Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”)
supports
the cannabis industry’s best practices for reliable testing, cannabis education and training, and brings unbiased cannabis
news coverage to the cannabis industry
. Our business units are described below.
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Digipath
Labs, Inc
. Digipath Labs’ mission is to provide pharmaceutical-grade analysis
and testing to the cannabis industry to ensure consumers and patients know exactly what
is in the cannabis they ingest and to help maximize the quality of our clients’
products through research, development, and standardization. We have been operating a
cannabis testing lab in Nevada since 2015 and have plans to open labs in other states
that have legalized the sale of cannabis, beginning with California.
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The
National Marijuana News Corp
. provides a balanced and unbiased approach to cannabis
news, interviews and education with a news/talk radio show, app, national marijuana news
website and social media presence focusing on the political, economic, medicinal, scientific,
and cultural dimensions of the rapidly evolving—and profoundly controversial—medicinal
and recreational marijuana industry.
|
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The
unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report
on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated
Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial
Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in
the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017. 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, 2018:
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|
State
of
|
|
|
Name
of Entity
(1)
|
|
Incorporation
|
|
Relationship
|
Digipath,
Inc.
(2)
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Nevada
|
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Parent
|
Digipath
Labs, Inc.
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Nevada
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Subsidiary
|
TNM
News, Inc.
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Nevada
|
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Subsidiary
|
GroSciences,
Inc.
(3)
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Colorado
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Subsidiary
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(1)
All entities are in the form of a corporation.
(2)
Holding company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath,
Inc., the parent company.
(3)
Entity formed for prospective purposes, but has not incurred any income or expenses to date.
The
consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant
inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries
will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s
headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary
for fair presentation of the information contained therein.
Reclassifications
Prior
period interest income in the amount of $7,500 has been reclassified to net against the related $7,500 of bad debt expense to
conform to the current period presentation. These reclassifications had no impact on net earnings, financial position or cash
flows.
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
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following
steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue
when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be
reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has
occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably
assured.
There
was no impact on the Company’s financial statements as a result of adopting ASC 606 for the nine months ended June 30, 2018
and 2017, or the twelve months ended September 30, 2017.
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.
W
e
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
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
, which
expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option
pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern
of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods
within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the
adoption of this ASU to have a material impact on its consolidated financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118
. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the
“Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from
the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact
all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The
calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to
1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In
February 2018, the FASB issued ASU No. 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income
. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result
of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after
December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period
of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which
clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The
new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the
same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted.
The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. Since ASU 2014-09 was issued, several
additional ASUs have been issued to clarify various elements of the guidance. These standards provide guidance on recognizing
revenue, including a five-step model to determine when revenue recognition is appropriate. The standard requires that an entity
recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard
to be effective with our first interim reporting period for the three months ended December 31, 2017. We use the modified retrospective
method of adoption. We have completed an initial evaluation of the potential impact from adopting the new standard, including
a detailed review of performance obligations for all material revenue streams. Based on this initial evaluation, adoption does
not have a material impact on our financial position, results of operations, or cash flows. Related disclosures have been expanded
in line with the requirements of the standard.
There
are no other recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material
effect on its financial position, results of operations, or cash flows.
Note
2 – Going Concern
As
shown in the accompanying condensed consolidated financial statements, the Company has incurred recurring losses from operations
resulting in an accumulated deficit of ($12,876,159), and as of June 30, 2018, the Company’s cash on hand may not be sufficient
to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources
of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The
accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
The
consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the
Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note
3 – Related Party Transactions
Stock
Based Compensation for Services
On
June 25, 2018, the Company issued 118,421 shares of common stock to its then CEO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $22,500 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On
June 25, 2018, the Company issued 31,579 shares of common stock to its then President and COO 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 that ended on June 30, 2018.
On
June 25, 2018, the Company issued 78,947 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 that ended on June 30, 2018.
On
March 26, 2018, the Company issued 207,852 shares of common stock to its then CEO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $45,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.
On
March 26, 2018, the Company issued 55,427 shares of common stock to its then President and COO for services rendered pursuant
to his employment 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 that ended on June 30, 2018.
On
March 26, 2018, the Company issued 138,568 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $30,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.
On
December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate
fair value of the common stock was $78,828 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
On
December 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer for his service on our Board of Directors.
The aggregate fair value of the common stock was $26,276 based on the closing price of the Company’s common stock on the
date of grant, and was expensed in full.
On
December 22, 2017, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to
our President and COO. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated
value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.2094, was $104,698.
The options were expensed over the vesting period, resulting in $104,698 of stock based compensation expense during the nine months
ended June 30, 2018.
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.
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, 2018 and September 30, 2017, respectively:
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Fair
Value Measurements at June 30, 2018
|
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|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
40,070
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
|
40,070
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
40,070
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair
Value Measurements at September 30, 2017
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
178,177
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
assets
|
|
|
178,177
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
178,177
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by
ASC Topic 820-10-35.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June
30, 2018 or the year ended September 30, 2017.
Note
5 – Accounts Receivable
Accounts
receivable was $200,867 and $266,613 at June 30, 2018 and September 30, 2017, respectively, net of allowance for doubtful accounts
of $85,221 and $32,180 at June 30, 2018 and September 30, 2017, respectively.
Note
6 – Fixed Assets
Fixed
assets consist of the following at June 30, 2018 and September 30, 2017:
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|
June 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
123,492
|
|
|
$
|
121,617
|
|
Office equipment
|
|
|
52,520
|
|
|
|
36,080
|
|
Furniture and fixtures
|
|
|
28,486
|
|
|
|
14,285
|
|
Lab equipment
|
|
|
1,099,942
|
|
|
|
938,450
|
|
Leasehold improvements
|
|
|
489,147
|
|
|
|
489,147
|
|
|
|
|
1,793,587
|
|
|
|
1,599,579
|
|
Less: accumulated
depreciation
|
|
|
(785,755
|
)
|
|
|
(572,530
|
)
|
Total
|
|
$
|
1,007,832
|
|
|
$
|
1,027,049
|
|
Depreciation
and amortization expense totaled $213,225 and $186,922 for the nine months ended June 30, 2018 and 2017, respectively.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
7 - 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, 2018, there were 1,425,942 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. Shares of Series A Preferred are convertible into common stock at a fixed conversion
rate of $0.20 per share.
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in
the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,425,942 shares of Series
A Preferred outstanding at June 30, 2018 are convertible into 7,129,710 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
During
the three months ended March 31, 2018, a total of 322,000 Series A Preferred shares were converted into 1,610,000 shares of common
stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
During
the three months ended December 31, 2017, a total of 150,000 Series A Preferred shares were converted into 750,000 shares of common
stock. The stock was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.
Common
Stock
Common
stock consists of $0.001 par value, 90,000,000 shares authorized, of which 40,897,568 shares were issued and outstanding as of
June 30, 2018.
Common
Stock Sales
On
April 13, 2018, the Company sold 14 units, consisting of an aggregate of 140,000 shares of its common stock and warrants to purchase
70,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of
$25,200. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 12, 2018, the Company sold 28 units, consisting of an aggregate of 280,000 shares of its common stock and warrants to purchase
140,000 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds
of $50,400. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
April 10, 2018, the Company sold 27.78 units, consisting of an aggregate of 277,778 shares of its common stock and warrants to
purchase 138,889 shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total
proceeds of $50,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
December 20, 2017, the Company sold 10 units, consisting of an aggregate of 100,000 shares of its common stock and warrants to
purchase 50,000 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total proceeds
of $18,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
December 14, 2017, the Company sold 13.89 units, consisting of an aggregate of 138,889 shares of its common stock and warrants
to purchase 69,445 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total
proceeds of $25,000. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
On
December 14, 2017, the Company sold 55.56 units, consisting of an aggregate of 555,600 shares of its common stock and warrants
to purchase 277,800 shares of common stock, exercisable at $0.26 per share over a thirty six month period, in exchange for total
proceeds of $100,008. The proceeds received were allocated between the common stock and warrants on a relative fair value basis.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Exercise
of Options
On
January 3, 2018, two option holders exercised options to purchase a total of 500,000 shares of common stock at $0.181 per share
on a cashless basis, resulting in the issuance of 317,172 shares of common stock.
On
January 2, 2018, an option holder exercised options to purchase 37,500 shares of common stock at $0.22 per share on a cashless
basis, resulting in the issuance of 21,000 shares of common stock.
Exercise
of Warrants
On
January 3, 2018, a warrant holder exercised warrants to purchase 71,428 shares of common stock at $0.26 per share on a cashless
basis, resulting in the issuance of 34,285 shares of common stock.
Common
Stock Issued for Services
On
June 25, 2018, the Company issued 118,421 shares of common stock to its then CEO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $22,500 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on June 30, 2018.
On
June 25, 2018, the Company issued 31,579 shares of common stock to its then President and COO 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 that ended on June 30, 2018.
On
June 25, 2018, the Company issued 78,947 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 that ended on June 30, 2018.
On
June 25, 2018, the Company issued 131,579 shares of common stock to a consultant for business development services. The fair value
of the common stock was $25,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed
over the requisite service period that ended on June 30, 2018.
On
June 25, 2018, the Company issued 100,000 shares of common stock to another consultant for business development services. The
fair value of the common stock was $19,000 based on the closing price of the Company’s common stock on the date of grant,
and was expensed over the requisite service period that ended on June 30, 2018.
On
March 26, 2018, the Company issued 207,852 shares of common stock to its then CEO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $45,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on March 31, 2018.
On
March 26, 2018, the Company issued 55,427 shares of common stock to its then President and COO for services rendered pursuant
to his employment 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 that ended on March 31, 2018.
On
March 26, 2018, the Company issued 138,568 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $30,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period that ended on March 31, 2018.
On
March 26, 2018, the Company issued 69,284 shares of common stock to a consultant for business development services. The 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 that ended on March 31, 2018.
On
December 22, 2017, the Company issued 300,000 shares of common stock to its CFO as a bonus for services rendered. The aggregate
fair value of the common stock was $78,828 based on the closing price of the Company’s common stock on the date of grant,
and was expensed in full.
On
December 22, 2017, the Company issued 100,000 shares of common stock to Dr. Alfredo Axtmayer for his service on our Board of Directors.
The aggregate fair value of the common stock was $26,276 based on the closing price of the Company’s common stock on the
date of grant, and was expensed in full.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On
November 29, 2017, a total of 314,069 shares of common stock were issued to three consultants that were engaged to assist the
Company with acquisition activities. The aggregate fair value of the common stock was $82,600 based on the closing price of the
Company’s common stock on the date of grant, and was expensed over the requisite service period that ended on December 31,
2017.
Amortization
of Stock Options
A
total of $438,683 of stock-based compensation expense was recognized from the amortization of options over their vesting period
during the nine months ended June 30, 2018.
Note
8 – 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 8,352,500 options were outstanding as of June 30, 2018. During the three months ended June 30, 2018, options to purchase
an aggregate total of 40,000 shares of common stock at a weighted average exercise price of $0.27 per share expired, during the
three months ended March 31, 2018, options to purchase an aggregate total of 55,000 shares of common stock at a weighted average
exercise price of $0.24 per share expired, and during the three months ended December 31, 2017, options to purchase an aggregate
total of 1,110,000 shares of common stock at a weighted average exercise price of $0.40 per share also expired.
On
January 3, 2018, two option holders exercised options to purchase a total of 500,000 shares of common stock at $0.181 per share
on a cashless basis, resulting in the issuance of 317,172 shares of common stock.
On
January 2, 2018, an option holder exercised options to purchase 37,500 shares of common stock at $0.22 per share on a cashless
basis, resulting in the issuance of 21,000 shares of common stock.
On
December 22, 2017, we granted fully vested options to purchase 500,000 shares of common stock as compensation for services to
our then President and COO. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated
value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.2094, was $104,698.
The options were expensed over the vesting period, resulting in $104,698 of stock based compensation expense during the nine months
ended June 30, 2018.
On
November 29, 2017, we granted fully vested options to purchase 100,000 shares of common stock as compensation for services to
our Chief Scientist. The options are exercisable over a ten year period at an exercise price of $0.27 per share. The estimated
value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value of $0.21, was $21,004.
The options were expensed over the vesting period, resulting in $21,004 of stock based compensation expense during the nine months
ended June 30, 2018.
On
November 29, 2017, we granted fully vested options to purchase an aggregate of 205,000 shares of common stock as compensation
for services to a total of ten of our employees. The options are exercisable over a ten year period at an exercise price of $0.27
per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 112% and a call option value
of $0.21, was $43,057. The options were expensed over the vesting period, resulting in $43,057 of stock based compensation expense
during the nine months ended June 30, 2018.
Note
9 – Common Stock Warrants
Warrants
to purchase a total of 6,117,128 shares of common stock were outstanding as of June 30, 2018. On January 3, 2018, a warrant holder
exercised warrants to purchase 71,428 shares of common stock at $0.26 per share on a cashless basis, resulting in the issuance
of 34,285 shares of common stock.
On
December 31, 2017, warrants to purchase 200,000 shares of common stock at $0.30 per share expired, and on December 30, 2017, warrants
to purchase another 300,000 shares of common stock at $0.45 per share also expired.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Warrants
to purchase an aggregate 348,889 shares of common stock at $0.30 per share over a 36 month period were issued at various dates
in April of 2018 pursuant to unit offerings for the sale of an aggregate of 697,778 shares of common stock in exchange for total
proceeds of $125,600.
Warrants
to purchase 50,000 shares of common stock at $0.26 per share over a 36 month period were issued on December 20, 2017 pursuant
to a unit offering for the sale of 100,000 shares of common stock in exchange for proceeds of $18,000, and warrants to purchase
a total of 347,245 shares of common stock at $0.26 per share over a 36 month period were issued on December 14, 2017 pursuant
to two unit offerings for the sale of an aggregate 694,489 shares of common stock in exchange for total proceeds of $125,008.
Note
10 – Other Income
Other
income for the nine months ended June 30, 2018 and 2017 consisted of the following:
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Settlement income on license
agreement
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Rental income on subleases
|
|
|
57,600
|
|
|
|
3,000
|
|
Restitution income
|
|
|
28,312
|
|
|
|
10,000
|
|
|
|
$
|
85,912
|
|
|
$
|
263,000
|
|
Note
11 - 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, 2018 and the year ended September 30, 2017, 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, 2018, the Company had approximately $7,787,000 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, 2018 and September 30, 2017, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
12 – Subsequent Events
Common
Stock Sales
On
July 11, 2018, the Company sold 66.67 units, consisting of 666,667 shares of its common stock and warrants to purchase 333,334
shares of common stock, exercisable at $0.30 per share over a thirty six month period, in exchange for total proceeds of $100,000.
The proceeds received were allocated between the common stock and warrants on a relative fair value basis.