UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For Quarterly Period Ended DecemberMarch 31, 20212022

 

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 classTrading Symbol(s)Name of each exchange on which registered
 N/AN/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.

 

YesNo

 

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

 

YesNo

 

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

 

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

 

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

 

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

 

YesNo

 

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 10,May 16, 2022 was 75,146,82072,730,153.

 

 

 
 

 

TABLE OF CONTENTS

 

 Page
 No.
PART I - FINANCIAL INFORMATION3
ITEM 1. FINANCIAL STATEMENTS (Unaudited)3
Consolidated Balance Sheets as of December 31, 2021 (Unaudited) and September 30, 20213
  Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and September 30, 20213
Condensed Consolidated Statements of Operations for the Three and Six Months Ended DecemberMarch 31, 2022 and 2021 and 2020 (Unaudited(Unaudited))4
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended DecemberMarch 31, 20212022 and 20202021 (Unaudited)5
  Condensed Consolidated Statements of Cash Flows for the ThreeSix Months Ended December,March 31, 2022 and 2021 and 2020 (Unaudited)6
  Notes to the Condensed Consolidated Financial Statements (Unaudited)7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK2123
ITEM 4. CONTROLS AND PROCEDURES2223
PART II - OTHER INFORMATION2324
ITEM 1. Legal Proceedings2324
ITEM 1A. RISK FACTORS2324
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS2423
ITEM 3. DEFAULTS UPON SENIOR SECURITIES2423
ITEM 4. MINE SAFETY DISCLOSURES2324
ITEM 5. OTHER INFORMATION2324
ITEM 6. EXHIBITS2425
  SIGNATURES2526

 

2
 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 March 31, September 30, 
 December 31, 2021  September 30, 2021  2022 2021 
 (Unaudited)    (Unaudited)   
Assets                
                
Current assets:                
Cash $90,305  $295,932  $82,769  $295,932 
Accounts receivable, net  330,398   214,900   259,268   214,900 
Deposits  25,141   24,751 
Note receivable  648,809   230,929   1,029,227   230,959 
Other current assets  41,489   60,353   27,241   24,751 
Deposits  71,093   60,353 
Total current assets  1,136,142   826,865   1,469,598   826,865 
                
Right-of-use asset  390,150   413,884   366,089   413,884 
Fixed assets, net  591,265   647,252   534,435   647,252 
Total non -current assets  981,415   1,061,136 
Total non-current assets  900,524   1,061,136 
                
Total Assets $2,117,557  $1,888,001  $2,370,122  $1,888,001 
                
Liabilities and Stockholders’ Deficit                
                
Current liabilities:                
Accounts payable $368,026  $370,977  $419,500  $370,977 
Accrued expenses  266,958   220,002   359,274   220,002 
Current portion of operating lease liabilities  95,924   93,601   98,281   93,601 
Current portion of finance lease liabilities  11,912   20,379   3,822   20,379 
Current maturities of convertible notes payable  1,700,650   1,050,000 
Current maturities of notes payable  439,612   259,425   486,458   259,425 
Current maturities of convertible notes payable  1,274,070   1,050,000 
Total current liabilities  2,456,502   2,014,384   3,067,985   2,014,384 
                
Non-current liabilities:                
Operating lease liabilities  305,246   330,151   279,981   330,151 
Notes payable  545,187   339,516   474,166   339,516 
Convertible notes payable, net of discounts and current maturities  -   257,282 
Convertible notes payable, net of discounts of $-0- and $8,322 at March 31, 2022 and September 30, 2021, respectively  -   257,282 
Total non-current liabilities  850,433   926,949   

754,147

   926,949 
                
Total Liabilities  3,306,935   2,941,333   3,822,132   2,941,333 
                
Series B convertible preferred stock, $0.001 par value, 1,500,000 shares authorized; 333,600 and 0 shares issued and outstanding as of December 31, 2021 and September 30, 2021 respectively  333,600   - 
Series B convertible preferred stock, $0.001 par value, 1,500,000 shares authorized; 333,600 and zero shares issued and outstanding as of March 31, 2022 and September 30, 2021 respectively  333,600   - 
                
Stockholders’ Deficit:        
Series A convertible preferred stock, $0.001 par value, 6,000,000 shares authorized; 1,047,942 and 1,325,942 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively  1,048   1,326 
Common stock, $0.001 par value, 250,000,000 shares authorized; 72,730,153 and 71,230,153 shares issued and outstanding at December 31, 2021 and September 30 2021, respectively  72,730   71,230 
Stockholders’ Equity (Deficit):        
Series A convertible preferred stock, $0.001 par value, 6,000,000 shares authorized; 1,047,942 and 1,325,942 shares issued and outstanding as of March 31, 2022 and September 30, 2021, respectively  1,048   1,326 
Common stock, $0.001 par value, 250,000,000 shares authorized; 75,146,820 and 71,230,153 shares issued and outstanding at March 31, 2022 and September 30 2021, respectively  75,147   71,230 
Additional paid-in capital  16,645,222   16,825,765   16,753,769   16,825,765 
Accumulated deficit  (18,241,978)  (17,951,653)  (18,615,574)  (17,951,653)
                
Total Stockholders’ Deficit  (1,522,978)  (1,053,332)  (1,785,610)  (1,053,332)
                
Total Liabilities and Stockholders’ Deficit $2,117,557  $1,888,001  $2,370,122  $1,888,001 

 

See accompanying notes to unaudited consolidated financial statements.

 

3
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

      2022 2021 2022 2021 
 For the Three Months Ended  For the Three Months Ended For the Six Months Ended 
 December 31,  March 31, March 31, 
 2021  2020  2022 2021 2022 2021 
              
Revenues $699,585  $500,385  $604,735  $633,160  $1,304,320  $1,133,545 
Cost of sales  422,601   420,885   396,032   416,915   818,633   837,800 
Gross profit  276,984   79,500   208,703   216,245   485,687   295,745 
                        
Operating expenses:                        
General and administrative  240,964   225,050   235,470   211,961   476,434   437,011 
Professional fees  268,471   114,544   286,390   107,819   554,861   222,363 
Change in allowance for doubtful accounts  (2,139)  88,170   16   (106,155)  (2,123)  (17,985)
Total operating expenses  507,296   427,764   521,876   213,625   1,029,172   641,389 
                        
Operating loss  (230,312)  (348,264)  (313,173)  2,620   (543,485)  (345,644)
                        
Other income (expense):                        
Interest income  9,380   -   15,295   47,918   24,675   47,918 
Interest expense  (69,393)  (42,373)  (75,718)  (32,337)  (145,111)  (74,710)
Total other income (expense)  (60,013)  (42,373)  (60,423)  15,581  (120,436)  (26,792)
                        
Net loss $(290,325) $(390,637)
Net income (loss) $(373,596) $18,201  $(663,921) $(372,436)
                        
Weighted average number of common shares outstanding - basic and fully diluted  72,387,762   58,423,853 
Weighted average number of common shares outstanding – basic  74,019,042   65,418,890   73,194,439   61,882,937 
Weighted average number of common shares outstanding – fully diluted  74,019,042   114,702,490   73,194,439   61,882,937 
                        
Net loss per share - basic and fully diluted $(0.00) $(0.01)
Net loss per share – basic $(0.00) $0.00  $(0.01) $(0.01)
Net loss per share – diluted $(0.00) $0.00  $(0.01) $(0.01)

 

See accompanying notes to unaudited consolidated financial statements.

 

4
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

 Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit  Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit 
 Series B  Series A        Series B  Series A         
 Convertible  Convertible   Additional   Total  Convertible  Convertible   Additional   Total 
 Preferred Stock  Preferred Stock Common Stock 

Paid-in

 Accumulated 

Stockholders’

  Preferred Stock  Preferred Stock Common Stock Paid-in Accumulated Stockholders’ 
 Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit  Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit 
                                        
Balance, September 30, 2021  -  $-   1,325,942  $1,326   71,230,153  $71,230  $16,825,765  $(17,951,653) $(1,053,332)  -  $-   1,325,942  $1,326   71,230,153  $71,230  $16,825,765  $(17,951,653) $(1,053,332)
                                                                        
Common stock sold for cash                                    
Common stock sold for cash, shares                                    
Common stock issued for debt conversion                                    
Common stock issued for debt conversion, shares                                    
Purchase of Series B Preferred shares  55,600   55,600   -   -   -   -   -   -   -   55,600   55,600   -   -   -   -   -   -   - 
                                                                        
Conversion of Series A Preferred into Series B Preferred  278,000   278,000   (278,000)  (278)  -   -   (277,722)  -   (278,000)  278,000   278,000   (278,000)  (278)  -   -   (277,722)  -   (278,000)
                                                                        
Stock-based compensation  -   -   -   -   1,500,000   1,500   97,179   -   98,679   -   -   -   -   1,500,000   1,500   97,179   -   98,679 
                                                                        
Net loss  -   -   -   -   -   -   -   (290,325)  (290,325)  -   -   -   -   -   -   -   (290,325)  (290,325)
                                                                        
Balance, December 31, 2021  333,600  $333,600   1,047,942  $1,048   72,730,153  $72,730  $16,645,222  $(18,241,978) $(1,522,978)  333,600   333,600   1,047,942   1,048   72,730,153   72,730   16,645,222   (18,241,978)  (1,522,978)
                                    
Common Shares issued for settlement of AP  -   -   -   -   250,000   250   7,250   -   7,500 
                                    
Stock-based compensation  -   -   -   -   2,166,667   2,167   101,297   -   103,464 
                                    
Net loss  -   -   -   -   -   -   -   (373,596)  (373,596
                                    
Balance, March 31, 2022  333,600  $333,600   1,047,942  $1,048   75,146,820  $75,147  $16,753,769  $(18,615,574) $(1,785,610)

 

 Series B Convertible  Series A Convertible   Additional   Total  Series B Convertible  Series A Convertible   Additional   Total 
 Preferred Stock  Preferred Stock Common Stock 

Paid-in

 Accumulated Stockholders’  Preferred Stock  Preferred Stock Common Stock Paid-in Accumulated Stockholders’ 
 Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit  Shares Amount  Shares Amount Shares Amount Capital (Deficit) Deficit 
                                        
Balance, September 30, 2020  -  $-   1,325,942  $1,326   58,270,567  $58,271  $16,116,400  $(17,265,150) $(1,089,153)  -  $-   1,325,942  $1,326   58,270,567  $58,271  $16,116,400  $(17,265,150) $(1,089,153)
                                                                        
Common stock sold for cash  -   -   -   -   900,000   900   19,350   -   20,250   -   -   -   -   900,000   900   19,350   -   20,250 
                                                                        
Common stock issued for debt conversion  -   -   -   -   3,666,668   3,666   106,334   -   110,000   -   -   -   -   3,666,668   3,666   106,334   -   110,000 
                                                                        
Stock-based compensation  -   -   -   -   1,228,155   1,228   42,832   -   44,060   -   -   -   -   1,228,155   1,228   42,832   -   44,060 
                                                                        
Net loss           -              -   -   -   -   -   -   (390,637)  (390,637)  -   -   -   -   -   -   -   (390,637)  (390,637)
                                                                        
Balance, December 31, 2020  -  $-   1,325,942  $1,326   64,065,390  $64,065  $16,284,916  $(17,655,787) $(1,305,480)  -   -   1,325,942   1,326   64,065,390   64,065   16,284,916   (17,655,787)  (1,305,480)
                                    
Common stock issued for debt conversion  -   -   -   -   3,000,000   3,000   87,000   -   90,000 
                                    
Stock-based compensation - related parties  -   -   -   -   866,430   867   56,157   -   57,024 
                                    
Stock-based compensation  -   -   -   -   250,000   250   29,647   -   29,897 
                                    
Net income  -   -   -   -   -   -   -   18,201   18,201 
                                    
Net income (loss)  -   -   -   -   -   -   -   18,201   18,201 
Balance, March 31, 2021  -  $-   1,325,942  $1,326   68,181,820  $68,182  $16,457,720  $(17,637,586) $(1,110,358)

 

See accompanying notes to unaudited consolidated financial statements.

5
 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 2021  2020  2022 2021 
 For the Three Months Ended  For the Six Months Ended 
 December 31,  March 31, 
 2021  2020  2022 2021 
Cash flows from operating activities                
Net loss $(290,325) $(390,637) $(663,921) $(372,436)
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in allowance for doubtful accounts  (2,139)  88,170   (2,123)  (17,985)
Depreciation and amortization expense  58,469   83,265   117,063   159,209 
Loss on disposal of fixed assets  -   2,227 
Gain on early extinguishment of debt  -   (40,338)
Stock-based compensation  98,679   44,060   202,143   130,981 
Amortization of debt discounts  19,766   8,322   39,103   8,322 
Decrease (increase) in assets:                
Accounts receivable  (113,359)  23,716   (42,245)  49,400 
Other current assets  6,984   8,451   (35,416)  12,677 
Deposits  (390)  -   (2,490)  - 
Right-of-use assets  23,734   22,506   47,795   45,308 
Increase (decrease) in liabilities:                
Accounts payable  (2,952)  72,142   56,023   (58,639)
Accrued expenses  46,956   (3,265)  139,272   27,814 
Lease liabilities  (22,582)  (20,424)  (45,490)  (41,143)
Net cash (used) in operating activities  (177,158)  (63,694)  (190,286)  (94,603)
                
Cash flows from investing activities                
Purchase of fixed assets  (2,482)  -   (4,246)  (1,206)
Advance of note receivable  (406,000)  -   (773,622)  - 
Net cash (used) in investing activities  (408,482)  -   (777,868)  (1,206)
                
Cash flows from financing activities                
Principal payments on finance lease  (8,467)  (6,946)  (16,557)  (16,715)
Principal payments on note payable, equipment financing  (14,142)  (13,289)  (28,317)  (26,769)
Proceeds from short term advances  -   40,000 
Proceeds from notes payable  400,000   -   390,000   - 
Proceeds from convertible notes  -   60,000   394,265   110,000 
Payments on convertible notes  (57,978)      (40,000)    
Proceeds from sale of common stock  -   20,250   -   20,250 
Proceeds from sale of preferred stock  55,600   -   55,600   - 
Net cash provided by financing activities  380,013   60,015   754,991   126,766 
                
Net (decrease) in cash  (205,627)  (3,679)
Net increase (decrease) in cash  (213,163)  30,957 
Cash - beginning  295,932   82,749   295,932   82,749 
Cash - ending $90,305  $79,070  $82,769  $113,706 
                
Supplemental disclosures:                
Interest paid $27,601  $14,179  $42,809  $32,294 
Income taxes paid  -   -   -   - 
                
Non-cash investing and financing activities:                
Common stock issued for debt conversion $-  $110,000  $-  $110,000 
Fixed assets acquired with note payable, equipment financing $-  $200,000 
Common stock issued for settlement of accounts payables $7,500  $- 
Conversion of Series A preferred into Series B preferred $278,000  $-  $278,000  $- 

 

See accompanying notes to unaudited consolidated financial statements.

6
 

 

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. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and hopes to open labs in other states that have legalized the sale of cannabis, beginning with California or Arizona.

 

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, 2021. 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 DecemberMarch 31, 2021: 2022:

Schedule of Entities Under Common Control and Ownership

Jurisdiction of
Name of Entity(1)IncorporationRelationship
Digipath, Inc.(2)NevadaParent
Digipath Labs, Inc.NevadaSubsidiary
Digipath Labs, S.A.SInc.(3)ColombiaNevadaSubsidiary
VSSL Enterprises, Ltd.(4)CanadaSubsidiary
Digipath Labs CA, Inc.(5)(3)CaliforniaSubsidiary
Digipath Labs S.A.S.(4)ColombiaSubsidiary
VSSL Enterprises, Ltd.(5)CanadaSubsidiary
TNM News Corp.(6)NevadaSubsidiary

 

(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)Formed during the second fiscal quarter of 2021, but has not yet commenced significant operations.
(4)Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations.
(4)(5)Acquired on March 11, 2020.
(5)(6)Formed during the third fiscal quarter of 2021, but has not yet commenced significant operations.Minimal activity, dissolved on July 28, 2021.

 

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.

 

7
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value of Financial Instruments

 

The Company adoptedUnder FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value establishes a three-level valuation hierarchy forin generally accepted accounting principles and expands disclosures ofabout fair value measurement and enhances disclosure requirements formeasurements. This Statement reaffirms that fair value measures.is the relevant measurement attribute. The three levels are definedadoption of this standard did not have a material effect on the Company’s financial statements as follows:

-Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
-Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
-Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

reflected herein. The carrying valueamounts of cash, accounts receivable, accounts payablespayable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

 

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.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. WeWe typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.

 

Stock-Based Compensation

The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which 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.

 

Recently Issued Accounting Pronouncements

There areIn August 2020, the FASB issued ASU 2020-06, Debt -Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40):Accounting for Convertible Instruments and Contracts in an Entity's Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity's own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no recently issued accounting pronouncementsearlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is evaluating the impact that the Company has yet to adopt that are expected tothis ASU may have a material effect on its consolidated financial position, results of operations, or cash flows.statements.

 

Note 2 –Going Concern

 

As shown in the accompanying condensed consolidated financial statements, as of DecemberMarch 31, 2021,2022, the Company had negative working capital of $1,320,3601,598,387, accumulated recurring losses of $18,241,97818,615,574, and only $90,30582,769 of cash on hand, which 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. Management believes these factors will contribute toward achieving profitability.

 

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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3 –Fair Value of Financial Instruments

 

The Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC 820”). 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.

 

8

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.

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of DecemberMarch 31, 20212022 and September 30, 2021, respectively:

Summary of Financial Instruments at Fair Value on Recurring Basis

 Fair Value Measurements at December 31, 2021  Fair Value Measurements at March 31, 2022 
 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Assets                   
Cash $90,305  $-  $-  $82,769  $-  $- 
                        
Liabilities                        
Lease liabilities  -   -   413,082   -   -   382,084 
Notes payable  -   984,799   -   -   960,624   - 
Convertible notes payable, net of discounts of $78,421  -   -   1,274,070 
Convertible notes payable  -   -   1,700,650 

 

  Fair Value Measurements at September 30, 2021 
  Level 1  Level 2  Level 3 
Assets            
Cash $295,932  $-  $- 
             
Liabilities            
Lease liabilities  -   -   444,131 
Notes payable  -   598,941   - 
Convertible notes payable, net of discounts of $98,188  -   -   1,307,282 

 

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.

 

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the threesix months ended DecemberMarch 31, 2022 or the year ended September 30, 2021.

 

Note 4 –Note Receivable

 

On various dates between December 28, 2018 and June 13, 2019, we loaned Northwest Analytical Labs, Inc. a total of $95,000. The loans bear interest at an annual rate of 10%, are evidenced by secured demand notes, and are secured by a lien on the borrower’s assets. An allowance for doubtful accounts for the full value of the notes has been recorded due to the uncertainty of collectability.

 

On various dates between August 23, 2021 and DecemberMarch 31, 2021,2022, we loaned C3 Labs, Inc. (“C3 Labs”) a total of $638,5001,003,622. The loans bear interest at an annual rate of 8%. $350,000 of theseThese loans are evidenced by secured demand notes, and are secured by a lien on the borrower’s assets and have a maturity date of August 23, 2022. The Company has recorded interest income of $15,120 during the six months ended March 31, 2022 with total accrued interest of $25,605 as of March 31, 2022.

The loans were made in connection with a potential acquisition of a controlling interest in C3 Labs. On March 11, 2022, the Company notified C3 Labs Inc., although no assurance can be madeof its termination of the letter of intent. The Company is currently in possession of equipment of C3 Labs, which it is in the process of liquidating. The Company anticipates that the proceeds of such liquidation will be sufficient to repay the Company will consummatein full all amounts owed to it by C3 Labs under the acquisition. The Company has recorded interest income of $9,380 during the three months ended December 31, 2021 with total accrued interest of $10,309 as of December 31, 2021secured loans.

 

9
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 –Fixed Assets

 

Fixed assets consist of the following at DecemberMarch 31, 20212022 and September 30, 2021:

 

Schedule of Fixed Assets

 2021 2020 
 December, September 30,  March 31, September 30, 
 2021 2021  2022 2021 
Software $125,903  $125,903  $125,903  $125,903 
Office equipment  71,601   71,601   71,601   71,601 
Furniture and fixtures  29,879   29,879   29,879   29,879 
Lab equipment  1,453,715   1,453,716   1,455,479   1,453,716 
Leasehold improvements  496,600   494,117   496,600   494,117 
Lab equipment held under capital leases  99,193   99,193   99,193   99,193 
Fixed assets, gross  2,276,891   2,274,409 
Fixed assets,gross  2,278,655   2,274,409 
Less: accumulated depreciation  (1,685,626)  (1,627,157)  (1,744,220)  (1,627,157)
Total $591,265  $647,252  $534,435  $647,252 

 

Depreciation and amortization expense totaledtotalled $58,469117,063 and $83,265159,209 for the threesix months ended DecemberMarch 31, 20212022 and 2020,2021, respectively.

 

Note 6 – Leases

 

The Company leases its operating and office facility under a non-cancelablenon-cancellable real property lease agreement that expires on August 31, 2025. 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 real property lease contains 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:

 Schedule of Components of Lease Expense

 For the Three For the Three  For the Six For the Six 
 Months Ended Months Ended  Months Ended Months Ended 
 December 31, December 31,  March 31, March 31, 
 2021 2020  2022 2021 
Operating lease cost $29,718  $29,718  $59,436  $21,644 
Finance lease cost:                
Amortization of assets  8,467   6,946   17,329   45,308 
Interest on lease liabilities  809   2,330   1,223   14,129 
Total net lease cost $38,994  $38,994  $18,552  $59,437 

 

Supplemental balance sheet information related to leases was as follows:

 

Schedule of Supplemental Balance Sheet Information

 December 31, September 30,  March 31, September 30, 
 2021 2021  2022 2021 
Operating leases:                
Operating lease assets $390,150  $413,884  $366,089  $413,884 
                
Current portion of operating lease liabilities  95,924  $93,601   98,281  $93,601 
Noncurrent operating lease liabilities  305,246   330,151   279,981   330,151 
Total operating lease liabilities $401,170  $423,752  $378,262  $423,752 
Finance lease:                
Equipment, at cost $99,193  $99,193  $99,193  $99,193 
Accumulated amortization  (44,637)  (39,677)  (49,596)  (36,677)
Equipment, net $54,556  $59,516  $49,597  $74,395 
                
Current portion of finance lease liabilities $11,912  $20,379  $3,822  $20,379 
Noncurrent finance lease liabilities  -   -   -   - 
Total finance lease liabilities $11,912  $20,379  $3,822  $20,379 
                
Weighted average remaining lease term:                
Operating leases  3.67 years   3.92 years   3.42 years   3.92 years 
Finance leases  0.30 years   0.55 years   0.05 years   1.55 years 
                
Weighted average discount rate:                
Operating leases  5.75%  5.75%  5.75%  5.75%
Finance lease  18.41%  18.41%  18.41%  18.41%

 

10
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Supplemental cash flow and other information related to leases was as follows:

Schedule of Supplemental Cash Flow and Other Information

 For the Three For the Three  For the Six For the Six 
 Months Ended Months Ended  Months Ended Months Ended 
 December 31, December 31,  March 31, March 31, 
 2021 2020  2022 2021 
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows used for operating leases $22,582  $20,424  $45,490  $41,143 
Financing cash flows used for finance leases $8,467  $6,946  $16,557  $16,715 
                
Leased assets obtained in exchange for lease liabilities:                
Total operating lease liabilities $-  $528,616  $-  $528,616 
Total finance lease liabilities $-  $99,193  $-  $99,193 

 

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelablenon-cancellable operating leases as of DecemberMarch 31, 2021:2022:

Schedule of Future Minimum Annual Lease Commitments Under Operating Leases

Fiscal Year Ending Minimum Lease  Minimum Lease 
September 30, Commitments  Commitments 
2022 $86,985 
2022 (for the six months remaining) $58,419 
2023  119,468   119,468 
2024  123,543   123,543 
2025  116,891   116,892 
2026  -   - 
Total future undiscounted lease payments  446,888   418,322 
Less interest  45,718   40,060 
Present value of lease payments  401,170   378,262 
Less current portion  95,924   98,281 
Long-term operating lease liabilities $305,246  $279,981 

 

Future minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows at DecemberMarch 31, 2021:2022:

 

Schedule of Future Minimum Annual Lease Payments Under Finance Lease

 Finance  Finance 
 Leases  Leases 
      
2022 $12,368  $3,865 
2023  -   - 
Total minimum lease payments  12,368   3,865 
Less interest  456   43 
Present value of lease liabilities  11,912   3,822 
Less current portion  11,912   3,822 
Long-term finance lease liabilities $-  $- 

 

11
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7 –Notes Payable

 

Notes payable consists of the following at DecemberMarch 31, 20212022 and September 30, 2021, respectively:

 Schedule of Notes Payable

 December 31, September 30,  March 31, September 30, 
 2021 2021  2022 2021 
          
On September 10, 2021, the Company, entered into a Secured Promissory note for $675,000 from US Canna Lab I, LLC, (the “Company Canna Lab Note”). The Company Canna Lab Note carries interest at 12% per annum, and is due on September 10, 2024 with monthly principal and interest payments of $22,419.66 beginning on October 1, 2021. As of December 31, 2021, a total $675,000 of the funds have been advanced to the Company. In addition, the Company was advanced an additional $125,000 of funds under the same terms as the original note. $800,000  $400,000 
On September 10, 2021, the Company, entered into a Secured Promissory note for $675,000 from US Canna Lab I, LLC, (the “Company Canna Lab Note”). The Company Canna Lab Note carries interest at 12% per annum, and is due on September 10, 2024 with monthly principal and interest payments of $22,419.66 beginning on October 1, 2021. As of March 31, 2022, a total $675,000 of the funds have been advanced to the Company. In addition, the Company was advanced an additional $115,000 of funds under the same terms as the original note. $790,000  $400,000 
                
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.  184,799   198,941   170,624   198,941 
                
Total notes payable  984,799   598,941   960,624   598,941 
Less: current maturities  (439,612)  (259,425)  (486,458)  (259,425)
Notes payable $545,187  $339,516  $474,166  $339,516 

 

The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $11,83641,277 and $4,1317,970 during the threesix months ended DecemberMarch 31, 20212022 and 2020,2021, respectively.

 

12
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8 – Convertible Notes Payable

 

Convertible notes payable consists of the following at December, 2021March 31, 2022 and September 30, 2021, respectively:

Schedule of Convertible Notes Payable

 December 31, September 30,  March 31, September 30, 
 2021 2021  2022 2021 
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 was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $10,000 of proceeds and the promissory note was increased to $60,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $10,000 of principal into 333,334 shares of common stock at a conversion price of $0.03 per share. $50,000  $50,000  $50,000  $50,000 
                
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $200,000. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.  150,000   150,000   150,000   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 was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $400,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.  350,000   350,000   350,000   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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On February 22, 2021, the noteholder converted $90,000 of principal into 3,000,000 shares of common stock at a conversion price of $0.03 per share. On September 30, 2021 the note was amended to add outstanding short term notes and accrued interest into the principal balance, making the outstanding balance 355,470, as amended. As a result of the modification, the Company recorded an additional debt discount of $98,188 as a result of the beneficial conversion feature of the additional principal. During the three months ended December 31, 2021, the Company repaid $52,978 of the balance of this note.  302,492   355,470 
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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On February 22, 2021, the noteholder converted $90,000 of principal into 3,000,000 shares of common stock at a conversion price of $0.03 per share. On September 30, 2021 the note was amended to add outstanding short term notes and accrued interest into the principal balance, making the outstanding balance 355,470, as amended. As a result of the modification, the Company recorded an additional debt discount of $98,188 as a result of the beneficial conversion feature of the additional principal. During the six months ended March 31, 2022, the Company repaid $40,000 of the balance of this note. In addition, during the six months ended March 31, 2022, the Company was advanced additional loans of $394,265 from the lender under the same terms.  709,735   355,470 
                
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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.  350,000   350,000   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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.  150,000   150,000   150,000   150,000 
                
Total convertible notes payable  1,352,492   1,405,470   1,759,735   1,407,470 
Less: unamortized debt discounts  (78,421)  (98,188)  (59,085)  (98,188)
Total convertible debt  1,274,070   1,307,282   1,700,650   1,307,282 
Less: current maturities  1,274,070   1,050,000   1,700,650   1,050,000 
Convertible notes payable $-  $257,282  $-  $257,282 

 

13
 

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 $98,18898,188.. 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 $19,76639,103. for the six months ended March 31, 2022. Unamortized discount as of DecemberMarch 31, 20212022 is $78,42159,085.

 

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 $28,27346,380 and $26,56751,802 for the threesix months ended DecemberMarch 31, 20212022 and 2020,2021, respectively.

 

The Company recognized interest expense for the threesix months ended DecemberMarch 31, 20212022 and 2020,2021, respectively, as follows:

Schedule of Interest Expense

 December 31, December 31,  March 31, March 31, 
 2021 2020  2022 2021 
          
Interest on short term loans $-  $1,023  $-  $1,687 
Interest on lease liabilities  3,601   2,330 
Interest on capital leases  6,603   4,929 
Interest on notes payable  17,753   4,131   41,277   7,970 
Amortization of beneficial conversion features  19,766   8,322   39,103   8,322 
Interest on convertible notes  28,273   26,567   58,128   51,802 
Total interest expense $69,393  $42,373  $145,111  $74,710 

 

Note 9 - Changes in Stockholders’ DeficitEquity

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”) and 1,500,000 have been designated as Series B Convertible Preferred Stock (“Series B Preferred”), with the remaining 2,500,000 shares available for designation from time to time by the Board as set forth below. As of DecemberMarch 31, 2021,2022, there were 1,047,942 shares of Series A Preferred issued and outstanding and 333,600 shares of Series B 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. Each share of Series A Preferred is currently convertible into five shares of common stock and each share of Series B Preferred is currently convertible into twenty-five shares of common stock.

 

Series A

 

The conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,047,942 shares of Series A Preferred outstanding at DecemberMarch 31, 20212022 are convertible into 5,239,710 shares of the common stock of the Company. No holder is permitted to convert its shares of Series A Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.

 

14
 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Additional terms of the Series A Preferred and include the following:

 

The shares of Series A Preferred are entitled to dividends when, as and if declared by the Board as to the shares of the common stock of the Company into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described above.
  
Upon the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, the shares of Series A Preferred are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase price per share of Series A Preferred plus all accrued but unpaid dividends.
  
The Series A Preferred plus all declared but unpaid dividends thereon automatically will be converted into common stock, at the then applicable conversion rate, upon the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred.
  
Each share of Series A Preferred will carry a number of votes equal to the number of shares of common stock into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described above. The Series A Preferred generally will vote together with the common stock and not as a separate class, except as provided below.
  
Consent of the holders of the outstanding Series A Preferred is required in order for the Company to: (i) amend or change the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred; (ii) authorize, create or issue shares of any class of stock having rights, preferences, privileges or powers superior to the Series A Preferred; (iii) reclassify any outstanding shares into shares having rights, preferences, privileges or powers superior to the Series A Preferred; or (iv) amend the Company’s Articles of Incorporation or Bylaws in a manner that adversely affects the rights of the Series A Preferred.
  
Pursuant to the Securities Purchase Agreements, holders of Series A Preferred are entitled to unlimited “piggyback” registration rights on registrations by the Company, subject to pro rata cutback at any underwriter’s discretion.

 

During the threesix months ended DecemberMarch 31, 2021,2022, the Company offered to the Series A Preferred shareholders the ability to convert their Preferred A shares into Preferred B shares for an additional investment of 20% of their initial Series A investment.investment. One Series A shareholder has agreed to invest additional cash proceeds of $55,600 for 55,600 Series B shares and converted 278,000 of their Series A into Series B.

 

Series B

 

The Series B Preferred were designated on December 29, 2021. Each share of Series B Preferred has a Stated Value of $1.00 and is currently convertible into common stock at a conversion price equal to $0.04. The conversion price of the Series B Preferred is subject to equitable adjustment in the event of a stock split, stock dividend or similar event with respect to the common stock, and in the event of the issuance of common stock by the Company below the conversion price, subject to customary exceptions. At the current conversion price, the 333,600 shares of Series B Preferred outstanding at DecemberMarch 31, 20212022 are convertible into 8,340,000 shares of the common stock of the Company. No holder is permitted to convert its shares of Series B Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.

 

Additional terms of the Series B Preferred and include the following:

 

The shares of Series B Preferred are not entitled to dividends, provided that if dividends are paid on the shares of common stock of the Company, the Series B Preferred will be entitled to dividends based on the number shares of common stock which the Series B Preferred may then be converted.
  
Upon the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, or upon a change in control whereby a stockholder gains control of 50% or more of the outstanding shares of common stock, the shares of Series B Preferred are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase price per share of Series B Preferred plus all accrued but unpaid dividends.
  
Each share of Series B Preferred carries a number of votes equal to the number of shares of common stock into which such Series B Preferred may then be converted.

15 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Due to the change in control provision of the Series B Preferred, the Series B Preferred is classified as temporary equity on the balance sheet.

 

On December 30, 2021, the Company entered into an Exchange Agreement with one of the Company’s institutional investors (the “Investor”), pursuant to which the Investor exchanged 278,000shares of the Series A Preferred for 278,000 shares of the Series B Preferred. In addition, on December 30, 2021, the Investor purchased 55,600 shares of Series B Preferred Stock at a price of $1.00 per share, resulting in gross proceeds to the Company of $55,600.

 

15

Common Stock

 

Common stock consists of $0.001 par value, 250,000,000 shares authorized, of which 72,730,15375,146,820 shares were issued and outstanding as of DecemberMarch 31, 2021.2022.

 

During the threesix months ended DecemberMarch 31, 2021,2022, the Company issued 1,500,000shares of its common stock in exchange for services rendered to the Company, by the chairman of the board of directors, with a total fair value $52,50098,679 based on the closing price of the Company’s common stock on the dates of grant. The

During the six months ended March 31, 2022, the Company issued 2,166,667 shares were issuedof its common stock in exchange for services rendered to the chairmanCompany by third party consultants, with a total fair value $103,464 based on the closing price of the boardCompany’s common stock on the dates of directors.grant.

During the six months ended March 31, 2022, the Company issued 250,000 shares of its common stock to settle outstanding payables in the amount of $7,500.

Note 10 – Common Stock Options

 

Stock Incentive Plan

 

On June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted on March 5, 2012 and 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. Options to purchase a total of 6,020,000shares of common stock were outstanding as of DecemberMarch 31, 2021.2022.

 

During the threesix months ended DecemberMarch 31, 2021,2022, the Company issued to an unrelated third party, options to purchase 1,000,000 shares of its common stock in exchange for services rendered to the Company with a total fair value $33,716. The Company estimated the fair value using the Black-Scholes Pricing Model, based on a volatility rate of 186% and call option values of $0.0337 and exercise prices of $0.035.

 

Amortization of Stock-Based Compensation

 

A total of $46,17953,739 and $17,06041,126 of stock-based compensation expense was recognized during the threesix months ended DecemberMarch 31, 20212022 and 2020,2021, respectively, as a result of the vesting of common stock options issued. As of DecemberMarch 31, 20212022 a total of $44,21331,798 of unamortized expense remains to amortized over the vesting period.

 

The following is a summary of information about the stock options outstanding at DecemberMarch 31, 2021.2022.

Summary of Common Stock Options Outstanding

   Shares Underlying 
Shares Underlying Options Outstanding  Options Exercisable 
                
      Weighted         
   Shares  Average Weighted  Shares  Weighted 
Range of  Underlying  Remaining Average  Underlying  Average 
Exercise  Options  Contractual Exercise  Options  Exercise 
Prices  Outstanding  Life Price  Exercisable  Price 
                
$0.05 – $0.13   5,020,000  7.12 years $0.08   4,043,809  $0.08 

16 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  Shares Underlying 
Shares Underlying Options Outstanding Options Exercisable 
                
      Weighted         
   Shares  Average  Weighted Shares  Weighted 
Range of  Underlying  Remaining  Average Underlying  Average 
Exercise  Options  Contractual  Exercise Options  Exercise 
Prices  Outstanding  Life  Price Exercisable  Price 
                     
$0.05 – $0.13   6,020,000  6.51 years  $0.07  5,359,285  $0.07 

 

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

Schedule of Activity of Outstanding Common Stock Options

   Weighted    Weighted 
   Average    Average 
 Number Exercise  Number Exercise 
 of Shares Price  of Shares Price 
Balance, September 30, 2021  5,620,000  $0.08   5,620,000  $0.08 
Options issued  1,000,000  $0.04   1,000,000  $0.04 
Options forfeited  (600,000) $0.11   (600,000) $0.11 
                
Balance, December 31, 2021  6,020,000  $0.07 
Balance, March 31, 2022  6,020,000  $0.07 
                
Exercisable, December 31, 2021  5,043,809  $0.07 
Exercisable, March 31, 2022  5,359,285  $0.07 

 

As of DecemberMarch 31, 2021,2022, these options in the aggregate had no intrinsic value as the per share market price of $0.0280.023 of the Company’s common stock as of such date was less than the weighted-average exercise price of these options of $0.080.07.

16

 

Note 11 – Common Stock Warrants

 

Warrants to purchase a total of 2,535,001 shares of common stock were outstanding as of DecemberMarch 31, 2021.2022.

 

The following is a summary of information about our warrants to purchase common stock outstanding at DecemberMarch 31, 2021.2022.

Summary of Common Stock Warrants Outstanding

 Shares Underlying   Shares Underlying 
Shares Underlying Warrants OutstandingShares Underlying Warrants Outstanding Warrants Exercisable Shares Underlying Warrants Outstanding Warrants Exercisable 
                       
   Weighted           Weighted       
 Shares Average Weighted Shares Weighted   Shares Average Weighted Shares Weighted 
Range ofRange of Underlying Remaining Average Underlying Average Range of Underlying Remaining Average Underlying Average 
ExerciseExercise Warrants Contractual Exercise Warrants Exercise Exercise Warrants Contractual Exercise Warrants Exercise 
PricesPrices Outstanding Life Price Exercisable Price Prices Outstanding Life Price Exercisable Price 
                       
$0.10 - 0.26  2,535,001 5.08 years $0.17  2,535,001 $0.17 0.10 - 0.26  2,535,001 4.84 years $0.17  2,535,001 $0.17 

 

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

 

Schedule of Outstanding Common Stock Warrants Activity

   Weighted    Weighted 
   Average    Average 
 Number Exercise  Number Exercise 
 of Shares Price  of Shares Price 
Balance, September 30, 2021  2,535,001  $0.17   2,535,001  $0.17 
Warrants granted  -   -   -   - 
Warrants expired  -   -   -   - 
                
Balance, December 31, 2021  2,535,001  $0.17 
Balance, March 31, 2022  2,535,001  $0.17 
                
Exercisable, December 31, 2021  2,535,001  $0.17 
Exercisable, March 31, 2022  2,535,001  $0.17 

 

As of DecemberMarch 31, 2021,2022, these warrants in the aggregate had no intrinsic value as the per share market price of $0.0280.023 of the Company’s common stock as of such date was less than the weighted-average exercise price of these optionswarrants of $0.080.17.

Note 12 – Commitments and Contingencies

 

Legal Contingencies

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

17
 

 

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, 2021 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, 2021 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

 

Overview

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states that have legalized the sale of cannabis, beginning with California.

 

Results of Operations for the Three Months Ended DecemberMarch 31, 20212022 and 2020:2021:

 

The following table summarizes selected items from the statement of operations for the three months ended DecemberMarch 31, 20212022 and 2020.2021.

 

  Three Months Ended December 31,  Increase / 
  2021  2020  (Decrease) 
Revenues $699,585  $500,385  $199,200 
Cost of sales  422,601   420,885   1,716 
Gross profit  276,984   79,500   197,484 
             
Operating expenses:            
General and administrative  240,964   225,050   15,914 
Professional fees  268,471   114,544   153,927 
Change in allowance for doubtful accounts  (2,139)  88,170   (90,309)
Total operating expenses:  507,296   427,764   79,532 
             
Operating income (loss)  (230,312)  (348,264)  117,952 
             
Total other income (expense)  (60,013)  (42,373)  (17,640)
             
Net loss $(290,325) $(390,637) $100,312 

  Three Months Ended March 31,  Increase / 
  2022  2021  (Decrease) 
Revenues $604,735  $633,160  $(28,425)
Cost of sales  396,032   416,915   (20,883)
Gross profit  208,703   216,245   (7,542)
             
Operating expenses:            
General and administrative  235,470   211,961   23,509 
Professional fees  286,390   107,819   178,571 
Change in allowance for doubtful accounts  16   (106,155)  106,171 
Total operating expenses:  521,876   213,625   308,251 
             
Operating income (loss)  (313,173)  2,620   (315,793)
             
Total other income (expense)  (60,423)  15,581   (76,004)
             
Net loss $(373,596) $18,201  $(391,797)

 

Revenues

 

Aggregate revenues for the three months ended DecemberMarch 31, 20212022 were $699,585,$604,735, compared to revenues of $500,385$633,160 during the three months ended DecemberMarch 31, 2020, an increase2021, a decrease of $199,200$28,425 or 40%4%. The increasedecrease in revenue was due to the increasea slight decrease in tourism in Nevada during the current period in comparisonas opposed to the prior yearsame period in which Nevada tourism was significantly depressed because of the COVID-19 coronavirus pandemic.2021.

 

18
 

 

Cost of Sales

 

Cost of sales for the three months ended DecemberMarch 31, 20212022 were $422,601,$396,032, compared to $420,885$416,915 during the three months ended DecemberMarch 31, 2020, an increase2021, a decrease of $1,716,$20,883, or less than 1%5%. 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 our increased labor andsales decrease of 4% as well as reducing our outsourced testing fees incurred during the current period. Our gross margins were approximately 40%35% during the three months ended DecemberMarch 31, 2021,2022, compared to 16%34% during the three months ended DecemberMarch 31, 2020,2021, which translated to $197,484$20,883 of increaseddecreased gross profit from our $199,200$28,425 of increaseddecreased revenues received in the current period. Our margins increased in the current period due to the increase in revenues, which increased at a greater rate than our labor costs and equipment servicing costs, in addition to reduced costs resulting from a decrease in outsourcing our testing services in the current period.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended DecemberMarch 31, 20212022 were $240,964,$235,470 compared to $225,050$211,961 during the three months ended DecemberMarch 31, 2020,2021, an increase of $15,914,$23,509, or 7%11%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $0 and $16,952 during the three months ended DecemberMarch 31, 20212022 and 2020,2021, respectively. General and administrative expenses increaseddecreased primarily due to increaseddecreased corporate overhead activities.

 

Professional Fees

 

Professional fees for the three months ended DecemberMarch 31, 20212022 were $268,471,$286,390, compared to $114,544$107,819 during the three months ended DecemberMarch 31, 2020,2021, an increase of $153,927,$178,571, or 134%166%. Professional fees included non-cash, stock-based compensation of $98,679$103,464 and $27,108$44,147 during the three months ended DecemberMarch 31, 20212022 and 2020,2021, respectively. Professional fees increased primarily due to increased corporate consulting services during the current period as we increased our focusfocused primarily on expansion efforts.the lab operations during the current period.

 

Change in Allowance for Doubtful Accounts

 

Our change in allowance for doubtful accounts for the three months ended DecemberMarch 31, 20212022 resulted in $2,139$16 of income, compared to $88,170$106,155 of expense during the three months ended DecemberMarch 31, 2020,2021, an improvement of $90,309,$106,171, or 102%100%. Our change in allowance for doubtful accounts improved during the current period as the Nevada tourism market began to open up again and our customers’ cash flows improved.

Operating Loss

Our operating loss for the three months ended March 31, 2022 was $313,173, compared to operating income of $2,620 during the three months ended March 31, 2021, a decrease of $315,793, or 12,053%. Our operating loss increased primarily due to our decreased gross profit and not having a reversal of our allowance for doubtful accounts.

Other Income (Expense)

Other expense, on a net basis, for the three months ended March 31, 2022 was $60,423, compared to other income, on a net basis, of $15,581 during the three months ended March 31, 2021, a net decrease of $76,004. Other expense consisted of interest expense of $75,718 for the three months ended March 31, 2022. partially offset by other income, consisting of $15,295 of interest income.

Net Loss

Net loss for the three months ended March 31, 2022 was $373,596, compared to net income of $18,201 during the three months ended March 31, 2021, a decrease of $391,797, or 2,153%. The net loss was primarily due to our decreased revenues, increase interest expense, and not having a reversal in our doubtful accounts from the March 31, 2021 period.

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Results of Operations for the Six Months Ended March 31, 2022 and 2021:

The following table summarizes selected items from the statement of operations for the six months ended March 31, 2022 and 2021.

  Six Months Ended March 31,  Increase / 
  2022  2021  (Decrease) 
Revenues $1,304,320  $1,133,545  $170,775 
Cost of sales  818,633   837,800   (19,167)
Gross profit  485,687   295,745   189,942 
             
Operating expenses:            
General and administrative  476,434   437,011   39,423 
Professional fees  554,861   222,363   332,498 
Change in allowance for doubtful accounts  (2,123)  (17,985)  15,862 
Total operating expenses:  1,029,172   641,389   387,783 
             
Operating loss  (543,485)  (345,644)  (197,841)
             
Total other income (expense)  (120,436)  (26,792)  (93,644)
             
Net loss $(663,921) $(372,436) $(291,485)

Revenues

Aggregate revenues for the six months ended March 31, 2022 were $1,304,320, compared to revenues of $1,133,545 during the six months ended March 31, 2021, an increase of $170,775, or 15%. The increase in revenue was due to the Nevada tourism market beginning to open up again and our customers’ cash flows improved during the current period.

Cost of Sales

Cost of sales for the six months ended March 31, 2022 were $818,633, compared to $837,800 during the six months ended March 31, 2021, a decrease of $19,167, or 2%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to our decrease in outsourcing to other labs. Our gross margins of approximately 37% and 26% during the six months ended March 31, 2022 and 2021, respectively, translated to $189,942 of increased gross profit in the current period.

General and Administrative Expenses

General and administrative expenses for the six months ended March 31, 2022 were $476,434, compared to $437,011 during the six months ended March 31, 2021, an increase of $39,423, 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 $0 and $33,904 during the six months ended March 31, 2022 and 2021, respectively. General and administrative expenses increased due primarily to increased corporate overhead activities offset by the discontinuation of rents on warehouse space that we were previously subleasing.

Professional Fees

Professional fees for the six months ended March 31, 2022 were $554,861, compared to $222,363 during the six months ended March 31, 2021, an increase of $332,498, or 150%. Professional fees included non-cash, stock-based compensation of $202,143 and $97,077 during the six months ended March 31, 2022 and March 31, 2021, respectively. Professional fees increased primarily due to increased use of corporate consulting services during the current period.

Change in Allowance for Doubtful Accounts

Our change in allowance for doubtful accounts resulted in $2,123 of income for the six months ended March 31, 2022, compared to $17,985 during the six months ended March 31, 2021, a decrease of $15,862, or 88%. Our change in allowance for doubtful accounts improved during the current period primarily as our allowance for doubtful accounts decreased from $96,285 to $88,600$88,711 during the quarter,period, as the Nevada tourism market began to open up again and our customers’ cash flows improved. The improvement was offset by the write-off of a loan we made in the amount of $5,361 that was not previously reserved for.

20

 

Operating Loss

 

Our operating loss for the threesix months ended DecemberMarch 31, 2022 was $543,485, compared to $345,644 during the six months ended March 31, 2021, was $230,312, compared to an operating lossincrease of $348,264 during the three months ended December 31, 2020, a decrease of $117,952,$197,841, or 34%57%. Our operating loss decreasedincreased primarily due to our increased gross profit, as tourism returneda large increase in Nevada after we navigated through the height of the effects of the COVID-19 coronavirus pandemic during the comparative period, as we continued to pare our general and administrative and professional fee costs, and decreased our allowance for doubtful accounts and overhead cost saving measures we implemented in response to Covid-19.fees.

 

Other Income (Expense)Expense

 

Other expense, on a net basis, for the threesix months ended DecemberMarch 31, 20212022 was $60,013,$120,436, compared to other expense, on a net basis, of $42,373$26,792 during the threesix months ended DecemberMarch 31, 2020,2021, a net increase of $17,640.$93,644. Other expense consisted of $145,111 of interest expense, as offset by interest income of $69,393 for$15,295, compared to $65,434 of interest expense, as offset by a gain on early extinguishment of debt in the threeamount of $40,338 and a gain on the distribution of $7,580 of previously impaired inventory to our former CEO, during the six months ended DecemberMarch 31, 2021, partially offset by $9,380 of interest income.2021.

 

Net Loss

 

Net loss for the threesix months ended DecemberMarch 31, 2022 was $663,921, compared to $372,436 during the six months ended March 31, 2021, was $290,325, compared to a net lossan increase of $390,637 during the three months ended December 31, 2020, a decrease of $100,312,$291,485, or 26%78%. The decreasedincreased net loss was due primarily due to our increased revenues, as the returning tourism in Nevada improved,larger professional fees and an increase in our gross margins.other expenses.

19 

 

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 nine-monthsix-month periods ended DecemberMarch 31, 20212022 and 2020:2021:

 

 2021  2020  2022 2021 
Operating Activities $(177,158) $(63,694) $(190,286) $(94,603)
Investing Activities  (408,482)  -   (777,868)  (1,206)
Financing Activities  380,013   30,015   754,991   126,766 
Net Decrease in Cash $(205,627) $(3,679) $(213,163) $30,957 

 

Net Cash Used in Operating Activities

 

During the threesix months ended DecemberMarch 31, 2021,2022, net cash used in operating activities was $177,158,$190,286, compared to net cash used in operating activities of $63,694$94,603 for the same period ended DecemberMarch 31, 2020.2021. The increase in cash used in operating activities was primarily attributable to our increase in accounts receivable.increased net loss.

 

Net Cash Used in Investing Activities

 

During the threesix months ended DecemberMarch 31, 2021,2022, net cash used in investing activities was $408,482,$777,868, compared to $0$1,206 for the same period ended DecemberMarch 31, 2020.2022. The increase in cash used in investing activities was a result of secured loans we made to C3 Labs, Inc. in connection with a potential acquisition. On March 11, 2022, the Company notified C3 Labs of its termination of the letter of intent. The Company is currently in possession of equipment of C3 Labs, which it is in the process of liquidating. The Company anticipates that the proceeds of such liquidation will be sufficient to repay the Company in full all amounts owed to it by C3 Labs under the secured loans.

 

Net Cash Provided by Financing Activities

 

During the threesix months ended DecemberMarch 31, 2021,2022, net cash provided by financing activities was $380,013,$754,991, compared to net cash provided by financing activities of $60,015$126,766 for the same period ended DecemberMarch 31, 2021. The current period consisted primarily of $400,000$390,000 of proceeds received on debt financing, $407,243 proceeds from convertible debt financing, proceeds of $55,600 from the sale of preferred stock, as offset by $8,467$28,317 of principal payments on an equipment lease and $14,142$16,557 of principal payments on an equipment loan, and $52,978 of principal payments made on convertible notes, compared to $60,000$110,000 of net proceeds received on convertible debt financing, $40,000 of proceeds from short term advances and proceeds of $20,250 from the sale of stock, as offset by $6,946$26,769 of principal payments on an equipment lease and $13,289$16,715 of principal payments on an equipment loan in the comparative period.

21

 

Ability to Continue as a Going Concern

 

As of DecemberMarch 31, 2021,2022, our balance of cash on hand was $90,305,$82,769, and we had negative working capital of $1,320,360$1,598,387 and an accumulated deficit of $18,615,574 resulting from recurring losses of $18,241,978.losses. 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.

 

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Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the salecommercial sales of lab testing services through our subsidiary Digipath Labs, Inc.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.

 

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

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Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

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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 DecemberMarch 31, 2021.2022. 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’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 DecemberMarch 31, 2021,2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

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

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

ITEM 1A. RISK FACTORS.

 

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

 

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

 

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-monthsix-month period ended DecemberMarch 31, 2021:2022:

Common Stock Issued for Services

 

On December 30, 2021, we entered into an Exchange Agreement with one of our institutional investors (the “Investor”), pursuant to whichFebruary 11, 2022, the Investor exchanged 278,000Company issued 2,166,667 shares of our Series A Preferred Stock for 278,000 shares of our newly designated Series B Preferred Stock (“Series B Preferred Stock”). The transaction was effected pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.

In addition, on December 30, 2021, the Investor purchased 55,600 shares of Series B Preferred Stock at a price of $1.00 per share, resulting in gross proceeds to the Company of $55,600. The transaction was effected pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

During the three months ended December 31, 2021, we issued 1,500,000 shares ofits common stock in exchange for services rendered to the Company by third party consultants, with a total fair value $65,000 based on the chairmanclosing price of the boardCompany’s common stock on the dates of directors. The transaction was effected pursuantgrant.

On February 11, 2022, the Company issued 250,000 shares of its common stock to Section 4(a)(2)settle outstanding payables in the amount of the Securities Act of 1933, as amended.$7,500.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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ITEM 6. EXHIBITS.

 

Exhibit Description
2.1 Stock Purchase Agreement between Digipath, Inc., VSSL Enterprises Ltd., Kyle Joseph Remenda, Philippe Olivier Henry, PhD, Audim Ventures Ltd. and Britt Ash Enterprises Ltd., dated March 9, 2020 (incorporated by reference to Exhibit 2.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on March 16, 2020)
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.3 Certificate of Amendment to Articles of Incorporation dated April 4, 2014 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.4 Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock dated April 9, 2014 (incorporated by reference to Exhibit 3.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.5 Certificate of Amendment to Articles of Incorporation dated May 22, 2015 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on May 26, 2015)
3.6 Certificate of Amendment to Articles of Incorporation dated May 14, 2019 (incorporated by reference to Exhibit 3.6 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on August 13, 2019)
3.7 Certificate of Designations of the Series B Preferred Stock dated December 29, 2021 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on January 6, 2022)
4.1 Form of 8% Senior Secured Convertible Notes due December 31, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on November 21, 2018)
4.2 Form of 8% Senior Secured Convertible Notes due September 23, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 26, 2019)
4.3 9% Secured Convertible Note, between Digipath, Inc. and holder, due August 10, 2022 (incorporated by reference to Exhibit 4.3 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.4 9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.4 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.5 9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.5 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on May 15, 2020)
4.6 Form of Amendment to 9% Secured Convertible Note, between Digipath, Inc. and holder, due August 10, 2022 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on January 6, 2021)
31.1* Section 302 Certification of Principal Executive Officer
31.2* Section 302 Certification of Principal Financial Officer
32.1* Section 906 Certification of Principal Executive Officer
32.2* Section 906 Certification of Principal Financial Officer
101.INS* XBRL Instance Document
101.SCH* XBRL Schema Document
101.CAL* XBRL Calculation Linkbase Document
101.DEF* XBRL Definition Linkbase Document
101.LAB* XBRL Labels Linkbase Document
101.PRE* XBRL Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Filed herewith.

 

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SIGNATURES

 

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

 

Date: February 14,May 16, 2022

 

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

 

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