UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number: 000-54239

 

 

DIGIPATH, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA		27-3601979
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

6450 Cameron Street, Suite 113

Las Vegas, Nevada 89118

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (702) 527-2060

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [  ] No [X]

 

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

Yes [X] No [  ]

 

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

Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging growth company	[X]

 

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

 

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

Yes [  ] No [X]

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of $0.20 per share as of March 31, 2019 was approximately $8,606,003.

 

As of December 20, 2019, there were 48,532,666 shares of registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	Mine Safety Disclosures	8
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	9
Item 6.	Selected Financial Data	11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 8.	Financial Statements and Supplementary Data	18
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19
Item 9A.	Controls and Procedures	19
Item 9B.	Other Information	19
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	20
Item 11.	Executive Compensation	21
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	24
Item 13.	Certain Relationships and Related Transactions, and Director Independence	25
Item 14.	Principal Accounting Fees and Services	25
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	26
SIGNATURES		27

 

 

PART I

 

Forward Looking Statements

 

This Form 10-K contains “forward-looking” statements including statements regarding our expectations of our future operations. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control.

 

These risks and uncertainties include demand for our products and services, governmental regulation of the cannabis industry, our ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of our liquidity and financial strength to support our growth, general economic and market conditions; our ability to sustain, manage, or forecast growth, our ability to successfully make and integrate acquisitions, new product development and introduction, existing government regulations and changes in, or the failure to comply with, government regulations, adverse publicity, difficulty in forecasting operating results, change in business strategy or development plans, business disruptions, and the ability to attract and retain qualified personnel. Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.

 

ITEM 1. DESCRIPTION OF BUSINESS

 

Overview

 

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

 

		Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
		GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from drug-type cannabis.

 

Business

 

Our cannabis testing business is operated through our wholly owned subsidiary, Digipath Labs, Inc., which performs all cannabis related testing using FDA-compliant laboratory equipment and processes. We opened our first testing lab in Las Vegas, Nevada in May of 2015 to serve the new State approved and licensed medical marijuana industry. We have plans to open labs in other legal states, assuming resources permit.

 

We seek to be the nation’s highest standard, full-service testing lab for cannabis, hemp and ancillary cannabis and hemp infused products. We are a third party independent testing laboratory facility for cannabis, cannabis infused products, hemp and other botanical nutraceuticals to serve growers, dispensaries, caregivers, producers, patients and eventually all end users of cannabis and botanical products.

 

Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis and hemp industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis and hemp they ingest and to help maximize the quality of our client’s products through research, development and standardization.

 

 

As a premier cannabis and hemp testing laboratory with ISO-17025:2017 accreditation, we take a careful, strategic approach to all of our cannabis and hemp testing. A diverse array of tests combined with our lab equipment and analytical instrumentation enable us to accurately test cannabis and hemp for potency, the presence of pesticides, microbial contamination, metals and heavy metals, which include, but are not limited to, substances like arsenic, cadmium, lead, or mercury. Not only is testing for potency and Cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”) content important, we recognize that more profound testing is needed particularly as a true national standard is developed. Digipath Labs is committed to follow Food and Drug Administration (“FDA”), Drug Enforcement Agency (“DEA”), Environmental Protection Agency (“EPA”), US Department of Agriculture (“USDA”) guidelines, proprietary standard operating procedures (“SOP”), and Good Lab Practices (“GLP”) that are in line with current Federal and State governing bodies. We utilize a variety of tests to safely and effectively share enhanced understanding of the cannabis plant with caregivers, dispensaries and patients. We are committed to the advancement of science by offering a method of standardization for cannabis that is intricate and accurate. This approach and our investment in state-of-the-art testing equipment is of the utmost importance.

 

Digipath Labs screens medicinal and recreational cannabis for potentially harmful contaminants, including:

 

— Residual Solvents (for extracts)

— Pesticides

— Mold and Yeast

— Heavy metals, including mercury, arsenic, lead, cadmium, chromium and nickel

— Biological toxins, such as aflatoxin and ocratoxins

— Microbial contaminants including E. coli, salmonella, coliforms, aspergillus gram negative bacteria and total aerobic bacteria

 

Digipath Labs also tests cannabis and hemp for its quality, potency, and cannabinoid and terpene profiles, which determine the suitability of specific chemoprofiles for the treatment of specific ailments.

 

We utilize one of our two Ultra-High Performance Liquid Chromatographs (“UPLC”), which accurately separates and measures the cannabinoid content of any sample of flower, edible, concentrate or other cannabis product. Our Inductively Coupled Plasma Mass Spectrometer (“ICP-MS”) is utilized for heavy metals testing, and provides accurate readings for harmful metals ensuring that the Parts Per Billion (“PPB”) are substantially below the regulated and accepted trace amounts. Our laboratory testing equipment is calibrated using third party reference standards to ensure precision measurements throughout the testing process and has been certified by ISO-17025:2017 standards.

 

With accurate science becoming a major part of the cannabis and hemp industry, the major question is one of standards; we hold ourselves accountable and provide efficient and accurate research and results to our clients. Our test results are meant to help dispensaries, caregivers and patients know the concentration and quality of their cannabis without having to question the credibility of the data.

 

Market Overview

 

According to a recent report, the United States’ legal cannabis market is projected to reach $11 billion in consumer spending in 2018 and more than $23 billion by 2022. In Nevada, cannabis sales rose to $639 million for the State’s fiscal year ended June 30, 2019, from $530 million in the prior fiscal year. As the cannabis industry continues to expand, we expect to see a parallel increase in state regulations related to the testing and disclosure of cannabis and cannabis and hemp related products. We believe that there will be a strong demand for qualified laboratories to perform such testing, both to assist producers of cannabis and cannabis products to meet expected state mandated requirements, and to provide assurance to consumers and state regulators regarding the safety and composition of such products. In addition, according to New Frontier Data, the hemp CBD business worldwide will grow from $4.4 billion in 2018 to over $14.7 billion by 2026.

 

 

With increased legalization nationwide, the lab-testing sector is expected to experience substantial growth. GreenWave Advisors, an independent research and financial analyst firm, projects annual revenue of $553 million for lab testing alone if the U.S. legalizes cannabis on a federal level. When adding in related services, such as data analytics and consulting, the revenue potential could surpass $866 million annually. The data troves collected through the testing process are already creating value and could become an increasingly valuable asset and generate substantial revenue for the most accomplished laboratories. This data could also be used to determine specific genetic attributes of targeted cannabinoids and assist with maximizing medicinal benefits and individualized medicine in the future.

 

Competition

 

The cannabis industry in the United States is highly fragmented, rapidly expanding and evolving. The industry is characterized by new and potentially disruptive or conflicting legislation promulgated on a state-by-state basis. Our competitors include local enterprises, some of which may have financial, technical, sales, marketing and other resources greater than ours. These companies also compete with us in recruiting and retaining qualified personnel and consultants.

 

Our competitive position depends on our ability to attract and retain qualified scientists and other personnel, develop effective proprietary products and solutions, the personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We compete in this area on the basis of price, regulatory compliance, vendor relationships, usefulness, availability, excellent customer service and ease of use of our services.

 

 

Government Regulation

 

Marijuana is categorized as a Schedule-I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law. A Schedule-I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” However, since 1995, thirty-three states and the District of Columbia have passed state laws that permit doctors to recommend prescribing cannabis for medical-use and eleven states and the District of Columbia have enacted laws that legalize the adult-use of cannabis for any reason. This has created an unpredictable business-environment for dispensaries and collectives that legally operate under state-laws but in violation of Federal law. On August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States Attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under state law, so long as:

 

	●	cannabis is not being distributed to minors and dispensaries are not located around schools and public buildings;
	●	the proceeds from sales are not going to gangs, cartels or criminal enterprises;
	●	cannabis grown in states where it is legal is not being diverted to other states;
	●	cannabis-related businesses are not being used as a cover for sales of other illegal drugs or illegal activity;
	●	there is not any violence or use of fire-arms in the cultivation and sale of marijuana;
	●	there is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and
	●	cannabis is not grown, used, or possessed on Federal properties.

 

The Cole Memo was meant only as a guide, not a rule of law, for United States Attorneys and did not alter in any way the Department of Justice’s Federal authority to enforce Federal law, including Federal laws relating to cannabis, regardless of state law. Moreover, the Cole Memorandum also provided that it could not be used as a defense to any criminal prosecution.

 

On January 4, 2018, United States Attorney General Jefferson Sessions issued a Memorandum to United States Attorneys rescinding the Cole Memorandum, stating that prosecutors should follow well-established principles in effect prior to the issuance of the Cole Memorandum that govern all federal prosecutions in deciding which activities to prosecute under existing federal laws. Federal legislation has been proposed over the years to reschedule or de-schedule cannabis, as well as to transform the Cole Memorandum into a rule of law.

 

Customers

 

We provide cannabis and hemp lab testing services in Las Vegas to Nevada licensed Medical Marijuana Enterprises (“MMEs”), and have expanded to recreational use facilities with the recently passed legislation that allows for the recreational use of marijuana in Nevada. We sell our services to these enterprises on a fixed fee per test or panel of tests, and offer a discounted price for customers based on volume. On June 17, 2014, Clark County initially approved a total of 117 special use permits for cultivation and 87 production applicants. As of February, 2019, MMEs approved by the State of Nevada include 66 dispensaries, 134 cultivators, 96 production facilities, 24 distributors and 10 labs (besides us), nine of which are located in Clark County. We have worked with over 85 cultivators and producers in and around Clark and Nye County. As new harvests come to market, we anticipate further customer growth, especially with the relatively recent legalization of recreational cannabis in the State of Nevada in 2017.

 

Research and Development

 

We believe that our future success will be impacted by our ability to continue to enhance and broaden our services to meet the evolving needs of a relatively newly regulated cannabis services industry. Our research and development efforts are focused on developing new, complementary solutions to streamline our processes and provide optimal services to both our customers and for regulators.

 

When developing our technical solutions to provide cannabis testing solutions, industry regulatory requirements also dictate that substantial documentation be created to demonstrate data integrity. Our standard operating procedures include streamlined methodologies for generating and maintaining testing services that can be tailored to the variations in other State jurisdictions, as necessary.

 

We expect to continue to invest in our businesses and to invest further as we expand our lab business for cannabis testing to other jurisdictions.

 

Marketing, Sales and Support

 

We use a range of communication platforms to reach our target customers. The goal of the marketing strategy is to position us as the leading testing company in the botanical, nutraceutical, and cannabis industries in the country. Our marketing efforts include digital/online, industry conferences and affiliations, media outreach, direct response and public relations. We believe that these efforts have the ability to deliver our brand message in a powerful way to maximize audience reach.

 

Seasonality

 

Our businesses are not subject to seasonality.

 

 

Insurance

 

We maintain property, business interruption and casualty insurance.

 

Employees

 

As of September 30, 2019, we had eighteen employees. None of our employees are members of a trade union. We believe that we maintain good relationships with our employees, and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.

 

Corporate Information

 

Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our website is located at http://www.digipath.com. The content on our website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Report.

 

ITEM 1A. Risk Factors

 

The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.

 

An investment in the Company is highly speculative in nature and involves an extremely high degree of risk.

 

We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations. We have a limited operating history. Our operations are subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

 

Our auditor has expressed substantial doubt about our ability to continue as a going concern. We may be unable to obtain additional capital required to implement our business plan. As a result of recurring net losses and insufficient cash reserves, our independent certified public accountant has added a paragraph to its report on our financial statements for the year ended September 30, 2019 questioning our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.

 

Our failure to manage growth effectively could impair our business. Our business strategy envisions a period of rapid growth that may put a strain on our administrative, operational resources and funding requirements. Our ability to effectively manage growth will require us to continue to expand the capabilities of our operational and management systems and to attract, train, manage and retain qualified personnel. There can be no assurance that we will be able to do so, particularly if losses continue and we are unable to obtain sufficient financing. If we are unable to successfully manage growth, our business, prospects, financial condition, and results of operations could be adversely affected.

 

 

Our plans are dependent upon key individuals and the ability to attract qualified personnel. In order to execute our business plan, we will be dependent on upon our executive officers and directors, as well as other key personnel. The loss of any of the foregoing individuals could have a material adverse effect upon our business prospects. Moreover our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate and retain such qualified personnel in the future, our business, operating results, and financial condition could be materially adversely affected. We may also depend on third party contractors and other partners, to assist with the execution of our business plan. There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with such third parties. The failure to succeed in these endeavors would have a material adverse effect on our ability to consummate our business plans.

 

Risks Related To Cannabis Related Businesses

 

Our business is dependent on state laws pertaining to the cannabis industry. As of December 25, 2019, thirty-three states and the District of Columbia allow its citizens to use medical cannabis. Additionally, eleven states and the District of Columbia have legalized cannabis for adult recreational use, and additional recreational measures are expected to be pursued by other states in the future. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business.

 

Cannabis remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our business. Despite the development of a cannabis industry legal under state laws, state laws legalizing medicinal and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. While the Obama Administration’s Department of Justice adopted a policy (known as the Cole Memorandum) that effectively stated that it was not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis, on January 4, 2018, the United States Attorney General rescinded the Cole Memorandum. The Federal government’s enforcement of Federal laws could cause significant financial damage to us and our shareholders.

 

The loss or temporary suspension of one or more of our licenses could significantly reduce our revenues. Our ability to operate our cannabis testing lab is dependent upon maintaining licenses issued by state and local regulators in Nevada. Our cannabis testing and business licenses were briefly suspended by Nevada regulators on January 19, 2018 and were reinstated on January 31, 2018. This significantly affected our financial results for the second and third fiscal quarters of 2018. In order to retain our licenses, we are required to comply with ongoing compliance and reporting requirements and ongoing regulation and oversight by governmental authorities. Any failure to comply with any such regulatory requirements or any failure to maintain any required licenses would have a material adverse effect on our business, financial condition, results of operation and, in the extreme case, require us to discontinue operations.

 

As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business. Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

 

Laws and regulations affecting the cannabis and marijuana industries are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us. Local, state and federal cannabis laws and regulations are constantly changing and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Any change in law or interpretation could have a material adverse effect on our business, financial condition, and results of operations.

 

 

Federal enforcement practices could change with respect to services providers to participants in the cannabis industry, which could adversely impact us. If the federal government were to change its practices, or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products. It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

Expansion by well-established laboratory testing companies into the cannabis industry could prevent us from realizing anticipated growth in customers and revenues. Traditional laboratory testing companies may expand their businesses into cannabis testing. If they decided to expand into cannabis testing, this could hurt the growth of our business and cause our revenues to be lower than we expect.

 

Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities. Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors and officers insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. We currently have adequate coverage, however, there are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

 

Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate. Despite rules issued by the United States Department of the Treasury mitigating the risk to banks that do business with cannabis companies permitted under state law, as well as guidance from the United States Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry. Our prior bank at which we maintained deposit accounts forced us to close our accounts. While after much difficulty we were recently able find a replacement banking institution, there can be no assurance that we will able to maintain this banking relationship. Since the use of cannabis remains illegal under Federal law, there remains a compelling argument that banks may be in violation of Federal law when accepting for deposit, funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry, including us, continue to have trouble establishing and maintain banking relationships. An inability to open and maintain bank accounts may make it difficult for us and our customers to do business. In addition, our inability to maintain a bank account previously resulted in our holding large sums of cash. Although we store our cash in a secure safe, holding large sums of cash exposes us to a greater risk of theft.

 

Risks Related To Our Common Stock

 

Our operating results may fluctuate causing volatility in our stock price. Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. The following factors may affect our operating results causing volatility in our stock price:

 

	●	Our ability to execute our business plan, compete effectively and attract customers;
	●	Our ability to respond effectively to a rapidly evolving regulatory and competitive landscape;
	●	The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure;
	●	Our ability to obtain working capital financing;
	●	Our ability to attract, motivate and retain top-quality employees;
	●	Investors’ general perception of us; and
	●	General economic conditions and those economic conditions specific to cannabis industry.

 

Trading in our common stock has been limited, there is no significant trading market for our common stock, and purchasers of our common stock may be unable to sell their shares. Our common stock is currently eligible for quotation on the OTCQB and OTCBB, however trading to date has been limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange, including the Nasdaq Stock Market. The OTCQB and OTCBB are often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.

 

 

Applicable sec rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price our common stock. Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. Penny stocks generally are equity securities with a per share price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, of our common stock and reducing the liquidity of an investment in our common stock.

 

We have outstanding shares of preferred stock with rights and preferences superior to those of our common stock. The issued and outstanding shares of Series A Cumulative Convertible Preferred Stock grant the holders of such preferred stock liquidation rights that are superior to those held by the holders of our common stock.

 

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock. We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock depends on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

ITEM 2. Properties

 

Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our leased premises are 6,000 square feet and are utilized for corporate business offices and a cannabis testing lab. Our premises are subject to a lease agreement expiring June 14, 2021. Our anticipated future lease commitments on a calendar year basis, including common area maintenance, are as follows:

 

2019		$	49,726
2020			151,283
2021			50,102
Total		$	251,111

 

We believe that our current facilities are adequate for our current needs. We intend to secure new facilities or expand existing facilities as necessary to support future growth. We believe that suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.

 

ITEM 3. Legal Proceedings

 

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.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Shares of our common stock trade on the over-the-counter market and are quoted on the OTCBB and OTCQB under the symbol “DIGP”. As of December 20, 2019, the closing price of our common stock on the OTCQB was $0.10.

 

The following table sets forth, for the fiscal quarters indicated, the high and low bid information for our common stock, as reported on the OTCQB. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

		High				Low
Fiscal Year Ended September 30, 2019
First Quarter		$	0.17			$	0.08
Second Quarter		$	0.31			$	0.11
Third Quarter		$	0.22			$	0.12
Fourth Quarter		$	0.15			$	0.10
Fiscal Year Ended September 30, 2018
First Quarter		$	0.39			$	0.15
Second Quarter		$	0.59			$	0.16
Third Quarter		$	0.25			$	0.17
Fourth Quarter		$	0.20			$	0.14

 

As of December 20, 2019, there were approximately 116 shareholders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”. As of December 20, 2019, there were 48,361,433 shares of common stock outstanding on record.

 

Dividends

 

We have not declared or paid any dividends on our common stock since our inception and do not anticipate paying dividends for the foreseeable future. The payment of dividends is subject to the discretion of our board of directors and depends, among other things, upon our earnings, our capital requirements, our financial condition, and other relevant factors. We intend to reinvest any earnings in the development and expansion of our business. Any cash dividends in the future to common shareholders will be payable when, as and if declared by our board of directors, based upon the board’s assessment of our financial condition and performance, earnings, need for funds, capital requirements, prior claims of preferred stock to the extent issued and outstanding, and other factors, including income tax consequences, restrictions and applicable laws. There can be no assurance, therefore, that any dividends on our common stock will ever be paid.

 

Equity Compensation Plan Information

 

Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders (1)			6,085,000			$	0.1320				5,415,000
Equity compensation plans not approved by security holders (2)			659,800				0.1901				N/A
Total			6,744,800			$	0.1377				5,415,000

 

⁽¹⁾ Represents awards under our 2012 Stock Incentive Plan which was initially adopted with shareholder approval, and amended on June 21, 2016 without shareholder approval (as amended, the “2012 Incentive Plan”). Below is a brief description of the material terms of the 2012 Incentive Plan and the awards that may be granted thereunder.

 

 

⁽²⁾ Consists of warrants issued to consultants of the Company in consideration of services with exercise prices of $0.1901 per share. For additional details see Note 11 to the accompanying financial statements.

 

2012 Incentive Plan

 

Effective Date and Expiration. The 2012 Incentive Plan, as amended, became effective on March 5, 2012, and will terminate on March 5, 2022, unless it is terminated earlier by our board of directors. No award may be made under the Incentive Plan after its expiration date, but awards made prior thereto may extend beyond that date.

 

Share Authorization. The maximum aggregate number of Shares which may be issued pursuant to awards granted under the 2012 Incentive Plan is Eleven Million Five Hundred Thousand (11,500,000) shares. Prior to its amendment in June 2016, Three Million shares had been authorized for issuance under the 2012 Plan.

 

General; Types of Awards. The 2012 Incentive Plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights (“SARs”) and restricted stock units (rights to receive, in cash or stock, the market value of one share of our commons stock). Incentive stock options (“ISOs”) may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to officers, employees, non-employee directors and consultants.

 

Administration. The 2012 Incentive Plan will be administered by our board of directors or a committee of our board of directors (the “Administrator”) as provided in the 2012 Incentive Plan. The Administrator will have the authority to select the eligible participants to whom awards will be granted, to determine the types of awards and the number of shares covered and to set the terms, conditions and provisions of such awards, to cancel or suspend awards under certain conditions, and to accelerate the exercisability of awards. The Administrator will be authorized to interpret the 2012 Incentive Plan, to establish, amend, and rescind any rules and regulations relating to the 2012 Incentive Plan, to determine the terms of agreements entered into with recipients under the 2012 Incentive Plan, and to make all other determinations that may be necessary or advisable for the administration of the 2012 Incentive Plan.

 

Eligibility. Options and other awards may be granted under the 2012 Incentive Plan to directors, officers, employees and consultants of our company and any of our subsidiaries, provided that the services of such consultants are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for our securities. At the date of this prospectus, all of our officers, directors and employees would have been eligible to receive awards under the 2012 Incentive Plan.

 

Stock Options. The exercise price per share of our common stock purchasable upon exercise of any stock option or SAR will be determined by the Administrator, but cannot in any event be less than 100% of the fair market value of our common stock on the date the award is granted. The Administrator will determine the term of each stock option or SAR (subject to a maximum term of 10 years) and each option or SAR will be exercisable pursuant to a vesting schedule determined by the Administrator. The grants and the terms of ISOs will be restricted to the extent required for qualification as ISOs by the U.S. Internal Revenue Code of 1986, as amended. Subject to approval of the Administrator, options or SARs may be exercised by payment of the exercise price in cash, shares of common stock or pursuant to a “cashless exercise” through a broker-dealer under an arrangement approved by the Administrator. The Administrator may require the grantee to pay to us any applicable withholding taxes that we are required to withhold with respect to the grant or exercise of any option. The withholding tax may be paid in cash or, subject to applicable law, the Administrator may permit the grantee to satisfy these obligations by the withholding or delivery of shares of our common stock. We may withhold from any shares of our common stock that may be issued pursuant to an option or from any cash amounts otherwise due from us to the recipient of the option an amount equal to such taxes.

 

Restricted Stock. Restricted shares may be sold or awarded for consideration determined by the Administrator, including cash, full-recourse promissory notes, as well as past and future services. Any award of restricted shares will be subject to a vesting schedule determined by the Administrator. Any restricted shares that are not vested will be subject to rights of repurchase, rights of first refusal or other restrictions as determined by the Administrator. In general, holders of restricted shares will have the same voting, dividend and other rights as our other stockholders.

 

Adjustments upon Changes in Capitalization. In the event of any change affecting shares of our common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distribution to stockholders other than cash dividends, the Administrator will make substitutions or adjustments in the aggregate number of shares that may be distributed under the 2012 Incentive Plan, and in the number and types of shares subject to, and the exercise prices under, outstanding awards granted under the 2012 Incentive Plan, in accordance with Section 10 and other provisions of the 2012 Incentive Plan.

 

 

Assignment. Unless otherwise permitted by the 2012 Incentive Plan and approved by the Administrator as permitted by the 2012 Incentive Plan, no award will be assignable or otherwise transferable by the grantee other than by will or the laws of descent and distribution and, during the grantee’s lifetime, an award may be exercised only by the grantee.

 

Amendment. Our board of directors may amend the 2012 Incentive Plan in any and all respects without stockholder approval, except as such stockholder approval may be required under applicable law or pursuant to the listing requirements of any national market system or securities exchange on which our equity securities may be listed or quoted.

 

Recent Sales of Unregistered Securities

 

The following issuances of our securities during the three month period ended September 30, 2019 were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited investors, familiar with our operations, and there was no general solicitation.

 

On September 25, 2019, we issued 58,824 shares of common stock to Todd Denkin for services he had rendered as our President and Chief Executive Officer.

 

On September 25, 2019, we issued 147,059 shares of common stock to Todd Peterson for his services rendered as our Chief Financial Officer.

 

ITEM 6. Selected Financial Data

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended September 30, 2019 and 2018. The discussion and analysis that follows should be read together with the section entitled “Forward Looking Statements” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K.

 

Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us 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, and brings unbiased cannabis news coverage to the cannabis industry. Our business units are described below.

 

		Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
		GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from drug-type cannabis.

 

Critical Accounting Policies

 

The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions.

 

Basis of Accounting

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. Intercompany accounts and transactions have been eliminated. All references to GAAP are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

Segment Reporting

 

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has two reportable segments.

 

 

Fair Value of Financial Instruments

 

The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined 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.

 

The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

 

Fixed Assets

 

Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:

 

Software	3 years
Office equipment	5 years
Furniture and fixtures	5 years
Lab equipment	7 years
Leasehold improvements	Term of lease

 

Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.

 

Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.

 

Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

 

Revenue Recognition

 

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

 

There was no impact on the Company’s financial statements from the adoption of ASC 606 for the years ended September 30, 2019 or 2018.

 

 

Our 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.

 

Advertising Costs

 

The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $221,980 and $108,295 for the years ended September 30, 2019 and 2018, respectively.

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2019 and 2018, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

 

Stock-Based Compensation

 

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

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

Uncertain Tax Positions

 

In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

Results of Operations

 

Our cannabis testing lab operations have steadily increased as the Nevada cannabis market has begun to mature. The following table shows operating results for the years ended September 30, 2019 and 2018.

 

		Years Ended September 30,								Increase /
		2019				2018				(Decrease)
Revenues		$	2,552,600			$	2,839,916			$	(287,316	)
Cost of sales			1,712,788				2,069,837				(357,049	)
Gross profit			839,812				770,079				69,733
Operating expenses:
General and administrative			1,673,785				2,056,592				(382,807	)
Professional fees			878,525				489,536				388,989
Bad debts expense			130,640				(17,280	)			147,920
Total operating expenses:			2,682,950				2,528,848				154,102
Operating loss			(1,843,138	)			(1,758,769	)			84,369
Total other income (expense)			37,806				105,112				(67,306	)
Net loss		$	(1,805,332	)		$	(1,653,657	)		$	151,675

 

Revenues

 

Aggregate revenues for the year ended September 30, 2019 were $2,552,600, compared to revenues of $2,839,916 during the year ended September 30, 2018, a decrease of $287,316, or 10%. The decrease in revenue was due to a spike in revenues in the comparative fiscal period ending September 30, 2018 due to the temporary suspension of two of our competitors by Nevada regulators in January 2018.

 

Cost of Sales

 

Cost of sales for the year ended September 30, 2019 were $1,712,788, compared to $2,069,837 during the year ended September 30, 2018, a decrease of $357,049, or 17%. Cost of sales consists primarily of labor, depreciation and maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current year was primarily due to better pricing on our consumable supplies, and improved efficiencies with respect to our labor. Our gross margins of approximately 33%, increased during the year ended September 30, 2019, compared to gross margins of approximately 27% during the year ended September 30, 2018, which translated to $69,733 of increased gross profit. We intend to continue to automate processes through equipment enhancements to improve our margins.

 

General and Administrative Expenses

 

General and administrative expenses for the year ended September 30, 2019 were $1,673,785, compared to $2,056,592 during the year ended September 30, 2018, a decrease of $382,807, or 19%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included stock-based compensation paid to officers of $84,185 during the year ended September 30, 2019, compared to $604,950 during the year ended September 30, 2018, a decrease of $520,760, or 86%. General and administrative expenses decreased primarily due to decreased stock-based compensation to officers, offset by increased marketing and travel expenses during the current year.

 

Professional Fees

 

Professional fees for the year ended September 30, 2019 were $878,525, compared to $489,536 during the year ended September 30, 2018, an increase of $388,989, or 79%. Professional fees increased primarily due to increased business development and legal fees, and increased stock-based compensation paid to directors and consultants during the current period. Stock-based compensation was $436,470 during the year ended September 30, 2019, compared to $287,440 during the year ended September 30, 2018, an increase of $149,030, or 52%.

 

 

Bad Debt Expense (Recoveries)

 

Bad debt expense for the year ended September 30, 2019 was $130,640, compared to recoveries of $(17,280) during the year ended September 30, 2018, an increase of $147,920. Bad debts expense increased during the current year as our allowance for doubtful accounts increased, including an allowance of $95,000 for potentially uncollectible notes receivable. We have not yet realized any bad debts on our trade receivables. Our allowance for doubtful accounts on trade receivables was $50,540 and $14,900 at September 30, 2019 and 2018, respectively, or less than 2% and 1% of sales for the years ended September 30, 2019 and 2018, respectively.

 

Operating Loss

 

Operating loss for the year ended September 30, 2019 was $1,843,138, compared to $1,758,769 during the year ended September 30, 2018, an increase of $84,369, or 5%. Operating loss increased primarily due to an increased change in our allowance for doubtful accounts, as offset in part by increased gross profit and decreased stock-based compensation during the year ended September 30, 2019, compared to the year ended September 30, 2018.

 

Other Income (Expense)

 

Other income, on a net basis, for the year ended September 30, 2019 was $37,806, compared to other income of $105,112 during the year ended September 30, 2018, a decrease of $67,306. Other income during the year ended September 30, 2019, consisted of rental income of $83,400 on sublease rents and a $30,000 gain on settlement of a previously written off note receivable, as offset by $65,670 of interest expense and a loss on disposal of fixed assets of $9,924. Other income during the year ended September 30, 2018, consisted of rental income of $76,800 from subleased office space and $28,312 of restitution payments received from a former employee.

 

Net Loss

 

Net loss for the year ended September 30, 2019 was $1,805,332, compared to $1,653,657 during the year ended September 30, 2018, an increase of $151,675, or 9%. The increased net loss was primarily due to increased marketing costs and bad debts expense as described above, offset in part by our increased gross profits and decreased stock-based compensation.

 

Liquidity and Capital Resources

 

As of September 30, 2019, the Company had current assets of $629,319, comprising of cash of $323,739, accounts receivable of $179,256, other assets of $74,260, and deposits of $51,704. The Company’s current liabilities as of September 30, 2019 were $471,493, consisting of $136,612 of accounts payable, $134,881 of accrued expenses, and $200,000 of current maturities of convertible notes payable.

 

The following table summarizes our total current assets, liabilities and working capital at September 30, 2019 and 2018.

 

		September 30,
		2019				2018
Current Assets		$	629,319			$	442,098
Current Liabilities		$	471,493			$	384,627
Working Capital		$	157,826			$	57,471

 

The following table summarizes our cash flows during the years ended September 30, 2019 and 2018, respectively.

 

		Years Ended
		September 30,
		2019				2018
Net cash used in operating activities		$	(1,042,213	)		$	(163,405	)
Net cash used in investing activities			(135,075	)			(207,353	)
Net cash provided by financing activities			1,325,000				368,608
Net change in cash		$	147,712			$	(2,150	)

 

 

Net Cash Used in Operating Activities

 

The increase in funds used in operating activities for the year ended September 30, 2019, compared to the year ended September 30, 2018, was primarily attributable to our increased net loss, as we didn’t benefit from the decreased competition from the suspension of two competing cannabis testing labs in the current period, as we did in the prior period.

 

Net Cash Used in Investing Activities

 

The decrease in funds used in investing activities for the year ended September 30, 2019, compared to the year ended September 30, 2018, was due primarily to investments made for cannabis testing equipment in the prior year that were not necessary in the current year, in addition to the advancement of $95,000 of short-term loans, as offset by $5,032 of proceeds received on the sale of fixed assets during the current year.

 

Net Cash Provided by Financing Activities

 

The increase in funds provided by financing activities for the year ended September 30, 2019, compared to the year ended September 30, 2018, was due to increased sales of our securities through private placement offerings, including $700,000 of proceeds from the sale of convertible notes, in the year ended September 30, 2019.

 

Satisfaction of our Cash Obligations for the Next 12 Months

 

As of September 30, 2019, our balance of cash on hand was $323,739. We do not currently have sufficient funds to fund our operations at their current levels for the next twelve months. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to continue to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.

 

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.

 

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

 

ITEM 8. Financial Statements and Supplementary Data

 

DIGIPATH, INC. & SUBSIDIARIES

 

FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED SEPTEMBER 30, 2019 AND 2018

 

TABLE OF CONTENTS

 

	Page
Report of Independent Registered Public Accounting Firm, M&K CPAS, PLLC	F-1
Consolidated Balance Sheets as of September 30, 2019 and 2018	F-2
Consolidated Statements of Operations for the years ended September 30, 2019 and 2018	F-3
Consolidated Statement of Stockholders’ Equity for the years ended September 30, 2019 and 2018	F-4
Consolidated Statements of Cash Flows for the years ended September 30, 2019 and 2018	F-5
Notes to Consolidated Financial Statements	F-6

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Digipath, Inc.,

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Digipath, Inc. (“the Company”) as of September 30, 2019 and 2018, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended September 30, 2019, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses from operations and insufficient working capital, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ M&K CPAS, PLLC

We have served as the Company’s auditor since 2017.

Houston, TX

December 30, 2019

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30,				September 30,
		2019				2018
Assets
Current assets:
Cash		$	323,739			$	176,027
Accounts receivable, net			179,256				167,734
Other current assets			74,620				72,690
Deposits			51,704				25,647
Total current assets			629,319				442,098
Fixed assets, net			726,614				957,108
Total Assets		$	1,355,933			$	1,399,206
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	136,612			$	325,864
Accrued expenses			134,881				58,238
Deferred revenues			-				525
Current maturities of convertible notes payable			200,000				-
Total current liabilities			471,493				384,627
Convertible notes payable, net of discounts of $41,426 and $-0- at September 30, 2019 and 2018, respectively			458,574				-
Total Liabilities			930,067				384,627
Stockholders’ Equity:
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 and 1,425,942 shares issued and outstanding at September 30, 2019 and 2018, respectively			1,326				1,426
Common stock, $0.001 par value, 250,000,000 and 90,000,000 shares authorized; 48,361,433 and 42,245,364 shares issued and outstanding at September 30, 2019 and 2018, respectively			48,361				42,245
Additional paid-in capital			15,331,839				14,121,236
Accumulated (deficit)			(14,955,660	)			(13,150,328	)
Total Stockholders’ Equity			425,866				1,014,579
Total Liabilities and Stockholders’ Equity		$	1,355,933			$	1,399,206

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Years Ended
		September 30,
		2019				2018
Revenues		$	2,552,600			$	2,839,916
Cost of sales			1,712,788				2,069,837
Gross profit			839,812				770,079
Operating expenses:
General and administrative			1,673,785				2,056,592
Professional fees			878,525				489,536
Bad debts expense (recoveries)			130,640				(17,280	)
Total operating expenses			2,682,950				2,528,848
Operating loss			(1,843,138	)			(1,758,769	)
Other income:
Other income			113,400				105,112
Loss on disposal of fixed assets			(9,924	)			-
Interest expense			(65,670	)			-
Total other income			37,806				105,112
Net loss		$	(1,805,332	)		$	(1,653,657	)
Weighted average number of common shares outstanding - basic and fully diluted			46,178,953				39,079,547
Net loss per share - basic and fully diluted		$	(0.04	)		$	(0.04	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

		Series A Convertible																Additional								Total
		Preferred Stock								Common Stock								Paid-in				Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Capital				(Deficit)				Equity
Balance, September 30, 2017			1,897,942			$	1,898				35,027,118			$	35,027			$	12,866,984			$	(11,496,671	)		$	1,407,238
Units of common stock and warrants sold for cash			-				-				2,158,934				2,159				366,449				-				368,608
Common stock issued for services			-				-				2,326,855				2,327				450,210				-				452,537
Common stock options issued for services			-				-				-				-				439,853				-				439,853
Conversion of preferred stock to common stock			(472,000	)			(472	)			2,360,000				2,360				(1,888	)			-				-
Cashless exercise of options and warrants			-				-				372,457				372				(372	)			-				-
Net loss for the year ended September 30, 2018			-				-				-				-				-				(1,653,657	)			(1,653,657	)
Balance, September 30, 2018			1,425,942			$	1,426				42,245,364			$	42,245			$	14,121,236			$	(13,150,328	)		$	1,014,579
Common stock sold for cash			-				-				3,125,000				3,125				621,875				-				625,000
Common stock issued for services			-				-				2,016,069				2,016				331,701				-				333,717
Common stock issued in exchange for termination of options			-				-				475,000				475				(475	)			-				-
Common stock options issued for services			-				-				-				-				186,938				-				186,938
Conversion of preferred stock to common stock			(100,000	)			(100	)			500,000				500				(400	)			-				-
Beneficial conversion feature of convertible debts			-				-				-				-				70,964				-				70,964
Net loss for the year ended September 30, 2019			-				-				-				-				-				(1,805,332	)			(1,805,332	)
Balance, September 30, 2019			1,325,942			$	1,326				48,361,433			$	48,361			$	15,331,839			$	(14,955,660	)		$	425,866

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Years Ended
		September 30,
		2019				2018
Cash flows from operating activities
Net loss		$	(1,805,332	)		$	(1,653,657	)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in allowance for doubtful accounts			130,640				(17,280	)
Depreciation and amortization expense			260,645				277,294
Loss on disposal of fixed assets			9,924				-
Stock issued for services			333,717				452,537
Options and warrants granted for services			186,938				439,853
Amortization of debt discounts			29,538				-
Decrease (increase) in assets:
Accounts receivable			(47,162	)			116,159
Other current assets			(1,930	)			1,060
Deposits			(26,057	)			-
Increase (decrease) in liabilities:
Accounts payable			(189,252	)			203,870
Accrued expenses			76,643				16,234
Deferred revenues			(525	)			525
Net cash used in operating activities			(1,042,213	)			(163,405	)
Cash flows from investing activities
Proceeds received on disposal of fixed assets			5,032				-
Purchase of fixed assets			(45,107	)			(207,353	)
Advance of note receivable			(95,000	)			-
Net cash used in investing activities			(135,075	)			(207,353	)
Cash flows from financing activities
Proceeds from convertible notes			700,000				-
Proceeds from sale of common stock			625,000				368,608
Net cash provided by financing activities			1,325,000				368,608
Net increase (decrease) in cash			147,712				(2,150	)
Cash - beginning			176,027				178,177
Cash - ending		$	323,739			$	176,027
Supplemental disclosures:
Interest paid		$	4,066			$	-
Income taxes paid		$	-			$	-
Non-cash investing and financing activities:
Value of preferred stock converted to common stock		$	100,000			$	472,000
Beneficial conversion feature of convertible notes payable		$	70,964			$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

DIGIPATH, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Nature of Business and Significant Accounting Policies

 

Nature of Business

 

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 business units are described below.

 

		Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
		GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from drug-type cannabis.

 

Basis of Accounting

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (SEC). Intercompany accounts and transactions have been eliminated. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

Principles of Consolidation

 

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

 

		Jurisdiction of
Name of Entity(1)		Incorporation		Relationship
Digipath, Inc.(2)		Nevada		Parent
Digipath Labs, Inc.		Nevada		Subsidiary
TNM News, Inc.		Nevada		Subsidiary
GroSciences, Inc.(3)		Colorado		Subsidiary
Digipath Labs S.A.S. (4)		Colombia		Subsidiary

 

(1)		All entities are in the form of a corporation.
(2)		Holding company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company.
(3)		Commenced operations during the first fiscal quarter of 2019, but has not incurred income to date.
(4)		Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations.

 

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

 

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

 

Reclassifications

 

Prior period stock-based compensation of $604,950, consisting of $230,328 of stock awards and $374,622 related to the amortization of stock options, paid to officers has been reclassified from professional fees to general and administrative expense to conform to the current period presentation. This reclassification had no impact on net earnings, financial position or cash flows.

 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

Segment Reporting

 

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

 

Fair Value of Financial Instruments

 

The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined 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.

 

The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

 

Accounts Receivable

 

Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company had an allowance for doubtful accounts of $50,540 and $14,900 as of September 30, 2019 and 2018, respectively.

 

Fixed Assets

 

Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:

 

Software	3 years
Office equipment	5 years
Furniture and fixtures	5 years
Lab equipment	7 years
Leasehold improvements	Term of lease

 

Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which have extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.

 

Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.

 

Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

 

 

Revenue Recognition

 

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

 

There was no impact on the Company’s financial statements from the adoption of ASC 606 for the years ended September 30, 2019 or 2018.

 

Our 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.

 

Significant Concentrations

 

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash deposits and accounts receivable. Through delayed payment terms, we at times grant credit, usually without collateral, to our customers for up to 30 days. Consequently, we are subject to potential credit risk related to changes in business and economic factors. However, we are entitled to payment for work performed and generally have certain lien rights in that work. Further, management believes that its billing and collection policies are adequate to manage potential credit risk. There can be no assurance, however, that we will not be adversely affected by credit risks we face.

 

One customer accounted for 15% and 7% of our sales for the years ended September 30, 2019 and 2018, respectively. Accounts receivable owed to us by that customer was $32,600, or 14% of our outstanding accounts receivable for the year ended September 30, 2019. All of their outstanding accounts receivable were less than 30 days outstanding.

 

Advertising Costs

 

The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $221,980 and $108,295 for the years ended September 30, 2019 and 2018, respectively.

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2019 and 2018, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

 

Stock-Based Compensation

 

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

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

Uncertain Tax Positions

 

In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modify the disclosure requirements of Topic 820. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU 2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach, without adjusting the comparative periods presented. The Company adopted ASU 2016-02 as of October 1, 2019, which will establish a right-of-use asset and lease liability on the Company’s balance sheet in amounts not yet determined.

 

There are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.

 

Note 2 – Going Concern

 

As shown in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of ($14,955,660), and as of September 30, 2019, the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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

 

Note 3 – Related Party Transactions

 

Stock Issued to Officers for Services

 

We issued an aggregate total of 176,020 shares of common stock to our former Chief Executive Officer, Todd Denkin, in quarterly increments for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $24,000 based on the closing price of the Company’s common stock on the dates of grant, and was expensed over the requisite service periods.

 

We issued an aggregate total of 440,049 shares of common stock to our Chief Financial Officer, Todd Peterson, in quarterly increments for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the dates of grant, and was expensed over the requisite service periods.

 

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

 

 

Options Issued to Officers and Directors for Services

 

On September 25, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Executive Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of September 25, 2020, September 25, 2021, and September 25, 2022, and are exercisable for a ten-year period at an exercise price of $0.102 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 111% and a call option value of $0.1017, was $40,470. The options are being expensed over the vesting period, resulting in $185 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $40,285 of unamortized expenses are expected to be expensed over the vesting period.

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Science Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $49,628 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $1,306 of unamortized expenses are expected to be expensed over the vesting period.

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to Bruce Raben, one of our directors. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $49,628 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $1,306 of unamortized expenses are expected to be expensed over the vesting period.

 

Re-Priced Options Issued to Officers and Directors for Services

 

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

 

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

 

Note 4 – Fair Value of Financial Instruments

 

Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

 

The Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

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

 

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

 

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

 

 

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2019 and 2018, respectively:

 

		Fair Value Measurements at September 30, 2019
		Level 1				Level 2				Level 3
Assets
Cash		$	323,739			$	-			$	-
Total assets			323,739				-				-
Liabilities
Convertible notes payable, net of discounts of $41,426			-				-				658,574
Total liabilities			-				-				658,574
		$	323,739			$	-			$	(658,574	)

 

		Fair Value Measurements at September 30, 2018
		Level 1				Level 2				Level 3
Assets
Cash		$	176,027			$	-			$	-
Total assets			176,027				-				-
Liabilities
None			-				-				-
Total liabilities			-				-				-
		$	176,027			$	-			$	-

 

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

 

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the years ended September 30, 2019 or 2018.

 

Note 5 – Accounts Receivable

 

Accounts receivable was $179,256 and $167,734 at September 30, 2019 and 2018, respectively, net of allowance for uncollectible accounts of $50,540 and $14,900 at September 30, 2019 and 2018, respectively. Bad debts expense (recoveries) resulting from our change in allowance was $130,640 and $(17,280) for the years ended September 30, 2019 and 2018, respectively.

 

Note 6 – Note Receivable

 

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

 

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.

 

Note 7 – Fixed Assets

 

Fixed assets consist of the following at September 30, 2019 and 2018:

 

		For the Years Ended
		September 30,
		2019				2018
Software		$	123,492			$	123,492
Office equipment			55,061				54,877
Furniture and fixtures			29,115				28,486
Lab equipment			1,118,942				1,110,930
Leasehold improvements			494,117				489,147
			1,820,727				1,806,932
Less: accumulated depreciation			(1,094,113	)			(849,824	)
Total		$	726,614			$	957,108

 

 

On various dates from July 1, 2019 through September 30, 2019, we disposed of fixed assets with an aggregate net book value of $14,956. The fixed assets consisted of office equipment with a historical cost basis of $2,868 and lab equipment with a historical cost basis of $28,444, and accumulated depreciation of $2,148 and $14,208, respectively. Total proceeds of $5,032 were received, resulting in a loss on disposal of $9,924.

 

Depreciation and amortization expense totaled $260,645 and $277,294 for the years ended September 30, 2019 and 2018, respectively.

 

Note 8 – Convertible Notes Payable

 

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

 

		September 30,				September 30,
		2019				2018
On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on September 23, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.		$	200,000			$	-
On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the nine months ended June 30, 2019.			350,000				-
On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.			150,000				-
Total convertible notes payable			700,000				-
Less: unamortized debt discounts			(41,426	)			-
			658,574				-
Less: current maturities			(200,000	)			-
Convertible notes payable		$	458,574			$	-

 

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

 

The aforementioned accounting treatment resulted in a total debt discount equal to $70,964 during the year ended September 30, 2019. The discount is amortized on a straight line basis from the dates of issuance until the earlier of the stated redemption date of the debt, as noted above, or the actual settlement date. During the year ended September 30, 2019, the Company recorded debt amortization expense in the amount of $29,538, attributed to the aforementioned debt discount.

 

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

 

The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $36,132 for the year ended September 30, 2019.

 

 

Note 9 – Stockholders’ Equity

 

Convertible Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares available for designation from time to time by the Board as set forth below. As of September 30, 2019, there were 1,325,942 shares of Series A Preferred issued and outstanding. The Board of Directors is authorized to determine any number of series into which the undesignated shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Each share of Series A Preferred is currently convertible into five shares of common stock.

 

The conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,325,942 shares of Series A Preferred outstanding at September 30, 2019 are convertible into 6,629,710 shares of the common stock of the Company. No holder is permitted to convert its shares of Series A Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.

 

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 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.

 

Preferred Stock Conversions for the Year Ended September 30, 2019

 

On December 31, 2018, a total of 100,000 shares of Series A Preferred were converted into 500,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

 

Preferred Stock Conversions for the Year Ended September 30, 2018

 

For the year ended September 30, 2018, a total of 472,000 shares of Series A Preferred were converted into 2,360,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.

 

Common Stock

 

Common stock consists of $0.001 par value, 250,000,000 shares authorized, of which 48,361,433 shares were issued and outstanding as of September 30, 2019.

 

Common Stock Sales for the Year Ended September 30, 2019

 

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

 

 

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

 

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

 

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

 

Common Stock Sales for the Year Ended September 30, 2018

 

On July 11, 2018, the Company sold 66.67 units, consisting of 666,667 shares of its common stock and warrants to purchase 333,334 shares of common stock, exercisable at $0.30 per share over a thirty-six month period, in exchange for total proceeds of $100,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.

 

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

 

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

 

On April 10, 2018, the Company sold 27.78 units, consisting of an aggregate of 277,778 shares of its common stock and warrants to purchase 138,889 shares of common stock, exercisable at $0.30 per share over a thirty-six month period, in exchange for total proceeds of $50,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.

 

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

 

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

 

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

 

Exercise of Options for the Year Ended September 30, 2018

 

On January 3, 2018, two option holders exercised options to purchase a total of 500,000 shares of common stock at $0.181 per share on a cashless basis, resulting in the issuance of 317,172 shares of common stock.

 

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

 

Exercise of Warrants for the Year Ended September 30, 2018

 

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

 

Additional Common Stock Issuances for the Year Ended September 30, 2019

 

On September 25, 2019, the Company issued 58,824 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On September 25, 2019, the Company issued 147,059 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On June 25, 2019, the Company issued 300,000 shares of common stock to a consultant for business development services to be performed from May 1, 2019 through October 31, 2019. The fair value of the common stock was $58,500 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

 

 

On June 25, 2019, the Company issued 41,667 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On June 25, 2019, the Company issued 104,167 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On May 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $8,030 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On April 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

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

 

On March 25, 2019, the Company issued 29,268 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2019, the Company issued 73,171 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $10,250 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On February 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $12,300 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

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

 

On December 25, 2018, the Company issued 46,261 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On December 25, 2018, the Company issued 115,652 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On December 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $19,455 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

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

 

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

 

 

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

 

Additional Common Stock Issuances for the Year Ended September 30, 2018

 

On September 25, 2018, the Company issued 39,344 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On September 25, 2018, the Company issued 98,361 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On September 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $22,875 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On September 12, 2018, the Company issued 193,424 shares of common stock to another consultant for business development services. The fair value of the common stock was $30,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On September 12, 2018, the Company issued 200,000 shares of common stock to Bruce Raben in connection with his appointment to our Board of Directors. The aggregate fair value of the common stock was $31,020 based on the closing price of the Company’s common stock on the date of grant, and is to be expensed over the requisite service period through September 30, 2019. A total of $1,458 was expensed during the year ended September 30, 2018, and as of September 30, 2018, a total of $29,562 of unamortized expenses are expected to be expensed during the fiscal year ended September 30, 2019.

 

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

 

On June 25, 2018, the Company issued 31,579 shares of common stock to its then President and COO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On June 25, 2018, the Company issued 78,947 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On June 25, 2018, the Company issued 131,579 shares of common stock to a consultant for business development services. The fair value of the common stock was $25,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On June 25, 2018, the Company issued 100,000 shares of common stock to another consultant for business development services. The fair value of the common stock was $19,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On March 26, 2018, the Company issued 207,852 shares of common stock to its then CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $45,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On March 26, 2018, the Company issued 55,427 shares of common stock to its then President and COO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $12,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On March 26, 2018, the Company issued 138,568 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $30,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

 

On March 26, 2018, the Company issued 69,284 shares of common stock to a consultant for business development services. The fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

On December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate fair value of the common stock was $78,828 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.

 

On December 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer for his service on our Board of Directors. The aggregate fair value of the common stock was $26,276 based on the closing price of the Company’s common stock on the date of grant, and was expensed in full.

 

On November 29, 2017, a total of 314,069 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $82,600 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on September 30, 2018.

 

Amortization of Stock-Based Compensation

 

A total of $29,562 and $1,458 of stock-based compensation expense was recognized during the years ended September 30, 2019 and 2018, respectively, as a result of the issuance of 200,000 shares of common stock to one of our directors, Bruce Raben, on September 12, 2018, as amortized over the requisite service period.

 

A total of $48,750 of stock-based compensation expense was recognized during the year ended September 30, 2019, as a result of the issuance of 300,000 shares of common stock to a consultant on June 25, 2019, as amortized over the requisite service period. As of September 30, 2019, a total of $9,750 of unamortized expenses are expected to be expensed during the remaining requisite service period.

 

A total of $186,938 and $439,853 of stock-based compensation expense was recognized from the amortization of options over their vesting period during the years ended September 30, 2019 and 2018, respectively.

 

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 6,085,000 shares of common stock were outstanding as of September 30, 2019.

 

Common Stock Option Issuances for the Year Ended September 30, 2019

 

On September 25, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Executive Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of September 25, 2020, September 25, 2021, and September 25, 2022, and are exercisable for a ten-year period at an exercise price of $0.102 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 111% and a call option value of $0.1017, was $40,470. The options are being expensed over the vesting period, resulting in $185 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $40,285 of unamortized expenses are expected to be expensed over the vesting period.

 

On September 25, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to a consultant. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of September 25, 2020, September 25, 2021, and September 25, 2022, and are exercisable for a ten-year period at an exercise price of $0.102 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 111% and a call option value of $0.1017, was $40,470. The options are being expensed over the vesting period, resulting in $185 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $40,285 of unamortized expenses are expected to be expensed over the vesting period.

 

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Science Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $49,628 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $1,306 of unamortized expenses are expected to be expensed over the vesting period.

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to Bruce Raben, one of our directors. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $49,628 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $1,306 of unamortized expenses are expected to be expensed over the vesting period.

 

On December 25, 2018, we granted fully vested options to purchase an aggregate of 345,000 shares of common stock as compensation for services to a total of fourteen of our employees. The options are exercisable over a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1017, was $35,078. The options are being expensed over the vesting period, resulting in $26,813 of stock-based compensation expense during the year ended September 30, 2019. As of September 30, 2019, a total of $8,265 of unamortized expenses are expected to be expensed over the vesting period.

 

Common Stock Option Issuances for the Year Ended September 30, 2018

 

On September 12, 2018, we granted options to purchase 200,000 shares of common stock as compensation for services to our Chief Science Officer pursuant to her appointment to the Company’s Board of Directors. The options vest over a one-year period, are exercisable over a ten-year period at an exercise price of $0.16 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1245, was $24,905. The options are being expensed over the vesting period, resulting in $23,735 and $1,170 of stock-based compensation expense during the years ended September 30, 2019 and 2018, respectively.

 

On December 22, 2017, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to our then President and COO. The options are exercisable over a ten-year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.2094, was $104,698. The options were expensed over the vesting period, resulting in $104,698 of stock-based compensation expense during the year ended September 30, 2018.

 

On November 29, 2017, we granted fully vested options to purchase 100,000 shares of common stock as compensation for services to our Chief Scientist. The options are exercisable over a ten-year period at an exercise price of $0.27 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.21, was $21,004. The options were expensed over the vesting period, resulting in $21,004 of stock-based compensation expense during the year ended September 30, 2018.

 

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

 

Common Stock Options Exchanged for Shares of Common Stock

 

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

 

 

Re-Priced Options Issued to Officers and Directors for Services

 

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

 

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

 

Common Stock Options Exercised for the Year Ended September 30, 2018

 

On January 3, 2018, two option holders exercised options to purchase a total of 500,000 shares of common stock at $0.181 per share on a cashless basis, resulting in the issuance of 317,172 shares of common stock.

 

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

 

Common Stock Options Cancelled or Expired for the Year Ended September 30, 2019

 

During the year ended September 30, 2019, options to purchase an aggregate total of 47,500 shares of common stock at a weighted average exercise price of $0.20 per share expired.

 

Common Stock Options Cancelled or Expired for the Year Ended September 30, 2018

 

During the year ended September 30, 2018, options to purchase an aggregate of 110,000 shares of common stock, exercisable over a ten-year period, at a weighted average exercise price of $0.25 per share expired.

 

During the year ended September 30, 2018, options to purchase an aggregate of 1,110,000 shares of common stock, exercisable over a three-year period, at a weighted average exercise price of $0.44 per share expired.

 

The following is a summary of information about the stock options outstanding at September 30, 2019.

 

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

$

0.102– $0.27

6,085,000

8.02 years

$

0.13

4,760,000

$

0.14

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:

 

		September 30,				September 30,
		2019				2018
Average risk-free interest rates			2.13	%			1.36	%
Average expected life (in years)			5.00				5.25
Volatility			109	%			112	%

 

The Black-Scholes option pricing model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company’s common stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its common stock options. During the years ended September 30, 2019 and September 30, 2018, there were no options granted with an exercise price below the fair value of the underlying stock at the grant date.

 

The weighted average fair value of options granted with exercise prices at the current fair value of the underlying stock during the year ended September 30, 2019 was approximately $0.12 per option.

 

 

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

 

						Weighted
						Average
		Number				Exercise
		of Shares				Price
Balance, September 30, 2017			9,290,000				0.23
Options issued			1,005,000				0.25
Options exercised			(537,500	)			(0.18	)
Options expired			(1,220,000	)			(0.42	)
Balance, September 30, 2018			8,537,500				0.20
Options issued			2,345,000				0.12
Options repurchased/expired			(4,797,500	)			(0.20	)
Balance, September 30, 2019			6,085,000			$	0.13
Exercisable, September 30, 2019			4,760,000			$	0.14

 

Amortization of Stock Options

 

A total of $186,938 and $439,853 of stock-based compensation expense was recognized from the amortization of options over their vesting period during the years ended September 30, 2019 and 2018, respectively.

 

As of September 30, 2019, these options in the aggregate had no intrinsic value as the per share market price of $0.11 of the Company’s common stock as of such date was less than the weighted-average exercise price of these options of $0.13.

 

Note 11 – Common Stock Warrants

 

We issued warrants in connection with private placements of our securities as set forth in Note 9 above.

 

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

 

On December 31, 2017, warrants to purchase 200,000 shares of common stock at $0.30 per share expired, and on December 30, 2017, warrants to purchase another 300,000 shares of common stock at $0.45 per share also expired.

 

The following is a summary of information about our warrants to purchase common stock outstanding at September 30, 2019 (including those issued to both investors and service providers).

 

Shares Underlying Warrants Outstanding

Shares Underlying Warrants Exercisable

Shares

Weighted Average

Weighted

Shares

Weighted

Range of

Underlying

Remaining

Average

Underlying

Average

Exercise

Warrants

Contractual

Exercise

Warrants

Exercise

Prices

Outstanding

Life

Price

Exercisable

Price

$

0.1901 – $0.30

3,417,126

1.73 years

$

0.25

3,417,126

$

0.25

 

The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:

 

		September 30,				September 30,
		2019				2018
Average risk-free interest rates			N/A				1.56	%
Average expected life (in years)			N/A				3.00
Volatility			N/A				110	%

 

No warrants were issued during the year ended September 30, 2019. The weighted average fair value of warrants granted with exercise prices at the current fair value of the underlying stock during the year ended September 30, 2018 was approximately $0.29 per warrant.

 

 

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

 

						Weighted
						Average
		Number				Exercise
		of Shares				Price
Balance, September 30, 2017			5,942,422			$	0.28
Warrants granted			1,079,468				0.29
Warrants exercised			(71,428	)			(0.26	)
Warrants expired			(500,000	)			(0.36	)
Balance, September 30, 2018			6,450,462				0.28
Warrants expired			(3,033,336	)			(0.30	)
Balance, September 30, 2019			3,417,126			$	0.25
Exercisable, September 30, 2019			3,417,126			$	0.25

 

Note 12 – Commitments and Contingencies

 

Lease Commitment

 

The Company leases space for its lab operations in Las Vegas, Nevada. Amounts of minimum future annual commitments on a calendar year basis, including common area maintenance fees, under non-cancelable operating leases are as follows:

 

2019		$	49,726
2020			151,283
2021			50,102
Total		$	251,111

 

Rent expense was $201,050 and $191,751 for the years ended September 30, 2019 and 2018, respectively.

 

Note 13 – Other Income

 

Other income for the years ended September 30, 2019 and 2018 consisted of the following:

 

		September 30,
		2019				2018
Settlement income on note receivable		$	30,000			$	-
Rental income on subleases			83,400				76,800
Restitution income			-				28,312
		$	113,400			$	105,112

 

Note 14 - Income Tax

 

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

 

For the years ended September 30, 2019 and 2018, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At September 30, 2019, the Company had approximately $9,142,000 of federal net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2031.

 

 

The effective income tax rate for the years ended September 30, 2019 and 2018 consisted of the following:

 

		September 30,
		2019				2018
Federal statutory income tax rate			21	%			21	%
State income taxes			-	%			-	%
Change in valuation allowance			(21	)%			(21	)%
Net effective income tax rate			-				-

 

The components of the Company’s deferred tax asset are as follows:

 

		September 30,
		2019				2018
Deferred tax assets:
Net operating loss carry forwards		$	1,919,820			$	1,676,325
Net deferred tax assets before valuation allowance		$	1,919,820			$	1,676,325
Less: Valuation allowance			(1,919,820	)			(1,676,325	)
Net deferred tax assets		$	-			$	-

 

Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at September 30, 2019 and 2018, respectively.

 

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

 

Note 15 – Subsequent Events

 

Equipment Purchase

 

On December 26, 2019, the Company closed borrowed $291,931 pursuant to a promissory note bearing interest at 5.75%, payable monthly over a five year term, to finance the purchase of lab testing equipment with a total purchase price of $368,733. The loan is secured by a lien on the purchased equipment.

 

Common Stock Issued for Services

 

On December 25, 2019, the Company issued 171,233 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

Management Changes

 

On December 19, 2019, Dr. Cindy Orser tendered her resignation as Chief Science Office, Laboratory Director and Board Member to be effective January 20, 2020.

 

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

ITEM 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018 (the “Evaluation Date”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management has conducted, with the participation of our Principal Executive Officer and our Principal Accounting Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of Evaluation Date. Management’s assessment of internal control over financial reporting was conducted using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013 Framework).

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we have not identified any material weaknesses in our internal control over financial reporting as of the Evaluation Date. We have thus concluded that our internal control over financial reporting was effective as of the Evaluation Date.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Changes in Internal Control over Financial Reporting

 

There have been no 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 fourth fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. Other Information

 

None.

 

 

PART III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

 

Set forth below are the present directors and executive officers of the Company. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.

 

Name		Age		Position
Kyle Remenda		36		CEO
Todd A. Peterson		50		CFO, Secretary
Cindy Orser		63		Director
Bruce Raben		66		Director
Dennis Hartmann		63		Director

 

Biographies

 

Set forth below are brief accounts of the business experience of each director and executive officer of the Company.

 

Kyle Remenda was appointed as our Chief Executive Officer on September 25, 2019. Mr. Remenda has served as the Chief Executive Officer of VSSL Enterprises Ltd. (“VSSL”) since its founding in December 2017. Since 2012, Mr. Remenda has also been the Chief Executive Officer of Remenda Solutions Ltd., a private company that provides risk mitigation, due diligence and government licensing services for commercial cannabis producers. Mr. Remenda was appointed our Chief Executive Officer pursuant to a binding letter of intent we entered into with VSSL, Mr. Remenda and Philippe Henry on September 25, 2019, pursuant to which we agreed to acquire all of VSSL’s outstanding shares of capital stock from Mr. Remenda and Mr. Henry for six million shares of our common stock and a cash payment of $200,000. We have not yet consummated this acquisition, which is subject to the satisfaction of various conditions to closing.

 

Todd Peterson, CPA, has been the chief financial officer of Digipath since June 19, 2015. Mr. Peterson had previously been the president of KSNE2 Enterprises, LLC, an accounting and consulting firm located in Las Vegas, Nevada specializing in publicly traded microcap companies, since August 2008. From February 2007 to August 2008, he was the senior accounting manager of Accuity Financial, an accounting firm located in Las Vegas, Nevada specializing in publicly traded microcap companies, Mr. Peterson was the audit manager of DeJoya Griffith and Company a PCAOB registered audit firm located in Las Vegas, Nevada providing audit and accounting services primarily to publicly traded microcap companies from November 2004 to February 2007, he was also the audit manager of Ocel, Heimer & Associates, Ltd., a regional audit firm located in Minneapolis, Minnesota from 1999 to 2004. Upon graduating from the University of St. Thomas with a Bachelor of Arts degree in accounting in 1997, Mr. Peterson worked as an accountant during 1998 for R.W. Ramsay & Associates, Ltd.

 

Dr. Cindy Orser was appointed to our Board of Directors on September 12, 2018. Dr. Orser has served as our Chief Science Officer since June 1, 2014. Since 2007, she has also been the President of Big Sky Biosystems, Inc., a consulting company through which Dr. Orser provides service to us and other clients. Dr. Orser holds a Ph.D. in Genetics, Plant Pathology from the University of California, Berkeley, and a B.S. in Botany and Philosophy from Montana State University-Bozeman. We believe that Dr. Orser’s experience and expertise in the cannabis testing industry qualify her to serve as our director.

 

Bruce Raben was appointed to our Board of Directors on September 12, 2018. Mr. Raben is the Managing Member of Hudson Capital Advisors BD, LLC, a registered broker dealer that he founded in 2004. Mr. Raben has been an investment banker, merchant banker and private investor for approximately 30 years. Starting in 1979 at Drexel Burnham Lambert, he worked on many leveraged buyouts and recapitalizations including Mattel Toys, SFN Co.’s, Magma Copper, Warnaco, Mellon Bank and John Fairfax. Mr. Raben then went on to co-found the Corporate Finance Department at Jeffries & Co. in 1990. Mr. Raben opened a west coast office for CIBC’s high yield finance and merchant banking activities in 1996. Mr. Raben received his A.B. from Vassar College in 1975 and his MBA from Columbia University in 1979. We believe that Mr. Raben’s investment banking and financial experience qualify him to serve as our director.

 

Dennis Hartmann was appointed to our Board of Directors on September 25, 2019. Mr. Hartmann had been an attorney engaged in private practice in the State of California for over 35 years. Mr. Hartmann holds a B.S. from the University of Alabama and a J.D. from the University of Texas School of Law. We believe that Mr. Hartmann’s legal experience qualifies him to serve as our director.

 

Family Relationships

 

None.

 

 

Board Committees and Audit Committee Financial Expert

 

We do not currently have a standing audit, nominating or compensation committee of the board of directors, or any committee performing similar functions. Our board of directors performs the functions of audit, nominating and compensation committees. As of the date of this prospectus, no member of our board of directors qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act.

 

Director Nominations

 

As of September 30, 2019, we did not affect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. We have not established formal procedures by which security holders may recommend nominees to the Company’s board of directors.

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of a registered class of the Company’s securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, executive officers and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. To our knowledge, based solely on the review of the copies of these forms furnished to us and representations that no other reports were required, the Company believes that all forms required to be filed under Section 16 of the Exchange Act for the year ended September 30, 2019 were filed timely, except that each of Todd Denkin and Todd Peterson filed two late Form 4 (each respect to a single transaction), and Kyle Remenda filed one late Form 4 subsequent to the year ended September 30, 2019 with respect to the issuance of an option to him on September 25, 2019.

 

Code of Ethics

 

We have adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our code of ethics may be obtained free of charge by contacting us at the address or telephone number listed on the cover page hereof.

 

ITEM 11. Executive Compensation

 

Summary Compensation Table

 

The following summary compensation table sets forth the aggregate compensation we paid or accrued during the fiscal years ended September 30, 2019 and September 30, 2018 to persons serving as our Chief Executive Officer and Chief Financial Officer during our year ended September 30, 2019 (our “Named Executive Officers”), who were our only executive officers during 2019.

 

Name and		Fiscal								Stock				Option
Financial Position		Year				Salary				Awards				Awards(8)				Total
Kyle Remenda,			2019			$	12,462			$	-			$	185	(2)		$	12,647
President and Chief Executive Officer			2018			$	-			$	-			$	-			$	-
Todd A. Peterson,			2019			$	99,301			$	60,000	(3)		$	-			$	159,301
Chief Financial Officer			2018			$	99,001			$	138,828	(4)		$	-			$	237,829
Todd Denkin,			2019			$	223,814			$	24,000	(5)		$	-			$	247,814
Former Chief Executive Officer			2018			$	205,042			$	24,000	(6)		$	197,776	(7)		$	426,818

 

(1)	Mr. Denkin was our Chief Executive Officer until his resignation on September 26, 2019. Mr. Denkin continued to consult for the Company for three months following his resignation at a rate of $6,000 per month.
(2)	Consists of options to purchase 500,000 shares of common stock exercisable at $0.102 per share over 10 years that vested immediately as to one-quarter of the shares, one year from the grant date as to one-quarter of the shares, two years from the grant date as to one-quarter of the shares, and three years following the grant date as to the remaining one-quarter of the shares issued as a signing bonus on September 25, 2019. The Company recognized $185 of stock-based compensation expense during the year ended September 30, 2019.

 

 

(3)	Consists of quarterly awards of stock in lieu of cash from December 25, 2018 through September 25, 2019, totaling 440,049 shares in the aggregate. The Company recognized $60,000 of stock-based compensation expense during the year ended September 30, 2019.
(4)	Consists of 300,000 shares of common stock issued as a bonus on December 22, 2017, and quarterly awards of stock in lieu of cash from March 26, 2018 through September 25, 2018, totaling 315,876 shares in the aggregate. The Company recognized $138,828 of stock-based compensation expense during the year ended September 30, 2018.
(5)	Consists of quarterly awards of stock in lieu of cash from December 25, 2018 through September 25, 2019, totaling 176,020 shares in the aggregate. The Company recognized $24,000 of stock-based compensation expense during the year ended September 30, 2019.
(6)	Consists of quarterly awards of stock in lieu of cash from March 26, 2018 through September 25, 2018, totaling 126,350 shares in the aggregate. The Company recognized $24,000 of stock-based compensation expense during the year ended September 30, 2018.
(7)	Consists of options to purchase 500,000 shares of common stock exercisable at $0.27 per share over 10 years issued as a bonus on December 22, 2017 that vested immediately, and options to purchase 2,500,000 shares of common stock exercisable at $0.20 per share over 10 years that vest immediately as to one-half of the shares, one year from the grant date as to one-quarter of the shares, and two years following the grant date as to the remaining one-quarter of the shares issued as a signing bonus on June 21, 2016. The Company recognized $197,776 of stock-based compensation expense during the year ended September 30, 2018.
(8)	See Note 10 of our audited financial statements included herein for additional information on assumptions made in the valuation of option awards.

 

Employment Agreements

 

We entered into an employment agreement with Kyle Remenda on September 25, 2019 under which he serves as our Chief Executive Officer. Pursuant to the employment agreement, we pay Mr. Remenda an annual base salary of $160,000, and awarded him an option to purchase 500,000 shares of Common Stock at a per share exercise price of $0.102 (the closing price of the Company’s Common Stock on the grant date). The option vested as to one-quarter of the shares immediately, with the remaining shares vesting in equal amounts on each of the next three anniversaries of the grant date. The employment agreement is for an initial term of one-year and will renew automatically for successive one-year periods unless either party provides written notice of non-renewal at least 30-days prior to the expiration of the then term.

 

We entered into an employment agreement with Todd Peterson on June 19, 2015 under which he serves as our Chief Financial Officer. The employment agreement provides for an initial term of three-months, which renews automatically for successive three-month periods unless either party provides written notice of non-renewal at least 10-days prior to the expiration of the then term. The employment agreement also has confidentiality and non-solicit provisions. Mr. Peterson received an initial salary of $7,500 per month and a $500 monthly stipend to cover health insurance costs, which may be increased from time to time. In addition, Mr. Peterson was issued an option to purchase 100,000 shares of common stock at an exercise price of $0.33 (the closing price of our common stock on the date of grant), vesting quarterly over the one-year period following the grant date. On December 22, 2017 the employment agreement was amended to provide for additional quarterly compensation of $15,000, payable in cash or shares of common stock at the Company’s discretion, on the fifth calendar day preceding each fiscal quarter.

 

We employed Mr. Denkin until his resignation pursuant to an Amended and Restated Employment Agreement dated June 21, 2016, which was amended on December 22, 2017 (as amended, the “Denkin Employment Agreement”). Pursuant to the Denkin Employment Agreement, (i) Mr. Denkin’s base salary was $192,000 per annum, and he received a car allowance of $750 per month, and (ii) commencing with the quarter ended December 31, 2017, Mr. Denkin was entitled to awards of quarterly compensation of $6,000, payable in cash or shares of our common stock at the Company’s discretion, on the fifth calendar day preceding each fiscal quarter. Pursuant to the Separation and Release Agreement we entered into with Mr. Denkin on September 26, 2019 (the “Separation Agreement”), we paid Mr. Denkin a lump sum payment of $20,000, and monthly payments of $6,000 during the three months following the date of the Separation Agreement for providing consulting services and assisting with the transition of our new Chief Executive Officer.

 

 

Outstanding Equity Awards

 

The following table sets forth information with respect to unexercised stock options, stock that has not vested, and equity incentive plan awards held by our Named Executive Officers at September 30, 2019.

 

Outstanding Option Awards at Fiscal Year-End
Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Option Exercise Price				Option Expiration Date
Kyle Remenda, Chief Executive Officer			500,000	(1)			375,000	(1)		$	0.102			September 25, 2029
Todd Peterson, Chief Financial Officer			100,000	(2)			-0-	(2)		$	0.13	(5)		June 19, 2025
Todd Denkin, former Chief Executive Officer			2,500,000	(3)			-0-	(3)		$	0.13	(5)		December 26, 2019
			500,000	(4)			-0-	(4)		$	0.13	(5)		December 26, 2019

 

⁽¹⁾ Options granted on September 25, 2019, vest immediately as to one-quarter of the shares, one year from the grant date as to one-quarter of the shares, two years from the grant date as to one-quarter of the shares, and three years following the grant date as to the remaining one-quarter.

⁽²⁾ Options granted on June 19, 2015, vested in four equal annual installments, commencing three months from the date of grant, and continuing on the next three quarters thereof until fully vested.

⁽³⁾ Options granted on June 21, 2016, vest immediately as to one-half of the shares, one year from the grant date as to one-quarter of the shares, and two years following the grant date as to the remaining one-quarter. These options expired three months from Mr. Denkin’s date of resignation, or December 26, 2019.

⁽⁴⁾ Options granted on December 22, 2017, fully vested. These options expired three months from Mr. Denkin’s date of resignation, or December 26, 2019.

⁽⁵⁾ Exercise price of options were repriced on January 7, 2019 to $0.13 per share.

 

Option Exercises and Stock Vested

 

None of our Named Executive Officers exercised any stock options or acquired stock through vesting of an equity award during the year ended September 30, 2019.

 

 

Director Compensation

 

The following table summarizes the compensation paid or accrued by us to our directors that are not Named Executive Officers for the year ended September 30, 2019.

 

Name		Fees Earned or Paid in Cash				Stock Award				Option Awards				Non-Equity Incentive Compensation				Change in Pension Value and Nonqualified Deferred Compensation Earnings				All other Compensation				Total
Bruce Raben(1)		$	15,000			$	-			$	50,934			$	-			$	-			$	27,000			$	92,934
Dr. Cindy Orser (2)		$	-			$	-			$	50,934			$	-			$	-			$	-			$	50,934
Dennis Hartmann		$	-			$	-			$	-			$	-			$	-			$	-			$	-

 

⁽¹⁾ We have agreed to compensate Mr. Raben $3,750 in cash per quarter for his service as a director. On January 7, 2019, we granted Bruce Raben an option to purchase 500,000 shares of common stock at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. “All other compensation” consists of cash payments of $27,000 for consulting fees.

⁽²⁾ On January 7, 2019, we granted Dr. Cindy Orser an option to purchase 500,000 shares of common stock at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. Dr. Orser is also compensated as an employee for her services to us as our Chief Science Officer for which she received an annual salary of $152,500 for the year ended September 30, 2019.

 

Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors.

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth, as of December 20, 2019, certain information with regard to the record and beneficial ownership of the Company’s common stock by (i) each person known to the Company to be the record or beneficial owner of 5% or more of the Company’s common stock, (ii) each director of the Company, (iii) each of the named executive officers, and (iv) all executive officers and directors of the Company as a group. The address of each of our directors and executive officers named in the table is c/o Digipath, Inc., 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118:

 

										Series A
		Common Stock								Preferred Stock
Name of Beneficial Owner(1)		Number of Shares				% of Class(2)				Number of Shares				% of Class
Officers and Directors:
Kyle Remenda, CEO(3)			125,000				*				-				-
Todd A. Peterson, CFO(4)			1,480,925				3.1	%			-				-
Dr. Cindy Orser, Director(5)			1,050,000				2.1	%			-				-
Bruce Raben, Director(6)			700,000				1.4	%			-				-
Dennis Hartmann, Director			-				-
Directors and Officers as a Group (5 persons)			3,355,925				6.7	%			-				-
5% Holders
William H. Bokovoy			3,200,001				6.6	%			-				-

 

* less than 1%

 

(1)	Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock or Series A Preferred Stock owned by such person.
(2)	Percentage of beneficial ownership is based upon 48,361,433 shares of Common Stock outstanding as of December 20, 2019. For each named person, this percentage includes Common Stock that the person has the right to acquire either currently or within 60 days of December 20, 2019, including through the exercise of an option; however, such Common Stock is not deemed outstanding for the purpose of computing the percentage owned by any other person.

 

 

(3)	Includes options to purchase 125,000 shares of common stock exercisable at $0.102 per share.
(4)	Includes options to purchase 100,000 shares of common stock exercisable at $0.13 per share.
(5)	Includes options to purchase 200,000 shares of common stock exercisable at $0.13 per share, options to purchase 100,000 shares of common stock exercisable at $0.13 per share, options to purchase 200,000 shares of common stock exercisable at $0.13 per share, and options to purchase 500,000 shares of common stock exercisable at $0.13 per share.
(6)	Includes options to purchase 500,000 shares of common stock exercisable at $0.13 per share.

 

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

 

Director Independence

 

Our board of directors currently consists of Dr. Cindy Orser, our Chief Science Officer, Bruce Raben and Dennis Hartmann. Our Board of Directors has determined that Mr. Raben and Mr. Hartmann, constituting a majority of our directors, are “independent” in accordance with the NASDAQ Global Market’s requirements. However, as our common stock is currently quoted on the OTCQB, we are not currently subject to corporate governance standards of listed companies.

 

ITEM 14. Principal AccountING Fees And Services

 

All audit work was performed by the full-time employees of M&K CPAS, PLLC (“M&K”) for the years ended September 30, 2019 and 2018. Our board of directors does not have an audit committee. The functions customarily delegated to an audit committee are performed by our full board of directors. Our board of directors approves in advance, all services performed by M&K. Our board of directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence, and has approved such services.

 

The following table sets forth fees billed by our auditors during the last two fiscal years for services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, services by our auditors that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as audit fees, services rendered in connection with tax compliance, tax advice and tax planning, and all other fees for services rendered.

 

		Years Ended September 30,
		2019				2018
Audit fees:(1)		$	44,000			$	30,000
Audit related fees			-				-
Tax fees			-				-
All other fees			-				-
Total		$	44,000			$	30,000

 

⁽¹⁾ Audit fees were principally for audit services and work performed in the review of the Company’s quarterly reports on Form 10-Q

 

 

PART IV

 

ITEM 15. Exhibits and Financial Statement Schedules

 

Exhibit		Description
3.1		Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.2		Bylaws (incorporated by reference to Exhibit 3.2 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.3		Certificate of Amendment to Articles of Incorporation dated April 4, 2014 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.4		Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock dated April 9, 2014 (incorporated by reference to Exhibit 3.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.5		Certificate of Amendment to Articles of Incorporation dated May 22, 2015 (incorporated by reference to Exhibit 3.1 of the 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)
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)
10.1		2012 Stock Incentive Plan (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 March 9, 2012)
10.2		Digipath, Inc. Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.3		Form of Stock Option Grant Notice for grants under the Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.4		Form of Option Agreement for grants under the Amended and Restated 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.5		Amended and Restated Employment Agreement between Digipath, Inc. and Todd Denkin, dated as of June 21, 2016 (incorporated by reference to Exhibit 10.5 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 27, 2016)
10.6		Amendment to Employment Agreement between Digipath, Inc. and Todd Denkin, dated as of December 22, 2017 (incorporated by reference to Exhibit 10.12 of the Form 10-K filed with the Securities and Exchange Commission by Digipath, Inc. on December 29, 2017)
10.7		Employment, Confidentiality and Proprietary Rights Agreement, dated as of June 19, 2015, between Digipath, Inc. and Todd A. Peterson (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on June 23, 2015)
10.8		Amendment to Employment Agreement between Digipath, Inc. and Todd Peterson, dated as of December 22, 2017 (incorporated by reference to Exhibit 10.13 of the Form 10-K filed with the Securities and Exchange Commission by Digipath, Inc. on December 29, 2017)
10.9		Security Agreement, between Digipath, Inc. Digipath Labs, Inc., and collateral agent for the holders of the 8% Senior Secured Convertible Notes due December 31, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on November 21, 2018)
10.10		Security Agreement, between Digipath, Inc. Digipath Labs, Inc., and holder of the 8% Secured Convertible Note due September 23, 2020 (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 26, 2019)
10.11		Binding Letter of Intent between Digipath, Inc., VSSL Enterprises Ltd., Kyle Remenda and Philippe Henry, dated September 25, 2019 (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 30, 2019)
10.12		Consulting Agreement between Digipath, Inc. and Philippe Henry, dated September 25, 2019 (incorporated by reference to Exhibit 10.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 30, 2019)
10.13		Separation and Release Agreement between Digipath, Inc. and Todd Denkin, dated September 26, 2019 (incorporated by reference to Exhibit 10.3 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 30, 2019)
10.14		Employment Agreement between Digipath, Inc. and Kyle Remenda, dated September 25, 2019 (incorporated by reference to Exhibit 10.4 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 30, 2019)
21.1		Subsidiaries (incorporated by reference to the list of subsidiaries in Note 1 to the financial statements included in this Annual Report on Form 10-K)
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

 

* Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

	DIGIPATH, INC.
	(Registrant)
	By:	/s/ Kyle Remenda
		Kyle Remenda
		Chief Executive Officer
	Dated:	December 30, 2019

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated:

 

Signature		Title		Date
/s/ Kyle Remenda		Chief Executive Officer		December 30, 2019
Kyle Remenda		(Principal Executive Officer)
/s/ Todd A. Peterson		Chief Financial Officer and Secretary		December 30, 2019
Todd A. Peterson		(Principal Financial Officer and Principal Accounting Officer)
/s/ Cindy Orser		Chief Science Officer, Director		December 30, 2019
Cindy Orser
/s/ Bruce Raben		Director		December 30, 2019
Bruce Raben
/s/ Dennis Hartmann		Director		December 30, 2019
Dennis Hartmann