Digipath, Inc. - FORM 10-Q

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

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 March 31, 2021

[ ] 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

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]

[ ]

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]

[ ]

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

[ ]

[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 May 14, 2021 was 68,181,820.

TABLE OF CONTENTS

		Page
		No.
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and September 30, 2020	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2021 and 2020 (Unaudited)	4
	Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months Ended March 31, 2021 and 2020 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended March 31, 2021 and 2020 (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	20
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	27
ITEM 1A.	RISK FACTORS	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4.	MINE SAFETY DISCLOSURES	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	28
	SIGNATURES	29

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
	2021			2020
	(Unaudited)
Assets

Current assets:
Cash	$	113,706		$	82,749
Accounts receivable, net		210,730			242,145
Other current assets		40,996			53,673
Deposits		18,675			18,675
Total current assets		384,107			397,242

Right-of-use asset		460,398			505,706
Fixed assets, net		725,175			885,405

Total Assets	$	1,569,680		$	1,788,353

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:
Accounts payable	$	329,307		$	387,946
Accrued expenses		190,742			163,152
Short term advances		90,112			50,112
Current portion of operating lease liabilities		89,078			84,731
Current portion of finance lease liabilities		33,146			32,532
Current maturities of notes payable		55,898			54,317
Total current liabilities		788,283			772,790

Non-current liabilities:
Operating lease liabilities		378,262			423,752
Finance lease liabilities		3,050			20,379
Notes payable		350,443			418,907
Convertible notes payable, net of discounts of $-0- and $8,322 at March 31, 2021 and September 30, 2020, respectively		1,160,000			1,241,678
Total non-current liabilities		1,891,755			2,104,716

Total Liabilities		2,680,038			2,877,506

Stockholders’ Equity (Deficit):
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; 68,181,820 and 58,270,567 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively		68,182			58,271
Additional paid-in capital		16,457,720			16,116,400
Accumulated (deficit)		(17,637,586	)		(17,265,150	)

Total Stockholders’ Equity (Deficit)		(1,110,358	)		(1,089,153	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	1,569,680		$	1,788,353

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Six Months Ended
	March 31,						March 31,
	2021			2020			2021			2020

Revenues	$	633,160		$	754,982		$	1,133,545		$	1,563,912
Cost of sales		416,915			497,029			837,800			902,510
Gross profit		216,245			257,953			295,745			661,402

Operating expenses:
General and administrative		211,961			406,919			437,011			795,351
Professional fees		107,819			327,434			222,363			511,067
Change in allowance for doubtful accounts		(106,155	)		117,870			(17,985	)		161,120
Total operating expenses		213,625			852,223			641,389			1,467,538

Operating income (loss)		2,620			(594,270	)		(345,644	)		(806,136	)

Other income (expense):
Other income		47,918			21,000			47,918			42,000
Interest expense		(32,337	)		(35,873	)		(74,710	)		(65,434	)
Total other income (expense)		15,581			(14,873	)		(26,792	)		(23,434	)

Net income (loss)	$	18,201		$	(609,143	)	$	(372,436	)	$	(829,570	)

Weighted average number of common shares outstanding - basic		65,418,890			50,586,842			61,882,937			49,473,671
Weighted average number of common shares outstanding - fully diluted		114,702,490			50,586,842			111,166,537			49,473,671

Net income (loss) per share - basic	$	0.00		$	(0.01	)	$	(0.01	)	$	(0.02	)
Net income (loss) per share - fully diluted	$	0.00		$	(0.01	)	$	0.00		$	(0.02	)

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

	For the Three Months Ended March 31, 2020
	Series A Convertible								Additional								Total Stockholders’
	Preferred Stock				Common Stock				Paid-in			Subscriptions		Accumulated			Equity
	Shares		Amount		Shares		Amount		Capital			Payable		(Deficit)			(Deficit)

Balance, December 31, 2019		1,325,942	$	1,326		48,532,666	$	48,533	$	15,374,094		$	-	$	(15,176,087	)	$	47,866

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		-		-		998,756		999		(8,536	)		37,500		-			29,963

Common stock options issued for services		-		-		-		-		20,611			-		-			20,611

Common stock warrants issued for services		-		-		-		-		70,012			-		-			70,012

Net loss for the three months ended March 31, 2020		-		-		-		-		-			-		(609,143	)		(609,143	)

Balance, March 31, 2020		1,325,942	$	1,326		56,737,672	$	56,738	$	15,879,225		$	37,500	$	(15,785,230	)	$	189,559

	For the Three Months Ended March 31, 2021
	Series A Convertible								Additional							Total Stockholders’
	Preferred Stock				Common Stock				Paid-in		Subscriptions		Accumulated			Equity
	Shares		Amount		Shares		Amount		Capital		Payable		(Deficit)			(Deficit)

Balance, December 31, 2020		1,325,942	$	1,326		64,065,390	$	64,065	$	16,284,916	$	-	$	(17,655,787	)	$	(1,305,480	)

Common stock issued for debt conversions		-		-		3,000,000		3,000		87,000		-		-			90,000

Common stock issued for services, related parties		-		-		866,430		867		47,913		-		-			48,780

Common stock issued for services		-		-		250,000		250		13,825		-		-			14,075

Common stock options issued for services, related parties		-		-		-		-		8,244		-		-			8,244

Common stock options issued for services		-		-		-		-		15,822		-		-			15,822

Net income for the three months ended March 31, 2021		-		-		-		-		-		-		18,201			18,201

Balance, March 31, 2021		1,325,942	$	1,326		68,181,820	$	68,182	$	16,457,720	$	-	$	(17,637,586	)	$	(1,110,358	)

	For the Six Months Ended March 31, 2020
	Series A Convertible								Additional							Total Stockholders’
	Preferred Stock				Common Stock				Paid-in		Subscriptions		Accumulated			Equity
	Shares		Amount		Shares		Amount		Capital		Payable		(Deficit)			(Deficit)

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		-		-		1,169,989		1,171		16,042		37,500		-			54,713

Common stock options issued for services		-		-		-		-		38,288		-		-			38,288

Common stock warrants issued for services		-		-		-		-		70,012		-		-			70,012

Net loss for the six months ended March 31, 2020		-		-		-		-		-		-		(829,570	)		(829,570	)

Balance, March 31, 2020		1,325,942	$	1,326		56,737,672	$	56,738	$	15,879,225	$	37,500	$	(15,785,230	)	$	189,559

	For the Six Months Ended March 31, 2021
	Series A Convertible								Additional							Total Stockholders’
	Preferred Stock				Common Stock				Paid-in		Subscriptions		Accumulated			Equity
	Shares		Amount		Shares		Amount		Capital		Payable		(Deficit)			(Deficit)

Balance, September 30, 2020		1,325,942	$	1,326		58,270,567	$	58,271	$	16,116,400	$	-	$	(17,265,150	)	$	(1,089,153	)

Common stock sold for cash, related party		-		-		900,000		900		19,350		-		-			20,250

Common stock issued for debt conversions		-		-		6,666,668		6,666		193,334		-		-			200,000

Common stock issued for services, related parties		-		-		1,594,585		1,595		62,185		-		-			63,780

Common stock issued for services		-		-		750,000		750		25,325		-		-			26,075

Common stock options issued for services, related parties		-		-		-		-		22,186		-		-			22,186

Common stock options issued for services		-		-		-		-		18,940		-		-			18,940

Net loss for the six months ended March 31, 2021		-		-		-		-		-		-		(372,436	)		(372,436	)

Balance, March 31, 2021		1,325,942	$	1,326		68,181,820	$	68,182	$	16,457,720	$	-	$	(17,637,586	)	$	(1,110,358	)

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended
	March 31,
	2021			2020
Cash flows from operating activities
Net loss	$	(372,436	)	$	(829,570	)
Adjustments to reconcile net loss to net cash used in operating activities:
Change in allowance for doubtful accounts		(17,985	)		43,250
Depreciation and amortization expense		159,209			156,171
Loss on disposal of fixed assets		2,227			-
Gain on early extinguishment of debt		(40,338	)		-
Stock issued for services		89,855			54,713
Options and warrants granted for services		41,126			108,300
Amortization of debt discounts		8,322			16,552
Decrease (increase) in assets:
Accounts receivable		49,400			(138,000	)
Other current assets		12,677			31,258
Inventory		-			(37,900	)
Deposits		-			26,057
Right-of-use assets		45,308			95,423
Increase (decrease) in liabilities:
Accounts payable		(58,639	)		103,736
Accrued expenses		27,814			6,971
Lease liabilities		(41,143	)		(93,465	)
Net cash used in operating activities		(94,603	)		(456,504	)

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		(1,206	)		(135,791	)
Net cash used in investing activities		(1,206	)		(335,648	)

Cash flows from financing activities
Proceeds from short term advances		40,000			25,000
Repayments of short term advances		-			(25,000	)
Principal payments on finance lease		(16,715	)		(35,387	)
Principal payments on note payable, equipment financing		(26,769	)		(12,729	)
Proceeds from convertible notes		110,000			550,000
Proceeds from sale of common stock		20,250			56,500
Net cash provided by financing activities		126,766			558,384

Net increase (decrease) in cash		30,957			(233,768	)
Cash - beginning		82,749			323,739
Cash - ending	$	113,706		$	89,971

Supplemental disclosures:
Interest paid	$	32,294		$	16,601
Income taxes paid	$	-		$	-

Non-cash investing and financing activities:
Fair value of net assets acquired from affiliate in business combination	$	-		$	18,871
Fair value of common stock paid to affiliate in business combination	$	-		$	373,750
Fixed assets acquired with capitalized finance lease	$	-		$	99,193
Fixed assets acquired with note payable, equipment financing	$	200,000		$	291,931

See accompanying notes to financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Organization

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

Basis of Presentation

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

The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020. 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 March 31, 2021:

	Jurisdiction of
Name of Entity⁽¹⁾	Incorporation	Relationship
Digipath, Inc.⁽²⁾	Nevada	Parent
Digipath Labs, Inc.	Nevada	Subsidiary
TNM News, Inc.	Nevada	Subsidiary
Digipath Labs S.A.S.⁽³⁾	Colombia	Subsidiary
VSSL Enterprises, Ltd.⁽⁴⁾	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⁾	Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations.
⁽⁴⁾	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.

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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

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

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

In August 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or related disclosures.

In November 2019, the FASB issued ASU 2019-12 – Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification. ASU 2019-12 and its related amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.

No other new accounting pronouncements, issued or effective during the period ended March 31, 2021, have had or are expected to have a significant impact on the Company’s financial statements.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 $17,637,586, negative working capital of $404,176, and as of March 31, 2021, 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 consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 3 – Related Party Transactions

Board of Directors Compensation

On March 25, 2021, the Board of Directors approved changes to the compensation arrangements for each of Edmond A. DeFrank and Dennis Hartmann for serving as directors of the Company, as follows:

	●	Effective April 1, 2021, annual compensation is increased from $18,000 to $30,000, payable in quarterly installments of $7,500 each; and

	●	Such compensation may now be paid in shares of common stock of the Company instead of cash, at the discretion of the Company.

In connection with the foregoing, the Board of Directors of the Company also approved changes to the compensation arrangements for Bruce Raben for serving as the Company’s Chairman of the Board, as follows:

	●	Effective April 1, 2021, annual compensation has been increased from $30,000 to $60,000, payable in quarterly installments of $15,000 each; and

	●	Such compensation may now be paid in shares of common stock of the Company instead of cash, at the discretion of the Company.

Common Stock Sold for Cash

On December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of $20,250.

Common Stock Issued for Services

On March 25, 2021, the Company issued 266,430 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, 2021, the Board also approved the issuance of 200,000 shares of Common Stock as a bonus to each of Edmond A. DeFrank, Dennis Hartmann and Bruce Raben, or 600,000 shares in the aggregate. The aggregate fair value of the common stock was $33,780 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

On December 25, 2020, the Company issued 728,155 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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4 – Fair Value of Financial Instruments

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

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

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

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

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

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of March 31, 2021 and September 30, 2020, respectively:

	Fair Value Measurements at March 31, 2021
	Level 1		Level 2			Level 3
Assets
Cash	$	113,706	$	-		$	-
Total assets		113,706		-			-
Liabilities
Short term advances		-		90,112			-
Lease liabilities		-		-			503,536
Notes payable		-		406,341			-
Convertible notes payable		-		-			1,160,000
Total liabilities		-		496,453			1,663,536
	$	113,706	$	(496,453	)	$	(1,663,536	)

	Fair Value Measurements at September 30, 2020
	Level 1		Level 2			Level 3
Assets
Cash	$	82,749	$	-		$	-
Total assets		82,749		-			-
Liabilities
Short term advances		-		50,112			-
Lease liabilities		-		-			561,394
Notes payable		-		473,224			-
Convertible notes payable, net of discounts of $8,322		-		-			1,241,678
Total liabilities		-		523,336			1,803,072
	$	82,749	$	(523,336	)	$	(1,803,072	)

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.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 liabilities consist of lease liabilities and a total of $1,160,000 of convertible debentures and $1,250,000 of convertible debentures, net of discounts of $-0- and $8,322, as of March 31, 2021 and September 30, 2020, respectively.

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the six months ended March 31, 2021 or the year ended September 30, 2020.

Note 5 – Accounts Receivable

Accounts receivable was $210,730 and $242,145 at March 31, 2021 and September 30, 2020, respectively, net of allowance for uncollectible accounts of $110,243 and $128,944 at March 31, 2021 and September 30, 2020, respectively.

Note 6 – Other Current Assets

Other current assets consist of the following:

	March 31,		September 30,
	2021		2020
Prepaid expenses	$	35,612	$	48,151
Other receivable		5,384		5,522
Total other current assets	$	40,996	$	53,673

Note 7 – Fixed Assets

Fixed assets consist of the following at March 31, 2021 and September 30, 2020:

	March 31,			September 30,
	2021			2020
Software	$	125,903		$	124,697
Office equipment		71,601			74,777
Furniture and fixtures		29,879			29,879
Lab equipment		1,398,716			1,398,716
Leasehold improvements		494,117			494,117
Lab equipment held under capital leases		99,193			99,193
		2,219,409			2,221,379
Less: accumulated depreciation		(1,494,234	)		(1,335,974	)
Total	$	725,175		$	885,405

On March 31, 2021, we distributed fixed assets with an aggregate net book value of $2,227 to our former CEO in satisfaction of accrued payroll that was owed. The fixed assets consisted of office equipment with a historical cost basis of $3,176 and accumulated depreciation of $949, resulting in a loss of $2,227 that was settled against the amount of unpaid compensation that was owed.

Depreciation and amortization expense totaled $159,209 and $156,171 for the six months ended March 31, 2021 and 2020, respectively.

Note 8 – Leases

The Company leases its operating and office facility under a non-cancelable real property lease agreement that expires on August 31, 2025. The Company also has a financing lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is economically feasible to continue to operate, management expects to enter into a new lease upon expiration. The real property lease contains provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The components of lease expense were as follows:

	For the Six
	Months Ended
	March 31,
	2021
Finance lease cost	$	21,644
Operating lease cost:
Amortization of assets		45,308
Interest on lease liabilities		14,129
Total lease cost	$	59,437

Supplemental balance sheet information related to leases was as follows:

	March 31,
	2021
Operating leases:
Operating lease assets	$	460,398

Current portion of operating lease liabilities	$	89,078
Noncurrent operating lease liabilities		378,262
Total operating lease liabilities	$	467,340
Finance lease:
Equipment, at cost	$	99,193
Accumulated amortization		(29,758	)
Equipment, net	$	69,435

Current portion of finance lease liability	$	33,146
Noncurrent finance lease liability		3,050
Total finance lease liability	$	36,196

Weighted average remaining lease term:
Operating leases		4.42 years
Finance leases		1.05 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 Six
	Months Ended
	March 31,
	2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	41,143
Financing cash flows used for finance leases	$	16,715

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Fiscal Year Ending	Minimum Lease
September 30,	Commitments
2021 (for the six months remaining)	$	56,511
2022		115,550
2023		119,468
2024		123,543
2025		116,891
	$	531,963

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

	Finance
	Leases

2021 (for the six months remaining)	$	18,553
2022		21,644
Total minimum lease payments		40,197
Less interest		4,001
Present value of lease liabilities		36,196
Less current portion		33,146
Long-term lease liabilities	$	3,050

Note 9 – Short Term Advances

Short term advances consist of the following at March 31, 2021 and September 30, 2020, respectively:

	March 31,		September 30,
	2021		2020

On March 23, 2021, we received $40,000 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8% per annum.	$	40,000	$	-

On July 20, 2020, we received $30,112 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8% per annum.		30,112		30,112

On January 21, 2020, we received $20,000 as a short-term loan from one of our convertible noteholders. No interest expense was recognized.		20,000		20,000

Total short term advances	$	90,112	$	50,112

The Company recorded interest expense pursuant to the stated interest rates on the short term loans in the amount of $1,687 for the six months ended March 31, 2021.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 10 –Notes Payable

Notes payable consists of the following at March 31, 2021 and September 30, 2020, respectively:

	March 31,			September 30,
	2021			2020

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 carried interest at 1.00% per annum, payable monthly beginning December 22, 2020, and was due on June 22, 2025. On January 12, 2021, the PPP Note and interest was forgiven, resulting in a gain on early extinguishment of debt in the amount of $40,338.	$	-		$	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. 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 Labs PPP Note. No assurance is provided that Labs will obtain forgiveness under the Labs PPP Note in whole or in part.		179,920			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.		226,421			253,190

Total notes payable		406,341			473,224
Less: current maturities		(55,898	)		(54,317	)
Notes payable	$	350,443		$	418,907

The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $7,970 and $7,955 during the six months ended March 31, 2021 and 2020, respectively.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 11 – Convertible Notes Payable

Convertible notes payable consists of the following at March 31, 2021 and September 30, 2020, respectively:

	March 31,		September 30,
	2021		2020

On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $10,000 of proceeds and the promissory note was increased to $60,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $10,000 of principal into 333,334 shares of common stock at a conversion price of $0.03 per share.	$	50,000	$	50,000

On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $200,000. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.		150,000		150,000

On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000. The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds that were received on January 4, 2021, and the promissory note was increased to $400,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.		350,000		350,000

On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On February 22, 2021, the noteholder converted $90,000 of principal into 3,000,000 shares of common stock at a conversion price of $0.03 per share.		110,000		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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the year ended September 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 August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.		150,000		150,000

Total convertible notes payable		1,160,000		1,250,000
Less: unamortized debt discounts		-		(8,322	)
		1,160,000		1,241,678
Less: current maturities		-		-
Convertible notes payable	$	1,160,000	$	1,241,678

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 $-0- and $8,322 during the six months ended March 31, 2021 and 2020, 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 $51,802 and $34,796 for the six months ended March 31, 2021 and 2020, respectively.

The Company recognized interest expense for the six months ended March 31, 2021 and 2020, respectively, as follows:

	March 31,		March 31,
	2021		2020

Interest on short term loans	$	1,687	$	-
Interest on capital leases		4,929		6,131
Interest on notes payable		7,970		7,955
Amortization of beneficial conversion features		8,322		16,552
Interest on convertible notes		51,802		34,796
Total interest expense	$	74,710	$	65,434

Note 12 - 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 March 31, 2021, 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 March 31, 2021 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 68,181,820 shares were issued and outstanding as of March 31, 2021.

Common Stock Sales

On December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of $20,250.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Debt Conversions

On February 22, 2021, a convertible noteholder converted $90,000 of principal into 3,000,000 shares at a conversion price of $0.03 per share. The note was converted in accordance with the conversion terms; therefore, no gain or loss has been recognized.

On December 29, 2020, the three holders of the Company’s 9% Secured Convertible Notes converted debt in the aggregate original principal amount of $110,000 into an aggregate of 3,666,668 shares at a conversion price of $0.03 per share. The note was converted in accordance with the conversion terms; therefore, no gain or loss has been recognized.

Common Stock Issued for Services, Related Parties

On March 25, 2021, the Board approved the issuance of 200,000 shares of Common Stock as a bonus to each of Edmond A. DeFrank, Dennis Hartmann and Bruce Raben, or 600,000 shares in the aggregate. The aggregate fair value of the common stock was $33,780 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

Common Stock Issued for Services

On March 25, 2021, the Company issued 250,000 shares of common stock to a consultant as a bonus for services rendered. The aggregate fair value of the common stock was $14,075 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

On December 28, 2020, the Company issued 500,000 shares of common stock to a consultant for services rendered pursuant to his consulting agreement. The aggregate fair value of the common stock was $12,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

Amortization of Stock-Based Compensation

A total of $41,126 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting period during the six months ended March 31, 2021.

Note 13 – Common Stock Options

Stock Incentive Plan

On June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted on March 5, 2012 and previously amended on May 20, 2014. As amended, the 2012 Plan provides for the issuance of up to 11,500,000 shares of common stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant.

A total of 3,120,000 options were outstanding as of March 31, 2021. During the six months ended March 31, 2021, options to purchase an aggregate total of 750,000 shares of common stock at a weighted average exercise price of $0.10 per share expired.

Options Granted

On March 25, 2021, we granted options to an individual to purchase 300,000 shares of the Company’s common stock, having an exercise price of $0.06 per share, exercisable over a ten-year term. The options are fully vested. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 167% and a call option value of $0.0527, was $15,822, resulting in $15,822 of stock-based compensation expense during the three months ended March 31, 2021.

Options Forfeited

On December 30, 2020, a total of 750,000 options with a weighted average exercise price of $0.10 were forfeited.

Note 14 – Common Stock Warrants

Warrants to purchase a total of 3,877,024 shares of common stock were outstanding as of March 31, 2021.

DIGIPATH, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the six months ended March 31, 2021, warrants to purchase an aggregate total of 397,245 shares of common stock at a weighted average exercise price of $0.26 per share expired.

Note 15 – Other Income (Expense)

Other income (expense) for the six months ended March 31, 2021 and 2020 consisted of the following:

	March 31,
	2021			2020
Gain on early extinguishment of debt	$	40,338		$	-
Settlement of accrued wages owed to former CEO with distribution of assets		7,580			-
Rental income on subleases		-			42,000
Interest expense		(74,710	)		(65,434	)
	$	(26,792	)	$	(23,434	)

Note 16 - 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 six months ended March 31, 2021 and the year ended September 30, 2020, 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 March 31, 2021, the Company had approximately $13,030,000 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 March 31, 2021 and September 30, 2020, respectively.

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

Note 17 – Subsequent Events

Short Term Advance

On April 29, 2021, the Company received $25,000 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8% per annum.

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, 2020 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, 2020 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

Overview

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

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

The following table summarizes selected items from the statement of operations for the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31,						Increase /
	2021			2020			(Decrease)
Revenues	$	633,160		$	754,982		$	(121,822	)
Cost of sales		416,915			497,029			(80,114	)
Gross profit		216,245			257,953			(41,708	)

Operating expenses:
General and administrative		211,961			406,919			(194,958	)
Professional fees		107,819			327,434			(219,615	)
Change in allowance for doubtful accounts		(106,155	)		117,870			(224,025	)
Total operating expenses:		213,625			852,223			(638,598	)

Operating income (loss)		2,620			(594,270	)		596,890

Total other income (expense)		15,581			(14,873	)		30,454

Net income (loss)	$	18,201		$	(609,143	)	$	627,344

Revenues

Aggregate revenues for the three months ended March 31, 2021 were $633,160, compared to revenues of $754,982 during the three months ended March 31, 2020, a decrease of $121,822, or 16%. 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 March 31, 2021 were $416,915, compared to $497,029 during the three months ended March 31, 2020, a decrease of $80,114, or 16%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to our decreased sales. Our gross margins were approximately 34% during both the three months ended March 31, 2021 and 2020, which translated to $41,708 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 March 31, 2021 were $211,961, compared to $406,919 during the three months ended March 31, 2020, a decrease of $194,958, or 48%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $16,952 and $19,684 during the three months ended March 31, 2021 and 2020, respectively. General and administrative expenses decreased due primarily to decreased corporate overhead activities and the discontinuation of rents on warehouse space that we were previously subleasing.

Professional Fees

Professional fees for the three months ended March 31, 2021 were $107,819, compared to $327,434 during the three months ended March 31, 2020, a decrease of $219,615, or 67%. Professional fees included non-cash, stock-based compensation of $44,147 and $100,902 during the three months ended March 31, 2021 and March 31, 2020, respectively. Professional fees decreased primarily due to decreased corporate consulting services during the current period as we focused primarily on the lab operations during the current period.

Change in Allowance for Doubtful Accounts

Our change in allowance for doubtful accounts for the three months ended March 31, 2021 resulted in $106,155 of income, compared to $117,870 of expense during the three months ended March 31, 2020, an increase of $224,025, or 190%. Our change in allowance for doubtful accounts improved during the current period primarily as our allowance for doubtful accounts decreased from $216,302 to $110,147 during the quarter, as the Nevada tourism market began to open up again and our customers’ cash flows improved.

Operating Income (Loss)

Our operating income for the three months ended March 31, 2021 was $2,620, compared to an operating loss of $594,270 during the three months ended March 31, 2020, an increase of $596,890. Our operating income increased primarily due to our decreased allowance for doubtful accounts and overhead cost saving measures we implemented in response to Covid-19 that were not reflected in the three months ended March 31, 2020.

Other Income (Expense)

Other income, on a net basis, for the three months ended March 31, 2021 was $15,581, compared to other expense, on a net basis, of $14,873 during the three months ended March 31, 2020, a net increase of $30,454. Other income consisted of a gain on early extinguishment of debt in the amount of $40,338, a gain on the distribution of $7,580 of previously impaired inventory to our former CEO, as partially offset by interest expense of $32,337 for the three months ended March 31, 2021. Other expense consisted of $35,873 of interest expense, as partially offset by other income, consisting of $21,000 of subleased rental income for the three months ended March 31, 2020.

Net Income (Loss)

Net income for the three months ended March 31, 2021 was $18,201, compared to a net loss of $609,143 during the three months ended March 31, 2020, an increase of $627,344. The increased net income was due to our decreased allowance for doubtful accounts and overhead cost savings, as we cut costs in order to address the economic effects of Covid-19, as described above, in addition to the $40,338 gain on early extinguishment of debt financing during the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

Results of Operations for the Six Months Ended March 31, 2021 and 2020:

The following table summarizes selected items from the statement of operations for the six months ended March 31, 2021 and 2020.

	Six Months Ended March 31,						Increase /
	2021			2020			(Decrease)
Revenues	$	1,133,545		$	1,563,912		$	(430,367	)
Cost of sales		837,800			902,510			(64,710	)
Gross profit		295,745			661,402			(365,657	)

Operating expenses:
General and administrative		437,011			795,351			(358,340	)
Professional fees		222,363			511,067			(288,704	)
Change in allowance for doubtful accounts		(17,985	)		161,120			179,105
Total operating expenses:		641,389			1,467,538			(826,149	)

Operating loss		(345,644	)		(806,136	)		(460,492	)

Total other income (expense)		(26,792	)		(23,434	)		3,358

Net loss	$	(372,436	)	$	(829,570	)	$	(457,134	)

Revenues

Aggregate revenues for the six months ended March 31, 2021 were $1,133,545, compared to revenues of $1,563,912 during the six months ended March 31, 2020, a decrease of $430,367, or 28%. 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 six months ended March 31, 2021 were $837,800, compared to $902,510 during the six months ended March 31, 2020, a decrease of $64,710, or 7%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to our decreased sales. Our gross margins of approximately 26% and 42% during the six months ended March 31, 2021 and 2020, respectively, translated to $365,657 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 six months ended March 31, 2021 were $437,011, compared to $795,351 during the six months ended March 31, 2020, a decrease of $358,340, or 45%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $33,904 and $38,084 during the six months ended March 31, 2021 and 2020, respectively. General and administrative expenses decreased due primarily to decreased corporate overhead activities and the discontinuation of rents on warehouse space that we were previously subleasing.

Professional Fees

Professional fees for the six months ended March 31, 2021 were $222,363, compared to $511,067 during the six months ended March 31, 2020, a decrease of $288,704, or 56%. Professional fees included non-cash, stock-based compensation of $97,077 and $124,929 during the six months ended March 31, 2021 and March 31, 2020, respectively. Professional fees decreased primarily due to decreased corporate consulting services during the current period as we focused primarily on the lab operations during the current period.

Change in Allowance for Doubtful Accounts

Our change in allowance for doubtful accounts resulted in $17,985 of income for the six months ended March 31, 2021, compared to $43,250 during the six months ended March 31, 2020, an increase of $179,105, or 111%. Our change in allowance for doubtful accounts improved during the current period primarily as our allowance for doubtful accounts decreased from $128,132 to $110,147 during the period, as the Nevada tourism market began to open up again and our customers’ cash flows improved.

Operating Loss

Our operating loss for the six months ended March 31, 2021 was $345,644, compared to $806,136 during the six months ended March 31, 2020, a decrease of $467,992, or 56%. Our operating loss decreased primarily due to our decreased allowance for doubtful accounts and overhead cost saving measures we implemented in response to Covid-19 that were not reflected in the six months ended March 31, 2021, compared to the six months ended March 31, 2020.

Other Income (Expense)

Other expense, on a net basis, for the six months ended March 31, 2021 was $26,792, compared to other expense, on a net basis, of $23,434 during the six months ended March 31, 2020, a net increase of $3,358. Other expense consisted of $74,710 of interest expense, as offset by a gain on early extinguishment of debt in the amount of $40,338 and a gain on the distribution of $7,580 of previously impaired inventory to our former CEO, compared to $65,434 of interest expense, as offset by $21,000 of sublet rental income, during the six months ended March 31, 2020.

Net Loss

Net loss for the six months ended March 31, 2021 was $372,436, compared to $829,570 during the six months ended March 31, 2020, a decrease of $457,134, or 57%. The decreased net loss was due primarily to overhead cost savings, as offset in part by reduced sales and diminished profit margins, as we focused all of our efforts on operating the lab due to the effects of Covid-19, as described above, during the six months ended March 31, 2021, compared to the six months ended March 31, 2020.

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 six-month periods ended March 31, 2021 and 2020:

	2021			2020
Operating Activities	$	(94,603	)	$	(456,504	)
Investing Activities		(1,206	)		(335,648	)
Financing Activities		126,766			558,384
Net Increase (Decrease) in Cash	$	30,957		$	(233,768	)

Net Cash Used in Operating Activities

During the six months ended March 31, 2021, net cash used in operating activities was $94,603, compared to net cash used in operating activities of $456,504 for the same period ended March 31, 2020. The decrease in cash used in operating activities was primarily attributable to our decreased net loss.

Net Cash Used in Investing Activities

During the six months ended March 31, 2021, net cash used in investing activities was $1,206, compared to $335,648 for the same period ended March 31, 2020. The decrease is attributable to fewer investments made for cannabis testing equipment in the current period, and the $200,000 purchase of VSSL Enterprises, Ltd. in the prior period.

Net Cash Provided by Financing Activities

During the six months ended March 31, 2021, net cash provided by financing activities was $126,766, compared to net cash provided by financing activities of $558,384 for the same period ended March 31, 2020. The current period consisted primarily of $150,000 of proceeds received on debt financing, proceeds of $20,250 from the sale of stock, as offset by $16,715 of principal payments on an equipment lease and $26,769 of principal payments on an equipment loan, compared to $ 550,000 of proceeds received on convertible note financing and proceeds of $56,500 from the sale of stock, as offset by $35,387 of principal payments on an equipment lease and $12,729 of principal payments on an equipment loan in the comparative period.

Ability to Continue as a Going Concern

As of March 31, 2021, our balance of cash on hand was $113,706. 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

Stock-Based Compensation

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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 March 31, 2021. 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 March 31, 2021, 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.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

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

ITEM 1A.

RISK FACTORS.

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following issuances of equity securities by the Company were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of the Securities Act of 1933 during the three-month period ended March 31, 2021:

Common Stock Issued for Services

On March 25, 2021, we issued 200,000 shares of common stock, restricted in accordance with Rule 144, to each of our three directors, or 600,000 shares in the aggregate.

On March 25, 2021, we issued 266,430 shares of common stock, restricted in accordance with Rule 144, to our CFO for services rendered pursuant to his employment agreement.

On December 28, 2020, we issued 250,000 shares of common stock, restricted in accordance with Rule 144, to a consultant for services.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

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

* Filed herewith.

SIGNATURES

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

Date: May 17, 2021

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

Digipath, Inc. - FORM 10-Q - May 17, 2021

Attached files

Digipath, Inc. Reports