Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digipath,
Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,”
“we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media
firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing,
cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under
ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the
quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing
lab in Nevada since 2015 and hopes to open labs in other states that have legalized the sale of cannabis, beginning with California or
Arizona.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The
unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on
Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated
Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements,
and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The interim Condensed Consolidated Financial Statements should
be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative
of the results that might be expected for the entire fiscal year.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control
and ownership at June 30, 2021:
Schedule
of Entities Under Common Control and Ownership
|
|
|
|
Jurisdiction
of
|
|
|
|
|
|
Name
of Entity(1)
|
|
|
Incorporation
|
|
|
Relationship
|
|
|
Digipath, Inc.(2)
|
|
|
Nevada
|
|
|
Parent
|
|
|
Digipath Labs, Inc.
|
|
|
Nevada
|
|
|
Subsidiary
|
|
|
Digipath Labs CA, Inc.(3)
|
|
|
California
|
|
|
Subsidiary
|
|
|
Digipath Labs S.A.S.(4)
|
|
|
Colombia
|
|
|
Subsidiary
|
|
|
VSSL Enterprises, Ltd.(5)
|
|
|
Canada
|
|
|
Subsidiary
|
|
|
TNM News Corp.(6)
|
|
|
Nevada
|
|
|
Subsidiary
|
|
|
(1)
|
|
All entities are
in the form of a corporation.
|
|
(2)
|
|
Holding company,
which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company.
|
|
(3)
|
|
Formed during the
second fiscal quarter of 2021, but has not yet commenced significant operations.
|
|
(4)
|
|
Formed during the
first fiscal quarter of 2019, but has not yet commenced significant operations.
|
|
(5)
|
|
Acquired on March
11, 2020.
|
|
(6)
|
|
Minimal activity,
dissolved on July 28, 2021.
|
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
The
Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the sale of lab testing services through our subsidiary Digipath Labs, Inc.
Revenue
is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis
products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per
test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which
time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We
typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based
on the aging of its receivables.
Stock-Based
Compensation
The
Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718)
and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the
equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a
commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives
for nonperformance.
Adoption
of New Accounting Standards and Recently Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted
by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards,
which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In
August 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-06, Debt–Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible
instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the
treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method.
The new guidance is effective for all entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2021, with early adoption permitted. The adoption
of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or related disclosures.
In
November 2019, the FASB issued ASU 2019-12 – Income Taxes (“Topic 740”): Simplifying the Accounting
for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and
simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification.
ASU 2019-12 and its related amendments are effective for public entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020. The provisions of this update did not have a material impact on the Company’s
financial position or results of operations.
No
other new accounting pronouncements, issued or effective during the period ended June 30, 2021, have had or are expected to have a significant
impact on the Company’s financial statements.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 – Going Concern
As shown in the accompanying condensed consolidated financial statements,
as of June 30, 2021, the Company had negative working capital of $417,788, accumulated recurring losses of $17,814,800, and only $72,809
of cash on hand, which 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. Management believes these factors will contribute toward achieving
profitability.
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
Board
of Directors Compensation
On
March 25, 2021, the Board of Directors approved changes to the compensation arrangements for each of Edmond A. DeFrank and Dennis Hartmann
for serving as directors of the Company, as follows:
|
|
●
|
Effective
April 1, 2021, annual compensation is increased from $18,000 to $30,000, payable in quarterly
installments of $7,500 each; and
|
|
|
●
|
Such
compensation may now be paid in shares of common stock of the Company instead of cash, at
the discretion of the Company.
|
In
connection with the foregoing, the Board of Directors of the Company also approved changes to the compensation arrangements for Bruce
Raben for serving as the Company’s Chairman of the Board, as follows:
|
|
●
|
Effective
April 1, 2021, annual compensation has been increased from $30,000 to $60,000, payable in
quarterly installments of $15,000 each; and
|
|
|
●
|
Such
compensation may now be paid in shares of common stock of the Company instead of cash, at
the discretion of the Company.
|
Common
Stock Sold for Cash
On
December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of $20,250.
Common
Stock Issued for Services
On
June 25, 2021, the Company issued 250,000 shares of common stock to its former CFO for services rendered pursuant to his employment agreement.
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.
On June 25, 2021, the Board approved the issuance of 250,000 shares of
common stock to Bruce Raben for services rendered. 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.
On June 25, 2021, the Board approved the issuance of 125,000 shares of
common stock to Dennis Hartmann for services rendered. The fair value of the common stock was $7,500 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 June 25, 2021, the Board approved the issuance of 83,333 shares of common
stock to Edmond A. DeFrank for services rendered. The fair value of the common stock was $5,000 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 2, 2021, the Board approved the issuance of 840,000 shares of common
stock to Bruce Raben for services rendered. The fair value of the common stock was $42,000 based on the closing price of the Company’s
common stock on the date of grant, and was expensed over the requisite service period.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On
March 25, 2021, the Company issued 266,430 shares of common stock to its former 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, 2021, the Board also approved the issuance of 200,000 shares of common stock as a bonus to each of Edmond A. DeFrank, Dennis
Hartmann and Bruce Raben, or 600,000 shares in the aggregate. The aggregate fair value of the common stock was $33,780 based on the closing
price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.
On
December 25, 2020, the Company issued 728,155 shares of common stock to its former 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.
Note
4 – Fair Value of Financial Instruments
The
Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC
820”). 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, 2021 and September 30, 2020, respectively:
Summary
of Financial Instruments at Fair Value on Recurring Basis
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
Fair
Value Measurements at June 30, 2021
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
72,809
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total
assets
|
|
|
72,809
|
|
|
|
-
|
|
|
|
-
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term advances
|
|
|
-
|
|
|
|
115,112
|
|
|
|
-
|
|
|
Lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
474,480
|
|
|
Notes payable
|
|
|
-
|
|
|
|
392,665
|
|
|
|
-
|
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
1,160,000
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
507,777
|
|
|
|
1,634,480
|
|
|
Total
|
|
$
|
72,809
|
|
|
$
|
(507,777
|
)
|
|
$
|
(1,634,480
|
)
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
Fair
Value Measurements at September 30, 2020
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
82,749
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total
assets
|
|
|
82,749
|
|
|
|
-
|
|
|
|
-
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term advances
|
|
|
-
|
|
|
|
50,112
|
|
|
|
-
|
|
|
Lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
561,394
|
|
|
Notes payable
|
|
|
-
|
|
|
|
473,224
|
|
|
|
-
|
|
|
Convertible notes payable,
net of discounts of $8,322
|
|
|
-
|
|
|
|
-
|
|
|
|
1,241,678
|
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
1,241,678
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
523,336
|
|
|
|
1,803,072
|
|
|
Total
|
|
$
|
82,749
|
|
|
$
|
(523,336
|
)
|
|
$
|
(1,803,072
|
)
|
The
fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by ASC Topic
820-10-35.
Level
3 liabilities consist of lease liabilities and a total of $1,160,000 of convertible debentures and $1,250,000 of convertible debentures,
net of discounts of $-0- and $8,322, as of June 30, 2021 and September 30, 2020, respectively.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June 30, 2021
or the year ended September 30, 2020.
Note
5 – Accounts Receivable
Accounts
receivable was $193,810 and $242,145 at June 30, 2021 and September 30, 2020, respectively, net of allowance for uncollectible accounts
of $96,282 and $128,944 at June 30, 2021 and September 30, 2020, respectively.
Note
6 – Other Current Assets
Other
current assets consist of the following:
Schedule
of Other Current Assets
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Prepaid expenses
|
|
$
|
63,470
|
|
|
$
|
48,151
|
|
|
Other receivable
|
|
|
5,480
|
|
|
|
5,522
|
|
|
Total
other current assets
|
|
$
|
68,950
|
|
|
$
|
53,673
|
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
7 – Fixed Assets
Fixed
assets consist of the following at June 30, 2021 and September 30, 2020:
Schedule
of Fixed Assets
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Software
|
|
$
|
125,903
|
|
|
$
|
124,697
|
|
|
Office equipment
|
|
|
71,601
|
|
|
|
74,777
|
|
|
Furniture and fixtures
|
|
|
29,879
|
|
|
|
29,879
|
|
|
Lab equipment
|
|
|
1,398,716
|
|
|
|
1,398,716
|
|
|
Leasehold improvements
|
|
|
494,117
|
|
|
|
494,117
|
|
|
Lab equipment held under capital
leases
|
|
|
99,193
|
|
|
|
99,193
|
|
|
Fixed assets, gross
|
|
|
2,219,409
|
|
|
|
2,221,379
|
|
|
Less: accumulated depreciation
|
|
|
(1,568,688
|
)
|
|
|
(1,335,974
|
)
|
|
Total
|
|
$
|
650,721
|
|
|
$
|
885,405
|
|
On
March 31, 2021, we distributed fixed assets with an aggregate net book value of $2,227 to our former CEO in satisfaction of accrued payroll
that was owed. The fixed assets consisted of office equipment with a historical cost basis of $3,176 and accumulated depreciation of
$949, resulting in a loss of $2,227 that was settled against the amount of unpaid compensation that was owed.
Depreciation
and amortization expense totaled $233,663 and $242,207 for the nine months ended June 30, 2021 and 2020, respectively.
Note
8 – Leases
The
Company leases its operating and office facility under
a non-cancelable real property lease agreement that expires on August 31, 2025. The Company also has a financing
lease for lab equipment subject to the recently adopted ASU 2016-02. In the locations in which it is economically feasible to continue
to operate, management expects to enter into a new lease upon expiration. The real property lease contains provisions requiring payment
of property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premise. As the Company’s
leases do not provide implicit discount rates, the Company uses an incremental borrowing rate based on the information available at the
commencement date in determining the present value of lease payments.
The
components of lease expense were as follows:
Schedule
of Components of Lease Expense
|
|
|
For the Nine
|
|
|
|
|
Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
Finance lease
cost
|
|
$
|
6,477
|
|
|
Operating lease cost:
|
|
|
|
|
|
Amortization
of assets
|
|
|
68,408
|
|
|
Interest
on lease liabilities
|
|
|
20,747
|
|
|
Total
lease cost
|
|
$
|
95,632
|
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Supplemental
balance sheet information related to leases was as follows:
Schedule
of Supplemental Balance Sheet Information
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
Operating
leases:
|
|
|
|
|
|
Operating
lease assets
|
|
$
|
437,298
|
|
|
|
|
|
|
|
|
Current
portion of operating lease liabilities
|
|
$
|
91,311
|
|
|
Noncurrent
operating lease liabilities
|
|
|
354,701
|
|
|
Total
operating lease liabilities
|
|
$
|
446,012
|
|
|
Finance
lease:
|
|
|
|
|
|
Equipment,
at cost
|
|
$
|
99,193
|
|
|
Accumulated
amortization
|
|
|
(34,718
|
)
|
|
Equipment, net
|
|
$
|
64,475
|
|
|
|
|
|
|
|
|
Current portion of finance
lease liability
|
|
$
|
28,468
|
|
|
Noncurrent finance lease
liability
|
|
|
-
|
|
|
Total
finance lease liability
|
|
$
|
28,468
|
|
|
|
|
|
|
|
|
Weighted average remaining
lease term:
|
|
|
|
|
|
Operating
leases
|
|
|
4.17
years
|
|
|
Finance
leases
|
|
|
0.8
years
|
|
|
|
|
|
|
|
|
Weighted average discount
rate:
|
|
|
|
|
|
Operating
leases
|
|
|
5.75
|
%
|
|
Finance
lease
|
|
|
18.41
|
%
|
Supplemental
cash flow and other information related to leases was as follows:
Schedule
of Supplemental Cash Flow and Other Information
|
|
|
For the Nine
|
|
|
|
|
Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
Cash paid for amounts included
in the measurement of lease liabilities:
|
|
|
|
|
|
Operating
cash flows used for operating leases
|
|
$
|
62,471
|
|
|
Financing
cash flows used for finance leases
|
|
$
|
24,443
|
|
Future
minimum lease commitments on a fiscal year basis, including common
area maintenance fees, under non-cancelable operating leases are as follows as of June 30, 2021:
Schedule
of Future Minimum Annual Lease Commitments Under Operating Leases
|
Fiscal Year Ending
|
|
Minimum Lease
|
|
|
September
30,
|
|
Commitments
|
|
|
2021 (for the
three months remaining)
|
|
$
|
28,566
|
|
|
2022
|
|
|
115,550
|
|
|
2023
|
|
|
119,468
|
|
|
2024
|
|
|
123,543
|
|
|
2025
|
|
|
116,891
|
|
|
Total minimum lease payments
|
|
|
504,018
|
|
|
Less interest
|
|
|
58,006
|
|
|
Present value of lease liabilities
|
|
|
446,012
|
|
|
Less current portion
|
|
|
91,311
|
|
|
Long-term lease liabilities
|
|
$
|
354,701
|
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Future
minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows
at June 30, 2021:
Schedule
of Future Minimum Annual Lease Payments Under Finance Lease
|
|
|
Finance
|
|
|
|
|
Leases
|
|
|
|
|
|
|
|
2021 (for the
three months remaining)
|
|
$
|
9,276
|
|
|
2022
|
|
|
21,644
|
|
|
Total
minimum lease payments
|
|
|
30,920
|
|
|
Less interest
|
|
|
2,452
|
|
|
Present
value of lease liabilities
|
|
|
28,468
|
|
|
Less current portion
|
|
|
28,468
|
|
|
Long-term
lease liabilities
|
|
$
|
-
|
|
Note
9 – Short Term Advances
Short
term advances consist of the following at June 30, 2021 and September 30, 2020, respectively:
Schedule of Short Term Advances
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
On April 29,
2021, we received $25,000 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8%
per annum.
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 23, 2021, we received
$40,000 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8% per annum.
|
|
|
40,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 20, 2020, we received
$30,112 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8% per annum.
|
|
|
30,112
|
|
|
|
30,112
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 21, 2020, we
received $20,000 as a short-term loan from one of our convertible noteholders. No interest expense was recognized.
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term advances
|
|
$
|
115,112
|
|
|
$
|
50,112
|
|
The
Company recorded interest expense pursuant to the stated interest rates on the short term loans in the amount of $3,123 for the nine
months ended June 30, 2021.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
10 –Notes Payable
Notes
payable consists of the following at June 30, 2021 and September 30, 2020, respectively:
Schedule of Notes Payable
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
On June 22,
2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank
(the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus
Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note carried interest at 1.00%
per annum, payable monthly beginning December 22, 2020, and was due on June 22, 2025. On January 12, 2021, the PPP Note and interest
was forgiven, resulting in a gain on early extinguishment of debt in the amount of $40,338.
|
|
$
|
-
|
|
|
$
|
40,114
|
|
|
|
|
|
|
|
|
|
|
|
On May 13, 2020, the Company,
through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $179,920 from WebBank Corp, pursuant to a
Promissory Note issued by Labs to WebBank Corp (the “Labs PPP Note”). The loan was made pursuant to the Payroll Protection
Program. The Labs PPP Note bears interest at 1.00% per annum, payable monthly beginning December 13, 2020, and is due on May 13,
2022. The Labs PPP Note may be repaid at any time without penalty.
Under the Payroll Protection Program, Labs will
be eligible for loan forgiveness up to the full amount of the Labs PPP Note and any accrued interest. The forgiveness amount will
be equal to the amount that Labs spends during the 8-week period beginning May 13, 2020 on payroll costs, payment of rent on any
leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum
amount of loan forgiveness for non-payroll expenses is 25% of the amount of the Labs PPP Note. On July 20, 2021, the PPP Note and
interest was forgiven, resulting in a gain on early extinguishment of debt in the amount of $182,054.
|
|
|
179,920
|
|
|
|
179,920
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 26, 2019, the
Company financed the purchase of $377,124 of lab equipment, in part, with the proceeds of a bank loan in the amount of $291,931.
The loan bears interest at the rate of 5.75% per annum and requires monthly payments of $5,622 over the five-year term of the loan
ending on December 26, 2024. The Company’s obligations under this loan are secured by a lien on the purchased equipment.
|
|
|
212,745
|
|
|
|
253,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
392,665
|
|
|
|
473,224
|
|
|
Less: current maturities
|
|
|
(56,705
|
)
|
|
|
(54,317
|
)
|
|
Notes payable
|
|
$
|
335,960
|
|
|
$
|
418,907
|
|
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $11,609
and $12,153 during the nine months ended June 30, 2021 and 2020, respectively.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
11 – Convertible Notes Payable
Convertible
notes payable consists of the following at June 30, 2021 and September 30, 2020, respectively:
Schedule of Convertible Notes Payable
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
On February
11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount
of $50,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the
Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to
$0.03 per share in exchange for an additional $10,000 of proceeds and the promissory note was increased to $60,000. The Company’s
obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.,
pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the note holder
converted $10,000 of principal into 333,334 shares of common stock at a conversion price of $0.03 per share.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 11, 2020, the
Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount
of $150,000. The Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the
Company’s common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to
$0.03 per share in exchange for an additional $50,000 of proceeds and the promissory note was increased to $200,000. The Company’s
obligations under the Note are secured by subordinated lien on the assets of the Company and its wholly-owned subsidiary Digipath
Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December 29, 2020, the
note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per share.
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 10, 2020, the
Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $350,000.
The Note matures on August 10, 2022, bears interest at a rate of 9% per annum, and was convertible into shares of the Company’s
common stock at a conversion price of $0.15 per share. On December 28, 2020, the conversion price was amended to $0.03 per share
in exchange for an additional $50,000 of proceeds that were received on January 4, 2021, and the promissory note was increased to
$400,000. The Company’s obligations under the Note are secured by a lien on the assets of the Company and its wholly-owned
subsidiary Digipath Labs, Inc., pursuant to a Security Agreement between the Company, Digipath Labs, Inc. and the investor. On December
29, 2020, the note holder converted $50,000 of principal into 1,666,667 shares of common stock at a conversion price of $0.03 per
share.
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 23, 2019,
the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on
August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note
holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and
the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the
assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. On February 22, 2021, the noteholder converted $90,000
of principal into 3,000,000 shares of common stock at a conversion price of $0.03 per share.
|
|
|
110,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 8, 2018, the
Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August
10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder
at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the
conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets
of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the year ended
September 30, 2019.
|
|
|
350,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 5, 2018, the
Company received proceeds of $150,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August
10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder
at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the
conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets
of the Company and its wholly-owned subsidiary Digipath Labs, Inc.
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes
payable
|
|
|
1,160,000
|
|
|
|
1,250,000
|
|
|
Less: unamortized debt
discounts
|
|
|
-
|
|
|
|
(8,322
|
)
|
|
|
|
|
1,160,000
|
|
|
|
1,241,678
|
|
|
Less: current maturities
|
|
|
-
|
|
|
|
-
|
|
|
Convertible notes payable
|
|
$
|
1,160,000
|
|
|
$
|
1,241,678
|
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible notes by allocating
a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature
was calculated on the commitment date using the effective conversion price of the convertible notes. This intrinsic value is limited
to the portion of the proceeds allocated to the convertible debt.
The
aforementioned accounting treatment resulted in a total debt discount equal to $70,964. The discount is amortized on a straight-line
basis from the dates of issuance until the earlier of the stated redemption date of the debts, as noted above or the actual settlement
date. The Company recorded debt amortization expense on the aforementioned debt discount in the amount of $8,322 and $24,783 during the
nine months ended June 30, 2021 and 2020, respectively.
All
of the convertible notes limit the maximum number of shares that can be owned by each note holder as a result of the conversions to common
stock to 4.99% of the Company’s issued and outstanding shares.
The
Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $76,309 and $61,099
for the nine months ended June 30, 2021 and 2020, respectively.
The
Company recognized interest expense for the nine months ended June 30, 2021 and 2020, respectively, as follows:
Schedule of Interest Expense
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Interest on
short term loans
|
|
$
|
3,123
|
|
|
$
|
-
|
|
|
Interest on capital leases
|
|
|
6,477
|
|
|
|
8,970
|
|
|
Interest on notes payable
|
|
|
11,609
|
|
|
|
12,153
|
|
|
Amortization of beneficial
conversion features
|
|
|
8,322
|
|
|
|
24,783
|
|
|
Interest on convertible
notes
|
|
|
76,309
|
|
|
|
61,099
|
|
|
Total
interest expense
|
|
$
|
105,840
|
|
|
$
|
107,005
|
|
Note
12 - Changes in Stockholders’ Equity
Convertible
Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have been
designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares available
for designation from time to time by the Board as set forth below. As of June 30, 2021, 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, 2021 are convertible into 6,629,710 shares of the common stock of the Company. No holder is permitted to convert its shares
of Series A Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common
stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 69,730,153 shares were issued and outstanding as of June
30, 2021.
Common
Stock Sales
On
December 30, 2020, the Company sold 900,000 shares of its common stock to its Chairman of the Board in exchange for proceeds of $20,250.
Debt
Conversions
On
February 22, 2021, a convertible noteholder converted $90,000 of principal into 3,000,000 shares at a conversion
price of $0.03 per share. The note was converted in accordance with the conversion terms; therefore, no gain or loss has been
recognized.
On
December 29, 2020, the three holders of the Company’s 9% Secured Convertible Notes converted debt in
the aggregate original principal amount of $110,000 into an aggregate of 3,666,668 shares at a conversion price of $0.03 per share.
The note was converted in accordance with the conversion terms; therefore, no gain or loss has been recognized.
Common
Stock Issued for Services, Related Parties
On
June 25, 2021, the Company issued 250,000 shares of common stock to its former CFO for services rendered pursuant to his employment agreement.
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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
On June 25, 2021, the Board approved the issuance
of 250,000 shares of common stock to Bruce Raben for services rendered. 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.
On June 25, 2021, the Board approved the issuance
of 125,000 shares of common stock to Dennis Hartmann for services rendered. The fair value of the common stock was $7,500 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 June 25, 2021, the Board approved the issuance
of 83,333 shares of common stock to Edmond A. DeFrank for services rendered. The fair value of the common stock was $5,000 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 2, 2021, the Board approved the issuance of 840,000 shares of common
stock to Bruce Raben for services rendered. The fair value of the common stock was $42,000 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, 2021, the Company issued 266,430 shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. 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.
On March 25, 2021, the Board approved the issuance of 200,000 shares of
common stock as a bonus to each of Edmond A. DeFrank, Dennis Hartmann and Bruce Raben, or 600,000 shares in the aggregate. The aggregate
fair value of the common stock was $33,780 based on the closing price of the Company’s common stock on the date of grant, and was
expensed over the requisite service period.
On
December 25, 2020, the Company issued 728,155 shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. 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.
Common
Stock Issued for Services
On
March 25, 2021, the Company issued 250,000 shares of common stock to a consultant as a bonus for services rendered. The aggregate fair
value of the common stock was $14,075 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 28, 2020, the Company issued 500,000 shares of common stock to a consultant for services rendered pursuant to his consulting
agreement. The aggregate fair value of the common stock was $12,000 based on the closing price of the Company’s common stock on
the date of grant, and was expensed over the requisite service period.
Amortization
of Stock-Based Compensation
A
total of $63,768 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting
period during the nine months ended June 30, 2021.
Note
13 – Common Stock Options
Stock
Incentive Plan
On
June 21, 2016, we amended and restated our 2012 Stock Incentive Plan (the “2012 Plan”), which was originally adopted on March
5, 2012 and previously amended on May 20, 2014. As amended, the 2012 Plan provides for the issuance of up to 11,500,000 shares of common
stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors of, and consultants
to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify as incentive stock options
under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from
date of grant.
A
total of 4,120,000 options were outstanding as of June 30, 2021. During the nine months ended June 30, 2021, options to purchase an aggregate
total of 750,000 shares of common stock at a weighted average exercise price of $0.10 per share expired.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Options
Granted
On June 2, 2021, we granted to A. Stone Douglass, a consultant of ours
at the time of grant, and currently our Chief Financial Officer, options to purchase 1,000,000 shares of the Company’s common stock,
having an exercise price of $0.06 per share, exercisable over a ten-year term. The options vest as to one quarter on July 1, 2021, and
quarterly over the next seven quarters as to the remaining shares, beginning on October 1, 2021. The estimated value using the Black-Scholes
Pricing Model, based on a volatility rate of 170% and a call option value of $0.0576, was $57,592, resulting in $14,398 of stock-based
compensation expense during the nine months ended June 30, 2021.
On
March 25, 2021, we granted options to an individual to purchase 300,000 shares of the Company’s common stock, having an exercise
price of $0.06 per share, exercisable over a ten-year term. The options are fully vested. The estimated value using the Black-Scholes
Pricing Model, based on a volatility rate of 167% and a call option value of $0.0527, was $15,822, resulting in $15,822 of stock-based
compensation expense during the nine months ended June 30, 2021.
Options
Forfeited
On
December 30, 2020, a total of 750,000 options with a weighted average exercise price of $0.10 were forfeited.
Note
14 – Common Stock Warrants
Warrants
to purchase a total of 2,868,335 shares of common stock were outstanding as of June 30, 2021.
During
the nine months ended June 30, 2021, warrants to purchase an aggregate total of 1,405,934 shares of common stock at a weighted average
exercise price of $0.24 per share expired.
Note
15 – Other Income (Expense)
Other
income (expense) for the nine months ended June 30, 2021 and 2020 consisted of the following:
Schedule of Other Income (Expense)
|
|
|
2021
|
|
|
2020
|
|
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Gain on early
extinguishment of debt
|
|
$
|
40,338
|
|
|
$
|
-
|
|
|
Settlement of accrued wages
owed to former CEO with distribution of assets
|
|
|
7,580
|
|
|
|
-
|
|
|
Rental income on subleases
|
|
|
-
|
|
|
|
63,000
|
|
|
Loss on disposal of fixed
assets
|
|
|
-
|
|
|
|
(28,238
|
)
|
|
Interest expense
|
|
|
(105,840
|
)
|
|
|
(107,005
|
)
|
|
Total
other income (expense)
|
|
$
|
(57,922
|
)
|
|
$
|
(72,243
|
)
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
16 - Income Tax
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that
deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes, referred to as temporary differences.
For
the nine months ended June 30, 2021 and the year ended September 30, 2020, the Company incurred a net operating loss and, accordingly,
no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of
the realization of any tax assets. At June 30, 2021, the Company had approximately $13,143,000 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, 2021 and September 30, 2020, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
17 – Subsequent Events
Termination
of Equipment Purchase Agreement
On July 22, 2021, the Company elected to terminate its asset
purchase agreement with PharmaLabs San Diego. In addition to the $55,000 non-refundable deposit that was paid on April 30, 2021 in exchange
for lab equipment that has not yet been delivered to us, we paid an additional $27,000 of extension and termination fees.
Common
Stock Issued for Services
On July 1, 2021, the Company issued 1,500,000 shares of common
stock to Todd Denkin in conjunction with his appointment as the Company’s President. The aggregate fair value of the common stock
was $81,900 based on the closing price of the Company’s common stock on the date of grant, and was expensed on the date of grant.