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”)
supports
the cannabis industry’s best practices for reliable testing, cannabis education and training, and brings unbiased cannabis
news coverage to the cannabis industry
. Our business units are described below.
|
●
|
Digipath
Labs, Inc. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry 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. In May of 2015, we opened our first testing lab in Nevada and
have plans to open labs in other states that have legalized the sale of cannabis.
|
|
|
|
|
●
|
The
National Marijuana News Corp. provides a balanced and unbiased approach to cannabis news, interviews and education with a
news/talk radio show, app, national marijuana news website and social media presence focusing on the political, economic,
medicinal, scientific, and cultural dimensions of the rapidly evolving—and profoundly controversial—medicinal
and recreational marijuana industry.
|
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, 2016. 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 September 30, 2016:
|
|
State 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
|
|
(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)
|
Entity
formed for prospective purposes, but has not incurred any income or expenses to date.
|
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.
Equity
Method
Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation
of several factors including, among others, representation on the Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting,
an Investee company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of
Operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption “Equity
in losses of unconsolidated entity” in the Consolidated Statements of Operations. The Company’s carrying value in
an equity method Investee company is reflected in the caption “Investment in Digipath Corp.” in the Company’s
Consolidated Balance Sheets. As of December 31, 2016, our share of losses from the investee company exceeded our basis, therefore
the investment is not currently presented on the balance sheet.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
U.S.
GAAP considers a change in reporting entity to include “changing specific subsidiaries that make up the group of entities
for which consolidated financial statements are presented.” Circumstances may arise where a parent’s controlling financial
interest (e.g., generally an ownership interest in excess of 50 percent of the outstanding voting stock) is reduced to a noncontrolling
investment that still enables it to exercise significant influence over the operating and financial policies of the investee.
A change that results from changed facts and circumstances (such as a partial sale of a subsidiary), where there was only one
acceptable method of accounting prior to the change in circumstances (consolidation) and only one acceptable method of accounting
after the change (equity method accounting), is not a change in reporting entity and is not be accounted for retrospectively.
Accordingly, a change from a controlling interest to a noncontrolling investment accounted for under the equity method is accounted
for prospectively from the date of change in control. When the Company’s carrying value in an equity method Investee company
is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company
guaranteed obligations of the Investee company or has committed additional funding. When the Investee company subsequently reports
income, the Company will not record its share of such income until it equals the amount of its share of losses not previously
recognized.
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.
In addition, the Company had debt instruments that required fair value measurement on a recurring basis.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery of product has met the criteria
established in the arrangement or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably
assured. This occurs when the products or services are completed in accordance with the contracts we have with clients. In connection
with our products and services arrangements, when we are paid in advance, these amounts are classified as deferred revenue and
amortized over the term of the agreement. With respect to our cannabis lab testing revenues,
we sell
our services on a determinable fixed fee per test, or panel of tests basis, and offer a discounted price for customers that agree
to enter into exclusive, long term contracts. W
e typically require payment within thirty days of the delivery of results.
Revenues are recognized upon the substantial completion of the tests when collectability is reasonably assured, which is usually
upon delivery of results to the customer.
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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Recent
Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-04,
Intangibles – Goodwill and Other (Topic 350)
. ASU 2017-04 simplifies the subsequent measurement of goodwill
by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should
be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should
be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company intends to early adopt the ASU in 2017.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
,
which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2018.
Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial
statements.
In
December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with
Customers
. ASU 2016-20 amended guidance regarding accounting for
Revenue from Contracts with Customers
, which requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. When effective, this standard will replace most existing revenue recognition guidance in GAAP. The standard also
requires more detailed disclosures and provides additional guidance for transactions that were not comprehensively addressed in
GAAP. This guidance is required to be adopted by us in the first quarter of fiscal 2019 by either recasting all years presented
in our financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of the
year of adoption. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-17,
Consolidation (Topic 810): Interests Held through Related Parties that are under
Common Control
. The amendments in this Update improve GAAP involving situations consisting of common control, wherein a single
decision maker focuses on the economics to which it is exposed when determining whether it is the primary beneficiary of a variable
interest entity (“VIE”) before potentially evaluating which party is most closely associated with the VIE. ASU 2016-17
is effective for public entities for fiscal periods beginning after December 15, 2017, including interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in
an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
,
which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for
an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence
was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU
2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual
reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial
statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the
first interim period if an entity issues interim financial statements. The Company is currently evaluating the impact of adopting
this ASU on its consolidated financial statements.
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.
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 ($10,557,691), and as of December 31, 2016, the Company’s cash on hand may not be
sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going
concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional
sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
The
consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the
Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note
3 – Related Party Transactions
Stock
Based Compensation for Services
On
January 1, 2016, we issued 500,000 shares of common stock to an entity owned by our CEO as compensation for board services rendered
during the 2016 calendar year. The aggregate fair value of the common stock was $70,000 based on the closing price of the Company’s
common stock on the date of grant, and was expensed in ratably over the requisite service period, resulting in $17,500 of stock
based compensation expense during the three months ended December 31, 2016.
On
June 21, 2016, the Company granted options to purchase 4,750,000 shares of common stock as compensation for services to our CEO,
Mr. Bianco. The options are exercisable over a ten year period at an exercise price of $0.20 per share, and 50% vest immediately,
with 25% vesting each year thereafter. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of
230% and a call option value of $0.1986, was $943,193. The options are being expensed over the vesting period, resulting in $58,950
of stock based compensation expense during the three months ended December 31, 2016.
On
June 21, 2016, the Company granted options to purchase 2,500,000 shares of common stock as compensation for services to our President
and COO, Mr. Denkin. The options are exercisable over a ten year period at an exercise price of $0.20 per share, and 50% vest
immediately, with 25% vesting each year thereafter. The estimated value using the Black-Scholes Pricing Model, based on a volatility
rate of 230% and a call option value of $0.1986, was $496,417. The options are being expensed over the vesting period, resulting
in $31,026 of stock based compensation expense during the three months ended December 31, 2016.
On
June 1, 2015, the Company granted options to purchase 200,000 shares of common stock as compensation for services to our Chief
Scientist. The options vest ratably in quarterly increments over two years beginning September 1, 2015. The options are exercisable
until June 1, 2025 at an exercise price of $0.40 per share. The estimated value using the Black-Scholes Pricing Model, based on
a volatility rate of 247% and a call option value of $0.3978, was $79,552. The options are being expensed over the vesting period,
resulting in $9,944 of stock based compensation expense during the three months ended December 31, 2016.
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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 December 31, 2016 and September 30, 2016, respectively:
|
|
Fair
Value Measurements at December 31, 2016
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
163,338
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available-for-sale
securities
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
assets
|
|
|
179,338
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
179,338
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair
Value Measurements at September 30, 2016
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
135,390
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available-for-sale
securities
|
|
|
9,200
|
|
|
|
-
|
|
|
|
-
|
|
Total
assets
|
|
|
144,590
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
144,590
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by
ASC Topic 820-10-35.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the three months ended December
31, 2016 or the year ended September 30, 2016.
Note
5 – Accounts Receivable
Accounts
receivable was $107,334 and $98,441 at December 31, 2016 and September 30, 2016, respectively, net of allowance for doubtful accounts
of $14,450 and $-0- at December 31, 2016 and September 30, 2016, respectively.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 – Fixed Assets
Fixed
assets consist of the following at December 31, 2016 and September 30, 2016:
|
|
December
31, 2016
|
|
September
30, 2016
|
Software
|
|
$
|
121,617
|
|
|
$
|
121,617
|
|
Office
equipment
|
|
|
36,080
|
|
|
|
36,080
|
|
Furniture
and fixtures
|
|
|
2,357
|
|
|
|
2,357
|
|
Lab
equipment
|
|
|
813,712
|
|
|
|
811,623
|
|
Leasehold
improvements
|
|
|
487,066
|
|
|
|
487,066
|
|
|
|
|
1,460,832
|
|
|
|
1,458,743
|
|
Less:
accumulated depreciation
|
|
|
(380,648
|
)
|
|
|
(318,995
|
)
|
Total
|
|
$
|
1,080,184
|
|
|
$
|
1,139,748
|
|
On
October 1, 2015, we disposed of fixed assets with a net book value of $3,122 pursuant to the deconsolidation of Digipath Corp.
The fixed assets consisted of furniture and fixtures with a historical cost basis of $48,779 and software with a historical cost
basis of $10,019, and accumulated depreciation of $48,779 and $6,897, respectively. No gain or loss was recognized on the disposals.
Depreciation
and amortization expense totaled $61,653 and $61,092 for the three months ended December 31, 2016 and 2015, respectively.
Note
7 – Available-for-Sale Securities
Available-for-sale
securities consist of the following at December 31, 2016 and September 30, 2016:
|
|
For
the Three Months Ended December 31, 2016
|
|
|
|
|
Gains
in
|
|
Losses
in
|
|
|
|
|
|
|
Accumulated
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
Other
|
|
Estimated
|
|
|
Amortized
|
|
Comprehensive
|
|
Comprehensive
|
|
Fair
|
|
|
Cost
|
|
Income
|
|
Income
|
|
Value
|
Common
stock
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
(34,000
|
)
|
|
$
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
(34,000
|
)
|
|
$
|
16,000
|
|
|
|
For
the Year Ended September 30, 2016
|
|
|
|
|
Gains
in
|
|
Losses
in
|
|
|
|
|
|
|
Accumulated
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
Other
|
|
Estimated
|
|
|
Amortized
|
|
Comprehensive
|
|
Comprehensive
|
|
Fair
|
|
|
Cost
|
|
Income
|
|
Income
|
|
Value
|
Common
stock
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
(40,800
|
)
|
|
$
|
9,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
(40,800
|
)
|
|
$
|
9,200
|
|
Common
stock consisted of 400,000 shares of common stock of Blue Line Protection Group, Inc., a Nevada corporation, acquired in March
of 2015 for $50,000.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 -
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”).
The
Board of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to
determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock.
As
of December 31, 2016, there were 3,020,442 shares of Series A Preferred issued and outstanding. Shares of Series A Preferred are
convertible into common stock at a fixed conversion rate of $0.20 per share.
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 3,020,442 shares of Series
A Preferred outstanding at December 31, 2016 are convertible into 15,102,210 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.
Preferred
Stock Conversions
On
November 28, 2016
, a shareholder converted 200,000 shares of Series A Preferred into 1,000,000 shares
of common stock.
The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On
November 4, 2016, a shareholder converted 200,000 shares of Series A Preferred into 1,000,000 shares of common stock. The stock
was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On
October 4, 2016, a shareholder converted 100,000 shares of Series A Preferred into 500,000 shares of common stock. The stock was
converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Common
Stock
Common
stock consists of $0.001 par value, 90,000,000 shares authorized, of which 24,991,041 shares were issued and outstanding as of
December 31, 2016.
Common
Stock Issued for Services
On
January 1, 2016, an affiliate of Mr. Bianco, a director of the Company, became entitled to receive 500,000 shares of common stock
for consulting services to be performed during 2016, subject to a ratable “claw back” provision the event of an early
termination of the consulting agreement. The total fair value of the common stock was $70,000 based on the closing price of the
Company’s common stock on the date of grant, and is being expensed over the twelve month requisite service period, resulting
in $17,500 of stock based compensation during the period.
Amortization
of Stock Options
A
total of $99,920 of stock-based compensation expense was recognized from the amortization of options over their vesting period
during the three months ended December 31, 2016.
Note
9 – 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 9,291,530 options were outstanding as of December 31, 2016. No options were granted, exercised or expired during the
three months ended December 31, 2016.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
10 – Common Stock Warrants
A
total of 4,193,136 warrants were outstanding as of December 31, 2016. No warrants were granted, exercised or expired during the
three months ended December 31, 2016.
Note
11 – Other Income
Other
income consists of rental income of $-0- and $18,000 for the three months ended December 31, 2016 and 2015, respectively, for
office space subleased to GB Sciences, Inc. at a monthly fee of $6,000, along with $150,000 received during the three months ended
December 31, 2016 pursuant to the settlement of a $300,000 license agreement with GB Sciences, Inc. In addition, we recognized
$4,000 and $-0- of other income for the three months ended December 31, 2016 and 2015, respectively, related to restitution payments
received from a former employee.
Note
12 - 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 three months ended December 31, 2016 and the year ended September 30, 2016, 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 December 31, 2016, the Company had approximately $6,818,000 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 December 31, 2016 and September 30, 2016, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
13 – Subsequent Events
Preferred
Stock Conversions
On
January 20, 2017
, a shareholder converted 100,000 shares of Series A Preferred into 500,000 shares
of common stock.
The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On
January 27, 2017
, a shareholder converted 220,000 shares of Series A Preferred into 1,100,000 shares
of common stock.
The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
On
January 27, 2017
, another shareholder converted 150,000 shares of Series A Preferred into 750,000 shares
of common stock.
The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Options
expired
On
January 1, 2017, options to purchase a total of 1,530 shares of common stock at $3.30 per share expired.