NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Nature of Business and Significant Accounting Policies
Nature
of Business
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) 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.
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●
|
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. We have been operating a cannabis testing lab
in Nevada since 2015 and have plans to open labs in other states that have legalized the sale of cannabis, beginning with
California.
|
|
|
|
|
●
|
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 Accounting
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange Commission (SEC). Intercompany accounts and transactions
have been eliminated. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The
FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common
control and ownership at September 30, 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
|
|
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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 were 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 Unconsolidated Entity” in the
Company’s Consolidated Balance Sheets. Our share of the losses in Digipath Corp. have exceeded our investment, therefore
there we no longer carry an asset on the balance
sheets, or a noncontrolling interest within the statements of operations.
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.
Reclassifications
Prior
year depreciation and amortization amounts of $244,580 have been reclassified to general and administrative expenses to conform
to the current period presentation. These reclassifications had no impact on net earnings, financial position or cash flows.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these estimates.
Segment
Reporting
ASC
Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Fair
Value of Financial Instruments
The
Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The
three levels are defined as follows:
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●
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Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
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●
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Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
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●
|
Level
3 inputs to valuation methodology are unobservable and significant to the fair measurement.
|
The
carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate
fair value primarily due to the short term nature of the instruments.
Accounts
Receivable
Accounts
receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability
based on past credit history with customers and their current financial condition. The Company had an allowance for doubtful accounts
of $32,180 and $-0- as of September 30, 2017 and 2016, respectively.
Fixed
Assets
Fixed
assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated
using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the
following life expectancy:
Software
|
|
|
3
years
|
|
Office
equipment
|
|
|
5
years
|
|
Furniture
and fixtures
|
|
|
5
years
|
|
Lab
equipment
|
|
|
7
years
|
|
Leasehold
improvements
|
|
|
Term
of lease
|
|
Repairs
and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which have extend the
useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are
retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss
is reflected in operations.
Impairment
of Long-Lived Assets
Long-lived
assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying
amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon
historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash
flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating
results to the extent that carrying value exceeds discounted cash flows of future operations.
Our
intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently
anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible
assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that
indicate the asset may be impaired.
Marketable
Securities
The
Company classifies its debt and marketable equity securities into held-to-maturity, trading, or available-for-sale categories.
Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities
to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available
for sale. Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet based on contractual
maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses
recognized in earnings. Debt and marketable equity securities not classified as held-to-maturity or as trading are classified
as available-for-sale and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the
determination of comprehensive income and reported in shareholders’ equity.
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 or certain volume commitments. We 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.
Advertising
Costs
The
Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $138,026 and $121,610
for the years ended September 30, 2017 and 2016, respectively.
Basic
and Diluted Loss Per Share
The
basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by
the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30,
2017 and 2016, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
Stock-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC
718) and Equity-Based Payments to Non-employees pursuant to ASC 505-50 (ASC 505-50). All transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the
fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete
or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently
large disincentives for nonperformance.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets
and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be
recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such
assets to be more likely than not.
Uncertain
Tax Positions
In
accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing
authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These
standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition.
Various
taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s
tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records
allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established,
is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The
assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with
the Company’s various filing positions.
Various
taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s
tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions.
In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records
allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established,
is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
Recent
Accounting Pronouncements
In
May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when a change to
the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification
accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after
a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim
periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect
the adoption of this ASU to have a material impact on its consolidated financial statements and does not plan to early adopt the
ASU.
In
May 2014 the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. Since ASU 2014-09 was issued, several
additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing
revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity
recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the new standard
is effective for reporting periods beginning after December 15, 2017. We plan to use the modified retrospective method of adoption
and will adopt the standard as of January 1, 2018, the beginning of our next fiscal year. We have completed an initial evaluation
of the potential impact from adopting the new standard, including a detailed review of performance obligations for all material
revenue streams. Based on this initial evaluation, we do not expect adoption will have a material impact on our financial position,
results of operations, or cash flows. Related disclosures will be expanded in line with the requirements of the standard. We will
continue our evaluation until our adoption of the new standard.
There
are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material
effect on its financial position, results of operations, or cash flows.
Note
2 – Going Concern
As
shown in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations resulting
in an accumulated deficit of ($11,496,671), and as of September 30, 2017, 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
Appointment
of Joseph J. Bianco as Chief Executive Officer
On
June 21, 2016, the Board appointed Joseph J. Bianco, one of our directors, to serve as the Company’s Chief Executive Officer.
As described further below, Todd Denkin, the Company’s Chief Executive Officer prior to such appointment, now serves as
the Company’s President and Chief Operating Officer, and as the President of Digipath’s wholly-owned subsidiaries,
Digipath Labs, Inc. and TNM News Corp.
In
connection with his appointment as Chief Executive Officer, Mr. Bianco entered into an Employment Agreement with the Company dated
June 21, 2016 for a three year term, and providing for an initial base salary of $96,000 per annum and a car allowance of $1,250
per month. Pursuant to this Employment Agreement, Mr. Bianco was awarded a stock option to purchase 4,750,000 shares of the Company’s
common stock at an exercise price of $0.20 per share. The option vests immediately as to one-half of the shares, one year from
the grant date as to one-quarter of the shares, and two years following the grant date as to the remaining one-quarter of the
shares. The Employment Agreement also terminated the letter agreement between Mr. Bianco’s affiliate and the Company pursuant
to which Mr. Bianco had provided consulting services to the Company.
Todd
Denkin Amended and Restated Employment Agreement
In
connection with Mr. Bianco’s appointment as the Company’s Chief Executive Officer, on June 21, 2016, the Company entered
into an Amended and Restated Employment Agreement with Todd Denkin, pursuant to which Mr. Denkin continues to serve as the Company’s
President, and in addition as its Chief Operating Officer, and as the President of Digipath’s wholly-owned subsidiaries,
Digipath Labs, Inc. and TNM News Corp. In addition, the term of Mr. Denkin’s employment has been extended for a period of
three years from June 21, 2016, and he will continue to be paid a base salary of $192,000 per annum, and receives a car allowance
of $750 per month. Pursuant to the Amended and Restated Employment Agreement, Mr. Denkin was awarded a stock option to purchase
2,500,000 shares of the Company’s common stock at an exercise price of $0.20 per share. The option vests immediately as
to one-half of the shares, one year from the grant date as to one-quarter of the shares, and two years following the grant date
as to the remaining one-quarter of the shares.
Stock
Issued to CFO for Services
On
March 1, 2017, the Company issued 25,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate fair
value of the common stock was $6,623 based on the closing price of the Company’s common stock on the date of grant, and
was expensed in full.
On
September 30, 2016, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate
fair value of the common stock was $59,970 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
Options
Issued to CFO for Services
On
June 19, 2015, the Company granted an option to purchase 100,000 shares of common stock as compensation for services to our Chief
Financial Officer. The option vests ratably in quarterly increments over one (1) year beginning September 19, 2015. The options
are exercisable until June 19, 2025 at an exercise price of $0.33 per share. The estimated fair value using the Black-Scholes
Pricing Model, based on a volatility rate of 237% and a call option value of $0.3274, was $32,744. The option was expensed over
the vesting period.
Stock
Issued to Director for Services
On
February 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer in connection with his appointment
to our Board of Directors. The aggregate fair value of the common stock was $34,000 based on the closing price of the Company’s
common stock on the date of grant, and was expensed in full.
Note
4 – Fair Value of Financial Instruments
Under
FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation
framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements
and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50
details the disclosures that are required for items measured at fair value.
The
Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial
assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date.
Level
2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market
data by correlation or other means (market corroborated inputs).
Level
3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset
or liability.
The
following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets
as of September 30, 2017 and 2016, respectively:
|
|
Fair
Value Measurements at September 30, 2017
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
178,177
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
|
178,177
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
178,177
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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 years ended September
30, 2017 or 2016.
We
recognized other than temporary impairment losses of $50,000 on our available-for-sale securities during the year ended September
30, 2017.
Note
5 – Accounts Receivable
Accounts
receivable was $266,613 and $98,441 at September 30, 2017 and 2016, respectively, net of allowance for uncollectible accounts
of $32,180 and $-0- at September 30, 2017 and 2016, respectively.
Note
6 – Fixed Assets
Fixed
assets consist of the following at September 30, 2017 and 2016:
|
|
For
the Years Ended
|
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Software
|
|
$
|
121,617
|
|
|
$
|
121,617
|
|
Office
equipment
|
|
|
36,080
|
|
|
|
36,080
|
|
Furniture
and fixtures
|
|
|
14,285
|
|
|
|
2,357
|
|
Lab
equipment
|
|
|
938,450
|
|
|
|
811,623
|
|
Leasehold
improvements
|
|
|
489,147
|
|
|
|
487,066
|
|
|
|
|
1,599,579
|
|
|
|
1,458,743
|
|
Less:
accumulated depreciation
|
|
|
(572,530
|
)
|
|
|
(318,995
|
)
|
Total
|
|
$
|
1,027,049
|
|
|
$
|
1,139,748
|
|
On
October 1, 2016, 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 $253,535 and $244,580 for the years ended September 30, 2017 and 2016, respectively.
Note
7 – Available-for-Sale Securities
Available-for-sale
securities consisted of 400,000 shares of common stock of Blue Line Protection Group, Inc., a Nevada corporation, acquired from
the issuer in March of 2015 for $50,000. These shares were evaluated and determined to be impaired on an ‘other than temporary’
basis on September 30, 2017, resulting in a loss of $50,000.
Note
8 – Stockholders’ Equity
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”). As of September 30, 2017, there are
1,897,942 shares of Series A Preferred issued and outstanding. 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. Effective as of April 4, 2014, the designations, rights and preferences of the preferred
shares changed to blank check preferred. The conversion price of the Series A Preferred is currently $0.20 per share.
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in
the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,897,942 shares of Series
A Preferred outstanding at September 30, 2017 are convertible into 9,489,710 shares of the common stock of the Company. No holder
is permitted to convert its shares of Series A Preferred if such conversion would cause the holder to beneficially own more than
4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder
by providing at least sixty-five days’ notice.
Additional
terms of the Series A Preferred include the following:
●
|
The
shares of Series A Preferred are entitled to dividends when, as and if declared by the Board as to the shares of the common
stock of the Company into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation
described above.
|
|
|
●
|
Upon
the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, the shares
of Series A Preferred are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase
price per share of Series A Preferred plus all accrued but unpaid dividends.
|
|
|
●
|
The
Series A Preferred plus all declared but unpaid dividends thereon automatically will be converted into common stock, at the
then applicable conversion rate, upon the affirmative vote of the holders of a majority of the outstanding shares of Series
A Preferred.
|
|
|
●
|
Each
share of Series A Preferred will carry a number of votes equal to the number of shares of common stock into which such Series
A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described above. The Series A Preferred
generally will vote together with the common stock and not as a separate class, except as provided below.
|
|
|
●
|
Consent
of the holders of the outstanding Series A Preferred is required in order for the Company to: (i) amend or change the rights,
preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred; (ii) authorize,
create or issue shares of any class of stock having rights, preferences, privileges or powers superior to the Series A Preferred;
(iii) reclassify any outstanding shares into shares having rights, preferences, privileges or powers superior to the Series
A Preferred; or (iv) amend the Company’s Articles of Incorporation or Bylaws in a manner that adversely affects the
rights of the Series A Preferred.
|
|
|
●
|
Pursuant
to the Securities Purchase Agreements, holders of Series A Preferred are entitled to unlimited “piggyback” registration
rights on registrations by the Company, subject to pro rata cutback at any underwriter’s discretion.
|
Preferred
Stock Conversions for the Year Ended September 30, 2017
For
the year ended September 30, 2017, a total of 1,622,500 shares of Series A Preferred were converted into 8,112,500 shares of common
stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Preferred
Stock Conversions for the Year Ended September 30, 2016
For
the year ended September 30, 2016, a total of 771,000 shares of Series A Preferred were converted into 3,855,000 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 35,027,118 shares were issued and outstanding as of
September 30, 2017.
Common
Stock Sales for the Year Ended September 30, 2017
On
August 25, 2017, the Company sold 33.333 units, consisting of 333,334 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.26 per share over a sixty month period, in exchange for total proceeds of $50,000. The
proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
August 25, 2017, the Company sold 7 units, consisting of 70,000 shares of its common stock and warrants to purchase 35,000 shares
of common stock, exercisable at $0.30 per share over a sixty month period, in exchange for total proceeds of $10,500. The proceeds
received were allocated between the common stock and warrants on a relative fair value basis.
On
August 4, 2017, the Company sold 100 units, consisting of 1,000,000 shares of its common stock and warrants to purchase 500,000
shares of common stock, exercisable at $0.26 per share over a sixty month period, in exchange for total proceeds of $150,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
July 28, 2017, the Company sold 33.333 units, consisting of 333,334 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.26 per share over a sixty month period, in exchange for total proceeds of $50,000. The
proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
June 21, 2017, the Company sold 33.333 units, consisting of 333,334 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.26 per share over a sixty month period, in exchange for total proceeds of $50,000. The
proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
February 21, 2017, the Company sold 1,428,575 units, consisting of 1,428,575 shares of its common stock and warrants to purchase
714,285 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds
of $250,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis. The warrants
were assigned to two individuals by the purchaser at the time of the sale.
Common
Stock Sales for the Year Ended September 30, 2016
On
May 2, 2016, the Company sold 100,000 units, consisting of 100,000 shares of its common stock and warrants to purchase 100,000
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $15,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 29, 2016, the Company sold 166,667 units, consisting of 166,667 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $25,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 14, 2016, the Company sold 166,667 units, consisting of 166,667 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $25,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 12, 2016, the Company sold 83,334 units, consisting of 83,334 shares of its common stock and warrants to purchase 83,334
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $12,500.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 7, 2016, the Company sold 166,667 units, consisting of 166,667 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $25,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
March 15, 2016, the Company sold 1,666,667 units, consisting of 1,666,667 shares of its common stock and warrants to purchase
1,666,667 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds
of $250,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
February 17, 2016, the Company sold 83,333 units, consisting of 83,333 shares of its common stock and warrants to purchase 83,333
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $12,500.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
January 19, 2016, the Company sold 333,334 units, consisting of 333,334 shares of its common stock and warrants to purchase 333,334
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $50,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
December 21, 2015, the Company sold 166,667 units, consisting of 166,667 shares of its common stock and warrants to purchase 166,667
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $25,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
November 23, 2015, the Company sold 100,000 units, consisting of 100,000 shares of its common stock and warrants to purchase 100,000
shares of common stock, exercisable at $0.40 per share over a thirty six month period, in exchange for total proceeds of $20,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
Additional
Common Stock Issuances for the Year Ended September 30, 2017
On
May 2, 2017, the Company issued 100,000 shares of common stock to Dr. John Abroon in connection with his appointment to our newly
created Advisory Board. The aggregate fair value of the common stock was $20,900 based on the closing price of the Company’s
common stock on the date of grant, and was expensed in full.
On
May 2, 2017, the Company issued 140,000 shares of common stock to a consultant in consideration of services rendered from April
1, 2017 through May 31, 2017. The aggregate fair value of the common stock was $29,260 based on the closing price of the Company’s
common stock on the date of grant, and was expensed in full.
On
March 1, 2017, the Company issued 25,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate fair
value of the common stock was $6,623 based on the closing price of the Company’s common stock on the date of grant, and
was expensed in full.
On
March 1, 2017, the Company issued 50,000 shares of common stock to its Chief Scientist as a bonus for services rendered. The aggregate
fair value of the common stock was $13,245 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
On
February 23, 2017, the Company issued 100,000 shares of common stock to a consultant for services to be rendered over a six month
period. The aggregate fair value of the common stock was $29,000 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
February 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer in connection with his appointment
to our Board of Directors. The aggregate fair value of the common stock was $34,000 based on the closing price of the Company’s
common stock on the date of grant, and was expensed in full.
On
February 22, 2017, the Company issued 40,000 shares of common stock to a consultant for services rendered. The aggregate fair
value of the common stock was $13,600 based on the closing price of the Company’s common stock on the date of grant, and
was expensed in full.
On
February 7, 2017, a total of 370,000 shares of common stock were issued to six consultants that were engaged to assist the Company
with acquisition activities over a six month period. The aggregate fair value of the common stock was $82,251 based on the closing
price of the Company’s common stock on the date of grant, and was expensed over the six month requisite service period.
Additional
Common Stock Issuances for the Year Ended September 30, 2016
On
September 30, 2016, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate
fair value of the common stock was $59,970 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
On
September 30, 2016, a total of 120,000 shares of common stock were issued to three consultants for services previously rendered.
The aggregate fair value of the common stock was $23,988 based on the closing price of the Company’s common stock on the
date of grant, and was expensed in full.
On
July 1, 2016, a total of 580,000 shares of common stock were issued to six consultants that were engaged to assist the Company
with acquisition activities over for a three month period. The aggregate fair value of the common stock was $104,980 based on
the closing price of the Company’s common stock on the date of grant, and was expensed over the three month requisite service
period.
On
February 1, 2016, a total of 300,000 shares of common stock were awarded to three consultants that were engaged to assist with
acquisition activities over for a three month period. The aggregate fair value of the common stock was $45,720 based on the closing
price of the Company’s common stock on the date of grant, and was expensed over the three month requisite service period.
On
January 1, 2016, the Company issued 40,000 shares of restricted common stock for investor relations services provided. The total
fair value of the common stock was $8,000 based on the closing price of the Company’s common stock on the date of grant
and was expensed in full.
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 was expensed over the twelve month requisite service period, resulting
in $17,500 and $52,500 of stock based compensation during the years ended September 30, 2017 and 2016, respectively.
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.
Common
Stock Option Issuances for the Year Ended September 30, 2016
No
common stock options were issued during the year ended September 30, 2017.
Common
Stock Option Issuances for the Year Ended September 30, 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.
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.
On
April 7, 2016, the Company granted options to purchase a total of 130,000 fully vested shares of common stock as compensation
for services to five employees. The options are exercisable over a ten year period at an exercise price of $0.22 per share. The
estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 238% and a call option value of $0.2183,
was $28,382. The fully vested options were expensed in full upon the grant date.
On
November 20, 2015, the Company granted options to purchase 500,000 fully vested shares of common stock as compensation for services
to a consultant. The options are exercisable over a three year period at an exercise price of $0.181 per share. The estimated
value using the Black-Scholes Pricing Model, based on a volatility rate of 234% and a call option value of $0.1734, was $86,708.
The fully vested options were expensed in full upon the grant date.
Common
Stock Options Exercised for the Years Ended September 30, 2017 and 2016
No
stock options were exercised during the years ended September 30, 2017 and 2016.
Common
Stock Options Cancelled or Expired for the Year Ended September 30, 2017
On
January 1, 2017, a total of 1,530 common stock options exercisable over a three year period from the original grant date of January
1, 2014 with an exercise price of $3.30 per share expired.
Common
Stock Options Cancelled or Expired for the Year Ended September 30, 2016
On
September 30, 2016, a total of 2,351 common stock options exercisable over a three year period from the original grant date of
September 30, 2013 with an exercise price of $3.30 per share expired.
The
following is a summary of information about the stock options outstanding at September 30, 2017.
|
|
Shares
Underlying
|
|
Shares
Underlying Options Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
Range
of
|
|
|
Underlying
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
Underlying
|
|
|
|
Average
|
|
Exercise
|
|
|
Options
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
|
Exercise
|
|
Prices
|
|
|
Outstanding
|
|
|
|
Life
|
|
|
|
Price
|
|
|
|
Exercisable
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.181
– $0.85
|
|
|
9,290,000
|
|
|
|
7.27
years
|
|
|
$
|
0.23
|
|
|
|
7,477,500
|
|
|
$
|
0.24
|
|
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants under the fixed option plan:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
Average
risk-free interest rates
|
|
|
N/A
|
%
|
|
|
1.18
|
%
|
Average
expected life (in years)
|
|
|
N/A
|
|
|
|
9.58
|
|
Volatility
|
|
|
N/A
|
%
|
|
|
235
|
%
|
The
Black-Scholes option pricing model was developed for use in estimating the fair value of short-term traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including expected stock price volatility. Because the Company’s common stock options have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can materially affect the fair
value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the
fair value of its common stock options. During the years ended September 30, 2017 and September 30, 2016, there were no options
granted with an exercise price below the fair value of the underlying stock at the grant date.
The
weighted average fair value of options granted with exercise prices at the current fair value of the underlying stock during the
year ended September 30, 2016 was approximately $0.20 per option.
The
following is a summary of activity of outstanding common stock options:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2015
|
|
|
1,413,881
|
|
|
$
|
0.43
|
|
Options
expired
|
|
|
(2,351
|
)
|
|
|
(0.30
|
)
|
Options
granted
|
|
|
7,880,000
|
|
|
|
3.30
|
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2016
|
|
|
9,291,530
|
|
|
|
0.23
|
|
Options
expired
|
|
|
(1,530
|
)
|
|
|
(3.30
|
)
|
|
|
|
|
|
|
|
|
|
Balance, September
30, 2017
|
|
|
9,290,000
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2017
|
|
|
7,477,500
|
|
|
$
|
0.24
|
|
Amortization
of Stock Options
A
total of $389,736 and $994,178 of stock-based compensation expense was recognized from the amortization of options over their
vesting period during the years ended September 30, 2017 and 2016, respectively.
As
of September 30, 2017, these options in the aggregate had no intrinsic value as the per share market price of $0.165 of the Company’s
common stock as of such date was less than the weighted-average exercise price of these options of $0.23.
Note
10 – Common Stock Warrants
In
addition to warrants issued in connection with private placements of our securities as set forth in Note 8 above, we issued the
following warrants to purchase our common stock as compensation for services.
On
June 6, 2016, the Company granted 659,800 fully vested common stock warrants as compensation for services to a consulting firm.
The options are exercisable over a five year period at an exercise price of $0.1901 per share. The estimated value using the Black-Scholes
Pricing Model, based on a volatility rate of 231% and a call option value of $0.1883, was $124,233 and was expensed in full on
June 6, 2016.
The
following is a summary of information about our warrants to purchase common stock outstanding at September 30, 2017 (including
those issued to both investors and service providers).
|
|
Shares
Underlying
|
|
Shares
Underlying Warrants Outstanding
|
|
Warrants
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Shares
|
|
|
Weighted
|
|
Range
of
|
|
Underlying
|
|
|
Remaining
|
|
|
Average
|
|
|
Underlying
|
|
|
Average
|
|
Exercise
|
|
Warrants
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Warrants
|
|
|
Exercise
|
|
Prices
|
|
|
Outstanding
|
|
|
|
Life
|
|
|
|
Price
|
|
|
|
Exercisable
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.1901
– $0.40
|
|
|
5,942,422
|
|
|
|
2.29
years
|
|
|
$
|
0.28
|
|
|
|
5,942,422
|
|
|
$
|
0.28
|
|
The
fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants under the fixed option plan:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
|
|
|
|
|
|
Average
risk-free interest rates
|
|
|
1.11
|
%
|
|
|
1.25
|
%
|
Average
expected life (in years)
|
|
|
3.50
|
|
|
|
3.50
|
|
Volatility
|
|
|
145
|
%
|
|
|
231
|
%
|
The
weighted average fair value of warrants granted with exercise prices at the current fair value of the underlying stock during
the years ended September 30, 2017 and 2016 was approximately $0.26 and $0.28 per warrant, respectively.
The
following is a summary of activity of outstanding common stock warrants:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2015
|
|
|
500,000
|
|
|
$
|
0.36
|
|
Warrants
granted
|
|
|
3,693,136
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2016
|
|
|
4,193,136
|
|
|
|
0.29
|
|
Warrants
granted
|
|
|
1,749,286
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2017
|
|
|
5,942,422
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2017
|
|
|
5,942,422
|
|
|
$
|
0.28
|
|
Amortization
of Stock Warrants
A
total of $-0- and $124,233 of stock-based compensation expense was recognized from the amortization of warrants over their vesting
period during the years ended September 30, 2017 and 2016, respectively.
Note
11 – Commitments and Contingencies
Lease
Commitment
The
Company leases space for its lab operations in Las Vegas, Nevada. Amounts of minimum future annual commitments on a calendar year
basis, including common area maintenance fees, under non-cancelable operating leases are as follows:
2017
|
|
$
|
47,329
|
|
2018
|
|
|
192,672
|
|
2019
|
|
|
198,904
|
|
2020
|
|
|
151,283
|
|
2021
|
|
|
50,102
|
|
Total
|
|
$
|
640,290
|
|
Rent
expense was $210,907 and $211,525 for the years ended September 30, 2017 and 2016, respectively.
Note 12 – Other Income
Other income for the years ended September
30, 2017 and 2016 consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Settlement income on license agreement
|
|
|
250,000
|
|
|
|
100,000
|
|
Rental income on subleases
|
|
|
20,568
|
|
|
|
30,000
|
|
Restitution income
|
|
|
11,500
|
|
|
|
24,000
|
|
|
|
|
282,068
|
|
|
|
154,000
|
|
Note
13 - Income Tax
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides
that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the years ended September 30, 2017 and 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 September 30, 2017, the Company had approximately $7,233,500 of federal net operating losses. The net operating
loss carry forwards, if not utilized, will begin to expire in 2031.
The
effective income tax rate for the years ended September 30, 2017 and 2016 consisted of the following:
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Federal
statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
State
income taxes
|
|
|
-
|
%
|
|
|
-
|
%
|
Change
in valuation allowance
|
|
|
(35.00
|
%)
|
|
|
(35.00
|
%)
|
Net
effective income tax rate
|
|
|
-
|
|
|
|
-
|
|
The
components of the Company’s deferred tax asset are as follows:
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
2,531,725
|
|
|
$
|
2,383,955
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets before valuation allowance
|
|
$
|
2,531,725
|
|
|
$
|
2,383,955
|
|
Less:
Valuation allowance
|
|
|
(2,531,725
|
)
|
|
|
(2,383,955
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Based
on the available objective evidence, including the Company’s history of its loss, management believes it is more likely
than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation
allowance against its net deferred tax assets at September 30, 2017 and 2016, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
14 – Subsequent Events
Preferred
Stock Conversions
On
December 19, 2017, a 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.
Common
Stock Sales
On
December 20, 2017, the Company sold 10 units, consisting of 100,000 shares of its common stock and 50,000 warrants, exercisable
at $0.26 per share over a sixty month period, in exchange for total proceeds of $18,000.
On
December 14, 2017, the Company sold 13.89 units, consisting of 138,889 shares of its common stock and 69,445 warrants, exercisable
at $0.30 per share over a sixty month period, in exchange for total proceeds of $10,500.
On
December 14, 2017, the Company sold 55.56 units, consisting of 555,600 shares of its common stock and 277,800 warrants, exercisable
at $0.26 per share over a sixty month period, in exchange for total proceeds of $150,000.
Common
Stock Issued for Services
On
December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate
fair value of the common stock was $78,810 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
On
December 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer for his services on our Board of
Directors. The aggregate fair value of the common stock was $26,270 based on the closing price of the Company’s common stock
on the date of grant, and was expensed in full.
On
November 29, 2017, a total of 314,069 shares of common stock were issued to three consultants that were engaged to assist the
Company with acquisition activities during the first fiscal period. The aggregate fair value of the common stock was $82,600 based
on the closing price of the Company’s common stock on the date of grant, and is being expensed over the six month requisite
service period.