Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics
and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices
for reliable testing, cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to
the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis
they ingest and to help maximize the quality of our clients’ products through research, development, and standardization.
Digipath has been operating a cannabis-testing lab in Nevada since 2015 and hopes to open labs in other states and countries that
have legalized the sale of cannabis, beginning with California or Arizona.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The
unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report
on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated
Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial
Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in
the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The interim Condensed Consolidated
Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented
are not necessarily indicative of the results that might be expected for the entire fiscal year.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common
control and ownership at December 31, 2020:
|
|
Jurisdiction
of
|
|
|
Name
of Entity(1)
|
|
Incorporation
|
|
Relationship
|
Digipath,
Inc.(2)
|
|
Nevada
|
|
Parent
|
Digipath
Labs, Inc.
|
|
Nevada
|
|
Subsidiary
|
TNM
News, Inc.
|
|
Nevada
|
|
Subsidiary
|
Digipath
Labs S.A.S.(3)
|
|
Colombia
|
|
Subsidiary
|
VSSL
Enterprises, Ltd.(4)
|
|
Canada
|
|
Subsidiary
|
(1)
|
All
entities are in the form of a corporation.
|
(2)
|
Holding
company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc.,
the parent company.
|
(3)
|
Formed
during the first fiscal quarter of 2019, but has not yet commenced significant operations.
|
(4)
|
Acquired
on March 11, 2020.
|
The
consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant
inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries
will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s
headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary
for fair presentation of the information contained therein.
Segment
Reporting
ASC
Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. The Company operates
as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Fair
Value of Financial Instruments
Under
FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant
measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements
as reflected herein. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the
balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company
recognizes revenue from the sale of lab testing services through our subsidiary Digipath Labs, Inc.
Revenue
is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis
products for licensed producers and cultivators within the state of Nevada on a determinable fixed
fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of
the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured.
We typically require payment within thirty days of the delivery of results. Management estimates
an allowance for doubtful accounts based on the aging of its receivables.
Stock-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC
718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the
fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete
or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently
large disincentives for nonperformance.
Adoption
of New Accounting Standards and Recently Issued Accounting Pronouncements
There
are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material
effect on its financial position, results of operations, or cash flows.
Note
2 – Going Concern
As
shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations
resulting in an accumulated deficit of $17,655,787, negative working capital of $572,905, and as of December 31, 2020, the Company’s
cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is
currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute
toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
The
consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the
Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note
3 – Related Party Transactions
Common
Stock Sold for Cash
On
December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of
$20,250.
Common
Stock Issued for Services
On
December 25, 2020, the Company issued 728,155 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note
4 – Fair Value of Financial Instruments
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 December 31, 2020 and September 30, 2020, respectively:
|
|
Fair Value Measurements at December 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
79,070
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
79,070
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term advances
|
|
|
-
|
|
|
|
50,112
|
|
|
|
-
|
|
Lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
534,024
|
|
Notes payable
|
|
|
-
|
|
|
|
459,935
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
1,200,000
|
|
Total liabilities
|
|
|
-
|
|
|
|
510,047
|
|
|
|
1,734,024
|
|
|
|
$
|
79,070
|
|
|
$
|
(510,047
|
)
|
|
$
|
(1,734,024
|
)
|
|
|
Fair Value Measurements at September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
82,749
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
82,749
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term advances
|
|
|
-
|
|
|
|
50,112
|
|
|
|
-
|
|
Lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
561,394
|
|
Notes payable
|
|
|
-
|
|
|
|
473,224
|
|
|
|
-
|
|
Convertible notes payable, net of discounts of $8,322
|
|
|
-
|
|
|
|
-
|
|
|
|
1,241,678
|
|
Total liabilities
|
|
|
-
|
|
|
|
523,336
|
|
|
|
1,803,072
|
|
|
|
$
|
82,749
|
|
|
$
|
(523,336
|
)
|
|
$
|
(1,803,072
|
)
|
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by
ASC Topic 820-10-35.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Level
3 liabilities consist of lease liabilities and a total of $1,200,000 of convertible debentures and $1,250,000 of convertible debentures,
net of discounts of $8,322, as of December 31, 2020 and September 30, 2020, respectively.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the three months ended December
31, 2020 or the year ended September 30, 2020.
Note
5 – Accounts Receivable
Accounts
receivable was $130,259 and $242,145 at December 31, 2020 and September 30, 2020, respectively, net of allowance for uncollectible
accounts of $216,302 and $128,944 at December 31, 2020 and September 30, 2020, respectively.
Note
6 – Other Current Assets
Other
current assets consist of the following:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
Prepaid expenses
|
|
$
|
39,901
|
|
|
$
|
48,151
|
|
Other receivable
|
|
|
5,321
|
|
|
|
5,522
|
|
Total other current assets
|
|
$
|
45,222
|
|
|
$
|
53,673
|
|
Note
7 – Fixed Assets
Fixed
assets consist of the following at December 31, 2020 and September 30, 2020:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
Software
|
|
$
|
124,697
|
|
|
$
|
124,697
|
|
Office equipment
|
|
|
74,777
|
|
|
|
74,777
|
|
Furniture and fixtures
|
|
|
29,879
|
|
|
|
29,879
|
|
Lab equipment
|
|
|
1,398,716
|
|
|
|
1,398,716
|
|
Leasehold improvements
|
|
|
494,117
|
|
|
|
494,117
|
|
Lab equipment held under capital leases
|
|
|
99,193
|
|
|
|
99,193
|
|
|
|
|
2,221,379
|
|
|
|
2,221,379
|
|
Less: accumulated depreciation
|
|
|
(1,419,239
|
)
|
|
|
(1,335,974
|
)
|
Total
|
|
$
|
802,140
|
|
|
$
|
885,405
|
|
Depreciation
and amortization expense totaled $83,265 and $70,874 for the three months ended December 31, 2020 and 2019, respectively.
Note
8 – Leases
The
Company leases its operating and office facility
under a non-cancelable real property lease agreement that expires on August 31, 2025. The Company also
has a financing lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is economically
feasible to continue to operate, management expects to enter into a new lease upon expiration. The real property lease contains
provisions requiring payment of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the
leased premise. As the Company’s leases do not provide implicit discount rates, the Company uses an incremental borrowing
rate based on the information available at the commencement date in determining the present value of lease payments.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The
components of lease expense were as follows:
|
|
For the Three
|
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
Operating lease cost
|
|
$
|
29,718
|
|
Finance lease cost:
|
|
|
|
|
Amortization of assets
|
|
|
6,946
|
|
Interest on lease liabilities
|
|
|
2,330
|
|
Total lease cost
|
|
$
|
38,994
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
December 31,
|
|
|
|
2020
|
|
Operating leases:
|
|
|
|
|
Operating lease assets
|
|
$
|
483,200
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
|
$
|
86,889
|
|
Noncurrent operating lease liabilities
|
|
|
401,170
|
|
Total operating lease liabilities
|
|
$
|
488,059
|
|
Finance lease:
|
|
|
|
|
Equipment, at cost
|
|
$
|
99,193
|
|
Accumulated amortization
|
|
|
(24,798
|
)
|
Equipment, net
|
|
$
|
74,395
|
|
|
|
|
|
|
Current portion of finance lease liability
|
|
$
|
34,053
|
|
Noncurrent finance lease liability
|
|
|
11,912
|
|
Total finance lease liability
|
|
$
|
45,965
|
|
|
|
|
|
|
Weighted average remaining lease term:
|
|
|
|
|
Operating leases
|
|
|
4.67 years
|
|
Finance leases
|
|
|
1.30 years
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
5.75
|
%
|
Finance lease
|
|
|
18.41
|
%
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
For the Three
|
|
|
|
Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
20,424
|
|
Financing cash flows used for finance leases
|
|
$
|
6,946
|
|
|
|
|
|
|
Leased assets obtained in exchange for lease liabilities:
|
|
|
|
|
Total operating lease liabilities
|
|
$
|
528,616
|
|
Total finance lease liabilities
|
|
$
|
99,193
|
|
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The
following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis,
including common area maintenance fees, under non-cancelable operating leases as of December 31, 2020:
Fiscal Year Ending
|
|
Minimum Lease
|
|
September 30,
|
|
Commitments
|
|
2021*
|
|
$
|
84,147
|
|
2022
|
|
|
115,550
|
|
2023
|
|
|
119,468
|
|
2024
|
|
|
123,543
|
|
2025
|
|
|
116,891
|
|
|
|
$
|
559,599
|
|
*
Liability pertains to the remaining nine month period from January 1, 2021 through September 30, 2021.
Future
minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as
follows at December 31, 2020:
|
|
Finance
|
|
|
|
Leases
|
|
|
|
|
|
2021*
|
|
$
|
30,921
|
|
2022
|
|
|
21,644
|
|
Total minimum lease payments
|
|
|
52,565
|
|
Less interest
|
|
|
6,600
|
|
Present value of lease liabilities
|
|
|
45,965
|
|
Less current portion
|
|
|
34,053
|
|
Long-term lease liabilities
|
|
$
|
11,912
|
|
*
Liability pertains to the remaining nine month period from January 1, 2021 through September 30, 2021.
Note
9 – Short Term Advances
Short
term advances consist of the following at December 31, 2020 and September 30, 2019, respectively:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
On July 20, 2020, we received $30,112 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8.0% per annum.
|
|
$
|
30,112
|
|
|
$
|
30,112
|
|
|
|
|
|
|
|
|
|
|
On January 21, 2020, we received $20,000 as a short-term loan from one of our convertible noteholders. No interest expense was recognized.
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
On December 26, 2019, we received $25,000 as a short-term loan from one of our convertible noteholders. The advance was subsequently repaid on February 6, 2020. No interest expense was recognized.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short term advances
|
|
$
|
50,112
|
|
|
$
|
50,112
|
|
The
Company recorded interest expense pursuant to the stated interest rates on the short term loans in the amount of $1,023 for the
three months ended December 31, 2020.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note
10 –Notes Payable
Notes
payable consists of the following at December 31, 2020 and September 30, 2019, respectively:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note carried interest at 1.00% per annum, payable monthly beginning December 22, 2020, and was due on June 22, 2025. The Digipath, Inc. Subsequent to the end of the quarter ended December 31, 2021, PPP Note and interest was forgiven by the Small Business Administration (“SBA”) on January 12, 2021.
|
|
$
|
40,114
|
|
|
$
|
40,114
|
|
|
|
|
|
|
|
|
|
|
On May 13, 2020, the Company, through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $179,920 from WebBank Corp, pursuant to a Promissory Note issued by Labs to WebBank Corp (the “Labs PPP Note”). The loan was made pursuant to the Payroll Protection Program. The Labs PPP Note bears interest at 1.00% per annum, payable monthly beginning December 13, 2020, and is due on May 13, 2022. The Labs PPP Note may be repaid at any time without penalty.
Under the Payroll Protection Program, Labs will be eligible for loan forgiveness up to the full amount of the Labs PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that Labs spends during the 8-week period beginning May 13, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the Labs PPP Note. No assurance is provided that Labs will obtain forgiveness under the Labs PPP Note in whole or in part.
|
|
|
179,920
|
|
|
|
179,920
|
|
|
|
|
|
|
|
|
|
|
On December 26, 2019, the Company financed the purchase of $377,124 of lab equipment, in part, with the proceeds of a bank loan in the amount of $291,931. The loan bears interest at the rate of 5.75% per annum and requires monthly payments of $5,622 over the five-year term of the loan ending on December 26, 2024. The Company’s obligations under this loan are secured by a lien on the purchased equipment.
|
|
|
239,901
|
|
|
|
253,190
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
459,935
|
|
|
|
473,224
|
|
Less: current maturities
|
|
|
(55,102
|
)
|
|
|
(54,317
|
)
|
Notes payable
|
|
$
|
404,833
|
|
|
$
|
418,907
|
|
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of
$4,131 and $3,819 during the three months ended December 31, 2020 and 2019, respectively.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note
11 – Convertible Notes Payable
Convertible
notes payable consists of the following at December 31, 2020 and September 30, 2020, respectively:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2020
|
|
|
|
|
|
|
|
|
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $10,000 of proceeds and the promissory note was increased to $60,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $10,000 of principal into 333,334 shares of common stock at a conversion price of $0.03 per share.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $200,000. The Company’s obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000. The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share in exchange for an additional $50,000 of proceeds that were received on January 4, 2021, and the promissory note was increased to $400,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.
|
|
|
300,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the year ended September 30, 2019.
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable
|
|
|
1,200,000
|
|
|
|
1,250,000
|
|
Less: unamortized debt discounts
|
|
|
-
|
|
|
|
(8,322
|
)
|
|
|
|
1,200,000
|
|
|
|
1,241,678
|
|
Less: current maturities
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable
|
|
$
|
1,200,000
|
|
|
$
|
1,241,678
|
|
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
In
addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible notes by allocating
a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the
feature was calculated on the commitment date using the effective conversion price of the convertible notes. This intrinsic value
is limited to the portion of the proceeds allocated to the convertible debt.
The
aforementioned accounting treatment resulted in a total debt discount equal to $70,964. The discount is amortized on a straight-line
basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement
date. The Company recorded debt amortization expense on the aforementioned debt discount in the amount of $-0- and $8,322 during
the three months ended December 31, 2020 and 2019, respectively.
All
of the convertible notes limit the maximum number of shares that can be owned by each note holder as a result of the conversions
to common stock to 4.99% of the Company’s issued and outstanding shares.
The
Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $26,567 and
$14,115 for the three months ended December 31, 2020 and 2019, respectively.
The
Company recognized interest expense for the three months ended December 31, 2020 and 2019, respectively, as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Interest on short term loans
|
|
$
|
1,023
|
|
|
$
|
-
|
|
Interest on capital leases
|
|
|
2,330
|
|
|
|
3,306
|
|
Interest on notes payable
|
|
|
4,131
|
|
|
|
3,819
|
|
Amortization of beneficial conversion features
|
|
|
8,322
|
|
|
|
8,321
|
|
Interest on convertible notes
|
|
|
26,567
|
|
|
|
14,115
|
|
Total interest expense
|
|
$
|
42,373
|
|
|
$
|
29,561
|
|
Note
12 - Changes in Stockholders’ Equity
Convertible
Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have
been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares
available for designation from time to time by the Board as set forth below. As of December 31, 2020, there were 1,325,942 shares
of Series A Preferred issued and outstanding. The
Board of Directors is authorized to determine any number of series into which the undesignated shares of preferred stock may be
divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Each
share of Series A Preferred is currently convertible into five shares of common stock.
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in
the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,325,942 shares of Series
A Preferred outstanding at December 31, 2020 are convertible into 6,629,710 shares of the common stock of the Company. No holder
is permitted to convert its shares of Series A Preferred if such conversion would cause the holder to beneficially own more than
4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder
by providing at least sixty-five days’ notice.
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 64,065,390 shares were issued and outstanding as of
February 12, 2021.
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Common
Stock Sales
On
December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of
$20,250.
Debt
Conversions
On
December 29, 2020, the three holders of the Company’s 9% Secured Convertible Notes converted
debt in the aggregate original principal amount of $110,000 into an aggregate of 3,666,668 shares at a conversion price of $0.03
per share.
Common
Stock Issued for Services
On
December 28, 2020, the Company issued 500,000 shares of common stock to a consultant for services rendered pursuant to his consulting
agreement. The aggregate fair value of the common stock was $12,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period.
On
December 25, 2020, the Company issued 728,155 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period.
Amortization
of Stock-Based Compensation
A
total of $17,060 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting
period during the three months ended December 31, 2020.
Note
13 – Common Stock Options
Stock
Incentive Plan
On
June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted
on March 5, 2012 and previously amended on May 20, 2014. As amended, the 2012 Plan provides for the issuance of up to 11,500,000
shares of common stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors
of, and consultants to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify
as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over
periods not exceeding ten years from date of grant.
A
total of 2,820,000 options were outstanding as of December 31, 2020. During the three months ended December 31, 2020, options
to purchase an aggregate total of 750,000 shares of common stock at a weighted average exercise price of $0.10 per share expired.
Note
14 – Common Stock Warrants
Warrants
to purchase a total of 3,877,024 shares of common stock were outstanding as of December 31, 2020.
During
the three months ended December 31, 2020, warrants to purchase an aggregate total of 397,245 shares of common stock at a weighted
average exercise price of $0.26 per share expired.
Note
15 – Other Income (Expense)
Other
income (expense) for the three months ended December 31, 2020 and 2019 consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Rental income on subleases
|
|
$
|
-
|
|
|
$
|
21,000
|
|
Interest expense
|
|
|
(42,373
|
)
|
|
|
(29,561
|
)
|
|
|
$
|
(42,373
|
)
|
|
$
|
(8,561
|
)
|
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Note
16 - Income Tax
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides
that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the three months ended December 31, 2020 and the year ended September 30, 2020, the Company incurred a net operating loss and,
accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to
the uncertainty of the realization of any tax assets. At December 31, 2020, the Company had approximately $13,056,000 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, 2020 and September 30, 2020, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
17 – Subsequent Events
Debt
Forgiveness
On
January 12, 2021, the Company PPP Note and interest in the principal amount of $40,114 was forgiven under the Payroll Protection
Program.