ITEM
1. FINANCIAL STATEMENTS
.
DIGIPATH,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
286,365
|
|
|
$
|
176,027
|
|
Accounts
receivable, net
|
|
|
185,829
|
|
|
|
167,734
|
|
Other
current assets
|
|
|
98,338
|
|
|
|
72,690
|
|
Deposits
|
|
|
25,647
|
|
|
|
25,647
|
|
Total
current assets
|
|
|
596,179
|
|
|
|
442,098
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
792,781
|
|
|
|
957,108
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,388,960
|
|
|
$
|
1,399,206
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
161,917
|
|
|
$
|
325,864
|
|
Accrued
expenses
|
|
|
56,087
|
|
|
|
58,238
|
|
Deferred
revenues
|
|
|
-
|
|
|
|
525
|
|
Total
current liabilities
|
|
|
218,004
|
|
|
|
384,627
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of discounts of $49,747 and $-0- at June 30, 2019 and September 30, 2018, respectively
|
|
|
450,253
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
668,257
|
|
|
|
384,627
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 and 1,425,942 shares issued and
outstanding at June 30, 2019 and September 30, 2018, respectively
|
|
|
1,326
|
|
|
|
1,426
|
|
Common
stock, $0.001 par value, 250,000,000 and 90,000,000 shares authorized; 48,155,550 and 42,245,364 shares issued and
outstanding; at June 30, 2019 and September 30, 2018, respectively
|
|
|
48,156
|
|
|
|
42,245
|
|
Additional
paid-in capital
|
|
|
15,224,816
|
|
|
|
14,121,236
|
|
Accumulated
(deficit)
|
|
|
(14,553,595
|
)
|
|
|
(13,150,328
|
)
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
720,703
|
|
|
|
1,014,579
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
1,388,960
|
|
|
$
|
1,399,206
|
|
See
accompanying notes to financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
652,920
|
|
|
$
|
521,772
|
|
|
$
|
1,946,590
|
|
|
$
|
2,223,630
|
|
Cost
of sales
|
|
|
424,067
|
|
|
|
520,888
|
|
|
|
1,334,217
|
|
|
|
1,563,518
|
|
Gross
profit
|
|
|
228,853
|
|
|
|
884
|
|
|
|
612,373
|
|
|
|
660,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
431,636
|
|
|
|
360,689
|
|
|
|
1,240,612
|
|
|
|
1,108,202
|
|
Professional
fees
|
|
|
195,052
|
|
|
|
228,482
|
|
|
|
677,299
|
|
|
|
964,269
|
|
Bad
debts expense (recoveries)
|
|
|
93,340
|
|
|
|
(45,200
|
)
|
|
|
143,170
|
|
|
|
53,041
|
|
Total
operating expenses
|
|
|
720,028
|
|
|
|
543,971
|
|
|
|
2,061,081
|
|
|
|
2,125,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(491,175
|
)
|
|
|
(543,087
|
)
|
|
|
(1,448,708
|
)
|
|
|
(1,465,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
19,750
|
|
|
|
43,012
|
|
|
|
92,400
|
|
|
|
85,912
|
|
Interest
expense
|
|
|
(18,203
|
)
|
|
|
-
|
|
|
|
(46,959
|
)
|
|
|
-
|
|
Total
other income
|
|
|
1,547
|
|
|
|
43,012
|
|
|
|
45,441
|
|
|
|
85,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(489,628
|
)
|
|
$
|
(500,075
|
)
|
|
$
|
(1,403,267
|
)
|
|
$
|
(1,379,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic and fully diluted
|
|
|
47,934,212
|
|
|
|
40,374,897
|
|
|
|
45,509,076
|
|
|
|
38,237,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and fully diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
See
accompanying notes to financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
Series
A Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2017
|
|
|
1,897,942
|
|
|
$
|
1,898
|
|
|
|
35,027,118
|
|
|
$
|
35,027
|
|
|
$
|
12,866,984
|
|
|
$
|
(11,496,671
|
)
|
|
$
|
1,407,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
of common stock and warrants sold for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
2,158,934
|
|
|
|
2,159
|
|
|
|
366,449
|
|
|
|
-
|
|
|
|
368,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,326,855
|
|
|
|
2,327
|
|
|
|
450,210
|
|
|
|
-
|
|
|
|
452,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
439,853
|
|
|
|
-
|
|
|
|
439,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
|
(472,000
|
)
|
|
|
(472
|
)
|
|
|
2,360,000
|
|
|
|
2,360
|
|
|
|
(1,888
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless
exercise of options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
372,457
|
|
|
|
372
|
|
|
|
(372
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year ended September 30, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,653,657
|
)
|
|
|
(1,653,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2018
|
|
|
1,425,942
|
|
|
$
|
1,426
|
|
|
|
42,245,364
|
|
|
$
|
42,245
|
|
|
$
|
14,121,236
|
|
|
$
|
(13,150,328
|
)
|
|
$
|
1,014,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock sold for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
3,125,000
|
|
|
|
3,125
|
|
|
|
621,875
|
|
|
|
-
|
|
|
|
625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
1,810,186
|
|
|
|
1,811
|
|
|
|
274,204
|
|
|
|
-
|
|
|
|
276,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in exchange for termination of options
|
|
|
-
|
|
|
|
-
|
|
|
|
475,000
|
|
|
|
475
|
|
|
|
(475
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,412
|
|
|
|
-
|
|
|
|
137,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock
|
|
|
(100,000
|
)
|
|
|
(100
|
)
|
|
|
500,000
|
|
|
|
500
|
|
|
|
(400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible debts
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,964
|
|
|
|
-
|
|
|
|
70,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the nine months ended June 30, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,403,267
|
)
|
|
|
(1,403,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2019 (Unaudited)
|
|
|
1,325,942
|
|
|
$
|
1,326
|
|
|
|
48,155,550
|
|
|
$
|
48,156
|
|
|
$
|
15,224,816
|
|
|
$
|
(14,553,595
|
)
|
|
$
|
720,703
|
|
See
accompanying notes to financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
|
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,403,267
|
)
|
|
$
|
(1,379,488
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Change
in allowance for doubtful accounts
|
|
|
143,170
|
|
|
|
53,041
|
|
Depreciation
and amortization expense
|
|
|
194,588
|
|
|
|
213,225
|
|
Stock
issued for services
|
|
|
276,015
|
|
|
|
377,204
|
|
Options
and warrants granted for services
|
|
|
137,412
|
|
|
|
438,683
|
|
Amortization
of debt discounts
|
|
|
21,217
|
|
|
|
-
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(66,265
|
)
|
|
|
12,705
|
|
Other
current assets
|
|
|
(25,648
|
)
|
|
|
6,018
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(163,947
|
)
|
|
|
74,240
|
|
Accrued
expenses
|
|
|
(2,151
|
)
|
|
|
(11,110
|
)
|
Deferred
revenues
|
|
|
(525
|
)
|
|
|
2,775
|
|
Net
cash used in operating activities
|
|
|
(889,401
|
)
|
|
|
(212,707
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(30,261
|
)
|
|
|
(194,008
|
)
|
Advance
of note receivable
|
|
|
(95,000
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(125,261
|
)
|
|
|
(194,008
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes
|
|
|
500,000
|
|
|
|
-
|
|
Proceeds
from sale of common stock
|
|
|
625,000
|
|
|
|
268,608
|
|
Net
cash provided by financing activities
|
|
|
1,125,000
|
|
|
|
268,608
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
110,338
|
|
|
|
(138,107
|
)
|
Cash
- beginning
|
|
|
176,027
|
|
|
|
178,177
|
|
Cash
- ending
|
|
$
|
286,365
|
|
|
$
|
40,070
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
4,066
|
|
|
$
|
-
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Value
of preferred stock converted to common stock
|
|
$
|
100,000
|
|
|
$
|
472,000
|
|
Beneficial
conversion feature of convertible notes payable
|
|
$
|
70,964
|
|
|
$
|
-
|
|
See
accompanying notes to financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics
and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices
for reliable testing, cannabis education and training. Our business units are described below.
|
Ø
|
Digipath
Labs, Inc
. Digipath Labs’ mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry,
under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to
help maximize the quality of our clients’ products through research, development, and standardization. Digipath has
been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have
legalized the sale of cannabis, beginning with California.
|
|
|
|
|
Ø
|
The
National Marijuana News Corp
. provides a balanced and unbiased approach to cannabis news, interviews and education with
a news/talk podcast, 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.
|
|
|
|
|
Ø
|
GroSciences,
Inc
. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis
through the testing process. GroSciences plans to develop and license specific formulations to other producers and product
makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from
drug-type cannabis.
|
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, 2018. The interim Condensed Consolidated
Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented
are not necessarily indicative of the results that might be expected for the entire fiscal year.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common
control and ownership at June 30, 2019:
Name
of Entity
(1)
|
|
Jurisdiction
of
Incorporation
|
|
Relationship
|
Digipath,
Inc.
(2)
|
|
Nevada
|
|
Parent
|
Digipath
Labs, Inc.
|
|
Nevada
|
|
Subsidiary
|
TNM
News, Inc.
|
|
Nevada
|
|
Subsidiary
|
GroSciences,
Inc.
(3)
|
|
Colorado
|
|
Subsidiary
|
Digipath
Labs S.A.S.
(4)
|
|
Colombia
|
|
Subsidiary
|
(1)
|
All
entities are in the form of a corporation.
|
(2)
|
Holding
company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the
parent company.
|
(3)
|
Commenced
operations during the first fiscal quarter of 2019, but has not incurred income to date.
|
(4)
|
Formed
during the first fiscal quarter of 2019, but has not yet commenced significant operations.
|
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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Segment
Reporting
ASC
Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Fair
Value of Financial Instruments
Under
FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant
measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements
as reflected herein. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the
balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.
Revenue
Recognition
Effective
October 1, 2018, the Company adopted 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., and to a lesser extent, through the
sale of advertising through one of our other subsidiaries, TNM News Corp. For the comparative periods, revenue has not been adjusted
and continues to be reported under ASC 605 — Revenue Recognition.
There
was no impact on the Company’s financial statements as a result of adopting ASC 606 for the nine months ended June 30, 2019,
or the twelve months ended September 30, 2018.
Revenue
is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis
products to 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.
The
Company also recognizes revenue through our subsidiary, TNM News Corp., which primarily recognizes revenue from advertisements
through partnered merchants. Payment for ad revenues are received prior to the distribution of the ad campaign, and the revenues
are recognized ratably over the campaign. The Company defers any revenue for which the term of the campaign has not yet been realized.
To date, these revenues have not been materially significant.
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.
Recent
Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-13,
Fair Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
,
which modify the disclosure requirements of Topic 820. The new guidance is effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company does
not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize assets and liabilities
for most leases. ASU 2016-02 is effective for public entity financial statements for annual periods beginning after December 15,
2018, and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. ASU
2016-02 was further clarified and amended within ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20 which included provisions
that would provide us with the option to adopt the provisions of the new guidance using a modified retrospective transition approach,
without adjusting the comparative periods presented. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated
financial statements.
There
are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material
effect on its financial position, results of operations, or cash flows.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 – Going Concern
As
shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations
resulting in an accumulated deficit of $14,553,595, and as of June 30, 2019, 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 – 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.
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets
as of June 30, 2019 and September 30, 2018, respectively:
|
|
Fair
Value Measurements at June 30, 2019
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
286,365
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
|
286,365
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of discounts of $49,747
|
|
|
-
|
|
|
|
-
|
|
|
|
450,253
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
450,253
|
|
|
|
$
|
286,365
|
|
|
$
|
-
|
|
|
$
|
(450,253
|
)
|
|
|
Fair
Value Measurements at September 30, 2018
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
176,027
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
|
176,027
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
176,027
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by
ASC Topic 820-10-35.
Level
3 liabilities consist of a total of $500,000 of convertible debentures, net of discounts of $49,747 as of June 30, 2019.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June
30, 2019 or the year ended September 30, 2018.
Note
4 – Note Receivable
On
March 8, 2019 and February 15, 2019, we loaned Big Valley Analytical Labs, Inc. $25,000 and $20,000, respectively. The loans carried
interest at an annual rate of 15%, were evidenced by secured demand notes, and were secured by a lien on the borrower’s
assets. The principal amount of the loans was subsequently repaid in full on April 1, 2019.
On
various dates between December 28, 2018 and June 13, 2019, we loaned Northwest Analytical Labs, Inc. a total of $95,000. The loans
bear interest at an annual rate of 10%, are evidenced by secured demand notes, which are secured by a lien on the borrower’s
assets. An allowance for doubtful accounts for the full value of the notes was recognized due to the uncertainty of collectability.
Note
5 – Accounts Receivable
Accounts
receivable was $185,829 and $167,734 at June 30, 2019 and September 30, 2018, respectively, net of allowance for doubtful accounts
of $63,070 and $14,900 at June 30, 2019 and September 30, 2018, respectively.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 – Fixed Assets
Fixed
assets consist of the following at June 30, 2019 and September 30, 2018:
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
Software
|
|
$
|
123,492
|
|
|
$
|
123,492
|
|
Office equipment
|
|
|
56,252
|
|
|
|
54,877
|
|
Furniture and fixtures
|
|
|
28,486
|
|
|
|
28,486
|
|
Lab equipment
|
|
|
1,133,730
|
|
|
|
1,110,930
|
|
Leasehold improvements
|
|
|
495,233
|
|
|
|
489,147
|
|
|
|
|
1,837,193
|
|
|
|
1,806,932
|
|
Less: accumulated depreciation
|
|
|
(1,044,412
|
)
|
|
|
(849,824
|
)
|
Total
|
|
$
|
792,781
|
|
|
$
|
957,108
|
|
Depreciation
and amortization expense totaled $194,588 and $213,225 for the nine months ended June 30, 2019 and 2018, respectively.
Note
7 – Convertible Notes Payable
Convertible
notes payable consist of the following at June 30, 2019 and September 30, 2018, respectively:
|
|
June 30,
2019
|
|
|
September
30,
2018
|
|
|
|
|
|
|
|
|
On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the nine months ended June 30, 2019.
|
|
$
|
350,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
On November 5, 2018, the Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on December 31, 2020. The principal and interest are convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable
|
|
|
500,000
|
|
|
|
-
|
|
Less: unamortized debt discounts
|
|
|
(49,747
|
)
|
|
|
-
|
|
Convertible notes payable
|
|
$
|
450,253
|
|
|
$
|
-
|
|
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 during the nine months ended June 30, 2019.
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. During the nine months ended June 30, 2019, the Company recorded debt
amortization expense in the amount of $21,217, attributed to the aforementioned debt discount.
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 $25,742 for
the nine months ended June 30, 2019.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 - Changes in Stockholders’ Equity
Convertible
Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have
been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares
available for designation from time to time by the Board as set forth below. As of June 30, 2019, there were 1,325,942 shares
of Series A Preferred issued and outstanding. The Board of Directors is authorized to determine any number of series into which
the undesignated shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions
granted to any series of the preferred stock. Each share of Series A Preferred is currently convertible into five shares of common
stock.
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in
the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,325,942 shares of Series
A Preferred outstanding at June 30, 2019 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.
Preferred
Stock Conversions
On
December 31, 2018, a total of 100,000 Series A Preferred shares were converted into 500,000 shares of common stock. The stock
was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 48,155,550 shares were issued and outstanding as of
June 30, 2019.
Common
Stock Sales
On
February 7, 2019, the Company sold 1,000,000 shares of its common stock in exchange for proceeds of $200,000.
On
February 1, 2019, the Company sold 250,000 shares of its common stock in exchange for proceeds of $50,000.
On
January 31, 2019, the Company sold 625,000 shares of its common stock in exchange for proceeds of $125,000.
On
January 24, 2019, the Company sold 1,250,000 shares of its common stock in exchange for proceeds of $250,000.
Common
Stock Issued for Services
On
June 25, 2019, the Company issued 300,000 shares of common stock to a consultant for business development services to be performed
from May 1, 2019 through October 31, 2019. The fair value of the common stock was $58,500 based on the closing price of the Company’s
common stock on the date of grant, and is being expensed over the requisite service period.
On
June 25, 2019, the Company issued 41,667 shares of common stock to its President and CEO for services rendered pursuant to his
employment agreement. The aggregate fair value of the common stock was $6,000 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
June 25, 2019, the Company issued 104,167 shares of common stock to its CFO for services rendered pursuant to his employment agreement.
The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the
date of grant, and was expensed over the requisite service period.
On
May 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with
acquisition activities. The fair value of the common stock was $8,030 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)
On
April 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with
acquisition activities. The fair value of the common stock was $9,500 based on the closing price of the Company’s common
stock on the date of grant, and was expensed over the requisite service period.
On
March 29, 2019, the Company issued 475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation
of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance,
therefore there was no additional expense as a result of the modification of the equity awards.
On
March 25, 2019, the Company issued 29,268 shares of common stock to its President and CEO for services rendered pursuant to his
employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s
common stock on the date of grant, and was expensed over the requisite service period.
On
March 25, 2019, the Company issued 73,171 shares of common stock to its CFO for services rendered pursuant to his employment agreement.
The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the
date of grant, and was expensed over the requisite service period.
On
March 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with
acquisition activities. The fair value of the common stock was $10,250 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 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company
with acquisition activities. The fair value of the common stock was $12,300 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
January 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company
with acquisition activities. The fair value of the common stock was $10,500 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, 2018, the Company issued 46,261 shares of common stock to its President and CEO for services rendered pursuant to
his employment agreement. The aggregate fair value of the common stock was $6,000 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, 2018, the Company issued 115,652 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period.
On
December 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the
Company with acquisition activities. The aggregate fair value of the common stock was $19,455 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
November 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the
Company with acquisition activities. The aggregate fair value of the common stock was $24,000 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
October 30, 2018, the Company issued 400,000 shares of common stock to another consultant for business development services to
be performed from November 1, 2018 through April 30, 2019. The fair value of the common stock was $54,120 based on the closing
price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.
On
October 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company
with acquisition activities. The aggregate fair value of the common stock was $23,250 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)
Amortization
of Stock-Based Compensation
A
total of $22,110 of stock-based compensation expense was recognized during the nine months ended June 30, 2019 as a result of
the issuance of 200,000 shares of common stock to one of our directors, Bruce Raben, on September 12, 2018, as amortized over
the requisite service period. As of June 30, 2019, a total of $7,452 of unamortized expenses are expected to be expensed during
the remaining fiscal year ended September 30, 2019.
A
total of $19,500 of stock-based compensation expense was recognized during the nine months ended June 30, 2019 as a result of
the issuance of 300,000 shares of common stock to a consultant on June 25, 2019, as amortized over the requisite service period.
As of June 30, 2019, a total of $39,000 of unamortized expenses are expected to be expensed during the remaining requisite service
period.
A
total of $137,412 of stock-based compensation expense was recognized from the amortization of options over their vesting period
during the nine months ended June 30, 2019.
Note
9 – Common Stock Options
Stock
Incentive Plan
On
June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted
on March 5, 2012 and previously amended on May 20, 2014. As amended, the 2012 Plan provides for the issuance of up to 11,500,000
shares of common stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors
of, and consultants to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify
as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over
periods not exceeding ten years from date of grant.
A
total of 5,105,000 options were outstanding as of June 30, 2019. During the nine months ended June 30, 2019, options to purchase
an aggregate total of 27,500 shares of common stock at a weighted average exercise price of $0.26 per share expired.
Options
Issued to Officers and Directors for Services
On
January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Science
Officer. The options vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July
7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share, based on the
most recent closing stock price. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107%
and a call option value of $0.1019, was $50,934. The options are being expensed over the vesting period, resulting in $32,463
of stock-based compensation expense during the nine months ended June 30, 2019. As of June 30, 2019, a total of $18,471 of unamortized
expenses are expected to be expensed over the vesting period.
On
January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to Bruce Raben, one
of our directors. The options vest immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7,
2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The
estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019,
was $50,934. The options are being expensed over the vesting period, resulting in $32,463 of stock-based compensation expense
during the nine months ended June 30, 2019. As of June 30, 2019, a total of $18,471 of unamortized expenses are expected to be
expensed over the vesting period.
Options
Exchanged for Common Stock
On
March 29, 2019, the Company issued 475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation
of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance,
therefore there was no additional expense as a result of the modification of the equity awards.
Re-Priced
Options Issued to Officers and Directors for Services
On
January 7, 2019, the board amended the following options to reduce their exercise price to $0.13 per share, based on the most
recent closing stock price. All other terms were unchanged. The modification of these equity awards resulted in an additional
expense of $36,764.
Original
|
|
Recipient’s
|
|
Option
|
|
# of
|
|
|
Term
|
|
|
Original
|
|
|
New
|
|
Grant Date
|
|
Name
|
|
Type
|
|
Options
|
|
|
In Mos.
|
|
|
Exercise $
|
|
|
Exercise $
|
|
6/1/2015
|
|
Cindy Orser
|
|
NSO Options
|
|
|
200,000
|
|
|
|
120
|
|
|
$
|
0.40
|
|
|
$
|
0.13
|
|
6/19/2015
|
|
Todd Peterson
|
|
ISO Options
|
|
|
100,000
|
|
|
|
120
|
|
|
$
|
0.33
|
|
|
$
|
0.13
|
|
6/21/2016
|
|
Todd Denkin
|
|
ISO Options
|
|
|
2,500,000
|
|
|
|
120
|
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
11/29/2017
|
|
Cindy Orser
|
|
NSO Options
|
|
|
100,000
|
|
|
|
120
|
|
|
$
|
0.27
|
|
|
$
|
0.13
|
|
12/22/2017
|
|
Todd Denkin
|
|
ISO Options
|
|
|
500,000
|
|
|
|
120
|
|
|
$
|
0.27
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Issued to Employees for Services
On
December 25, 2018, we granted fully vested options to purchase an aggregate of 345,000 shares of common stock as compensation
for services to a total of fourteen of our employees. The options are exercisable over a ten-year period at an exercise price
of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option
value of $0.1017, was $35,078. The options are being expensed over the vesting period, resulting in $17,971 of stock-based compensation
expense during the nine months ended June 30, 2019. As of June 30, 2019, a total of $17,107 of unamortized expenses are expected
to be expensed over the vesting period.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
10 – Common Stock Warrants
Warrants
to purchase a total of 3,417,126 shares of common stock were outstanding as of June 30, 2019.
On
various dates from December 21, 2018 to May 2, 2019, warrants to purchase an aggregate of 2,933,336 shares of common stock at
$0.30 per share expired, and on November 23, 2018, warrants to purchase another 100,000 shares of common stock at $0.40 per share
expired.
Note
11 – Other Income
Other
income for the nine months ended June 30, 2019 and 2018 consisted of the following:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Settlement income on note receivable
|
|
$
|
30,000
|
|
|
$
|
-
|
|
Rental income on subleases
|
|
|
62,400
|
|
|
|
57,600
|
|
Restitution income
|
|
|
-
|
|
|
|
28,312
|
|
|
|
$
|
92,400
|
|
|
$
|
85,912
|
|
On
December 1, 2018, we received $30,000 as full settlement of a Note dated December 17, 2014, consisting of $250,000 of principal
and approximately $58,125 of unpaid interest that was previously written off as uncollectible.
Note
12 - Income Tax
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides
that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the nine months ended June 30, 2019 and the year ended September 30, 2018, the Company incurred a net operating loss and, accordingly,
no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty
of the realization of any tax assets. At June 30, 2019, the Company had approximately $8,900,000 of federal net operating losses.
The net operating loss carry forwards, if not utilized, will begin to expire in 2031.
Based
on the available objective evidence, including the Company’s history of its loss, management believes it is more likely
than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation
allowance against its net deferred tax assets at June 30, 2019 and September 30, 2018, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
13 – Subsequent Events
There
were no subsequent events to report.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for
the year ended September 30, 2018 and presumes that readers have access to, and will have read, the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K.
The following discussion and analysis also should be read together with our financial statements and the notes to the financial
statements included elsewhere in this Form 10-Q.
The
following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including,
without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult
to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should
not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described
in our Annual Report on Form 10-K for the year ended September 30, 2018 in the section entitled “Risk Factors” for
a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.
We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following
should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.
Overview
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics
and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices
for reliable testing, cannabis education and training. Our business units as of June 30, 2019 are described below.
|
Ø
|
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.
|
|
|
|
|
Ø
|
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.
|
|
|
|
|
Ø
|
GroSciences,
Inc
. Launched during the first fiscal quarter of 2019 to capitalize on the extensive data we have collected from cannabis
through the testing process. GroSciences plans to develop and license specific formulations to other producers and product
makers in the industry, and to market and sell its “Tru-Hemp ID” Kit which distinguishes industrial hemp from
drug-type cannabis.
|
Our
cannabis testing revenues improved slightly over the previous fiscal quarter, but was substantially lower than our comparative
nine month period ending June 30, 2018. This decrease was primarily the result of the temporary suspension by regulators of two
of our competitors in the prior year’s quarter, resulting in a significant increase in our sales during that quarter. Our
revenues stabilized subsequent to the prior period when these competitors were reinstated. As an ISO 17025:2017 accredited lab,
we believe that we are now well positioned to handle future growth in full compliance with Nevada’s regulations applicable
to our operations and are actively working to expand to other jurisdictions.
We
are currently seeking to expand our lab testing services to Colombia, and to that end have retained Colombian counsel, formed
a Colombian subsidiary and hired two local employees. Our goal is to launch a testing lab in Colombia by the end of the fiscal
year, although there can be no assurance that we will be successful in that regard.
In
January 2019, we entered into an agreement to provide potency testing laboratories for hemp production at sites owned by Hemp,
Inc. in North Carolina, Oregon and Arizona. Under the terms of the agreement, we will oversee and manage the construction and
build out of a hemp potency-testing laboratory in three of Hemp Inc.’s locations and Hemp. Inc. will provide the space for
the testing laboratories at no cost to us.
We
are also exploring opportunities to capitalize on the extensive data we have collected from our cannabis testing activities. Through
our wholly-owned subsidiary, GroSciences, Inc., we intend to license specific formulations and intellectual property developed
from our experience in the cannabis industry. We have not yet commenced operations for this initiative, other than minimal research
and development activities and patent filings.
Results
of Operations for the Three Months Ended June 30, 2019 and 2018:
The
following table summarizes selected items from the statement of operations for the three months ended June 30, 2019 and 2018.
|
|
Three Months Ended June 30,
|
|
|
Increase /
|
|
|
|
2019
|
|
|
2018
|
|
|
(Decrease)
|
|
Revenues
|
|
$
|
652,920
|
|
|
$
|
521,772
|
|
|
$
|
131,148
|
|
Cost of sales
|
|
|
424,067
|
|
|
|
520,888
|
|
|
|
(96,821
|
)
|
Gross profit (loss)
|
|
|
228,853
|
|
|
|
884
|
|
|
|
227,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
431,636
|
|
|
|
360,689
|
|
|
|
70,947
|
|
Professional fees
|
|
|
195,052
|
|
|
|
228,482
|
|
|
|
(33,430
|
)
|
Bad debts expense (recoveries)
|
|
|
93,340
|
|
|
|
(45,200
|
)
|
|
|
138,540
|
|
Total operating expenses:
|
|
|
720,028
|
|
|
|
543,971
|
|
|
|
176,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(491,175
|
)
|
|
|
(543,087
|
)
|
|
|
(51,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
1,547
|
|
|
|
43,012
|
|
|
|
(41,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(489,628
|
)
|
|
$
|
(500,075
|
)
|
|
$
|
(10,447
|
)
|
Revenues
Revenues
were generated by our cannabis testing lab and to a de minimis extent, from advertising on TNM News’ media outlets. Aggregate
revenues for the three months ended June 30, 2019 were $652,920, compared to revenues of $521,772 during the three months ended
June 30, 2018, an increase of $131,148, or 25%. The increase in revenue was due to industry growth and expansion to hemp testing
during the current period.
Cost
of Sales
Cost
of sales for the three months ended June 30, 2019 were $424,067, compared to $520,888 during the three months ended June 30, 2018,
a decrease of $96,821, or 19%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies
consumed in our testing operations. The decreased cost of sales in the current period was primarily due to better pricing on our
consumable supplies, and improved efficiencies with respect to our labor. Our gross margins of approximately 35%, increased during
the three months ended June 30, 2019, compared to gross margins of approximately -0-% during the three months ended June 30, 2018,
due primarily to decreased cost of sales in the current quarter and increased costs in the prior quarter when we devoted significant
resources to the improvement of operations and compliance with regulations, including the ISO 17025:2017 requirement.
General
and Administrative Expenses
General
and administrative expenses for the three months ended June 30, 2019 were $431,636, compared to $360,689 during the three months
ended June 30, 2018, an increase of $70,947, or 20%. The expenses consisted primarily of marketing, rent, salaries and wages,
and travel expenses. General and administrative expense increased during the current period due to increased investor relation
expenses.
Professional
Fees
Professional
fees for the three months ended June 30, 2019 were $195,052, compared to $228,482 during the three months ended June 30, 2018,
a decrease of $33,430, or 15%. Professional fees included non-cash, stock-based compensation of $114,018 and $177,472 during the
three months ended June 30, 2019 and June 30, 2018, respectively. Professional fees decreased primarily due to decreased stock-based
compensation during the current period.
Bad
Debts Expense (Recoveries)
Bad
debts expense (recoveries) for the three months ended June 30, 2019 was $93,340, compared to recoveries of $(45,200) during the
three months ended June 30, 2018, an increase of $138,540, or 307%. Bad debts expense increased during the current period as our
allowance for doubtful accounts increased with an allowance of $95,000 for potentially uncollectible notes receivable and the
change in allowance for doubtful accounts on our trade receivables during the quarter.
Operating
Loss
Our
operating loss for the three months ended June 30, 2019 was $491,175, compared to $543,087 during the three months ended June
30, 2018, a decrease of $51,912, or 10%. Our operating loss decreased primarily due to increased margins, as offset in part by
increased marketing expenses, during the three months ended June 30, 2019, compared to the three months ended June 30, 2018.
Other
Income
Other
income for the three months ended June 30, 2019 was $1,547, compared to other income of $43,012 during the three months ended
June 30, 2018, a decrease of $41,465, or 96%. Other income consisted of $21,000 of sublease rents, as offset by a $1,250 reversal
of interest income and $18,203 of interest expense for the three months ended June 30, 2019. Other income during the three months
ended June 30, 2018 consisted of $19,200 of subleased rents and $23,812 of restitution payments received from a former employee.
Net
Loss
Net
loss for the three months ended June 30, 2019 was $489,628, compared to $500,075 during the three months ended June 30, 2018,
a decrease of $10,447, or 2%. The decreased net loss was due primarily to increased gross profits as described above, as offset
in part by increased investment relation expenses, increased bad debts expense, and interest on debt financing.
Results
of Operations for the Nine Months Ended June 30, 2019 and 2018:
The
following table summarizes selected items from the statement of operations for the nine months ended June 30, 2019 and 2018.
|
|
Nine Months Ended June 30,
|
|
|
Increase /
|
|
|
|
2019
|
|
|
2018
|
|
|
(Decrease)
|
|
Revenues
|
|
$
|
1,946,590
|
|
|
$
|
2,223,630
|
|
|
$
|
(277,040
|
)
|
Cost of sales
|
|
|
1,334,217
|
|
|
|
1,563,518
|
|
|
|
(229,301
|
)
|
Gross profit
|
|
|
612,373
|
|
|
|
660,112
|
|
|
|
(47,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,240,612
|
|
|
|
1,108,202
|
|
|
|
132,410
|
|
Professional fees
|
|
|
677,299
|
|
|
|
964,269
|
|
|
|
(286,970
|
)
|
Bad debts expense
|
|
|
143,170
|
|
|
|
53,041
|
|
|
|
90,129
|
|
Total operating expenses:
|
|
|
2,061,081
|
|
|
|
2,125,512
|
|
|
|
(64,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,448,708
|
)
|
|
|
(1,465,400
|
)
|
|
|
(16,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
45,441
|
|
|
|
85,912
|
|
|
|
(40,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,403,267
|
)
|
|
$
|
(1,379,488
|
)
|
|
$
|
23,779
|
|
Revenues
Revenues
were generated by our cannabis testing lab and to a de minimis extent, from advertising on TNM News’ media outlets. Aggregate
revenues for the nine months ended June 30, 2019 were $1,946,590, compared to revenues of $2,223,630 during the nine months ended
June 30, 2018, a decrease of $277,040, or 12%. The decrease in revenue was due to a spike in revenues in the comparative fiscal
period ending June 30, 2018 due to regulators’ temporary suspension of two of our competitors during that period. Our revenues
normalized when these competitors were reinstated.
Cost
of Sales
Cost
of sales for the nine months ended June 30, 2019 were $1,334,217, compared to $1,563,518 during the nine months ended June 30,
2018, a decrease of $229,301, or 15%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and
supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to better pricing
on our consumable supplies, and improved efficiencies with respect to our labor. Our gross margins of approximately 31%, increased
slightly during the nine months ended June 30, 2019, compared to gross margins of approximately 30% during the nine months ended
June 30, 2018.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended June 30, 2019 were $1,240,612, compared to $1,108,202 during the nine months
ended June 30, 2018, an increase of $132,410, or 12%. The expenses consisted primarily of marketing, rent, salaries and wages,
and travel expenses. General and administrative expense increased during the current period due to increased investor relation
and travel expenses.
Professional
Fees
Professional
fees for the nine months ended June 30, 2019 were $677,299, compared to $964,269 during the nine months ended June 30, 2018, a
decrease of $286,970, or 30%. Professional fees included non-cash, stock-based compensation of $413,427 and $815,887 during the
nine months ended June 30, 2019 and June 30, 2018, respectively. Professional fees decreased primarily due to decreased stock-based
compensation, as diminished by increased marketing efforts during the current period.
Bad
Debts Expense
Bad
debts expense for the nine months ended June 30, 2019 was $143,170, compared to $53,041 during the nine months ended June 30,
2018, an increase of $90,129, or 170%. Bad debts expense increased during the current period as our allowance for doubtful accounts
increased with an allowance of $95,000 for potentially uncollectible notes receivable was recognized during the current period.
Our bad debts expense due to the change in our allowance for doubtful accounts was 2.5% and 2.4% of sales for the nine months
ended June 30, 2019 and 2018, respectively.
Operating
Loss
Our
operating loss for the nine months ended June 30, 2019 was $1,448,708, compared to $1,465,400 during the nine months ended June
30, 2018, a decrease of $16,692, or 1%. Our operating loss decreased primarily due to decreased revenues and an increased change
in our allowance for doubtful accounts, as offset in part by decreased stock-based compensation, during the nine months ended
June 30, 2019, compared to the nine months ended June 30, 2018.
Other
Income
Other
income for the nine months ended June 30, 2019 was $45,441, compared to other income of $85,912 during the nine months ended June
30, 2018, a decrease of $40,471, or 47%. Other income consisted of $62,400 of sublease rents and a $30,000 gain on settlement
of a previously written off note receivable, as offset by $46,959 of interest expense for the nine months ended June 30, 2019.
Other income during the nine months ended June 30, 2018 consisted of $57,600 of subleased rents and $28,312 of restitution payments
received from a former employee.
Net
Loss
Net
loss for the nine months ended June 30, 2019 was $1,403,267, compared to $1,379,488 during the nine months ended June 30, 2018,
an increase of $23,779, or 2%. The increased net loss was due primarily to decreased gross profits and increased marketing costs
and bad debts expense as described above, as offset in part by decreased stock-based compensation, over the comparative nine month
period.
Liquidity
and Capital Resources
The
following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities
for the nine month periods ended June 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Operating Activities
|
|
$
|
(889,401
|
)
|
|
$
|
(212,707
|
)
|
Investing Activities
|
|
|
(125,261
|
)
|
|
|
(194,008
|
)
|
Financing Activities
|
|
|
1,125,000
|
|
|
|
268,608
|
|
Net Increase (Decrease) in Cash
|
|
$
|
110,338
|
|
|
$
|
(138,107
|
)
|
Net
Cash Used in Operating Activities
During
the nine months ended June 30, 2019, net cash used in operating activities was $889,401, compared to net cash used in operating
activities of $212,707 for the same period ended June 30, 2018. The increase in cash used in operating activities is primarily
attributable to our increased net loss as we didn’t benefit from the decreased competition from the suspension of two competing
cannabis testing labs in the current period, as we did in the prior period.
Net
Cash Used in Investing Activities
During
the nine months ended June 30, 2019, net cash used in investing activities was $125,261, compared to $194,008 for the same period
ended June 30, 2018. The decrease is attributable to investments made for cannabis testing equipment in the prior period that
was not necessary in the current period, in addition to the advancement of short-term loans during the current period.
Net
Cash Provided by Financing Activities
During
the nine months ended June 30, 2019, net cash provided by financing activities was $1,125,000, compared to $268,608 for the same
period ended June 30, 2018. The current period consisted of $500,000 of proceeds received on fixed convertible debt financing
at $0.14 per share and the sale of $625,000 of common stock, while the comparative period consisted of proceeds received from
the sale of $268,608 of common stock and warrants.
Ability
to Continue as a Going Concern
As
of June 30, 2019, our balance of cash on hand was $286,365. We currently may not have sufficient funds to sustain our operations
for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business.
As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative
cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations
through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial
capital expenditure and working capital needs.
The
Company has incurred recurring losses from operations resulting in an accumulated deficit, and, as set forth above, the Company’s
cash on hand is not sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability
to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is
currently seeking additional sources of capital to fund short term operations. In the event sales do not materialize at the expected
rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be
no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without
either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution
to existing stockholders.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
Off-Balance
Sheet Arrangements
We
have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage
in trading activities involving non-exchange traded contracts.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant
to the preparation of our financial statements. These accounting policies are important for an understanding of our financial
condition and results of operations. Critical accounting policies are those that are most important to the presentation of our
financial condition and results of operations and require management’s subjective or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the
possibility that future events affecting the estimate may differ significantly from management’s current judgments.
While
our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere
in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and
evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation
of our financial statements.
Revenue
Recognition
Effective
October 1, 2018, the Company adopted 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., and to a lesser extent, through the
sale of advertising through one of our other subsidiaries, TNM News Corp. For the comparative periods, revenue has not been adjusted
and continues to be reported under ASC 605 — Revenue Recognition.
There
was no impact on the Company’s financial statements as a result of adopting ASC 606 for the nine months ended June 30,
2019, or the twelve months ended September 30, 2018.
Revenue
is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis
products to 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.
The
Company also recognizes revenue through our subsidiary, TNM News Corp., which primarily recognizes revenue from advertisements
through partnered merchants. Payment for ad revenues are received prior to the distribution of the ad campaign, and the revenues
are recognized ratably over the campaign. The Company defers any revenue for which the term of the campaign has not yet been realized.
To date, these revenues have not been materially significant.
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.