the temporary suspension of our Nevada licenses.part by interest expense on debt financing.

Results of Operations for the NineSix Months Ended June 30, 2018March 31, 2019 and 2017:2018:

The following table summarizes selected items from the statement of operations for the ninesix months ended June 30, 2018March 31, 2019 and 2017.2018.

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 ninesix months ended June 30, 2018March 31, 2019 were $2,223,630,$1,293,670, compared to revenues of $1,296,115$1,701,858 during the ninesix months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $927,515,$408,188, or 72%24%. The increasedecrease in revenue was due to a spike in revenues inthe continued growth of our testing lab operations in Nevada as our customer base, consisting of production and cultivation facilities, increased their operations, particularly following the implementation of the Nevada law permitting the recreational use of marijuana, which went into effect on July 1, 2017. This was bolstered during the firstcomparative fiscal quarter of the current periodending March 31, 2018 due to the suspensions that were served by Nevada regulators onregulators’ temporary suspension of two of our competitors as offset in part by our own suspension during the second fiscal quarter of the current period. We believe that period.Our revenues normalized when these regulatory disruptions are reflective of the early stages of our nascent industry and are not indicative of ordinary operating conditions in Nevada.competitors were reinstated.

Cost of Sales

Cost of sales for the ninesix months ended June 30, 2018March 31, 2019 were $1,563,518,$910,150, compared to $640,871$1,042,630 during the ninesix months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $922,647,$132,480, or 144%13%. 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 was primarily due to the cost of outsourcingbetter pricing on our pesticide analysis,consumable supplies, and increased labor and supplies as we revampedimproved efficiencies with respect to our operations to comply with regulators’ requirements and gear up for increased demand. During the nine months ended June 30, 2018, we began to implement ISO/IEC 17025 standards for the competence of testing and calibration laboratories, and outsourced our pesticide testing to a third party while we repaired and upgraded instrumentation and developed State approved assays. At the end of June, our pesticide were methods certified by the State of Nevada and were able to resume our own pesticide testing, which is expected to significantly reduce our cost of sales in future periods.labor. Our gross margins of approximately 30%, decreased during the ninesix months ended June 30, 2018,March 31, 2019, compared to gross margins of approximately 51%39% during the ninesix months ended June 30, 2017. We anticipate our gross margins to beMarch 31, 2018 when we experienced a spike in the neighborhood of 50% as we now perform our own pesticide tests.revenues.

General and Administrative Expenses

General and administrative expenses for the ninesix months ended June 30, 2018March 31, 2019 were $1,108,202,$808,976, compared to $907,994$747,513 during the ninesix months ended June 30, 2017,March 31, 2018, an increase of $200,208,$61,463, or 22%8%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expense increased during the current period due to increased travel expenses.

Professional Fees

Professional fees for the ninesix months ended June 30, 2018March 31, 2019 were $964,269,$482,247, compared to $745,437$735,787 during the ninesix months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $218,832,$253,540, or 29%34%. Professional fees included non-cash, stock-based compensation of $815,887$299,409 and $524,054$638,415 during the threesix months ended June 30,March 31, 2019 and March 31, 2018, and June 30, 2017, respectively, including the amortization of $438,683 and $299,760, respectively, of stock options expense that is now fully amortized.respectively. Professional fees increaseddecreased primarily due to increaseddecreased stock-based compensation, paid to employees and consultantsas diminished by increased investment relations efforts during the current period.

Bad Debts Expense

Bad debts expense for the ninesix months ended June 30, 2018March 31, 2019 was $53,041,$49,830, compared to $23,150$98,241 during the ninesix months ended June 30, 2017, an increaseMarch 31, 2018, a decrease of $29,891,$48,411, or 129%49%. Bad debts expense increaseddecreased during the current period as our allowance for doubtful accounts increaseddecreased with the growth in sales and disruption of operationsgreater resources devoted to collection efforts during the year.current period. Our bad debts expense due to the change in our allowance for doubtful accounts was 2.4%4% and 1.8%6% of sales for the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, respectively.

Operating Loss

Our operating loss for the ninesix months ended June 30, 2018March 31, 2019 was $1,465,400$957,533, compared to $1,021,337$922,313 during the ninesix months ended June 30, 2017,March 31, 2018, an increase of $444,063,$35,220, or 43%4%. Our operating loss increased primarily due to increased cost of salesdecreased revenues, as we reworked our lab processes, in addition to increased stock-based compensation, offset in part by our increased revenues,decreased stock-based compensation, during the ninesix months ended June 30, 2018,March 31, 2019, compared to the ninesix months ended June 30, 2017.March 31, 2018.

Other Income

Other income for the ninesix months ended June 30, 2018March 31, 2019 was $85,912,$43,894, compared to other income of $263,000$42,900 during the ninesix months ended June 30, 2017, a decreaseMarch 31, 2018, an increase of $177,088.$994, or 2%. Other income consisted of $57,600$1,250 of subleased rentinterest income, $41,400 of sublease rents and $28,312 related to restitution payments received from a former employee$30,000 gain on settlement of a previously written off note receivable, as offset by $28,756 of interest expense for the ninesix months ended June 30, 2018.March 31, 2019. Other income during the ninesix months ended June 30, 2017March 31, 2018 consisted of $250,000 received pursuant to the settlement under a license agreement with GB Sciences, Inc., $3,000$38,400 of subleased rental incomerents and $10,000$4,500 of restitution payments received from a former employee.

Net Loss

Net loss for the ninesix months ended June 30, 2018March 31, 2019 was $1,379,488,$913,639, compared to $758,337$879,413 during the ninesix months ended June 30, 2017,March 31, 2018, an increase of $621,151,$34,226, or 82%4%. The increased net loss was due primarily to increased staffing and outsourced pesticide testing costsdecreased revenues, as offset in part by decreased stock-based compensation, over the comparative ninesix month period, as we revamped operations to better position ourselves for anticipated increased demand in the recreational cannabis market and addressed the temporary suspension of our Nevada licenses.

period.

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 ninesix month periods ended June 30, 2018March 31, 2019 and 2017:2018:

Net Cash Provided inby (Used in) Operating Activities

During the ninesix months ended June 30, 2018,March 31, 2019, net cash used in operating activities was $212,707,$690,634, compared to net cash used inprovided by operating activities of $184,533$101,547 for the same period ended June 30, 2017.March 31, 2018. The increase in cash used in operating activities is primarily attributable to our increased net lossas we continued to develop ourdidn’t benefit from the decreased competition from the suspension of two competing cannabis testing lab operationslabs in the current period, as we did in the prior period.

Net Cash Used in Investing Activities

During the ninesix months ended June 30, 2018,March 31, 2019, net cash used in investing activities was $194,008,$96,375, compared to $136,894$186,370 for the same period ended June 30, 2017.March 31, 2018. The increasedecrease is attributable to greater investments made for cannabis testing equipment in the currentprior period thanthat was not necessary in the comparativecurrent period, in addition to the advancement of short term loans during the current period.

Net Cash Provided by Financing Activities

During the ninesix months ended June 30, 2018,March 31, 2019, net cash provided by financing activities was $268,608,$1,125,000, compared to $300,000$143,008 for the same period ended June 30, 2017.March 31, 2018. The current period consisted of proceeds received on fixed convertible debt financing at $0.14 per share and the sale of $625,000 of common stock, while the comparative period consisted of proceeds received from the sale of stock and warrants.

Ability to Continue as a Going Concern

As of June 30, 2018,March 31, 2019, our balance of cash on hand was $40,070.$514,018. We currently may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business.As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial capital expenditure and working capital needs.

The Company has incurred recurring losses from operations resulting in an accumulated deficit, and, as set forth above, the Company’s cash on hand is not sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations.In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution to existing stockholders.

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

The Company has adoptedAccounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) on October 1, 2017.. This updateprovides guidance on recognizing revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity recognize revenue from contracts with customers to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new update does not affect how the Company recognizes revenue in accordance with ASC 605,606, Revenue Recognition. ASC 605606 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery of product has met the criteria established in the arrangement or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. With respect to our cannabis lab testing revenues,we sell our services on a determinable fixed fee per test, or panel of tests basis, and offer a discounted price for customers that agree to exclusive or predetermined quantities of tests. We typically require payment within thirty days of the delivery of results. Revenues are recognized upon the substantial completion of the tests when collectability is reasonably assured, which is usually upon delivery of results to the customer.

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'scounterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018.March 31, 2019. 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'sSEC’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'scompany’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 June 30, 2018,March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

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

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

The following issuances of equity securities by the Company were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of the Securities Act of 1933 during the three month period ended June 30, 2018:March 31, 2019:

On JuneMarch 25, 2018,2019, we issued 118,42129,268 shares of common stock, restricted in accordance with Rule 144, to Joseph Biancoour President and CEO for his services rendered as our CEO.pursuant to his employment agreement.

On JuneMarch 25, 2018,2019, we issued 31,57973,171 shares of common stock, restricted in accordance with Rule 144, to Todd Denkinour CFO for his services rendered as our President and COO.pursuant to his employment agreement.

On JuneMarch 25, 2018,2019, we issued 78,947a total of 150,000 shares of common stock, restricted in accordance with Rule 144, to Todd Peterson for his services rendered as our CFO.

The following issuances of common stock and warrants duringa consultant that was engaged to assist the three month period ended June 30, 2018 are restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuances were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited investors, familiarCompany with our operations, and there was no general solicitation.acquisition activities.

On April 13, 2018,February 7, 2019, the Company sold 14 units, consisting of an aggregate of 140,0001,000,000 shares of its common stock, and warrants to purchase 70,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period,restricted in accordance with Rule 144, in exchange for total proceeds of $25,200.$200,000.

On April 12, 2018,February 1, 2019, the Company sold 28 units, consisting of an aggregate of 280,000250,000 shares of its common stock, and warrants to purchase 140,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period,restricted in accordance with Rule 144, in exchange for total proceeds of $50,400.$50,000.

On April 10, 2018,January 31, 2019, the Company sold 27.78 units, consisting of an aggregate of 277,778625,000 shares of its common stock, and warrants to purchase 138,889 shares of common stock, exercisable at $0.30 per share over a thirty six month period,restricted in accordance with Rule 144, in exchange for total proceeds of $50,000.$125,000.

On January 24, 2019, the Company sold 1,250,000 shares of its common stock, restricted in accordance with Rule 144, in exchange for proceeds of $250,000.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

* Filed herewith.

SIGNATURES

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

Date: August 14, 2018May 15, 2019