Chnages in Stockholders' Equity | NOTE 10 - CHANGES IN STOCKHOLDERS EQUITY Reverse Stock Split Effective May 27, 2015, the Company effected the 1 for 10 Reverse Stock Split. No fractional shares were issued, and no cash or other consideration was paid in connection with the Reverse Stock Split. Instead, the Company issued one whole share of the post-Reverse Stock Split common stock to any stockholder who otherwise would have received a fractional share as a result of the Reverse Stock Split. The Company was authorized to issue 900,000,000 shares of common stock prior to the Reverse Stock Split. As a result of the Reverse Stock Split, the Companys authorized shares decreased ratably to 90,000,000 shares of common stock. The Reverse Stock Split did not have any effect on the stated par value of the common stock, or the Companys authorized preferred stock. Unless otherwise stated, all share and per share information in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect the Reverse Stock Split. 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. As of June 30, 2015, there are 4,671,000 shares of Series A Preferred issued and outstanding. On April 9, 2014, the Company entered into Securities Purchase Agreements with accredited investors pursuant to which the Company issued an aggregates of 6,000,000 shares of Series A Preferred in exchange for $6,000,000, which consisted of cash paid by investors and the cancellation of indebtedness of the Company under advances previously made to the Company by such investors. Shares of Series A Preferred were initially convertible into common stock based on a conversion formula equal to the price per share ($1.00) divided by a conversion price equal to the lesser of (A) $0.02 and (B) seventy percent (70%) of the average of the three (3) lowest daily volume weighted average prices (VWAPs) occurring during the twenty (20) consecutive trading days immediately preceding the applicable conversion date on which the Holder elects to convert any shares of Series A Preferred. On March 13, 2015, following the approval of our Board of Directors and the written consent of the holders of our Series A Preferred, the conversion price of the Series A Preferred was amended to remove the VWAP conversion feature from it, so that the Series A Preferred was convertible into common stock at a fixed price of $0.02 per share. As a result of the Reverse Stock Split, the conversion price of the Series A Preferred is currently $0.20 per share. The conversion price is adjustable in the event of stock splits and other adjustments in the Companys capitalization, and in the event of certain negative actions undertaken by the Company. At the current conversion price, the 4,671,290 shares of Series A Preferred outstanding at June 30, 2015 are convertible into 23,356,450 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. Additional terms of the Series A Preferred 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 Companys 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 underwriters discretion. Common Stock Common stock consists of $0.001 par value, 90,000,000 shares authorized, of which 12,135,965 shares were issued and outstanding as of June 30, 2015. During the quarter ended December 31, 2014, the Company issued 2,880 shares associated with the exercise of options with an exercise price of $3.30 per share and received $9,506 in cash. During the same period, the Company approved the issuance of 160,000 shares of the Companys common stock and recognized $114,083 of compensation expense associated with the issuance and vesting of these shares, and additional compensation expense of $68,333 for the vesting of prior period awards. During the quarter ended December 31, 2014, a total of 447,500 shares of Series A Preferred were converted into 2,237,500 shares of common stock. During the quarter ended December 31, 2014, the Company cancelled 1,219,589 non-plan options and issued 1,110,000 plan options and 500,000 warrants with exercise prices ranging from $0.30 to $0.85 per share, vesting immediately. The Company recorded the replacement of the stock options award as a modification of the terms of the cancelled awards, with the total compensation cost measured at the date of cancellation and replacement as being the sum of the portion of the grant-date fair value of the original award for which the requisite compensation expense had already been recognized at that date plus the incremental cost resulting from the cancellation and replacement. The Company recorded a net total of $845,540 stock option compensation expense related to these issuances and cancellations. During the quarter ended March 31, 2015, a total of 252,000 shares of Series A Preferred were converted into 1,320,061 shares of common stock. During the quarter ended March 31, 2015, the Company issued 40,000 shares of common stock and cancelled 75,000 shares of common stock associated with transactions fully recorded in a previous period. During the same period, the Company issued 12,500 shares of common stock and recognized compensation expense associated with the issuance and vesting of these shares in the amount of $23,063. During the quarter ended June 30, 2015, a total of 478,710 shares of Series A Preferred were converted into 2,562,384 shares of common stock. Stock Incentive Plan On March 5, 2012, we adopted our 2012 Stock Incentive Plan (the 2012 Plan) providing for the issuance of up to 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. On May 20, 2014, the 2012 Plan was amended to increase the number of shares of Common Stock which may be issued pursuant to awards granted under the plan to 3,000,000. 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. During the quarter ended December 31, 2014, the Company cancelled 1,219,589 non-plan options and issued 1,110,000 plan options and 500,000 warrants with exercise prices ranging from $0.30 to $0.85 per share, vesting immediately. The Company recorded the replacement of the stock options award as a modification of the terms of the cancelled awards, with the total compensation cost measured at the date of cancellation and replacement as being the sum of the portion of the grant-date fair value of the original award for which the requisite compensation expense had already been recognized at that date plus the incremental cost resulting from the cancellation and replacement. The Company recorded a net total of $845,540 stock option compensation expense related to these issuances and cancellations. During the quarter ended March 31, 2015, the Company did not issue any stock or option awards and recognized compensation expense associated with the vesting of option and stock awards issued in prior periods in the amount of $23,063. On June 1, 2015, the Company granted options to purchase 200,000 shares of common stock as compensation for services to our Chief Scientist. The options vest ratably in quarterly increments over two (2) years beginning September 1, 2015. The options are exercisable until June 1, 2025 at an exercise price of $0.40 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 247% and a call option value of $0.3978, was $39,776. The options are being expensed over the vesting period. The Company didnt recognize any stock based compensation expense on this option during the three months ended June 30, 2015. On June 19, 2015, the Company granted 100,000 common stock options as compensation for services to our new Chief Financial Officer. The options vest ratably in quarterly increments over one (1) year beginning September 19, 2015. The options are exercisable until June 19, 2025 at an exercise price of $0.33 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 237% and a call option value of $0.3274, was $32,744. The options are being expensed over the vesting period. The Company didnt recognize any stock based compensation expense during the three months ended June 30, 2015. The weighted-average grant date fair value of options granted during the three month periods ended June 30, 2015 and 2014 was $0.40 and $-0-, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. For purposes of determining the expected life of the option, an average of the estimated holding period is used. The risk-free rate for periods within the contractual life of the options is based on the U. S. Treasury yield in effect at the time of the grant. Three months ended June 30, 2015 2014 Volatility 256 % - Expected dividends - - Expected average term (in years) 3.0 - Risk free rate - average 1.64 % - Forfeiture rate 0 % - A summary of option activity as of June 30, 2015 and changes during the two years then ended is presented below: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at September 30, 2014 406,762 $ 0.30 Granted 1,110,000 0.40 Exercised (2,881 ) (3.30 ) Forfeited or expired (400,000 ) (0.30 ) Outstanding at December 31, 2014 1,113,881 0.40 3.00 $ 0.00 Granted - - Exercised - - Forfeited or expired - - Outstanding at March 31, 2015 1,113,881 0.40 2.74 $ 0.40 Granted 300,000 0.38 Exercised - - Forfeited or expired - - Outstanding at June 30, 2015 1,413,881 $ 0.57 2.70 $ 0.00 As of June 30, 2015, these options in the aggregate had no intrinsic value as the per share market price of $0.27 of the Companys common stock as of such date was less than the weighted-average exercise price of these options of $0.40. A summary of the status of the Companys nonvested shares granted under the Companys stock option plan as of June 30, 2015 is presented below: Weighted- Average Grant Date Shares Fair Value Nonvested at September 30, 2014 229,167 $ 0.40 Granted 1,110,000 0.40 Vested (939,167 ) (0.40 ) Forfeited (400,000 ) (0.40 ) Nonvested at December 31, 2014 - - Granted - - Vested - - Forfeited - - Nonvested at March 31, 2015 - - Granted 300,000 0.38 Vested - - Forfeited - - Nonvested at June 30, 2015 300,000 $ 0.38 Additional information regarding options outstanding as of June 30, 2015 is as follows: Options Outstanding at June 30, 2015 Options Exercisable at June 30, 2015 Range of Exercise Price Number of Options Outstanding Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Number of Shares Exercisable Weighted Average Exercise Price $ 0.40 1,110,000 2.50 $ 0.40 1,100,000 $ 0.40 $ 3.30 3,881 1.00 $ 3.30 3,881 $ 3.30 $ 0.38 300,000 10.00 $ 0.38 - $ - 1,413,881 4.09 1,103,881 $ 0.40 Non-Plan Options During the three month period ended December 31, 2014, the Company issued options outside of the 2012 Plan to purchase 100,000 shares of common stock with an exercise price of $0.85, vesting quarterly over a period of one year, resulting in compensation expense of $82,826. These options were cancelled and re-issued as options under our 2012 plan in the quarter ended December 31, 2015. In addition to options granted under the 2012 Plan, at December 31, 2014, the Company had outstanding options to purchase 200,000 shares of common stock. During the three month period ended December 31, 2014, holders of non-plan options to purchase 200,000 shares of common stock surrendered such options to the Company for cancellation. Company Warrants During the three months ended December 31, 2014, the Company issued warrants to purchase 500,000 shares of common stock at a weighted average exercise price of $0.36 per share to a service provider and former employee following the return for cancellation of prior stock grants and options totaling 500,000 shares. Outstanding warrants as of June 30, 2015, totaled 650,000 shares of common stock with a weighted average exercise price of $0.40 per share. Subsidiary Warrants On April 19, 2014, DigiPath, Corp., a subsidiary of DigiPath, Inc. which is dedicated to digital microscopy, granted five-year common stock Purchase Warrants to Steven Barbee and Eric Stoppenhagen (the Consultants) to purchase an aggregate of 6,000,000 shares of common stock of DigiPath, Corp. at an exercise price of $0.10 per share over a five (5) year period from the date of grant. The warrant holders cannot exercise more than 4.99% of the Companys issued and outstanding common stock without 65 days notice. The warrants are issued by the Companys subsidiary, and if exercised in total would represent approximately two thirds (66.67%) of the equity of the subsidiary, resulting in dilution of DigiPath, Inc.s ownership to approximately one third (33.33%). The Company recorded a total of $343,533 of expense associated with the issuance of these warrants and recorded a non-controlling interest as a reduction to total stockholders equity on the Companys balance sheet because the warrants were issued by the Companys subsidiary. No continued allocation of the non-controlling interest in the equity of the subsidiary has been recognized, as the warrants havent been exercised and DigiPath, Inc. is still currently in control of 100% of the interests of the subsidiary. |