Attached files

file filename
EX-32.2 - Digipath, Inc.ex32-2.htm
EX-32.1 - Digipath, Inc.ex32-1.htm
EX-31.2 - Digipath, Inc.ex31-2.htm
EX-31.1 - Digipath, Inc.ex31-1.htm
EX-10.5 - Digipath, Inc.ex10-5.htm
EX-10.4 - Digipath, Inc.ex10-4.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For Quarterly Period Ended June 30, 2020

 

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number 000-54239

 

 

Digipath, Inc.

(Exact name of registrant issuer as specified in its charter)

 

Nevada   27-3601979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     
6450 Cameron St Suite 113 Las Vegas, NV   89118
(Address of principal executive offices)   (zip code)

 

(702) 527-2060

(Registrant’s telephone number, including area code)

 

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

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

 

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

 

Yes [X] No [  ]

 

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

 

Yes [X] No [  ]

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

The number of shares of registrant’s common stock outstanding as of August 11, 2020 was 57,612,672.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  Page
  No.
PART I - FINANCIAL INFORMATION  
ITEM 1.   FINANCIAL STATEMENTS (Unaudited) 3
    Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and September 30, 2019 3
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2020 and 2019 (Unaudited) 4
    Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended June 30, 2020 and 2019 (Unaudited) 5
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2020 and 2019 (Unaudited) 7
    Notes to the Condensed Consolidated Financial Statements (Unaudited) 8
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4.   CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION  
ITEM 1.   Legal Proceedings 29
ITEM 1A.   RISK FACTORS 29
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 29
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES 29
ITEM 4.   MINE SAFETY DISCLOSURES 29
ITEM 5.   OTHER INFORMATION 29
ITEM 6.   EXHIBITS 30
    SIGNATURES 31

 

2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   September 30, 
   2020   2019 
   (Unaudited)     
Assets          
Current assets:          
Cash  $126,862   $323,739 
Accounts receivable, net   171,126    179,256 
Other current assets   122,694    74,620 
Inventory   37,900    - 
Deposits   25,647    51,704 
Total current assets   484,229    629,319 
           
Goodwill from affiliate   592,621    - 
Right-of-use asset   193,094    - 
Fixed assets, net   988,444    726,614 
           
Total Assets  $2,258,388   $1,355,933 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities:          
Accounts payable  $369,675   $136,612 
Accrued expenses   138,328    134,881 
Short term advances   20,000    - 
Current portion of operating lease liabilities   195,739    - 
Current portion of finance lease liabilities   28,901    - 
Current maturities of notes payable   53,544    -
Convertible notes payable, net of discounts of $16,643 and $-0- at June 30, 2020 and September 30, 2019, respectively     683,357        
200,000
 
Total current liabilities   1,489,544    471,493 
           
Finance lease liabilities   28,468    - 
Notes payable   432,779    - 
Convertible notes payable, net of discounts of $-0- and $41,426 at June 30, 2020 and September 30, 2019, respectively     550,000       458,574  
           
Total Liabilities   2,500,791    930,067 
           
Stockholders’ Equity:          
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 shares issued and outstanding     1,326       1,326  
Common stock, $0.001 par value, 250,000,000 shares authorized; 57,612,672 and 48,361,433 shares issued and outstanding at June 30, 2020 and September 30, 2019, respectively     57,613       48,361  
Additional paid-in capital   16,004,575    15,331,839 
Accumulated (deficit)   (16,305,917)   (14,955,660)
           
Total Stockholders’ Equity   (242,403)   425,866 
           
Total Liabilities and Stockholders’ Equity  $2,258,388   $1,355,933 

 

See accompanying notes to financial statements.

 

3

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
                 
Revenues  $407,229   $652,920   $1,971,141   $1,946,590 
Cost of sales   347,724    424,067    1,250,234    1,334,217 
Gross profit   59,505    228,853    720,907    612,373 
                     
Operating expenses:                    
General and administrative   328,128    431,636    1,123,479    1,240,612 
Professional fees   177,835    195,052    688,902    677,299 
Bad debts expense   25,420    93,340    186,540    143,170 
Total operating expenses   531,383    720,028    1,998,921    2,061,081 
                     
Operating loss   (471,878)   (491,175)   (1,278,014)   (1,448,708)
                     
Other income (expense):                    
Other income   21,000    19,750    63,000    92,400 
Loss on disposal of fixed assets   (28,238)   -    (28,238)   - 
Interest expense   (41,571)   (18,203)   (107,005)   (46,959)
Total other income (expense)   (48,809)   1,547    (72,243)   45,441 
                     
Net loss  $(520,687)  $(489,628)  $(1,350,257)  $(1,403,267)
                     
Weighted average number of common shares outstanding - basic and fully diluted     57,225,309       47,934,212       52,048,121       45,509,076  
                     
Net loss per share - basic and fully diluted  $(0.01)  $(0.01)  $(0.03)  $(0.03)

 

See accompanying notes to financial statements.

 

4

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

   For the Three Months Ended June 30, 2019 
   Series A Convertible           Additional           Total 
   Preferred Stock   Common Stock   Paid-in   Subscriptions   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Payable   (Deficit)   Equity 
                                 
Balance, March 31, 2019   1,325,942   $1,326    47,609,716   $47,610   $15,111,344   $-   $(14,063,967)  $  1,096,313 
                                         
Common stock issued for services   -    -    545,834    546    64,854    -    -    65,400 
                                         
Common stock options issued for services   -    -    -    -    48,618    -    -    48,618 
                                         
Net loss for the three months ended June 30, 2019   -    -    -    -    -    -    (489,628)   (489,628)
                                         
Balance, June 30, 2019   1,325,942   $1,326    48,155,550   $48,156   $15,224,816   $          -   $(14,553,595)  $720,703 

 

   For the Three Months Ended June 30, 2020 
   Series A Convertible           Additional           Total 
   Preferred Stock   Common Stock   Paid-in   Subscriptions   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Payable   (Deficit)   Equity 
                                 
Balance, March 31, 2020   1,325,942   $1,326    56,737,672   $56,738   $15,879,225   $37,500   $(15,785,230)  $     189,559 
                                         
Common stock issued for services   -    -    875,000    875    97,318    (37,500)   -    60,693 
                                         
Common stock options issued for services   -    -    -    -    28,032    -    -    28,032 
                                         
Net loss for the three months ended June 30, 2020   -    -    -    -    -    -    (520,687)   (520,687)
                                         
Balance, June 30, 2020   1,325,942   $1,326    57,612,672   $57,613   $16,004,575   $       -   $(16,305,917)  $(242,403)

 

5

 

 

   For the Nine Months Ended June 30, 2019 
   Series A Convertible           Additional           Total 
   Preferred Stock   Common Stock   Paid-in   Subscriptions   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Payable   (Deficit)   Equity 
                                 
Balance, September 30, 2018   1,425,942   $1,426    42,245,364   $42,245   $14,121,236   $-   $(13,150,328)  $  1,014,579 
                                         
Common stock sold for cash   -    -    3,125,000    3,125    621,875    -    -    625,000 
                                         
Common stock issued for services   -    -    1,810,186    1,811    274,204    -    -    276,015 
                                         
Common stock issued in exchange for termination of options   -    -    475,000    475    (475)   -    -    - 
                                         
Common stock options issued for services   -    -    -    -    137,412    -    -    137,412 
                                         
Conversion of preferred stock to common stock   (100,000)   (100)   500,000    500    (400)   -    -    - 
                                         
Beneficial conversion feature of convertible debts   -    -    -    -    70,964    -    -    70,964 
                                         
Net loss for the nine months ended June 30, 2019   -    -    -    -    -    -    (1,403,267)   (1,403,267)
                                         
Balance, June 30, 2019   1,325,942   $1,326    48,155,550   $48,156   $15,224,816   $         -   $(14,553,595)  $720,703 

 

   For the Nine Months Ended June 30, 2020 
   Series A Convertible           Additional           Total 
   Preferred Stock   Common Stock   Paid-in   Subscriptions   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Payable   (Deficit)   Equity 
                                 
Balance, September 30, 2019   1,325,942   $1,326    48,361,433   $48,361   $15,331,839   $-   $(14,955,660)  $     425,866 
                                         
Common stock sold for cash   -    -    706,250    706    55,794    -    -    56,500 
                                         
Common stock issued for acquisition of VSSL Enterprises, Ltd.   -    -    6,500,000    6,500    367,250    -    -    373,750 
                                         
Common stock issued for services   -    -    2,044,989    2,046    113,360    -    -    115,406 
                                         
Common stock options issued for services   -    -    -    -    66,320    -    -    66,320 
                                         
Common stock warrants issued for services   -    -    -    -    70,012    -    -    70,012 
                                         
Net loss for the nine months ended June 30, 2020   -    -    -    -    -                 -    (1,350,257)   (1,350,257)
                                         
Balance, June 30, 2020   1,325,942   $1,326    57,612,672   $57,613   $16,004,575   $-   $(16,305,917)  $(242,403)

 

See accompanying notes to financial statements.

 

6

 

 

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended 
   June 30, 
   2020   2019 
Cash flows from operating activities          
Net loss  $(1,350,257)  $(1,403,267)
Adjustments to reconcile net loss to net cash used in operating activities:          
Change in allowance for doubtful accounts   186,540    143,170 
Depreciation and amortization expense   242,207    194,588 
Loss on disposal of fixed assets   28,238    - 
Stock issued for services   115,406    276,015 
Options and warrants granted for services   136,332    137,412 
Amortization of debt discounts   24,783    21,217 
Decrease (increase) in assets:          
Accounts receivable   (176,825)   (66,265)
Other current assets   (42,815)   (25,648)
Inventory   (37,900)   - 
Deposits   26,057    - 
Right-of-use assets   144,149    - 
Increase (decrease) in liabilities:          
Accounts payable   230,483    (163,947)
Accrued expenses   169    (2,151)
Lease liabilities   (141,504)   - 
Deferred revenues   -    (525)
Net cash used in operating activities   (614,937)   (889,401)
           
Cash flows from investing activities          
Cash acquired from affiliate in acquisition of VSSL   143    - 
Cash paid for purchase of VSSL Enterprises, Ltd.   (200,000)   - 
Purchase of fixed assets   (141,151)   (30,261)
Advance of note receivable   -    (95,000)
Net cash used in investing activities   (341,008)   (125,261)
           
Cash flows from financing activities          
Proceeds from short term advances   25,000    - 
Repayments of short term advances   (25,000)   - 
Principal payments on finance lease   (41,824)   - 
Principal payments on note payable, equipment financing   (25,642)   - 
Proceeds from notes payable   220,034    - 
Proceeds from convertible notes   550,000    500,000 
Proceeds from sale of common stock   56,500    625,000 
Net cash provided by financing activities   759,068    1,125,000 
           
Net increase (decrease) in cash   (196,877)   110,338 
Cash - beginning   323,739    176,027 
Cash - ending  $126,862   $286,365 
           
Supplemental disclosures:          
Interest paid  $35,869   $4,066 
Income taxes paid  $-   $- 
           
Non-cash investing and financing activities:          
Fair value of net assets acquired in business combination from affiliate  $18,871   $- 
Fair value of common stock paid in business combination from affiliate  $373,750   $- 
Fixed assets acquired with capitalized finance lease  $99,193   $- 
Fixed assets acquired with note payable, equipment financing  $291,931   $- 
Value of preferred stock converted to common stock  $-   $100,000 
Beneficial conversion feature of convertible notes payable  $-   $70,964 

 

See accompanying notes to financial statements.

 

7

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization, Basis of Presentation and Significant Accounting Policies

 

Organization

 

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

 

  Ø Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. 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.
     
  Ø GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from drug-type cannabis.
     
  Ø VSSL Enterprises, Ltd. Acquired in March 2020, and based in British Colombia, Canada, VSSL is a cannabis genomics, plant sciences and consulting firm that builds predictive tools for the cannabis industry, and uses molecular and bioinformatics tools to deliver unique solutions suited to its customers’ business models.

 

Basis of Presentation

 

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

 

The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control and ownership at June 30, 2020:

 

   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
VSSL Enterprises, Ltd.(5)  Canada  Subsidiary

 

(1) All entities are in the form of a corporation.
(2) Holding company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company.
(3) Commenced operations during the first fiscal quarter of 2019, but has not incurred income to date.
(4) Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations.
(5) Acquired on March 11, 2020.

 

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

 

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

 

8

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Segment Reporting

 

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

 

Fair Value of Financial Instruments

 

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

 

Revenue Recognition

 

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

 

Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. 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.

 

Inventory

 

Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Our products consist of handheld devices used to test cannabis for THC, CBD and CBG levels under our GroSciences, Inc. subsidiary. We have not yet commenced sales of this product.

 

Stock-Based Compensation

 

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

 

Adoption of New Accounting Standards and Recently Issued Accounting Pronouncements

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. There was no impact on the Company’s financial statements as a result of adopting this ASU for the nine-month period ending June 30, 2020 or the year ended September 30, 2019.

 

9

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

 

The new standard became effective for fiscal years beginning after December 15, 2019, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on October 1, 2019 using the modified retrospective transition approach as of the effective date of the initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before October 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.

 

The most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.

 

The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases. The new standard did not have a material impact.

 

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

 

Note 2 – Going Concern

 

As shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $16,305,917, negative working capital of $1,005,315, and as of June 30, 2020, the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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

 

10

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 3 – Acquisition from Affiliate

 

On March 9, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with VSSL Enterprises Ltd (“VSSL”), Kyle Joseph Remenda (“Remenda”), Philippe Olivier Henry, PhD (“Henry”), Audim Ventures Ltd. (“Audim”), and Britt Ash Enterprises Ltd. (“Britt Ash” and, together with Remenda, Henry and Audim, the “VSSL Stockholders”), pursuant to which the Company acquired all of VSSL’s outstanding shares of capital stock from the VSSL Stockholders for consideration consisting of 6,500,000 shares of Digipath’s common stock and a cash payment of $200,000. The closing of the acquisition occurred on March 11, 2020. The aggregate fair value of the common stock was $373,750 based on the closing price of the Company’s common stock on the date of closing.

 

Mr. Remenda, who held 45% of the VSSL’s shares prior to its acquisition by the Company, is the CEO of VSSL and was appointed as Digipath’s Chief Executive Officer in September 2019 in connection with the execution of the binding letter of intent with respect to the Company’s acquisition of VSSL. In addition, Mr. Henry, who also held 45% of VSSL’s shares prior to its acquisition by the Company, was engaged as a consultant by Digipath in September 2019.

 

This acquisition was accounted for as a business combination under the purchase method of accounting. The purchase resulted in the recognition of $592,621 of goodwill reflected on the Company’s balance sheet. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

 

   March 11, 
   2020 
Consideration:     
Cash  $200,000 
Fair value of 6,500,000 shares of common stock   373,750 
Liabilities assumed   20,600 
Total consideration  $594,350 
      
Fair value of identifiable assets acquired assumed:     
Cash  $143 
Accounts receivable   1,585 
Total fair value of assets assumed   1,729 
Consideration paid in excess of fair value (Goodwill)(1)  $592,621 

 

(1)The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as goodwill.

 

Pro Forma Results

 

The following table sets forth the unaudited pro forma results of the Company as if the acquisition of the VSSL was effective on the first day of each of the three and nine month periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.

 

   Three Months Ended June 30, 
   2020   2019 
   (Unaudited)   (Unaudited) 
Revenues  $407,229   $666,699 
Net loss  $(520,687)  $(488,772)
Basic and diluted net loss per share  $(0.01)  $(0.01)
Weighted average number of common shares outstanding - basic and fully diluted   57,225,309    54,434,212 

 

   Nine Months Ended June 30, 
   2020   2019 
   (Unaudited)   (Unaudited) 
Revenues  $1,979,633   $2,000,085 
Net loss  $(1,367,478)  $(1,393,789)
Basic and diluted net loss per share  $(0.02)  $(0.03)
Weighted average number of common shares outstanding - basic and fully diluted   55,914,909    52,009,076 

 

Note 4 – Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

11

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of June 30, 2020 and September 30, 2019, respectively:

 

   Fair Value Measurements at June 30, 2020 
    Level 1    Level 2    Level 3 
Assets               
Cash  $126,862   $-   $- 
Goodwill   -    -    592,621 
Total assets   126,862    -    592,621 
Liabilities               
Short term advances   -    20,000    - 
Lease liabilities   -    -    253,108 
Notes payable   -    486,323    - 
Convertible notes payable, net of discounts of $16,643   -    -    1,233,357 
Total liabilities   -    506,323    1,486,465 
   $126,862   $(506,323)  $(893,844)

 

   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)

 

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

 

Level 3 liabilities consist of a total of $1,250,000 of convertible debentures, net of discounts of $16,643 and $41,426 as of June 30, 2020 and September 30, 2019, respectively.

 

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June 30, 2020 or the year ended September 30, 2019.

 

Note 5 – Accounts Receivable

 

Accounts receivable was $171,126 and $179,256 at June 30, 2020 and September 30, 2019, respectively, net of allowance for uncollectible accounts of $239,731 and $50,540 at June 30, 2020 and September 30, 2019, respectively.

 

12

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fixed Assets

 

Fixed assets consist of the following at June 30, 2020 and September 30, 2019:

 

   June 30,   September 30, 
    2020    2019 
Software  $124,697   $123,492 
Office equipment   74,777    55,061 
Furniture and fixtures   29,879    29,115 
Lab equipment   1,428,667    1,118,942 
Leasehold improvements   494,117    494,117 
Lab equipment held under capital leases   99,193    - 
    2,251,331    1,820,727 
Less: accumulated depreciation   (1,262,887)   (1,094,113)
Total  $988,444   $726,614 

 

During the three-months ended June 30, 2020, the Company disposed of lab equipment no longer in service. No proceeds were received on the disposal of the equipment, resulting in a loss on disposal of fixed assets of $28,238, which represented the net book value at the time of disposal.

 

Depreciation and amortization expense totaled $242,207 and $194,588 for the nine months ended June 30, 2020 and 2019, respectively.

 

Note 7 – Leases

 

The Company’s leases its operating and office facilities, and sub-leases one of the units, under non-cancelable real property lease agreements that expire on May 31, 2021 and June 30, 2021. The Company also has a financing lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is economically feasible to continue to operate, management expects to enter into a new lease upon expiration. The operating and office facility leases contain provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

 

The components of lease expense were as follows:

 

   For the Nine 
   Months Ended 
   June 30, 
    2020 
Operating lease cost  $156,008 
Finance lease cost:     
Amortization of assets   15,767 
Interest on lease liabilities   8,970 
Sublease income   (63,000)
Total net lease cost  $117,745 

 

13

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Supplemental balance sheet information related to leases was as follows:

 

   June 30, 
    2020 
Operating leases:     
Operating lease assets  $193,094 
      
Current portion of operating lease liabilities  $195,739 
Noncurrent operating lease liabilities   - 
Total operating lease liabilities  $195,739 
Finance lease:     
Equipment, at cost  $99,193 
Accumulated amortization   (14,879)
Equipment, net  $84,314 
      
Current portion of finance lease liability  $28,901 
Noncurrent finance lease liability   28,468 
Total finance lease liability  $57,369 
      
Weighted average remaining lease term:     
Operating leases   1.00 year 
Finance leases   1.80 years 
      
Weighted average discount rate:     
Operating leases   5.75%
Finance lease   18.41%

 

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

 

   For the Nine 
   Months Ended 
   June 30, 
    2020 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows provided by sublet operating leases  $63,000 
Operating cash flows used for operating leases  $141,504 
Financing cash flows used for finance leases  $41,824 
      
Leased assets obtained in exchange for lease liabilities:     
Total operating lease liabilities  $- 
Total finance lease liabilities  $99,193 

 

Future minimum annual lease commitments under non-cancelable operating leases are as follows at June 30, 2020:

 

Fiscal Year Ending  Minimum Lease   Sublease   Net Lease 
September 30,   Commitments    Income    Commitments 
2020*  $52,693   $-   $52,693 
2021   148,957    -    148,957 
   $201,650   $-   $201,650 

 

* Liability pertains to the remaining three month period from July 1, 2020 through September 30, 2020.

 

14

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Future minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows at June 30, 2020:

 

   Finance 
    Leases 
      
2020*  $9,276 
2021   37,105 
2022   21,644 
Total minimum lease payments   68,025 
Less interest   10,656 
Present value of lease liabilities   57,369 
Less current portion   28,901 
Long-term lease liabilities  $28,468 

 

* Liability pertains to the remaining three month period from July 1, 2020 through September 30, 2020.

 

Note 8 – Short Term Advances

 

Short term advances consist of the following at June 30, 2020 and September 30, 2019, respectively:

 

   June 30,   September 30, 
   2020   2019 
           
On December 26, 2019, a total of $25,000 was received as a short-term loan from one of our convertible noteholders. The advance was subsequently repaid on February 6, 2020. No interest expense was recognized.  $-   $        - 
           
On January 21, 2020, a total of $20,000 was received as a short-term loan from one of our convertible noteholders. No interest expense was recognized.   20,000    - 
Less: current maturities   (20,000)   - 
Note payable  $-   $- 

 

15

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 9 –Notes Payable

 

Notes payable consists of the following at June 30, 2020 and September 30, 2019, respectively:

 

   June 30,   September 30, 
   2020   2019 
           
On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note bears interest at 1.00% per annum, payable monthly beginning December 22, 2020, and is due on June 22, 2025. The Company PPP Note may be repaid at any time without penalty.
 
Under the Payroll Protection Program, the Company will be eligible for loan forgiveness up to the full amount of the Company PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning June 22, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 40% of the amount of the Company PPP Note. No assurance is provided that the Company will obtain forgiveness under the Company PPP Note in whole or in part.
  $40,114   $            - 
           
On May 13, 2020, the Company, through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $179,920 from WebBank Corp, pursuant to a Promissory Note issued by Labs to WebBank Corp (the “Labs PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the CRES Act. The Labs PPP Note bears interest at 1.00% per annum, payable monthly beginning December 13, 2020, and is due on May 13, 2022. The Labs PPP Note may be repaid at any time without penalty.
 
Under the Payroll Protection Program, Labs will be eligible for loan forgiveness up to the full amount of the Labs PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that Labs spends during the 8-week period beginning May 13, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the PPP Note. No assurance is provided that Labs will obtain forgiveness under the Labs PPP Note in whole or in part.
   179,920    - 
           
On December 26, 2019, the Company financed the purchase of $377,124 of lab equipment, in part, with the proceeds of a bank loan in the amount of $291,931. The loan bears interest at the rate of 5.75% per annum and requires monthly payments of $5,622 over the five-year term of the loan ending on December 26, 2024. The Company’s obligations under this loan are secured by a lien on the purchased equipment.   266,289    - 
           
Total notes payable   486,323    - 
Less: current maturities   (53,544)   - 
Notes payable  $432,779   $- 

 

The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $12,153 during the nine months ended June 30, 2020.

 

16

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 10 – Convertible Notes Payable

 

Convertible notes payable consists of the following at June 30, 2020 and September 30, 2019, respectively:

 

   June 30,   September 30, 
   2020   2019 
           
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor.  $50,000   $- 
           
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor.   150,000    - 
           
On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000. The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor.   350,000    - 
           
On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on September 23, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.   200,000    200,000 
           
On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the nine months ended June 30, 2019.   350,000    350,000 
           
On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.   150,000    150,000 
           
Total convertible notes payable   1,250,000    700,000 
Less: unamortized debt discounts   (16,643)   (41,426)
    1,233,357    658,574 
Less: current maturities   (683,357)   (200,000)
Convertible notes payable  $550,000   $458,574 

 

17

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

The aforementioned accounting treatment resulted in a total debt discount equal to $70,964. The discount is amortized on a straight-line basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date. The Company recorded debt amortization expense on the aforementioned debt discount in the amount of $24,783 and $21,217 during the nine months ended June 30, 2020 and 2019, respectively.

 

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

 

The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $61,099 and $25,742 for the nine months ended June 30, 2020 and 2019, respectively.

 

The Company recognized interest expense for the nine months ended June 30, 2020 and 2019, respectively, as follows:

 

   June 30,   June 30, 
   2020   2019 
           
Interest on capital leases  $8,970   $- 
Interest on notes payable   12,153    - 
Amortization of beneficial conversion features   24,783    21,217 
Interest on convertible notes   61,099    25,742 
Total interest expense  $107,005   $46,959 

 

Note 11 - Changes in Stockholders’ Equity

 

Convertible Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares available for designation from time to time by the Board as set forth below. As of June 30, 2020, 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 June 30, 2020 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.

 

Common Stock

 

Common stock consists of $0.001 par value, 250,000,000 shares authorized, of which 57,612,672 shares were issued and outstanding as of August 14, 2020.

 

Common Stock Sales

 

On February 10, 2020, the Company sold 81,250 shares of its common stock in exchange for proceeds of $6,500.

 

On January 16, 2020, the Company sold a total of 625,000 shares of its common stock in exchange for proceeds of $50,000.

 

Common Stock Issued to Affiliate for Acquisition

 

On March 11, 2020, the Company acquired all of VSSL’s outstanding shares of capital stock from the VSSL’s stockholders for consideration consisting of 6,500,000 shares of the Company’s common stock and a cash payment of $200,000. The aggregate fair value of the Company’s common stock was $373,750 based on the closing price of the Company’s common stock on the closing date.

 

18

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Common Stock Issued for Services

 

On June 25, 2020, the Company issued 375,000 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2020, the Company issued 248,756 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2020, the Company issued 750,000 shares of common stock to a consultant for investor relations services to be performed from March 25, 2020 through August 25, 2020. The fair value of the common stock was $45,300 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

 

On January 27, 2020, the Company issued 500,000 shares of common stock to a consultant for investor relations services to be performed from February 1, 2020 through July 31, 2020. The fair value of the common stock was $37,500 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period. The shares were subsequently issued on April 6, 2020.

 

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

 

Amortization of Stock-Based Compensation

 

A total of $28,719 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 750,000 shares of common stock to a consultant on March 25, 2020, as amortized over the requisite service period. A total of $16,581 of unamortized expenses are to be expensed during the remaining requisite service period.

 

A total of $31,937 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 500,000 shares of common stock to a consultant on January 27, 2020, as amortized over the requisite service period. A total of $5,563 of unamortized expenses are to be expensed during the remaining requisite service period.

 

A total of $9,750 of stock-based compensation expense was recognized during the nine months ended June 30, 2020 as a result of the issuance of 300,000 shares of common stock to a consultant on June 25, 2019, as amortized over the requisite service period. No further unamortized expenses are to be expensed during the remaining requisite service period.

 

A total of $128,304 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting period during the nine months ended June 30, 2020.

 

Note 12 – 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.

 

Common Stock Option Issuances

 

On March 25, 2020, we granted options to purchase 500,000 shares of common stock as compensation for services to our former Chief Financial Officer. The options vested immediately as to 166,667 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0468, was $23,425. The options are being expensed over the vesting period, resulting in $3,113 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $20,312 of unamortized expenses are expected to be expensed over the vesting period.

 

19

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our Chief Executive Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0499, was $37,420. The options are being expensed over the vesting period, resulting in $5,793 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $31,627 of unamortized expenses are expected to be expensed over the vesting period.

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our Chief Operating Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0499, was $37,420. The options are being expensed over the vesting period, resulting in $5,793 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $31,627 of unamortized expenses are expected to be expensed over the vesting period.

 

On March 9, 2020, we granted options to purchase 1,000,000 shares of common stock as compensation for services to our Chairman of the Board of Directors. The options vested immediately as to 333,333 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0499, was $49,894. The options are being expensed over the vesting period, resulting in $7,724 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $42,170 of unamortized expenses are expected to be expensed over the vesting period.

 

On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to a consultant. The options vested immediately, and are exercisable for a five-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 108% and a call option value of $0.0403, was $4,031.

 

On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to another consultant. The options vested immediately, and are exercisable for a five-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 108% and a call option value of $0.0403, was $4,031.

 

On January 31, 2020, we granted options to purchase 250,000 shares of common stock as compensation for Director services to Dennis Hartmann. The options vested immediately as to 62,500 shares and as to an additional 62,500 shares on each of January 31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $2,353 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $14,725 of unamortized expenses are expected to be expensed over the vesting period.

 

On January 29, 2020, Edmond A. DeFrank was appointed to the Company’s Board of Directors, filling the vacancy resulting from the resignation of Dr. Cindy Orser on January 20, 2020. On January 31, 2020, we granted Mr. DeFrank options to purchase 250,000 shares of common stock as compensation for Director services. The options vested immediately as to 62,500 shares and as to an additional 62,500 shares on each of January 31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $2,353 of stock-based compensation expense during the nine months ended June 30, 2020. As of June 30, 2020, a total of $14,725 of unamortized expenses are expected to be expensed over the vesting period.

 

A total of 5,625,000 options were outstanding as of June 30, 2020. During the nine months ended June 30, 2020, options to purchase an aggregate total of 4,160,000 shares of common stock at a weighted average exercise price of $0.14 per share expired.

 

Note 13 – Common Stock Warrants

 

Warrants to purchase a total of 4,274,269 shares of common stock were outstanding as of June 30, 2020.

 

On March 9, 2020, we granted a ten-year warrant to purchase 1,500,000 shares of common stock at a price of $0.10 per share to a consultant as compensation for services. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0467, was $70,012.

 

On February 21, 2020, warrants to purchase 642,857 shares of common stock at $0.26 per share expired.

 

20

 

 

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 14 – Other Income (Expense)

 

Other income (expense) for the nine months ended June 30, 2020 and 2019 consisted of the following:

 

   June 30, 
   2020   2019 
Settlement income on note receivable  $-   $30,000 
Rental income on subleases   63,000    62,400 
Loss on disposal of fixed assets   (28,238)   - 
Interest expense   (107,005)   (46,959)
   $(72,243)  $45,441 

 

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

 

Note 15 - 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 nine months ended June 30, 2020 and the year ended September 30, 2019, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At June 30, 2020, the Company had approximately $13,800,000 of federal net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2031.

 

Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at June 30, 2020 and September 30, 2019, respectively.

 

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

 

Note 16 – Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date through the date these financial statements were issued. There were no subsequent events to report.

 

21

 

 

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

 

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 2019 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.

 

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 2019 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

 

Overview

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our business units as of June 30, 2020 are described below.

 

 

Ø

Digipath Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. 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.
     
  Ø GroSciences, Inc. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis through the testing process. GroSciences plans to develop and license specific formulations to other producers and product makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from drug-type cannabis.
     
  Ø VSSL Enterprises, Ltd. Acquired in March 2020, and based in British Colombia, Canada, VSSL is a cannabis genomics, plant sciences and consulting firm that builds predictive tools for the cannabis industry, and uses molecular and bioinformatics tools to deliver unique solutions suited to its customers’ business models. The acquisition resulted in $592,621 of goodwill, which will be evaluated for impairment at year-end. The operations did not have significant impact on the results of operations for Digipath, Inc. for the periods presented.

 

The Company’s financial performance was negatively impacted by the COVID-19 coronavirus pandemic during the three and nine month periods ended June 30, 2020. This is due to the decline in the Nevada cannabis markets resulting in turn from the substantial decline in Nevada tourism resulting from COVID-19. While the Company’s testing operations have recently begun to increase, management is unable to predict when testing operations will revert to historical levels.

 

22

 

 

Results of Operations for the Three Months Ended June 30, 2020 and 2019:

 

The following table summarizes selected items from the statement of operations for the three months ended June 30, 2020 and 2019.

 

   Three Months Ended June 30,   Increase / 
   2020   2019   (Decrease) 
Revenues  $407,229   $652,920   $(245,691)
Cost of sales   347,724    424,067    (76,343)
Gross profit (loss)   59,505    228,853    (169,348)
                
Operating expenses:               
General and administrative   328,128    431,636    (103,508)
Professional fees   177,835    195,052    (17,217)
Bad debts expense   25,420    93,340    (67,920)
Total operating expenses:   531,383    720,028    (188,645)
                
Operating loss   (471,878)   (491,175)   (19,297)
                
Total other income (expense)   (48,809)   1,547    (50,356)
                
Net loss  $(520,687)  $(489,628)  $31,059 

 

Revenues

 

Aggregate revenues for the three months ended June 30, 2020 were $407,229, compared to revenues of $652,920 during the three months ended June 30, 2019, a decrease of $245,691, or 38%. The decrease in revenue was due to the effects the COVID-19 coronavirus pandemic had on the tourism industry in Nevada during the current period.

 

Cost of Sales

 

Cost of sales for the three months ended June 30, 2020 were $347,724, compared to $424,067 during the three months ended June 30, 2019, a decrease of $76,343, or 18%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period were primarily due to decreased labor and reduced consumption of lab supplies related to the effects of the COVID-19 pandemic. Our gross margins of approximately 15% and 35% during the three months ended both June 30, 2020 and 2019, respectively, translated to $169,348 of decreased gross profit in the current period. Our margins were significantly affected by the decline in revenues, given our inability to cut fixed costs, including rent, depreciation and maintenance contracts on our lab equipment.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended June 30, 2020 were $328,128, compared to $431,636 during the three months ended June 30, 2019, a decrease of $103,508, or 24%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $33,976 and $28,370 during the three months ended June 30, 2020 and 2019, respectively.

 

Professional Fees

 

Professional fees for the three months ended June 30, 2020 were $177,835, compared to $195,052 during the three months ended June 30, 2019, a decrease of $17,217, or 9%. Professional fees included non-cash, stock-based compensation of $54,749 and $85,648 during the three months ended June 30, 2020 and June 30, 2019, respectively. Professional fees decreased primarily due to decreased stock-based compensation during the current period.

 

23

 

 

Bad Debts Expense

 

Bad debts expense for the three months ended June 30, 2020 was $25,420, compared to $93,340 during the three months ended June 30, 2019, a decrease of $67,920, or 73%. Bad debts expense decreased during the current period as our allowance for doubtful accounts increased slightly, from $214,311 to $239,731 during the quarter.

 

Operating Loss

 

Our operating loss for the three months ended June 30, 2020 was $471,878, compared to $491,175 during the three months ended June 30, 2019, a decrease of $19,297, or 4%. Our operating loss decreased primarily due to improvements in collection efforts and reductions in corporate overhead and professional fees that offset our decreased gross profits due to the effects of Covid-19 during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

 

Other Income (Expense)

 

Other expense, on a net basis, for the three months ended June 30, 2020 was $48,809, compared to other income, on a net basis, of $1,547 during the three months ended June 30, 2019, a net decrease of $50,356. Other expense consisted of $41,571 of interest expense and a loss on disposal of fixed assets of $28,238, as partially offset by other income, consisting of $21,000 of subleased rental income for the three months ended June 30, 2020. Other income during the three months ended June 30, 2019 consisted of $19,750 of subleased rents, as offset by $18,203 of interest expense.

 

Net Loss

 

Net loss for the three months ended June 30, 2020 was $520,687, compared to $489,628 during the three months ended June 30, 2019, an increase of $31,059, or 6%. The increased net loss was due primarily to reductions in gross profits due to Covid-19, as offset by improved collection efforts that reduced bad debts expense and reductions in corporate expenses as described above, in addition to increased interest on debt financing.

 

24

 

 

Results of Operations for the Nine Months Ended June 30, 2020 and 2019:

 

The following table summarizes selected items from the statement of operations for the nine months ended June 30, 2020 and 2019.

 

   Nine Months Ended June 30,   Increase / 
   2020   2019   (Decrease) 
Revenues  $1,971,141   $1,946,590   $24,551 
Cost of sales   1,250,234    1,334,217    (83,983)
Gross profit (loss)   720,907    612,373    108,534 
                
Operating expenses:               
General and administrative   1,123,479    1,240,612    (117,133)
Professional fees   688,902    677,299    11,603 
Bad debts expense   186,540    143,170    43,370 
Total operating expenses:   1,998,921    2,061,081    (62,160)
                
Operating loss   (1,278,014)   (1,448,708)   (170,694)
                
Total other income (expense)   (72,243)   45,441    (117,684)
                
Net loss  $(1,350,257)  $(1,403,267)  $(53,010)

 

Revenues

 

Aggregate revenues for the nine months ended June 30, 2020 were $1,971,141, compared to revenues of $1,946,590 during the nine months ended June 30, 2019, an increase of $24,551, or 1%. The increase in revenue was due to a strong first fiscal quarter, as offset by the negative effects the COVID-19 coronavirus pandemic had on the tourism industry in Nevada during the current period.

 

Cost of Sales

 

Cost of sales for the nine months ended June 30, 2020 were $1,250,234, compared to $1,334,217 during the nine months ended June 30, 2019, a decrease of $83,983, or 6%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. Our gross margins of approximately 37%, increased during the nine months ended June 30, 2020, compared to gross margins of approximately 31% during the nine months ended June 30, 2019, due primarily to increased revenues of $24,551 and $83,983 of decreased cost of sales in the current period. We intend to continue to automate processes through equipment enhancements to improve our margins, and implemented a new lab management system, purchased a new triple quad machine and are experimenting with a new microbiology testing system that we expect will help increase our testing capacity and decrease our variable costs.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended June 30, 2020 were $1,123,479, compared to $1,240,612 during the nine months ended June 30, 2019, a decrease of $117,133, or 9%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $72,060 and $85,110 during the nine months ended June 30, 2020 and 2019, respectively. General and administrative expenses decreased primarily due to decreased corporate overhead as we responded to the effects of Covid-19 during the current period.

 

Professional Fees

 

Professional fees for the nine months ended June 30, 2020 were $688,902, compared to $677,299 during the nine months ended June 30, 2019, an increase of $11,603, or 2%. Professional fees included non-cash, stock-based compensation of $179,678 and $328,317 during the nine months ended June 30, 2020 and June 30, 2019, respectively. Professional fees increased primarily due to increased legal fees associated with our acquisition of VSSL during the current period.

 

25

 

 

Bad Debts Expense

 

Bad debts expense for the nine months ended June 30, 2020 were $186,540, compared to $143,170 during the nine months ended June 30, 2019, an increase of $43,370, or 30%. Bad debts expense increased during the current period as our allowance for doubtful accounts increased to $239,731 during the period due to the effects of COVID-19.

 

Operating Loss

 

Our operating loss for the nine months ended June 30, 2020 was $1,278,014, compared to $1,448,708 during the nine months ended June 30, 2019, a decrease of $170,694, or 12%. Our operating loss decreased primarily due to increased gross profits and reductions in corporate overhead as we responded to the effects of Covid-19 during the nine months ended June 30, 2020, compared to the nine months ended June 30, 2019.

 

Other Income (Expense)

 

Other expense, on a net basis, for the nine months ended June 30, 2020 was $72,243, compared to other income, on a net basis, of $45,441 during the nine months ended June 30, 2019, a net decrease of $117,684. Other expense consisted of $107,005 of interest expense and a loss on disposal of fixed assets of $28,238, as partially offset by other income, consisting of $63,000 of subleased rental income for the nine months ended June 30, 2020. Other income during the nine months ended June 30, 2019 consisted of $62,400 of sublease rents and a $30,000 gain on settlement of a previously written off note receivable, as offset by $46,959 of interest expense.

 

Net Loss

 

Net loss for the nine months ended June 30, 2020 was $1,350,257, compared to $1,403,267 during the nine months ended June 30, 2019, a decrease of $53,010, or 4%. The decreased net loss was due primarily to increased gross profits, as partially offset by increased legal fees and bad debts expense as described above, in addition to a loss on disposal of fixed assets and increased interest on debt financing.

 

Liquidity and Capital Resources

 

The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the nine-month periods ended June 30, 2020 and 2019:

 

   2020   2019 
Operating Activities  $(614,937)  $(889,401)
Investing Activities   (341,008)   (125,261)
Financing Activities   759,068    1,125,000 
Net Increase (Decrease) in Cash  $(196,877)  $110,338 

 

Net Cash Used in Operating Activities

 

During the nine months ended June 30, 2020, net cash used in operating activities was $614,937, compared to net cash used in operating activities of $889,401 for the same period ended June 30, 2019. The decrease in cash used in operating activities was primarily attributable to our decreased net loss.

 

Net Cash Used in Investing Activities

 

During the nine months ended June 30, 2020, net cash used in investing activities was $341,008, compared to $125,261 for the same period ended June 30, 2019. The increase is attributable to investments made for cannabis testing equipment and the purchase of VSSL Enterprises, Ltd. in the current period.

 

Net Cash Provided by Financing Activities

 

During the nine months ended June 30, 2020, net cash provided by financing activities was $759,068, compared to net cash provided by financing activities of $1,125,000 for the same period ended June 30, 2019. The current period consisted primarily of $550,000 of proceeds received on convertible note financing, proceeds of $220,034 received on PPP notes payable and proceeds of $56,500 from the sale of stock, as offset by $41,824 of principal payments on an equipment lease and $25,642 of principal payments on an equipment loan, compared to $500,000 of proceeds received on convertible debt financing and $625,000 received from the sale of stock in the comparative period.

 

26

 

 

Ability to Continue as a Going Concern

 

As of June 30, 2020, our balance of cash on hand was $126,862. We currently may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial capital expenditure and working capital needs.

 

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

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Revenue Recognition

 

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.

 

27

 

 

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.

 

Stock-Based Compensation

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Interim President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2020, our Interim President and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

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

 

28

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

ITEM 1A. RISK FACTORS.

 

We have identified the following risk factor in addition to those included in Part I, Item 1A of our Form 10-K for the fiscal year ended September 30, 2019. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business, financial condition and results of operations.

 

The outbreak of the COVID-19 coronavirus has negatively impacted and could continue to negatively impact our business and the global economy. In addition, the COVID-19 pandemic could negatively impact our ability to obtain financing when required.

 

The recent outbreak of the COVID-19 coronavirus has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that we or our employees, customers, and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. While it is not possible at this time to estimate the full impact that COVID-19 will have on our business, following the end of our most recent quarter ended June 30, 2020, the Company’s cannabis testing operations significantly declined due to the decline in the Nevada cannabis markets resulting in turn from the substantial decline in Nevada tourism resulting from COVID-19. COVID-19 has also had an adverse impact on global economic conditions, which could impair our ability to raise capital when needed.

 

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

 

The following issuances of equity securities by the Company were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of the Securities Act of 1933 during the three-month period ended June 30, 2020:

 

Common Stock Issued for Services

 

On June 25, 2020, we issued 375,000 shares of common stock, restricted in accordance with Rule 144, to our CFO for services rendered pursuant to his employment agreement.

 

On April 6, 2020, we issued 500,000 shares of common stock, restricted in accordance with Rule 144, to a consultant for investor relations services to be performed from January 27, 2020 through July 27, 2020.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

Appointment of Interim President

 

On August 12, 2020, the Company appointed one of our Directors, Dennis Hartman as the Interim President of the Company. Mr. Hartmann was previously appointed to our Board of Directors on September 25, 2019. Mr. Hartmann, age 63, had been an attorney engaged in private practice in the State of California for over 35 years. Mr. Hartmann holds a B.S. from the University of Alabama and a J.D. from the University of Texas School of Law. Mr. Hartmann is not a party to an employment agreement with the Company and is not being compensated for his service as Interim President.

 

Debt Financing

 

On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note bears interest at 1.00% per annum, payable monthly beginning December 22, 2020, and is due on June 22, 2025. The PPP Note may be repaid at any time without penalty.

 

Under the Payroll Protection Program, the Company will be eligible for loan forgiveness up to the full amount of the Company PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning June 22, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 40% of the amount of the Company PPP Note. No assurance is provided that the Company will obtain forgiveness under the Company PPP Note in whole or in part.

 

The Company PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the Company PPP Note.

 

29

 

 

ITEM 6. EXHIBITS.

 

Exhibit   Description
2.1   Stock Purchase Agreement between Digipath, Inc., VSSL Enterprises, Ltd., Kyle Joseph Remenda, Philippe Olivier Henry, PhD, Audim Ventures Ltd., and Britt Ash Enterprises Ltd., dated March 9, 2020 (incorporated by reference to Exhibit 2.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on March 16, 2020)
3.1   Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.2   Bylaws (incorporated by reference to Exhibit 3.2 of the Form 10 filed with the Securities and Exchange Commission by Digipath, Inc. on July 15, 2011)
3.3   Certificate of Amendment to Articles of Incorporation dated April 4, 2014 (incorporated by reference to Exhibit 3.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.4   Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Series A Convertible Preferred Stock dated April 9, 2014 (incorporated by reference to Exhibit 3.2 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on April 10, 2014)
3.5   Certificate of Amendment to Articles of Incorporation dated May 22, 2015 (incorporated by reference to Exhibit 3.1 of the Current 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 Current Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on November 21, 2018)
4.2   Form of 8% Senior Secured Convertible Notes due September 23, 2020 (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K filed with the Securities and Exchange Commission by Digipath, Inc. on September 26, 2019)
4.3   9% Secured Convertible Note, between Digipath, Inc. and holder, due August 10, 2022 (incorporated by reference to Exhibit 4.3 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.4   9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.4 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
4.5   9% Secured Subordinated Convertible Note, between Digipath, Inc. and holder, due August 11, 2022 (incorporated by reference to Exhibit 4.5 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on May 15, 2020)
10.1   Security Agreement, between Digipath, Inc., Digipath Labs, Inc., and holder of the 9% Senior Secured Convertible Note due August 10, 2022 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
10.2   Security Agreement, between Digipath, Inc., Digipath Labs, Inc., and holder of the 9% Senior Secured Convertible Note due August 11, 2022 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on February 14, 2020)
10.3   Security Agreement, between Digipath, Inc., Digipath Labs, Inc., and holder of the 9% Senior Secured Convertible Note due August 11, 2022 (incorporated by reference to Exhibit 10.3 of the Current Report on Form 10-Q filed with the Securities and Exchange Commission by Digipath, Inc. on May 15, 2020)
10.4*   Paycheck Protection Program Loan Note between Digipath Labs, Inc. and WebBank, holder of the 1% Promissory Note due May 13, 2025
10.5*   Paycheck Protection Program Loan Note between Digipath, Inc. and Cross River Bank, holder of the 1% Promissory Note due June 22, 2025
31.1*   Section 302 Certification of Interim President
31.2*   Section 302 Certification of Chief Financial Officer
32.1*   Section 906 Certification of Interim President
32.2*   Section 906 Certification of Chief 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.

 

30

 

 

SIGNATURES

 

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

 

Date: August 14, 2020

 

DIGIPATH, INC.  
     
By: /s/ Dennis Hartmann  
Name: Dennis Hartmann  
Title: Interim President and Director  
     
By: /s/ Todd Peterson  
Name: Todd Peterson  
Title: Chief Financial Officer and Secretary  

 

31