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
|
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, 2019. The interim Condensed Consolidated
Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented
are not necessarily indicative of the results that might be expected for the entire fiscal year.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the following entities, all of which were under common
control and ownership at December 31, 2019:
|
|
Jurisdiction
of
|
|
|
Name
of Entity(1)
|
|
Incorporation
|
|
Relationship
|
Digipath,
Inc.(2)
|
|
Nevada
|
|
Parent
|
Digipath
Labs, Inc.
|
|
Nevada
|
|
Subsidiary
|
TNM
News, Inc.
|
|
Nevada
|
|
Subsidiary
|
GroSciences,
Inc.(3)
|
|
Colorado
|
|
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
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.
Inventory
Inventories
are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out
(FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive
levels, deterioration, and other factors in evaluating net realizable value. Our products consist of
handheld devices used to test cannabis for THC, CBD and CBG levels under our GroSciences, Inc. subsidiary. We have not yet commenced
sales of this product.
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.
Adoption
of New Accounting Standards and Recently Issued 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, 2018, with early adoption permitted. There
was no impact on the Company’s financial statements as a result of adopting this ASU for the three-month period ending
December 31, 2019 or the year ended September 30, 2019.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize
the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic
842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to
Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes
a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases
with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern
and classification of expense recognition in the statement of operations.
The
new standard became effective for fiscal years beginning after December 15, 2019, with early adoption permitted. A modified retrospective
transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity
may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial
statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing
leases also apply to leases entered into between the date of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative
periods. The Company adopted the new standard on October 1, 2019 using the modified retrospective transition approach as of the
effective date of the initial application. Consequently, financial information will not be updated and the disclosures required
under the new standard will not be provided for dates and periods before October 1, 2019. The new standard provides a number of
optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits
entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial
direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.
The
most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities
on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.
The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term
leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities,
and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition.
The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases.
The new standard did not have a material impact.
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 $15,176,087, and as of December 31, 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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial
assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level
1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date.
Level
2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability
(e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market
data by correlation or other means (market corroborated inputs).
Level
3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset
or liability.
The
following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets
as of December 31, 2019 and September 30, 2019, respectively:
|
|
Fair Value Measurements at December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
68,657
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
68,657
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term advances
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
Lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
364,195
|
|
Note payable, equipment financing
|
|
|
-
|
|
|
|
291,931
|
|
|
|
-
|
|
Convertible notes payable, net of discounts of $33,105
|
|
|
-
|
|
|
|
-
|
|
|
|
666,895
|
|
Total liabilities
|
|
|
-
|
|
|
|
316,931
|
|
|
|
1,031,090
|
|
|
|
$
|
68,657
|
|
|
$
|
(316,931
|
)
|
|
$
|
(1,031,090
|
)
|
|
|
Fair Value Measurements at September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
323,739
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
323,739
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of discounts of $41,426
|
|
|
-
|
|
|
|
-
|
|
|
|
658,574
|
|
Total liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
658,574
|
|
|
|
$
|
323,739
|
|
|
$
|
-
|
|
|
$
|
(658,574
|
)
|
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 $700,000 of convertible debentures, net of discounts of $33,105 and $41,426 as of December
31, 2019 and September 30, 2019, respectively.
There
were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the three months ended December
31, 2019 or the year ended September 30, 2019.
Note
4 – Accounts Receivable
Accounts
receivable was $282,068 and $179,256 at December 31, 2019 and September 30, 2019, respectively, net of allowance for uncollectible
accounts of $93,790 and $50,540 at December 31, 2019 and September 30, 2019, respectively.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
5 – Fixed Assets
Fixed
assets consist of the following at December 31, 2019 and September 30, 2019:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2019
|
|
Software
|
|
$
|
123,492
|
|
|
$
|
123,492
|
|
Office equipment
|
|
|
57,460
|
|
|
|
55,061
|
|
Furniture and fixtures
|
|
|
29,115
|
|
|
|
29,115
|
|
Lab equipment
|
|
|
1,498,789
|
|
|
|
1,118,942
|
|
Leasehold improvements
|
|
|
494,117
|
|
|
|
494,117
|
|
Lab equipment held under capital leases
|
|
|
99,193
|
|
|
|
-
|
|
|
|
|
2,302,166
|
|
|
|
1,820,727
|
|
Less: accumulated depreciation
|
|
|
(1,164,987
|
)
|
|
|
(1,094,113
|
)
|
Total
|
|
$
|
1,137,179
|
|
|
$
|
726,614
|
|
Depreciation
and amortization expense totaled $70,874 and $64,381 for the three months ended December 31, 2019 and 2018, respectively.
Note
6 – Leases
The
Company’s leases its operating and office facilities, and sub-leases one of the units, under non-cancelable real property
lease agreements that expire on May 31, 2021 and June 30, 2021. 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 operating and office facility leases contain 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:
|
|
For the Three
Months Ended
December 31,
2019
|
|
Operating lease cost
|
|
$
|
52,002
|
|
Finance lease cost:
|
|
|
|
|
Amortization of assets
|
|
|
4,960
|
|
Interest on lease liabilities
|
|
|
3,306
|
|
Sublease income
|
|
|
(21,000
|
)
|
Total net lease cost
|
|
$
|
39,268
|
|
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Supplemental
balance sheet information related to leases was as follows:
|
|
December
31,
|
|
|
|
2019
|
|
Operating
leases:
|
|
|
|
Operating
lease assets
|
|
$
|
289,867
|
|
|
|
|
|
|
Current
portion of operating lease liabilities
|
|
$
|
196,069
|
|
Noncurrent
operating lease liabilities
|
|
|
94,777
|
|
Total
operating lease liabilities
|
|
$
|
290,846
|
|
Finance
lease:
|
|
|
|
|
Equipment,
at cost
|
|
$
|
99,193
|
|
Accumulated
amortization
|
|
|
(4,960
|
)
|
Equipment,
net
|
|
$
|
94,233
|
|
|
|
|
|
|
Current
portion of finance lease liability
|
|
$
|
29,771
|
|
Noncurrent
finance lease liability
|
|
|
43,578
|
|
Total
finance lease liability
|
|
$
|
73,349
|
|
|
|
|
|
|
Weighted
average remaining lease term:
|
|
|
|
|
Operating
leases
|
|
|
1.5
years
|
|
Finance
leases
|
|
|
2.3
years
|
|
|
|
|
|
|
Weighted
average discount rate:
|
|
|
|
|
Operating
leases
|
|
|
5.75
|
%
|
Finance
lease
|
|
|
18.41
|
%
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
For
the Three
|
|
|
Months
Ended
|
|
|
December
31,
|
|
|
2019
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating
cash flows provided by sublet operating leases
|
|
$
|
21,000
|
Operating
cash flows used for operating leases
|
|
$
|
51,024
|
Operating
cash flows used for finance leases
|
|
$
|
3,306
|
Financing
cash flows used for finance leases
|
|
$
|
25,843
|
|
|
|
|
Leased
assets obtained in exchange for lease liabilities:
|
|
|
|
Total
operating lease liabilities
|
|
$
|
-
|
Total
finance lease liabilities
|
|
$
|
99,193
|
Future
minimum annual lease commitments under non-cancelable operating leases are as follows at December 31, 2019:
Fiscal Year Ending
|
|
|
Minimum
Lease
|
|
|
Sublease
|
|
|
Net
Lease
|
|
September 30,
|
|
|
Commitments
|
|
|
Income
|
|
|
Commitments
|
|
2020*
|
|
|
$
|
155,032
|
|
|
$
|
42,000
|
|
|
$
|
113,032
|
|
2021
|
|
|
|
148,957
|
|
|
|
-
|
|
|
|
148,957
|
|
|
|
|
$
|
303,989
|
|
|
$
|
42,000
|
|
|
$
|
261,989
|
|
*
Liability pertains to the remaining nine month period from January 1, 2020 through September 30, 2020.
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 December 31, 2019:
|
|
Finance
|
|
|
|
Leases
|
|
|
|
|
|
2020*
|
|
$
|
30,921
|
|
2021
|
|
|
37,105
|
|
2022
|
|
|
21,644
|
|
Total
minimum lease payments
|
|
|
89,670
|
|
Less
interest
|
|
|
16,321
|
|
Present
value of lease liabilities
|
|
|
73,349
|
|
Less
current portion
|
|
|
29,771
|
|
Long-term
lease liabilities
|
|
$
|
43,578
|
|
*
Liability pertains to the remaining nine month period from January 1, 2020 through September 30, 2020.
Note
7 – Short Term Advances
On
December 26, 2019, a total of $25,000 was received as a short-term loan from one of our convertible noteholders. The advance was
subsequently repaid on February 6, 2020. No interest expense was recognized.
Note
8 –Note Payable, Equipment Financing
Note
payable consists of the following at December 31, 2019 and September 30, 2019, respectively:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
291,931
|
|
|
$
|
-
|
|
Less:
current maturities
|
|
|
(52,030
|
)
|
|
|
-
|
|
Note
payable
|
|
$
|
239,901
|
|
|
$
|
-
|
|
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the equipment loan in the amount of
$3,819 during the three months ended December 31, 2019.
Note
9 – Convertible Notes Payable
Convertible
notes payable consists of the following at December 31, 2019 and September 30, 2019, respectively:
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
|
|
|
|
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 September 23, 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 $0.11 per share. The Company’s obligations under this Note are secured
by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
On
November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest
rate, which matures on 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 is
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 three months ended June 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 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
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes payable
|
|
|
700,000
|
|
|
|
700,000
|
|
Less:
unamortized debt discounts
|
|
|
(33,105
|
)
|
|
|
(41,426
|
)
|
|
|
|
666,895
|
|
|
|
658,574
|
|
Less:
current maturities
|
|
|
(666,895
|
)
|
|
|
(200,000
|
)
|
Convertible
notes payable
|
|
$
|
-
|
|
|
$
|
458,574
|
|
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 during the three months ended December
31, 2018. 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 $8,321 and $4,846 during the three months ended December 31, 2019 and 2018,
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 $14,115 and
$5,907 for the three months ended December 31, 2019 and 2018, respectively.
The
Company recognized interest expense for the three months ended December 31, 2019 and 2018, respectively, as follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Interest
on capital leases
|
|
$
|
3,306
|
|
|
$
|
-
|
|
Interest
on notes payable
|
|
|
3,819
|
|
|
|
-
|
|
Amortization
of beneficial conversion features
|
|
|
8,321
|
|
|
|
4,846
|
|
Interest
on convertible notes
|
|
|
14,115
|
|
|
|
5,907
|
|
Total
interest expense
|
|
$
|
29,561
|
|
|
$
|
10,753
|
|
Note
10 - Changes in Stockholders’ Equity
Convertible
Preferred Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share, of which 6,000,000 have
been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining 4,000,000 shares
available for designation from time to time by the Board as set forth below. As of December 31, 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 December 31, 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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Common
Stock
Common
stock consists of $0.001 par value, 250,000,000 shares authorized, of which 48,532,666 shares were issued and outstanding as of
December 31, 2019.
Common
Stock Issued for Services
On
December 25, 2019, the Company issued 171,233 shares of common stock to its CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock
on the date of grant, and was expensed over the requisite service period.
Amortization
of Stock-Based Compensation
A
total of $22,110 of stock-based compensation expense was recognized during the three months ended December 31, 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 December 31, 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 $9,750 of stock-based compensation expense was recognized during the three months ended December 31, 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.
No further unamortized expenses are to be expensed during the remaining requisite service period.
A
total of $17,677 of stock-based compensation expense was recognized from the amortization of options over their vesting period
during the three months ended December 31, 2019.
Note
11 – 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 3,085,000 options were outstanding as of December 31, 2019. During the three months ended December 31, 2019, options
to purchase an aggregate total of 3,000,000 shares of common stock at a weighted average exercise price of $0.13 per share expired.
Note
12 – Common Stock Warrants
Warrants
to purchase a total of 3,417,126 shares of common stock were outstanding as of December 31, 2019.
Note
13 – Other Income (Expense)
Other
income (expense) for the three months ended December 31, 2019 and 2018 consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Settlement
income on note receivable
|
|
$
|
-
|
|
|
$
|
30,000
|
|
Rental
income on subleases
|
|
|
21,000
|
|
|
|
20,400
|
|
Interest
expense
|
|
|
(29,561
|
)
|
|
|
(10,753
|
)
|
|
|
$
|
(8,561
|
)
|
|
$
|
39,647
|
|
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.
DIGIPATH,
INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
14 - Income Tax
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides
that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the three months ended December 31, 2019 and the year ended September 30, 2019, the Company incurred a net operating loss and,
accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to
the uncertainty of the realization of any tax assets. At December 31, 2019, the Company had approximately $9,200,000 of federal
net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2031.
Based
on the available objective evidence, including the Company’s history of its loss, management believes it is more likely
than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation
allowance against its net deferred tax assets at December 31, 2019 and September 30, 2019, respectively.
In
accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note
15 – Subsequent Events
Common
Stock Issuances for Services
On
January 27, 2020, the Company issued 500,000 shares of common stock to a consultant for investor relations services to be performed
from February 1, 2020 through July 31, 2020. The fair value of the common stock was $37,500 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.
Options
Issued to Directors for Services
On
January 29, 2020, Edmond A. DeFrank was appointed to the Company’s Board of Directors, filling the vacancy resulting from
the resignation of Dr. Cindy Orser on January 20, 2020. On
January 31, 2020, we granted Mr. DeFrank options to purchase 250,000 shares of common stock as compensation for Director services.
The options vest immediately as to 62,500 shares and as to an additional 62,500 shares on each of January
31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise price of $0.10
per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 106% and a call option value
of $0.0683, was $17,078. The options are being expensed over the vesting period.
On
January 31, 2020, we granted options to purchase 250,000 shares of common stock as compensation for Director services to Dennis
Hartmann. The options vest immediately as to 62,500 shares and as to an additional 62,500 shares on
each of January 31, 2021, January 31, 2022, and January 31, 2023, and are exercisable for a ten-year period at an exercise
price of $0.10 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 106% and a
call option value of $0.0683, was $17,078. The options are being expensed over the vesting period.
Convertible
Note Financing
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 $150,000. The transaction
was effected pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506(b) promulgated thereunder. The
Note matures on August 11, 2022, bears interest at a rate of 9% per annum, and is convertible into shares of the Company’s
common stock at a conversion price of $0.15 per share. 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
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 transaction was effected pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended and Rule 506(b) promulgated thereunder. The Note matures on August 10, 2022, bears interest at a rate of 9% per
annum, and is convertible into shares of the Company’s common stock at a conversion price of $0.15 per share. 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.