UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

  [X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 
       
   

For the fiscal year ended September 30, 2020

 

OR

 
       
  [  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934 

 
       
    For the transition period from ____________ to ____________  
       
    Commission file number: 000-54239  

 

 

DIGIPATH, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA   27-3601979
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

6450 Cameron Street, Suite 113

Las Vegas, Nevada 89118

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (702) 527-2060

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading
Symbol(s)
  Name of each exchange on which registered
N/A   N/A   N/A

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

  Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

 

  Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

  Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

  Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  Yes [  ] No [X]

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of $0.07 per share as of March 31, 2020 was approximately $3,831,573.

 

As of January 26, 2021, there were 64,065,390 shares of registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I    
Item 1. Business   1
Item 1A. Risk Factors   4
Item 1B. Unresolved Staff Comments   7
Item 2. Properties   8
Item 3. Legal Proceedings   8
Item 4. Mine Safety Disclosures   8
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   9
Item 6. Selected Financial Data   11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk   17
Item 8. Financial Statements and Supplementary Data   18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   19
Item 9A. Controls and Procedures   19
Item 9B. Other Information   19
PART III    
Item 10. Directors, Executive Officers and Corporate Governance   20
Item 11. Executive Compensation   21
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   24
Item 13. Certain Relationships and Related Transactions, and Director Independence   25
Item 14. Principal Accounting Fees and Services   25
PART IV    
Item 15. Exhibits and Financial Statement Schedules   26
SIGNATURES   28

 

 

 

 

PART I

 

Forward Looking Statements

 

This Form 10-K contains “forward-looking” statements including statements regarding our expectations of our future operations. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control.

 

These risks and uncertainties include demand for our products and services, governmental regulation of the cannabis industry, our ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of our liquidity and financial strength to support our growth, general economic and market conditions; our ability to sustain, manage, or forecast growth, our ability to successfully make and integrate acquisitions, new product development and introduction, existing government regulations and changes in, or the failure to comply with, government regulations, adverse publicity, difficulty in forecasting operating results, change in business strategy or development plans, business disruptions, and the ability to attract and retain qualified personnel. Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.

 

ITEM 1. DESCRIPTION OF BUSINESS

 

Overview

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our 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.

 

Business

 

Our cannabis testing business is operated through our wholly owned subsidiary, Digipath Labs, Inc., which performs all cannabis related testing using FDA-compliant laboratory equipment and processes. We opened our first testing lab in Las Vegas, Nevada in May of 2015 to serve the new State approved and licensed medical marijuana industry. We have plans to open labs in other legal states, assuming resources permit.

 

We seek to be the nation’s highest standard, full-service testing lab for cannabis, hemp and ancillary cannabis and hemp infused products. We are a third party independent testing laboratory facility for cannabis, cannabis infused products, hemp and other botanical nutraceuticals to serve growers, dispensaries, caregivers, producers, patients and eventually all end users of cannabis and botanical products.

 

Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis and hemp industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis and hemp they ingest and to help maximize the quality of our client’s products through research, development and standardization.

 

1

 

 

As a premier cannabis and hemp testing laboratory with ISO-17025:2017 accreditation, we take a careful, strategic approach to all of our cannabis and hemp testing. A diverse array of tests combined with our lab equipment and analytical instrumentation enable us to accurately test cannabis and hemp for potency, the presence of pesticides, microbial contamination, metals and heavy metals, which include, but are not limited to, substances like arsenic, cadmium, lead, or mercury. Not only is testing for potency and Cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”) content important, we recognize that more profound testing is needed particularly as a true national standard is developed. Digipath Labs is committed to follow Food and Drug Administration (“FDA”), Drug Enforcement Agency (“DEA”), Environmental Protection Agency (“EPA”), US Department of Agriculture (“USDA”) guidelines, proprietary standard operating procedures (“SOP”), and Good Lab Practices (“GLP”) that are in line with current Federal and State governing bodies. We utilize a variety of tests to safely and effectively share enhanced understanding of the cannabis plant with caregivers, dispensaries and patients. We are committed to the advancement of science by offering a method of standardization for cannabis that is intricate and accurate. This approach and our investment in state-of-the-art testing equipment are of the utmost importance.

 

Digipath Labs screens medicinal and recreational cannabis for potentially harmful contaminants, including:

 

— Residual Solvents (for extracts)

— Moisture

— Water Activity

— Visual Inspection

— Pesticides

— Heavy metals, including mercury, arsenic, lead, cadmium, chromium and nickel

— Biological toxins, such as aflatoxin and ocratoxins

— Microbial contaminants including E. coli, salmonella, coliforms, aspergillus, gram negative bacteria, total aerobic bacteria and mold and yeast

 

Digipath Labs also tests cannabis and hemp for its quality, potency, and cannabinoid and terpene profiles, which determine the suitability of specific chemoprofiles for the treatment of specific ailments.

 

We utilize one of our two Ultra-High Performance Liquid Chromatographs (“UPLC”), which accurately separates and measures the cannabinoid content of any sample of flower, edible, concentrate or other cannabis products. Our Inductively Coupled Plasma Mass Spectrometer (“ICP-MS”) is utilized for heavy metals testing, and provides accurate readings for harmful metals ensuring that the Parts Per Billion (“PPB”) are substantially below the regulated and accepted trace amounts. Our laboratory testing equipment is calibrated using third party reference standards to ensure precision measurements throughout the testing process and has been certified by ISO-17025:2017 standards.

 

With accurate science becoming a major part of the cannabis and hemp industry, the major question is one of standards; we hold ourselves accountable and provide efficient and accurate research and results to our clients. Our test results are meant to help dispensaries, caregivers and patients know the concentration and quality of their cannabis without having to question the credibility of the data.

 

Market Overview

 

According to New Frontier Data, a cannabis researcher based in Washington, D.C., the hemp CBD business worldwide will grow from $4.4 billion in 2018 to over $14.7 billion by 2026, and the worldwide cannabis industry in 2019 generated $15 Billion. In 2024 that will increase to $44.8 Billion. Total legal sales of cannabis in current legal states are projected to grow at a compound annual growth rate (CAGR) of 14% over the next six years, reaching nearly $30 billion by 2025. This figure takes into account the likely projection that more states will legalize. Currently, forty-two states and the District of Columbia have passed some kind of medical and/or adult use marijuana laws.

 

  * Annual sales of medical cannabis are projected to grow at a 17% CAGR through 2025, to an estimated $13.1 billion by 2025; adult-use sales are projected to grow at a 16% CAGR, to $16.6 billion.
  * An estimated 38.4 million U.S. adults consume cannabis at least once annually, from either a legal or illicit source.
  * 36% of cannabis consumers report using cannabis daily, and 59% use cannabis at least once a week.

 

With increased legalization nationwide, the lab-testing sector is expected to experience substantial growth. According to The Insight Partners, the cannabis testing market is expected to reach approximately $2.5 billion in 2025, with an estimated CAGR of 11.9% from 2017-2025. The data troves collected through the testing process are already creating value and could become an increasingly valuable asset and generate substantial revenue for the most accomplished laboratories. This data could also be used to determine specific genetic attributes of targeted cannabinoids and assist with maximizing medicinal benefits and individualized medicine in the future.

 

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Competition

 

The cannabis industry in the United States is highly fragmented, rapidly expanding and evolving. The industry is characterized by new and potentially disruptive or conflicting legislation promulgated on a state-by-state basis. Our competitors include local enterprises, some of which may have financial, technical, sales, marketing and other resources greater than ours. These companies also compete with us in recruiting and retaining qualified personnel and consultants.

 

Our competitive position depends on our ability to attract and retain qualified scientists and other personnel, develop effective proprietary products and solutions, the personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We compete in this area on the basis of price, regulatory compliance, vendor relationships, usefulness, availability, excellent customer service and ease of use of our services.

 

Government Regulation

 

Marijuana is categorized as a Schedule-I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law. A Schedule-I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” However, since 1995, forty-two states and the District of Columbia have passed some kind of medical and/or adult use marijuana laws. This has created an unpredictable business-environment for dispensaries and collectives that legally operate under state-laws but in violation of Federal law. On August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States Attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under state law, so long as:

 

  cannabis is not being distributed to minors and dispensaries are not located around schools and public buildings;
  the proceeds from sales are not going to gangs, cartels or criminal enterprises;
  cannabis grown in states where it is legal is not being diverted to other states;
  cannabis-related businesses are not being used as a cover for sales of other illegal drugs or illegal activity;
  there is not any violence or use of fire-arms in the cultivation and sale of marijuana;
  there is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and
  cannabis is not grown, used, or possessed on Federal properties.

 

The Cole Memo was meant only as a guide, not a rule of law, for United States Attorneys and did not alter in any way the Department of Justice’s Federal authority to enforce Federal law, including Federal laws relating to cannabis, regardless of state law. Moreover, the Cole Memorandum also provided that it could not be used as a defense to any criminal prosecution.

 

On January 4, 2018, United States Attorney General Jefferson Sessions issued a Memorandum to United States Attorneys rescinding the Cole Memorandum, stating that prosecutors should follow well-established principles in effect prior to the issuance of the Cole Memorandum that govern all federal prosecutions in deciding which activities to prosecute under existing federal laws. Federal legislation has been proposed over the years to reschedule or de-schedule cannabis, as well as to transform the Cole Memorandum into a rule of law.

 

Customers

 

We provide cannabis and hemp lab testing services in Las Vegas to Nevada licensed Medical Marijuana Enterprises (“MMEs”), and have expanded to recreational use facilities with the recently passed legislation that allows for the recreational use of marijuana in Nevada. We sell our services to these enterprises on a fixed fee per test or panel of tests, and offer a discounted price for customers based on volume. On June 17, 2014, Clark County initially approved a total of 117 special use permits for cultivation and 87 production applicants. Since the inception of legalized adult-use marijuana, Nevada has issued 288 cannabis-related licenses, including those for retail stores, cultivation, production, and testing labs, according to the state taxation department. We have worked with over 85 cultivators and producers in and around Clark and Nye County. As new harvests come to market, we anticipate further customer growth, especially with the relatively recent legalization of recreational cannabis in the State of Nevada in 2017.

 

Research and Development

 

We believe that our future success will be impacted by our ability to continue to enhance and broaden our services to meet the evolving needs of a relatively newly regulated cannabis services industry. Our research and development efforts are focused on developing new, complementary solutions to streamline our processes and provide optimal services to both our customers and for regulators.

 

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When developing our technical solutions to provide cannabis testing solutions, industry regulatory requirements also dictate that substantial documentation be created to demonstrate data integrity. Our standard operating procedures include streamlined methodologies for generating and maintaining testing services that can be tailored to the variations in other State jurisdictions, as necessary.

 

We expect to continue to invest in our businesses and to invest further as we expand our lab business for cannabis testing to other jurisdictions.

 

Marketing, Sales and Support

 

We use a range of communication platforms to reach our target customers. The goal of the marketing strategy is to position us as the leading testing company in the botanical, nutraceutical, and cannabis industries in the country. Our marketing efforts include digital/online, industry conferences and affiliations, media outreach, direct response and public relations. We believe that these efforts have the ability to deliver our brand message in a powerful way to maximize audience reach.

 

Seasonality

 

Our businesses are not subject to seasonality.

 

Insurance

 

We maintain property, business interruption and casualty insurance.

 

Employees

 

As of September 30, 2020, we had eighteen employees. None of our employees are members of a trade union. We believe that we maintain good relationships with our employees, and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.

 

Corporate Information

 

Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our website is located at http://www.digipath.com. The content on our website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Report.

 

ITEM 1A. Risk Factors

 

The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.

 

An investment in the Company is highly speculative in nature and involves an extremely high degree of risk.

 

We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations. We have a limited operating history. Our operations are subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

 

Our auditor has expressed substantial doubt about our ability to continue as a going concern. We may be unable to obtain additional capital required to implement our business plan. As a result of recurring net losses and insufficient cash reserves, our independent certified public accountant has added a paragraph to its report on our financial statements for the year ended September 30, 2020 questioning our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.

 

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Our failure to manage growth effectively could impair our business. Our business strategy envisions a period of rapid growth that may put a strain on our administrative, operational resources and funding requirements. Our ability to effectively manage growth will require us to continue to expand the capabilities of our operational and management systems and to attract, train, manage and retain qualified personnel. There can be no assurance that we will be able to do so, particularly if losses continue and we are unable to obtain sufficient financing. If we are unable to successfully manage growth, our business, prospects, financial condition, and results of operations could be adversely affected.

 

Our plans are dependent upon key individuals and the ability to attract qualified personnel. In order to execute our business plan, we will be dependent on upon our executive officers and directors, as well as other key personnel. The loss of any of the foregoing individuals could have a material adverse effect upon our business prospects. Moreover our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate and retain such qualified personnel in the future, our business, operating results, and financial condition could be materially adversely affected. We may also depend on third party contractors and other partners, to assist with the execution of our business plan. There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with such third parties. The failure to succeed in these endeavors would have a material adverse effect on our ability to consummate our business plans.

 

Risks Related To Cannabis Related Businesses

 

Our business is dependent on state laws pertaining to the cannabis industry. As of January, 2021, thirty-six states and the District of Columbia allow its citizens to use medical cannabis. Additionally, fifteen states and the District of Columbia have legalized cannabis for adult recreational use, and additional recreational measures are expected to be pursued by other states in the future. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business.

 

Cannabis remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our business. Despite the development of a cannabis industry legal under state laws, state laws legalizing medicinal and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. While the Obama Administration’s Department of Justice adopted a policy (known as the Cole Memorandum) that effectively stated that it was not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis, on January 4, 2018, the United States Attorney General rescinded the Cole Memorandum. The Federal government’s enforcement of Federal laws could cause significant financial damage to us and our shareholders.

 

The loss or temporary suspension of one or more of our licenses could significantly reduce our revenues. Our ability to operate our cannabis testing lab is dependent upon maintaining licenses issued by state and local regulators in Nevada. Our cannabis testing and business licenses were briefly suspended by Nevada regulators on January 19, 2018 and were reinstated on January 31, 2018. This significantly affected our financial results for the second and third fiscal quarters of 2018. In order to retain our licenses, we are required to comply with ongoing compliance and reporting requirements and ongoing regulation and oversight by governmental authorities. Any failure to comply with any such regulatory requirements or any failure to maintain any required licenses would have a material adverse effect on our business, financial condition, results of operation and, in the extreme case, require us to discontinue operations.

 

5

 

 

As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business. Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

 

Laws and regulations affecting the cannabis and marijuana industries are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us. Local, state and federal cannabis laws and regulations are constantly changing and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Any change in law or interpretation could have a material adverse effect on our business, financial condition, and results of operations.

 

Federal enforcement practices could change with respect to services providers to participants in the cannabis industry, which could adversely impact us. If the federal government were to change its practices, or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products. It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

Expansion by well-established laboratory testing companies into the cannabis industry could prevent us from realizing anticipated growth in customers and revenues. Traditional laboratory testing companies may expand their businesses into cannabis testing. If they decided to expand into cannabis testing, this could hurt the growth of our business and cause our revenues to be lower than we expect.

 

Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities. Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors and officers insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. We currently have adequate coverage, however, there are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.

 

Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate. Despite rules issued by the United States Department of the Treasury mitigating the risk to banks that do business with cannabis companies permitted under state law, as well as guidance from the United States Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry. Our prior bank at which we maintained deposit accounts forced us to close our accounts. While after much difficulty we were recently able find a replacement banking institution, there can be no assurance that we will able to maintain this banking relationship. Since the use of cannabis remains illegal under Federal law, there remains a compelling argument that banks may be in violation of Federal law when accepting for deposit, funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry, including us, continue to have trouble establishing and maintain banking relationships. An inability to open and maintain bank accounts may make it difficult for us and our customers to do business. In addition, our inability to maintain a bank account previously resulted in our holding large sums of cash. Although we store our cash in a secure safe, holding large sums of cash exposes us to a greater risk of theft.

 

The outbreak of the COVID-19 coronavirus has negatively impacted and could continue to negatively impact our business and the global economy. In addition, the COVID-19 pandemic could negatively impact our ability to obtain financing when required.

 

The COVID-19 coronavirus has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that we or our employees, customers, and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. During portions of our year ended September 30, 2020, the Company’s cannabis testing operations significantly declined due to the decline in the Nevada cannabis markets, which resulted in turn from the substantial decline in Nevada tourism due to COVID-19. While our operations have recently improved due to the reopening of Nevada casinos and increased tourism compared to its recent depressed levels, there can be no assurance that this trend will continue. COVID-19 has also had an adverse impact on global economic conditions, which could impair our ability to raise capital when needed.

 

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Risks Related To Our Common Stock

 

Our operating results may fluctuate causing volatility in our stock price. Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. The following factors may affect our operating results causing volatility in our stock price:

 

  Our ability to execute our business plan, compete effectively and attract customers;
  Our ability to respond effectively to a rapidly evolving regulatory and competitive landscape;
  The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure;
  Our ability to obtain working capital financing;
  Our ability to attract, motivate and retain top-quality employees;
  Investors’ general perception of us; and
  General economic conditions and those economic conditions specific to cannabis industry.

 

Trading in our common stock has been limited, there is no significant trading market for our common stock, and purchasers of our common stock may be unable to sell their shares. Our common stock is currently eligible for quotation on the OTCQB and OTCBB, however trading to date has been limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange, including the Nasdaq Stock Market. The OTCQB and OTCBB are often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.

 

Applicable sec rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price our common stock. Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. Penny stocks generally are equity securities with a per share price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, of our common stock and reducing the liquidity of an investment in our common stock.

 

We have outstanding shares of preferred stock with rights and preferences superior to those of our common stock. The issued and outstanding shares of Series A Cumulative Convertible Preferred Stock grant the holders of such preferred stock liquidation rights that are superior to those held by the holders of our common stock.

 

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock. We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock depends on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.

 

ITEM 1B. Unresolved Staff Comments

 

None.

 

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ITEM 2. Properties

 

Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our leased premises are 6,000 square feet and are utilized for corporate business offices and a cannabis testing lab. Our premises are subject to a lease agreement expiring August 31, 2025. The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases:

 

2021   $ 111,782  
2022     115,550  
2023     119,468  
2024     123,543  
2025     116,891  
Total   $ 587,234  

 

We believe that our current facilities are adequate for our current needs. We intend to secure new facilities or expand existing facilities as necessary to support future growth. We believe that suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.

 

ITEM 3. Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

8

 

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Shares of our common stock trade on the over-the-counter market and are quoted on the OTCBB and OTCQB under the symbol “DIGP”. As of January 15, 2021, the closing price of our common stock on the OTCQB was $0.05.

 

The following table sets forth, for the fiscal quarters indicated, the high and low bid information for our common stock, as reported on the OTCQB. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

    High     Low  
Fiscal Year Ended September 30, 2020                
First Quarter   $ 0.12     $ 0.08  
Second Quarter   $ 0.12     $ 0.02  
Third Quarter   $ 0.08     $ 0.03  
Fourth Quarter   $ 0.04     $ 0.01  
                 
Fiscal Year Ended September 30, 2019                
First Quarter   $ 0.17     $ 0.08  
Second Quarter   $ 0.31     $ 0.11  
Third Quarter   $ 0.22     $ 0.12  
Fourth Quarter   $ 0.15     $ 0.10  

 

As of January 15, 2021, there were approximately 121 shareholders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”. As of January 15, 2021, there were 64,065,390 shares of common stock outstanding on record.

 

Dividends

 

We have not declared or paid any dividends on our common stock since our inception and do not anticipate paying dividends for the foreseeable future. The payment of dividends is subject to the discretion of our board of directors and depends, among other things, upon our earnings, our capital requirements, our financial condition, and other relevant factors. We intend to reinvest any earnings in the development and expansion of our business. Any cash dividends in the future to common shareholders will be payable when, as and if declared by our board of directors, based upon the board’s assessment of our financial condition and performance, earnings, need for funds, capital requirements, prior claims of preferred stock to the extent issued and outstanding, and other factors, including income tax consequences, restrictions and applicable laws. There can be no assurance, therefore, that any dividends on our common stock will ever be paid.

 

Equity Compensation Plan Information

 

Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted-average exercise price of outstanding options, warrants and rights     Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))  
    (a)     (b)     (c)  
Equity compensation plans approved by security holders (1)     3,570,000     $ 0.1052       5,681,644  
Equity compensation plans not approved by security holders (2)     2,159,800       0.1275       N/A  
Total     6,744,800     $ 0.1377       5,681,644  

 

(1) Represents awards under our 2012 Stock Incentive Plan which was initially adopted with shareholder approval, and amended on June 21, 2016 without shareholder approval (as amended, the “2012 Incentive Plan”). Below is a brief description of the material terms of the 2012 Incentive Plan and the awards that may be granted thereunder.

(2) Consists of warrants issued to consultants of the Company in consideration of services with exercise prices of $0.1901 and $0.10 per share. For additional details see Note 12 to the accompanying financial statements.

 

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2012 Incentive Plan

 

Effective Date and Expiration. The 2012 Incentive Plan, as amended, became effective on March 5, 2012, and will terminate on March 5, 2022, unless it is terminated earlier by our board of directors. No award may be made under the Incentive Plan after its expiration date, but awards made prior thereto may extend beyond that date.

 

Share Authorization. The maximum aggregate number of Shares which may be issued pursuant to awards granted under the 2012 Incentive Plan is Eleven Million Five Hundred Thousand (11,500,000) shares. Prior to its amendment in June 2016, Three Million shares had been authorized for issuance under the 2012 Plan.

 

General; Types of Awards. The 2012 Incentive Plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights (“SARs”) and restricted stock units (rights to receive, in cash or stock, the market value of one share of our commons stock). Incentive stock options (“ISOs”) may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to officers, employees, non-employee directors and consultants.

 

Administration. The 2012 Incentive Plan will be administered by our board of directors or a committee of our board of directors (the “Administrator”) as provided in the 2012 Incentive Plan. The Administrator will have the authority to select the eligible participants to whom awards will be granted, to determine the types of awards and the number of shares covered and to set the terms, conditions and provisions of such awards, to cancel or suspend awards under certain conditions, and to accelerate the exercisability of awards. The Administrator will be authorized to interpret the 2012 Incentive Plan, to establish, amend, and rescind any rules and regulations relating to the 2012 Incentive Plan, to determine the terms of agreements entered into with recipients under the 2012 Incentive Plan, and to make all other determinations that may be necessary or advisable for the administration of the 2012 Incentive Plan.

 

Eligibility. Options and other awards may be granted under the 2012 Incentive Plan to directors, officers, employees and consultants of our company and any of our subsidiaries, provided that the services of such consultants are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for our securities. At the date of this prospectus, all of our officers, directors and employees would have been eligible to receive awards under the 2012 Incentive Plan.

 

Stock Options. The exercise price per share of our common stock purchasable upon exercise of any stock option or SAR will be determined by the Administrator, but cannot in any event be less than 100% of the fair market value of our common stock on the date the award is granted. The Administrator will determine the term of each stock option or SAR (subject to a maximum term of 10 years) and each option or SAR will be exercisable pursuant to a vesting schedule determined by the Administrator. The grants and the terms of ISOs will be restricted to the extent required for qualification as ISOs by the U.S. Internal Revenue Code of 1986, as amended. Subject to approval of the Administrator, options or SARs may be exercised by payment of the exercise price in cash, shares of common stock or pursuant to a “cashless exercise” through a broker-dealer under an arrangement approved by the Administrator. The Administrator may require the grantee to pay to us any applicable withholding taxes that we are required to withhold with respect to the grant or exercise of any option. The withholding tax may be paid in cash or, subject to applicable law, the Administrator may permit the grantee to satisfy these obligations by the withholding or delivery of shares of our common stock. We may withhold from any shares of our common stock that may be issued pursuant to an option or from any cash amounts otherwise due from us to the recipient of the option an amount equal to such taxes.

 

Restricted Stock. Restricted shares may be sold or awarded for consideration determined by the Administrator, including cash, full-recourse promissory notes, as well as past and future services. Any award of restricted shares will be subject to a vesting schedule determined by the Administrator. Any restricted shares that are not vested will be subject to rights of repurchase, rights of first refusal or other restrictions as determined by the Administrator. In general, holders of restricted shares will have the same voting, dividend and other rights as our other stockholders.

 

Adjustments upon Changes in Capitalization. In the event of any change affecting shares of our common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distribution to stockholders other than cash dividends, the Administrator will make substitutions or adjustments in the aggregate number of shares that may be distributed under the 2012 Incentive Plan, and in the number and types of shares subject to, and the exercise prices under, outstanding awards granted under the 2012 Incentive Plan, in accordance with Section 10 and other provisions of the 2012 Incentive Plan.

 

Assignment. Unless otherwise permitted by the 2012 Incentive Plan and approved by the Administrator as permitted by the 2012 Incentive Plan, no award will be assignable or otherwise transferable by the grantee other than by will or the laws of descent and distribution and, during the grantee’s lifetime, an award may be exercised only by the grantee.

 

10

 

 

Amendment. Our board of directors may amend the 2012 Incentive Plan in any and all respects without stockholder approval, except as such stockholder approval may be required under applicable law or pursuant to the listing requirements of any national market system or securities exchange on which our equity securities may be listed or quoted.

 

Recent Sales of Unregistered Securities

 

The following issuances of our securities during the three month period ended September 30, 2020 were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder. The purchasers were accredited investors, familiar with our operations, and there was no general solicitation.

 

On September 25, 2020, we issued 657,895 shares of common stock to Todd Peterson for his services rendered as our Chief Financial Officer.

 

ITEM 6. Selected Financial Data

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended September 30, 2020 and 2019. The discussion and analysis that follows should be read together with the section entitled “Forward Looking Statements” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K.

 

Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report.

 

Overview

 

Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) 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 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.

 

Critical Accounting Policies

 

The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions.

 

Basis of Accounting

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. Intercompany accounts and transactions have been eliminated. All references to GAAP are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

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

 

The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

 

  - Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
  - Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
  - Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

 

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The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

 

Fixed Assets

 

Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:

 

Software 3 years
Office equipment 5 years
Furniture and fixtures 5 years
Lab equipment 7 years
Leasehold improvements Term of lease

 

Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.

 

Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.

 

Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

 

Revenue Recognition

 

Effective October 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the 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 was recognized when the following criteria had been 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 from the adoption of ASC 606 for the years ended September 30, 2020 or 2019.

 

Our 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.

 

Advertising Costs

 

The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $45,120 and $221,980 for the years ended September 30, 2020 and 2019, respectively.

 

13

 

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2020 and 2019, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

 

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 the consideration provided in exchange for the purchase of goods or services consists of 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.

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

Uncertain Tax Positions

 

In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

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Results of Operations

 

The following table shows operating results for the years ended September 30, 2020 and 2019.

 

    Years Ended September 30,     Increase /  
    2020     2019     (Decrease)  
Revenues   $ 2,574,399     $ 2,552,600     $ 21,799  
Cost of sales     1,778,564       2,712,788       65,776  
Gross profit     795,835       839,812       (43,977 )
                         
Operating expenses:                        
General and administrative     1,483,253       1,673,785       (190,532 )
Professional fees     782,885       878,525       (95,640 )
Bad debts expense     91,558       130,640       (39,082 )
Impairment expense     630,521       -       630,521  
Total operating expenses:     2,988,217       2,682,950       305,267  
                         
Operating loss     (2,192,382 )     (1,843,138 )     349,244  
                         
Total other income (expense)     (117,108 )     37,806       (154,914 )
                         
Net loss   $ (2,309,490 )   $ (1,805,332 )   $ 504,158  

 

Revenues

 

Aggregate revenues for the year ended September 30, 2020 were $2,574,399, compared to revenues of $2,552,600 during the year ended September 30, 2019, an increase of $21,799, or 1%. Revenues increased slightly despite severe disruptions to the Nevada cannabis market during portions of the year as a result of the COVID-19 pandemic.

 

Cost of Sales

 

Cost of sales for the year ended September 30, 2020 were $1,778,564, compared to $1,712,788 during the year ended September 30, 2019, an increase of $65,776, or 4%. Cost of sales consists primarily of labor, depreciation and maintenance on lab equipment, and supplies consumed in our testing operations. The increased cost of sales in the current year was primarily due to equipment failures that caused us to have to outsource some of our testing to competitors. Our gross margins of approximately 31%, decreased during the year ended September 30, 2020, compared to gross margins of approximately 33% during the year ended September 30, 2019, which translated to $43,977 of decreased gross profit. We intend to continue to automate processes through equipment enhancements to improve our margins.

 

General and Administrative Expenses

 

General and administrative expenses for the year ended September 30, 2020 were $1,483,253, compared to $1,673,785 during the year ended September 30, 2019, a decrease of $190,532, or 11%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included stock-based compensation paid to officers of $110,473 during the year ended September 30, 2020, compared to $84,185 during the year ended September 30, 2019, an increase of $26,288, or 31%. General and administrative expenses decreased primarily due to decreased advertising and investment relations expenses during the current year.

 

Professional Fees

 

Professional fees for the year ended September 30, 2020 were $782,885, compared to $878,525 during the year ended September 30, 2019, a decrease of $95,640, or 11%. Professional fees decreased primarily due to decreased business development and legal fees, and decreased stock-based compensation paid to directors and consultants, as offset by increased consulting and board fees during the current period. Stock-based compensation was $253,748 during the year ended September 30, 2020, compared to $436,470 during the year ended September 30, 2019, a decrease of $182,722, or 42%.

 

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Bad Debt Expense

 

Bad debt expense for the year ended September 30, 2020 was $91,558, compared to $130,640 during the year ended September 30, 2019, a decrease of $39,082. Bad debts expense decreased during the current year as we recognized $95,000 of debts in the prior year that we had written off as uncollectible notes receivable, and our allowance for doubtful accounts increased in the current year by approximately $78,400. Our allowance for doubtful accounts on trade receivables was $128,944 and $50,540 at September 30, 2020 and 2019, respectively, or approximately 5% and 2% of sales for the years ended September 30, 2020 and 2019, respectively.

 

Impairment Expense

 

Impairment expense for the year ended September 30, 2020 was $630,521. Impairment expense consisted of $592,621 of goodwill impairment following our acquisition of VSSL Enterprises, and $37,900 of impairment expense related to our investment in the development of handheld devices used to test cannabis for THC, CBD and CBG levels under our GroSciences, Inc. subsidiary, which has ceased operations.

 

Operating Loss

 

Operating loss for the year ended September 30, 2020 was $2,192,382, compared to $1,843,138 during the year ended September 30, 2019, an increase of $349,244, or 19%. Operating loss increased primarily due to $630,521 of impairment expense, and decreased gross profit, as offset in part by decreased general and administrative, professional fees and bad debts expense during the year ended September 30, 2020, compared to the year ended September 30, 2019.

 

Other Income (Expense)

 

Other expense, on a net basis, for the year ended September 30, 2020 was $117,108, compared to other income of $37,806 during the year ended September 30, 2019, a decrease of $154,914. Other expense during the year ended September 30, 2020 consisted of rental income of $79,285 on sublease rents and a $1,724 gain on the modification of operating leases, as offset by $148,024 of interest expense and a loss on disposal of fixed assets of $50,093. Other income during the year ended September 30, 2019, consisted of rental income of $83,400 on sublease rents and a $30,000 gain on settlement of a previously written off note receivable, as offset by $65,670 of interest expense and a loss on disposal of fixed assets of $9,924.

 

Net Loss

 

Net loss for the year ended September 30, 2020 was $2,309,490, compared to $1,805,332 during the year ended September 30, 2019, an increase of $504,158, or 28%. The increased net loss was primarily due to expenses on impaired assets and an increased loss on disposal of fixed assets, along with increased interest expense.

 

Liquidity and Capital Resources

 

As of September 30, 2020, the Company had current assets of $397,242, comprising of cash of $82,749, accounts receivable of $242,145, other assets of $53,673, and deposits of $18,675. The Company’s current liabilities as of September 30, 2020 were $742,678, consisting of $387,946 of accounts payable, $163,152 of accrued expenses, $20,000 of short term advances, the current portion of operating lease liabilities in the amount of $84,731, the current portion of financing lease liabilities in the amount of $32,532, and the current maturities of notes payable in the amount of $54,317.

 

The following table summarizes our total current assets, liabilities and working capital at September 30, 2020 and 2019.

 

    September 30,  
    2020     2019  
Current Assets   $ 397,242     $ 629,319  
                 
Current Liabilities   $ 742,678     $ 471,493  
                 
Working Capital   $ (345,436 )   $ 157,826  

 

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The following table summarizes our cash flows during the years ended September 30, 2020 and 2019, respectively.

 

    Years Ended  
    September 30,  
    2020     2019  
Net cash used in operating activities   $ (671,605 )   $ (1,042,213 )
Net cash used in investing activities     (341,008 )     (135,075 )
Net cash provided by financing activities     771,623       1,325,000  
                 
Net change in cash   $ (240,990 )   $ 147,712  

 

Net Cash Used in Operating Activities

 

The decrease in funds used in operating activities for the year ended September 30, 2020, compared to the year ended September 30, 2019, was primarily attributable to our increased net loss, as we didn’t benefit from the decreased competition from the suspension of two competing cannabis testing labs in the current period, as we did in the prior period.

 

Net Cash Used in Investing Activities

 

The increase in funds used in investing activities for the year ended September 30, 2020, compared to the year ended September 30, 2019, was due primarily to the $200,000 of cash paid for the purchase of VSSL Enterprises, Ltd. in the current year.

 

Net Cash Provided by Financing Activities

 

The decrease in funds provided by financing activities for the year ended September 30, 2020, compared to the year ended September 30, 2019, was primarily due to decreased sales of our securities through private placement offerings and the sale of convertible notes, in the year ended September 30, 2020.

 

Satisfaction of our Cash Obligations for the Next 12 Months

 

As of September 30, 2020, our balance of cash on hand was $82,749. We do not currently have sufficient funds to fund our operations at their current levels for the next twelve months. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to continue to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.

 

Off-Balance Sheet Arrangements

 

We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

 

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

17

 

 

ITEM 8. Financial Statements and Supplementary Data

 

DIGIPATH, INC. & SUBSIDIARIES

 

FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019

 

TABLE OF CONTENTS

 

    Page
Report of Independent Registered Public Accounting Firm, M&K CPAS, PLLC   F-1
     
Consolidated Balance Sheets as of September 30, 2020 and 2019   F-2
     
Consolidated Statements of Operations for the years ended September 30, 2020 and 2019   F-3
     
Consolidated Statement of Stockholders’ Equity for the years ended September 30, 2020 and 2019   F-4
     
Consolidated Statements of Cash Flows for the years ended September 30, 2020 and 2019   F-5
     
Notes to Consolidated Financial Statements   F-6

 

18

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Digipath, Inc.,

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Digipath, Inc. (“the Company”) as of September 30, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended September 30, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses from operations and insufficient working capital, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ M&K CPAS, PLLC

 

We have served as the Company’s auditor since 2017.

Houston, TX

January 29, 2021

 

F- 1  

 

 

DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
             
    September 30,     September 30,  
    2020     2019  
Assets                
                 
Current assets:                
Cash   $ 82,749     $ 323,739  
Accounts receivable, net     242,145       179,256  
Other current assets     53,673       74,620  
Deposits     18,675       51,704  
Total current assets     397,242       629,319  
                 
Right-of-use asset     505,706       -  
Fixed assets, net     885,405       726,614  
                 
Total Assets   $ 1,788,353     $ 1,355,933  
                 
Liabilities and Stockholders’ Equity                
                 
Current liabilities:                
Accounts payable   $ 387,946     $ 136,612  
Accrued expenses     163,152       134,881  
Short term advances     50,112       -  
Current portion of operating lease liabilities     84,731       -  
Current portion of finance lease liabilities     32,532       -  
Current maturities of notes payable     54,317       -  
Convertible notes payable     -       200,000  
Total current liabilities     772,790       471,493  
                 
Non-current liabilities:                
Operating lease liabilities     423,752       -  
Finance lease liabilities     20,379       -  
Notes payable     418,907       -  
Convertible notes payable, net of discounts of $8,322 and $41,426 at September 30, 2020 and 2019, respectively     1,241,678       458,574  
Total non-current liabilities     2,104,716       458,574  
                 
Total Liabilities     2,877,506       930,067  
                 
Stockholders’ Equity (Deficit):                
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; 1,325,942 shares issued and outstanding     1,326       1,326  
Common stock, $0.001 par value, 250,000,000 shares authorized; 58,270,567 and 48,361,433 shares issued and outstanding at September 30, 2020 and 2019, respectively     58,271       48,361  
Additional paid-in capital     16,116,400       15,331,839  
Accumulated (deficit)     (17,265,150 )     (14,955,660 )
                 
Total Stockholders’ Equity (Deficit)     (1,089,153 )     425,866  
                 
Total Liabilities and Stockholders’ Equity (Deficit)   $ 1,788,353     $ 1,355,933  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F- 2  

 

 

DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
             
    For the Years Ended  
    September 30,  
    2020     2019  
             
Revenues   $ 2,574,399     $ 2,552,600  
Cost of sales     1,778,564       1,712,788  
Gross profit     795,835       839,812  
                 
Operating expenses:                
General and administrative     1,483,253       1,673,785  
Professional fees     782,885       878,525  
Bad debts expense     91,558       130,640  
Impairment expense     630,521       -  
Total operating expenses     2,988,217       2,682,950  
                 
Operating loss     (2,192,382 )     (1,843,138 )
                 
Other income (expense):                
Other income     81,009       113,400  
Loss on disposal of fixed assets     (50,093 )     (9,924 )
Interest expense     (148,024 )     (65,670 )
Total other income (expense)     (117,108 )     37,806  
                 
Net loss   $ (2,309,490 )   $ (1,805,332 )
                 
Weighted average number of common shares outstanding - basic and fully diluted     53,455,848       46,178,953  
                 
Net loss per share - basic and fully diluted   $ (0.04 )   $ (0.04 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F- 3  

 

 

DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
                                           
    Series A Convertible                 Additional           Total  
    Preferred Stock     Common Stock     Paid-in     Accumulated     Stockholders’Equity  
    Shares     Amount     Shares     Amount     Capital     (Deficit)    

(Deficit)

 
                                           
Balance, September 30, 2018     1,425,942     $ 1,426       42,245,364     $ 42,245     $ 14,121,236     $ (13,150,328 )   $ 1,014,579  
                                                         
Common stock sold for cash     -       -       3,125,000       3,125       621,875       -       625,000  
                                                         
Common stock issued for services     -       -       2,016,069       2,016       331,701       -       333,717  
                                                         
Common stock issued in exchange for termination of options     -       -       475,000       475       (475 )     -       -  
                                                         
Common stock options issued for services     -       -       -       -       186,938       -       186,938  
                                                         
Conversion of preferred stock to common stock     (100,000 )     (100 )     500,000       500       (400 )     -       -  
                                                         
Beneficial conversion feature of convertible debts     -       -       -       -       70,964       -       70,964  
                                                         
Net loss for the year ended September 30, 2019     -       -       -       -       -       (1,805,332 )     (1,805,332 )
                                                         
Balance, September 30, 2019     1,325,942     $ 1,326       48,361,433     $ 48,361     $ 15,331,839     $ (14,955,660 )   $ 425,866  
                                                         
Common stock sold for cash     -       -       706,250       706       55,794       -       56,500  
                                                         
Common stock issued for acquisition of VSSL Enterprises, Ltd.     -       -       6,500,000       6,500       367,250       -       373,750  
                                                         
Common stock issued for services     -       -       2,702,884       2,704       149,846       -       152,550  
                                                         
Common stock options issued for services     -       -       -       -       141,659       -       141,659  
                                                         
Common stock warrants issued for services     -       -       -       -       70,012       -       70,012  
                                                         
Net loss for the year ended September 30, 2020     -       -       -       -       -       (2,309,490 )     (2,309,490 )
                                                         
Balance, September 30, 2020     1,325,942     $ 1,326       58,270,567     $ 58,271     $ 16,116,400     $ (17,265,150 )   $ (1,089,153 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F- 4  

 

 

DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
             
    For the Years Ended  
    September 30,  
    2020     2019  
Cash flows from operating activities                
Net loss   $ (2,309,490 )   $ (1,805,332 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in allowance for doubtful accounts     91,558       130,640  
Depreciation and amortization expense     323,391       260,645  
Loss on disposal of fixed assets     50,093       9,924  
Gain on modification of operating leases     (1,724 )     -  
Inventory impairment     37,900       -  
Goodwill impairment     592,621       -  
Stock issued for services     152,550       333,717  
Options and warrants granted for services     211,671       186,938  
Amortization of debt discounts     33,104       29,538  
Decrease (increase) in assets:                
Accounts receivable     (152,862 )     (47,162 )
Other current assets     26,206       (1,930 )
Inventory     (37,900 )     -  
Deposits     33,029       (26,057 )
Right-of-use assets     182,120       -  
Increase (decrease) in liabilities:                
Accounts payable     248,754       (189,252 )
Accrued expenses     24,993       76,643  
Lease liabilities     (177,619 )     -  
Deferred revenues     -       (525 )
Net cash used in operating activities     (671,605 )     (1,042,213 )
                 
Cash flows from investing activities                
Cash acquired from affiliate in acquisition of VSSL     143       -  
Cash paid for purchase of VSSL Enterprises, Ltd.     (200,000 )     -  
Proceeds received on disposal of fixed assets     -       5,032  
Purchase of fixed assets     (141,151 )     (45,107 )
Advance of note receivable     -       (95,000 )
Net cash used in investing activities     (341,008 )     (135,075 )
                 
Cash flows from financing activities                
Proceeds from short term advances     55,112       -  
Repayments of short term advances     (25,000 )     -  
Principal payments on finance lease     (46,282 )     -  
Principal payments on note payable, equipment financing     (38,741 )     -  
Proceeds from notes payable     220,034       -  
Proceeds from convertible notes     550,000       700,000  
Proceeds from sale of common stock     56,500       625,000  
Net cash provided by financing activities     771,623       1,325,000  
                 
Net increase (decrease) in cash     (240,990 )     147,712  
Cash - beginning     323,739       176,027  
Cash - ending   $ 82,749     $ 323,739  
                 
Supplemental disclosures:                
Interest paid   $ 57,906     $ 4,066  
Income taxes paid   $ -     $ -  
                 
Non-cash investing and financing activities:                
Fair value of net assets acquired in business combination from affiliate   $ 18,871     $ -  
Fair value of common stock paid in business combination from affiliate   $ 373,750     $ -  
Fixed assets acquired with capitalized finance lease   $ 99,193     $ -  
Fixed assets acquired with note payable, equipment financing   $ 291,931     $ -  
Value of preferred stock converted to common stock   $ -     $ 100,000  
Beneficial conversion feature of convertible notes payable   $ -     $ 70,964  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F- 5  

 

 

DIGIPATH, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Nature of Business and Significant Accounting Policies

 

Nature of Business

 

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 has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.

 

Basis of Accounting

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (SEC). Intercompany accounts and transactions have been eliminated. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

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 September 30, 2020:

 

    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
VSSL Enterprises, Ltd.(5)   Canada   Subsidiary

 

(1) All entities are in the form of a corporation.

(2) Holding company, which owns each of the wholly-owned subsidiaries. All subsidiaries shown above are wholly-owned by Digipath, Inc., the parent company.

(3) Commenced operations during the first fiscal quarter of 2019, and had minimal operations until being dissolved on September 30, 2020.

(4) Formed during the first fiscal quarter of 2019, but has not yet commenced significant operations.

(5) Acquired on March 11, 2020.

 

The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.

 

These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

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.

 

F- 6  

 

 

Fair Value of Financial Instruments

 

The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

 

  - Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
  - Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
  - Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

 

The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.

 

Accounts Receivable

 

Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company had an allowance for doubtful accounts of $128,944 and $50,540 as of September 30, 2020 and 2019, respectively.

 

Fixed Assets

 

Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:

 

Software 3 years
Office equipment 5 years
Furniture and fixtures 5 years
Lab equipment 7 years
Leasehold improvements Term of lease

 

Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which have extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.

 

Impairment of Long-Lived Assets

 

Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.

 

Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

 

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 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.

 

F- 7  

 

 

Our 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.

 

Advertising Costs

 

The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $45,120 and $221,980 for the years ended September 30, 2020 and 2019, respectively.

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2020 and 2019, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

 

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 the consideration provided in exchange for the purchase of goods or services consists of 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.

 

Income Taxes

 

The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.

 

Uncertain Tax Positions

 

In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.

 

Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.

 

F- 8  

 

 

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. The new standard did not have a material impact.

 

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. 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 consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $17,265,150 and negative working capital of $345,436, and as of September 30, 2020, the Company’s cash on hand may not be sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. Management believes these factors will contribute toward achieving profitability. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

F- 9  

 

 

Note 3 – Related Party Transactions

 

Common Stock Issued to Affiliate for Acquisition

 

On March 11, 2020, the Company acquired all of VSSL’s outstanding shares of capital stock from VSSL’s stockholders for consideration consisting of 6,500,000 shares of the Company’s common stock and a cash payment of $200,000. The aggregate fair value of the Company’s common stock was $373,750 based on the closing price of the Company’s common stock on the closing date. Prior to the closing of the acquisition, on September 25, 2019, the Company appointed one of the principal sellers of VSSL, Kyle Remenda, as CEO of Digipath, Inc. Mr. Remenda subsequently resigned on July 1, 2020 due to COVID-19 travel restrictions.

 

Stock Issued to Officers for Services

 

During the year ended September 30, 2020, we issued an aggregate total of 1,452,884 shares of common stock to our Chief Financial Officer, Todd Peterson, in quarterly increments for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the dates of grant, and was expensed over the requisite service periods.

 

Options Issued to Officers and Directors for Services

 

On March 25, 2020, we granted options to purchase 500,000 shares of common stock as compensation for services to our former Chief Financial Officer. The options vested immediately as to 166,667 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0468, was $23,425. The options are being expensed over the vesting period, resulting in $11,713 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $11,712 of unamortized expenses are expected to be expensed over the vesting period.

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our former Chief Executive Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $37,420. The options were expensed over the vesting period, resulting in $18,710 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, the options were forfeited due to his resignation.

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our former Chief Operating Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $37,420. The options are being expensed over the vesting period, resulting in $18,710 of stock-based compensation expense during the year ended September 30, 2020. The options were forfeited on December 30, 2020 due to his resignation. As of September 30, 2020, a total of $4,716 of unamortized expenses are expected to be expensed over the vesting period.

 

On March 9, 2020, we granted options to purchase 1,000,000 shares of common stock as compensation for services to our Chairman of the Board of Directors. The options vested immediately as to 333,333 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $49,894. The options are being expensed over the vesting period, resulting in $24,947 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $24,947 of unamortized expenses are expected to be 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 vested 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 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $4,270 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $12,808 of unamortized expenses are expected to be expensed over the vesting period.

 

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 vested 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 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $4,270 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $12,808 of unamortized expenses are expected to be expensed over the vesting period.

 

F- 10  

 

 

Note 4 – Acquisition from Affiliate

 

On March 9, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with VSSL Enterprises Ltd (“VSSL”), Kyle Joseph Remenda (“Remenda”), Philippe Olivier Henry, PhD (“Henry”), Audim Ventures Ltd. (“Audim”), and Britt Ash Enterprises Ltd. (“Britt Ash” and, together with Remenda, Henry and Audim, the “VSSL Stockholders”), pursuant to which the Company acquired all of VSSL’s outstanding shares of capital stock from the VSSL Stockholders for consideration consisting of 6,500,000 shares of Digipath’s common stock and a cash payment of $200,000. The closing of the acquisition occurred on March 11, 2020. The aggregate fair value of the common stock was $373,750 based on the closing price of the Company’s common stock on the date of closing.

 

Mr. Remenda, who held 45% of the VSSL’s shares prior to its acquisition by the Company, is the CEO of VSSL and was appointed as Digipath’s Chief Executive Officer in September 2019 in connection with the execution of the binding letter of intent with respect to the Company’s acquisition of VSSL. In addition, Mr. Henry, who also held 45% of VSSL’s shares prior to its acquisition by the Company, was engaged as a consultant by Digipath in September 2019. Messrs. Remenda and Henry resigned July 1, 2020 and June 12, 2020, respectively.

 

This acquisition was accounted for as a business combination under the purchase method of accounting. The purchase resulted in the recognition of $592,621 of goodwill, which was determined to be impaired and expensed on September 30, 2020. According to the purchase method of accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:

 

    March 11,  
    2020  
Consideration:        
Cash   $ 200,000  
Fair value of 6,500,000 shares of common stock     373,750  
Liabilities assumed     20,600  
Total consideration   $ 594,350  
         
Fair value of identifiable assets acquired assumed:        
Cash   $ 143  
Accounts receivable     1,585  
Total fair value of assets assumed     1,729  
Consideration paid in excess of fair value (Impaired Goodwill)(1)   $ 592,621  

 

  (1)The consideration paid in excess of the net fair value of assets acquired and liabilities assumed was recognized as goodwill and determined to be impaired on September 30, 2020 due to the lack of significant revenues, and our inability to fund the necessary research and development to develop its assets.

 

Pro Forma Results

 

The following table sets forth the unaudited pro forma results of the Company as if the acquisition of VSSL was effective on the first day of each of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.

 

    For the Years Ended September 30,  
    2020     2019  
    (Unaudited)     (Unaudited)  
Revenues   $ 2,588,803     $ 2,666,374  
Net loss   $ (2,343,662 )   $ (1,788,680 )
Basic and diluted net loss per share   $ (0.04 )   $ (0.03 )
Weighted average number of common shares outstanding - basic and fully diluted     56,350,657       52,678,953  

 

F- 11  

 

 

Note 5 – Fair Value of Financial Instruments

 

Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.

 

The Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

 

Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.

 

The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2020 and 2019, respectively:

 

    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     -       20,000       -  
Lease liabilities     -       -       561,394  
Notes payable     -       503,336       -  
Convertible notes payable, net of discounts of $8,322     -       -       1,241,678  
Total liabilities     -       523,336       1,803,072  
    $ 82,749     $ (523,336 )   $ (1,803,072 )

 

    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 is 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 $1,250,000 of convertible debentures, net of discounts of $8,322 and $41,426 as of September 30, 2020 and 2019, respectively.

 

There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the years ended September 30, 2020 or 2019.

 

F- 12  

 

 

Note 6 – Accounts Receivable

 

Accounts receivable was $242,145 and $179,256 at September 30, 2020 and 2019, respectively, net of allowance for uncollectible accounts of $128,944 and $50,540 at September 30, 2020 and 2019, respectively.

 

Note 7 – Other Current Assets

 

Other current assets consist of the following:

 

    September 30,     September 30,  
    2020     2019  
Prepaid expenses   $ 48,151     $ 74,620  
Other receivable     5,522       -  
Total prepaid expenses   $ 53,673     $ 74,620  

 

Note 8 – Note Receivable

 

On March 8, 2019 and February 15, 2019, we loaned Big Valley Analytical Labs, Inc. $25,000 and $20,000, respectively. The loans carried interest at an annual rate of 15%, were evidenced by secured demand notes, and were secured by a lien on the borrower’s assets. The principal amount of the loans was subsequently repaid in full on April 1, 2019.

 

On various dates between December 28, 2018 and June 13, 2019, we loaned Northwest Analytical Labs, Inc. a total of $95,000. The loans bear interest at an annual rate of 10%, are evidenced by secured demand notes, and are secured by a lien on the borrower’s assets. An allowance for doubtful accounts for the full value of the notes has been recorded due to the uncertainty of collectability.

 

Note 9 – Fixed Assets

 

Fixed assets consist of the following at September 30, 2020 and 2019:

 

    For the Years Ended  
    September 30,  
    2020     2019  
Software   $ 124,697     $ 123,492  
Office equipment     74,777       55,061  
Furniture and fixtures     29,879       29,115  
Lab equipment     1,398,716       1,118,942  
Leasehold improvements     494,117       494,117  
Lab equipment held under capital leases     99,193       -  
      2,221,379       1,820,727  
Less: accumulated depreciation     (1,335,974 )     (1,094,113 )
Total   $ 885,405     $ 726,614  

 

On various dates from June 30, 2020 through September 30, 2020, the Company disposed of lab equipment no longer in service. No proceeds were received on the disposal of the equipment, resulting in a loss on disposal of fixed assets of $50,093, which represented the net book value at the time of disposal.

 

On various dates from July 1, 2019 through September 30, 2019, we disposed of fixed assets with an aggregate net book value of $14,956. The fixed assets consisted of office equipment with a historical cost basis of $2,868 and lab equipment with a historical cost basis of $28,444, and accumulated depreciation of $2,148 and $14,208, respectively. Total proceeds of $5,032 were received, resulting in a loss on disposal of $9,924.

 

Depreciation and amortization expense totaled $323,391 and $260,645 for the years ended September 30, 2020 and 2019, respectively.

 

F- 13  

 

 

Note 10 – 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 operating and office facility 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:

 

    For the  
    Year Ended  
    September 30,  
    2020  
Operating lease cost   $ 207,772  
Finance lease cost:        
Amortization of assets     20,224  
Interest on lease liabilities     10,696  
Sublease income     (79,285 )
Total net lease cost   $ 159,407  

 

Supplemental balance sheet information related to leases was as follows:

 

    September 30,  
    2020  
Operating leases:        
Operating lease assets   $ 505,706  
         
Current portion of operating lease liabilities   $ 84,731  
Noncurrent operating lease liabilities     423,752  
Total operating lease liabilities   $ 508,483  
Finance lease:        
Equipment, at cost   $ 99,193  
Accumulated amortization     (19,839 )
Equipment, net   $ 79,354  
         
Current portion of finance lease liabilities   $ 32,532  
Noncurrent finance lease liabilities     20,379  
Total finance lease liabilities   $ 52,911  
         
Weighted average remaining lease term:        
Operating leases     4.92 years  
Finance leases     1.55 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  
    Year Ended  
    September 30,  
    2020  
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows provided by sublet operating leases   $ 79,285  
Operating cash flows used for operating leases   $ 177,619  
Financing cash flows used for finance leases   $ 46,282  
         
Leased assets obtained in exchange for lease liabilities:        
Total operating lease liabilities   $ 528,616  
Total finance lease liabilities   $ 99,193  

 

F- 14  

 

 

The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases as of September 30, 2020:

 

Fiscal Year Ending   Minimum Lease  
September 30,   Commitments  
2021   $ 111,782  
2022     115,550  
2023     119,468  
2024     123,543  
2025     116,891  
    $ 587,234  

 

Future minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows at September 30, 2020:

 

    Finance  
    Leases  
       
2021   $ 40,197  
2022     21,644  
Total minimum lease payments     61,841  
Less interest     8,930  
Present value of lease liabilities     52,911  
Less current portion     32,532  
Long-term lease liabilities   $ 20,379  

 

Note 11 – Short Term Advances

 

Short term advances consist of the following at September 30, 2020 and 2019, respectively:

 

    September 30,     September 30,  
    2020     2019  
             
On July 20, 2020, we received $30,112 as a short-term loan from one of our convertible noteholders. The loan bears interest at the rate of 8.0% per annum.   $ 30,112     $ -  
                 
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       -  
                 
On December 26, 2019, we received $25,000 as a short-term loan from one of our convertible noteholders. The advance was subsequently repaid on February 6, 2020. No interest expense was recognized.     -       -  
                 
Total short term advances   $ 50,112     $ -  

 

The Company recorded interest expense pursuant to the stated interest rates on the short term loans in the amount of $61 for the year ended September 30, 2020.

 

F- 15  

 

  

Note 12 –Notes Payable

 

Notes payable consists of the following at September 30, 2020 and 2019, respectively:

 

    September 30,     September 30,  
    2020     2019  
             
On June 22, 2020, the Company, borrowed $40,114 from Cross River Bank, pursuant to a Promissory Note issued by the Company to Cross River Bank (the “Company PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “Payroll Protection Program”). The Company PPP Note carried interest at 1.00% per annum, payable monthly beginning December 22, 2020, and was due on June 22, 2025. The Digipath, Inc. PPP Note and interest was forgiven by the Small Business Administration (“SBA”) on January 12, 2021.
 
Under the Payroll Protection Program, the Company will be eligible for loan forgiveness up to the full amount of the Company PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that the Company spends during the 24-week period beginning June 22, 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 40% of the amount of the Company PPP Note. No assurance is provided that the Company will obtain forgiveness under the Company PPP Note in whole or in part.
  $ 40,114     $ -  
                 
On May 13, 2020, the Company, through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $179,920 from WebBank Corp, pursuant to a Promissory Note issued by Labs to WebBank Corp (the “Labs PPP Note”). The loan was made pursuant to the Payroll Protection Program. The Labs PPP Note bears interest at 1.00% per annum, payable monthly beginning December 13, 2020, and is due on May 13, 2022. The Labs PPP Note may be repaid at any time without penalty.
 
Under the Payroll Protection Program, Labs will be eligible for loan forgiveness up to the full amount of the Labs PPP Note and any accrued interest. The forgiveness amount will be equal to the amount that Labs spends during the 8-week period beginning May 13, 2020 on payroll costs, payment of rent on any leases in force prior to February 15, 2020 and payment on any utility for which service began before February 15, 2020. The maximum amount of loan forgiveness for non-payroll expenses is 25% of the amount of the Labs PPP Note. No assurance is provided that Labs will obtain forgiveness under the Labs PPP Note in whole or in part.
    179,920       -  
                 
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.     253,190       -  
                 
Total notes payable     473,224       -  
Less: current maturities     (54,317 )     -  
Notes payable   $ 418,907     $ -  

 

The Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $16,473 during the year ended September 30, 2020.

 

F- 16  

 

 

Note 13 – Convertible Notes Payable

 

Convertible notes payable consist of the following at September 30, 2020 and 2019, respectively:

 

    September 30,     September 30,  
    2020     2019  
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.   $ 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.     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 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.     350,000       -  
                 
On September 23, 2019, the Company received proceeds of $200,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.11 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc.     200,000       200,000  
                 
On November 8, 2018, the Company received proceeds of $350,000 on a senior secured convertible note that carries an 8% interest rate, which matures on August 10, 2022, as amended. The principal and interest were convertible into shares of common stock at the discretion of the note holder at a fixed conversion price of $0.14 per share. On September 30, 2020, the maturity date was extended to August 10, 2022 and the conversion price was amended to $0.03 per share. The Company’s obligations under this Note are secured by a lien on the assets of the Company and its wholly-owned subsidiary Digipath Labs, Inc. A total of $4,066 of interest was repaid during the nine 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 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     1,250,000       700,000  
Less: unamortized debt discounts     (8,322 )     (41,426 )
      1,241,678       658,574  
Less: current maturities     -       (200,000 )
Convertible notes payable   $ 1,241,678     $ 458,574  

 

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 year ended September 30, 2020. The discount is amortized on a straight-line basis from the dates of issuance until the earlier of the stated redemption date of the debt, as noted above, or the actual settlement date. The Company recorded debt amortization expense attributed to the aforementioned debt discount in the amounts of $33,104 and $29,538, during the years ended September 30, 2020 and 2019, respectively.

 

All of the convertible notes limit the maximum number of shares that can be owned by each note holder as a result of the conversions to common stock to 4.99% of the Company’s issued and outstanding shares.

 

F- 17  

 

 

The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $87,690 and $36,132 for the years ended September 30, 2020 and 2019, respectively.

 

The Company recognized interest expense for the years ended September 30, 2020 and 2019, respectively, as follows:

 

    September 30,     September 30,  
    2020     2019  
             
Interest on short term loans   $ 61     $ -  
Interest on capital leases     10,696       -  
Interest on notes payable     16,473       -  
Amortization of beneficial conversion features     33,104       29,538  
Interest on convertible notes     87,690       36,132  
Total interest expense   $ 148,024     $ 65,670  

 

Note 14 – 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 September 30, 2020, there were 1,325,942 shares of Series A Preferred issued and outstanding. The Board of Directors is authorized to determine any number of series into which the undesignated shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Each share of Series A Preferred is currently convertible into five shares of common stock.

 

The conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event of certain negative actions undertaken by the Company. At the current conversion price, the 1,325,942 shares of Series A Preferred outstanding at September 30, 2020 are convertible into 6,629,710 shares of the common stock of the Company. No holder is permitted to convert its shares of Series A Preferred if such conversion would cause the holder to beneficially own more than 4.99% of the issued and outstanding common stock of the Company immediately after such conversion, unless waived by such holder by providing at least sixty-five days’ notice.

 

Additional terms of the Series A Preferred include the following:

 

The shares of Series A Preferred are entitled to dividends when, as and if declared by the Board as to the shares of the common stock of the Company into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described above.
   
Upon the liquidation or dissolution of the Company, or any merger or sale of all or substantially all of the assets, the shares of Series A Preferred are entitled to receive, prior to any distribution to the holders of common stock, 100% of the purchase price per share of Series A Preferred plus all accrued but unpaid dividends.
   
The Series A Preferred plus all declared but unpaid dividends thereon automatically will be converted into common stock, at the then applicable conversion rate, upon the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred.
   
Each share of Series A Preferred will carry a number of votes equal to the number of shares of common stock into which such Series A Preferred may then be converted, subject to the 4.99% beneficial ownership limitation described above. The Series A Preferred generally will vote together with the common stock and not as a separate class, except as provided below.
   
Consent of the holders of the outstanding Series A Preferred is required in order for the Company to: (i) amend or change the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred; (ii) authorize, create or issue shares of any class of stock having rights, preferences, privileges or powers superior to the Series A Preferred; (iii) reclassify any outstanding shares into shares having rights, preferences, privileges or powers superior to the Series A Preferred; or (iv) amend the Company’s Articles of Incorporation or Bylaws in a manner that adversely affects the rights of the Series A Preferred.
   
Pursuant to the Securities Purchase Agreements, holders of Series A Preferred are entitled to unlimited “piggyback” registration rights on registrations by the Company, subject to pro rata cutback at any underwriter’s discretion.

 

F- 18  

 

 

Preferred Stock Conversions for the Year Ended September 30, 2019

 

On December 31, 2018, a total of 100,000 shares of Series A Preferred were converted into 500,000 shares of common stock. The stock was converted in accordance with the conversion terms; therefore, no gain or loss has been recognized.

 

Common Stock

 

Common stock consists of $0.001 par value, 250,000,000 shares authorized, of which 58,270,567 shares were issued and outstanding as of September 30, 2020.

 

Common Stock Sales for the Year Ended September 30, 2020

 

On February 10, 2020, the Company sold 81,250 shares of its common stock in exchange for proceeds of $6,500.

 

On January 16, 2020, the Company sold a total of 625,000 shares of its common stock in exchange for proceeds of $50,000.

 

Common Stock Sales for the Year Ended September 30, 2019

 

On February 7, 2019, the Company sold 1,000,000 shares of its common stock in exchange for proceeds of $200,000.

 

On February 1, 2019, the Company sold 250,000 shares of its common stock in exchange for proceeds of $50,000.

 

On January 31, 2019, the Company sold 625,000 shares of its common stock in exchange for proceeds of $125,000.

 

On January 24, 2019, the Company sold 1,250,000 shares of its common stock in exchange for proceeds of $250,000.

 

Common Stock Issued to Affiliate for Acquisition

 

On March 11, 2020, the Company acquired all of VSSL’s outstanding shares of capital stock from VSSL’s stockholders for consideration consisting of 6,500,000 shares of the Company’s common stock and a cash payment of $200,000. The aggregate fair value of the Company’s common stock was $373,750 based on the closing price of the Company’s common stock on the closing date.

 

Additional Common Stock Issuances for the Year Ended September 30, 2020

 

On September 25, 2020, the Company issued 657,895 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On June 25, 2020, the Company issued 375,000 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2020, the Company issued 248,756 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2020, the Company issued 750,000 shares of common stock to a consultant for investor relations services to be performed from March 25, 2020 through August 25, 2020. The fair value of the common stock was $45,300 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

 

On 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. The shares were subsequently issued on April 6, 2020.

 

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.

 

F- 19  

 

 

Additional Common Stock Issuances for the Year Ended September 30, 2019

 

On September 25, 2019, the Company issued 58,824 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On September 25, 2019, the Company issued 147,059 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On June 25, 2019, the Company issued 300,000 shares of common stock to a consultant for business development services to be performed from May 1, 2019 through October 31, 2019. The fair value of the common stock was $58,500 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

 

On June 25, 2019, the Company issued 41,667 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On June 25, 2019, the Company issued 104,167 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On May 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $8,030 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On April 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 29, 2019, the Company issued 475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance, therefore there was no additional expense as a result of the modification of the equity awards.

 

On March 25, 2019, the Company issued 29,268 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2019, the Company issued 73,171 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On March 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $10,250 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On February 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $12,300 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On January 25, 2019, a total of 50,000 shares of common stock were issued to a consultant that was engaged to assist the Company with acquisition activities. The fair value of the common stock was $10,500 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On December 25, 2018, the Company issued 46,261 shares of common stock to its President and CEO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $6,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

F- 20  

 

 

On December 25, 2018, the Company issued 115,652 shares of common stock to its CFO for services rendered pursuant to his employment agreement. The aggregate fair value of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On December 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $19,455 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On November 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $24,000 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

On October 30, 2018, the Company issued 400,000 shares of common stock to another consultant for business development services to be performed from November 1, 2018 through April 30, 2019. The fair value of the common stock was $54,120 based on the closing price of the Company’s common stock on the date of grant, and is being expensed over the requisite service period.

 

On October 25, 2018, a total of 150,000 shares of common stock were issued to three consultants that were engaged to assist the Company with acquisition activities. The aggregate fair value of the common stock was $23,250 based on the closing price of the Company’s common stock on the date of grant, and was expensed over the requisite service period.

 

Amortization of Stock-Based Compensation

 

A total of $45,300 of stock-based compensation expense was recognized during the year ended September 30, 2020 as a result of the issuance of 750,000 shares of common stock to a consultant on March 25, 2020, as amortized over the requisite service period.

 

A total of $37,500 of stock-based compensation expense was recognized during the year ended September 30, 2020 as a result of the issuance of 500,000 shares of common stock to a consultant on January 27, 2020, as amortized over the requisite service period.

 

A total of $29,562 of stock-based compensation expense was recognized during the year ended September 30, 2019, as a result of the issuance of 200,000 shares of common stock to one of our directors, Bruce Raben, on September 12, 2018, as amortized over the requisite service period.

 

A total of $9,750 and $48,750 of stock-based compensation expense was recognized during the years ended September 30, 2020 and 2019, respectively, 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.

 

A total of $211,671 and $186,938 of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting period during the years ended September 30, 2020 and 2019, respectively.

 

Note 15 – 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. Options to purchase a total of 3,570,000 shares of common stock were outstanding as of September 30, 2020.

 

Common Stock Option Issuances for the Year Ended September 30, 2020

 

On March 25, 2020, we granted options to purchase 500,000 shares of common stock as compensation for services to our Chief Financial Officer. The options vested immediately as to 166,667 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0468, was $23,425. The options are being expensed over the vesting period, resulting in $11,713 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $11,712 of unamortized expenses are expected to be expensed over the vesting period.

 

F- 21  

 

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our former Chief Executive Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $37,420. The options were expensed over the vesting period, resulting in $18,710 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, the options were forfeited due to his resignation.

 

On March 9, 2020, we granted options to purchase 750,000 shares of common stock as compensation for services to our former Chief Operating Officer. The options vested immediately as to 250,000 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $37,420. The options are being expensed over the vesting period, resulting in $18,710 of stock-based compensation expense during the year ended September 30, 2020. The options were forfeited on December 30, 2020 due to his resignation. As of September 30, 2020, a total of $4,716 of unamortized expenses are expected to be expensed over the vesting period.

 

On March 9, 2020, we granted options to purchase 1,000,000 shares of common stock as compensation for services to our Chairman of the Board of Directors. The options vested immediately as to 333,333 shares and the remaining shares vest in equal monthly amounts over the next 24 months following the grant date, 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 110% and a call option value of $0.0499, was $49,894. The options are being expensed over the vesting period, resulting in $24,947 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $24,947 of unamortized expenses are expected to be expensed over the vesting period.

 

On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to a consultant. The options vested immediately, and are exercisable for a five-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 108% and a call option value of $0.0403, was $4,031.

 

On February 18, 2020, we granted options to purchase 100,000 shares of common stock as compensation for services to another consultant. The options vested immediately, and are exercisable for a five-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 108% and a call option value of $0.0403, was $4,031.

 

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 vested 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 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $4,270 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $12,808 of unamortized expenses are expected to be expensed over the vesting period.

 

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 vested 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 238% and a call option value of $0.0683, was $17,078. The options are being expensed over the vesting period, resulting in $4,270 of stock-based compensation expense during the year ended September 30, 2020. As of September 30, 2020, a total of $12,808 of unamortized expenses are expected to be expensed over the vesting period.

 

Common Stock Option Issuances for the Year Ended September 30, 2019

 

On September 25, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our former Chief Executive Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of September 25, 2020, September 25, 2021, and September 25, 2022, and are exercisable for a ten-year period at an exercise price of $0.102 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 111% and a call option value of $0.1017, was $40,470. The options were expensed over the vesting period, resulting in $20,050 and $185 of stock-based compensation expense during the years ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the options were forfeited due to his resignation.

 

F- 22  

 

 

On September 25, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to a consultant. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of September 25, 2020, September 25, 2021, and September 25, 2022, and are exercisable for a ten-year period at an exercise price of $0.102 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 111% and a call option value of $0.1017, was $40,470. The options were expensed over the vesting period, resulting in $$20,050 and $185 of stock-based compensation expense during the years ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the options were forfeited due to his resignation.

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to our former Chief Science Officer. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options were expensed over the vesting period, resulting in $1,306 and $49,628 of stock-based compensation expense during the years ended September 30, 2020 and 2019, respectively.

 

On January 7, 2019, we granted options to purchase 500,000 shares of common stock as compensation for services to Bruce Raben, one of our directors. The options vested immediately as to 125,000 shares and as to an additional 125,000 shares on each of April 7, 2019, July 7, 2019, and October 7, 2019, and are exercisable for a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1019, was $50,934. The options were expensed over the vesting period, resulting in $1,306 and $49,628 of stock-based compensation expense during the years ended September 30, 2020 and 2019, respectively.

 

On December 25, 2018, we granted fully vested options to purchase an aggregate of 345,000 shares of common stock as compensation for services to a total of fourteen of our employees. The options are exercisable over a ten-year period at an exercise price of $0.13 per share. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 107% and a call option value of $0.1017, was $35,078. The options were expensed over the vesting period, resulting in $8,265 and $26,813 of stock-based compensation expense during the years ended September 30, 2020 and 2019, respectively.

 

Common Stock Options Exchanged for Shares of Common Stock

 

On March 29, 2019, the Company issued 475,000 shares of common stock to the estate of our former CEO in exchange for the cancellation of 4,750,000 common stock options. The aggregate fair value of the options exceeded the fair value of the common stock at issuance, therefore there was no additional expense as a result of the modification of the equity awards.

 

Re-Priced Options Issued to Officers and Directors for Services

 

On January 7, 2019, the board amended the following options to reduce their exercise price to $0.13 per share. All other terms were unchanged. The modification of these equity awards resulted in an additional expense of $36,764.

 

Original   Recipient’s   Option   # of     Term     Original     New  
Grant Date   Name   Type   Options     In Mos.     Exercise $     Exercise $  
6/1/2015   Cindy Orser*   NSO Options     200,000       120     $ 0.40     $ 0.13  
6/19/2015   Todd Peterson   ISO Options     100,000       120     $ 0.33     $ 0.13  
6/21/2016   Todd Denkin*   ISO Options     2,500,000       120     $ 0.20     $ 0.13  
11/29/2017   Cindy Orser*   NSO Options     100,000       120     $ 0.27     $ 0.13  
12/22/2017   Todd Denkin*   ISO Options     500,000       120     $ 0.27     $ 0.13  
                                         
              3,400,000                          

 

*Forfeited due to resignations during the year ended September 30, 2020.

 

Common Stock Options Expired for the Year Ended September 30, 2020

 

During the year ended September 30, 2020, options to purchase an aggregate total of 6,215,000 shares of common stock at a weighted average exercise price of $0.13 per share expired.

 

Common Stock Options Expired for the Year Ended September 30, 2019

 

During the year ended September 30, 2019, options to purchase an aggregate total of 47,500 shares of common stock at a weighted average exercise price of $0.20 per share expired.

 

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The following is a summary of information about the stock options outstanding at September 30, 2020.

 

      Shares Underlying  
Shares Underlying Options Outstanding     Options Exercisable  
                               
          Weighted                  
    Shares     Average   Weighted     Shares     Weighted  
Range of     Underlying     Remaining   Average     Underlying     Average  
Exercise     Options     Contractual   Exercise     Options     Exercise  
Prices     Outstanding     Life   Price     Exercisable     Price  
                               
$ 0.10 – $0.13       3,570,000     8.85 years   $ 0.11       2,070,000     $ 0.11  

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:

 

    September 30,     September 30,  
    2020     2019  
             
Average risk-free interest rates     0.92 %     2.13 %
Average expected life (in years)     5.00       5.00  
Volatility     141 %     109 %

 

The Black-Scholes option pricing model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company’s common stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its common stock options. During the years ended September 30, 2020 and September 30, 2019, there were no options granted with an exercise price below the fair value of the underlying stock at the grant date.

 

The weighted average fair value of options granted with exercise prices at the current fair value of the underlying stock during the year ended September 30, 2020 was approximately $0.10 per option.

 

The following is a summary of activity of outstanding common stock options:

 

          Weighted  
          Average  
    Number     Exercise  
    of Shares     Price  
Balance, September 30, 2018     8,537,500       0.20  
Options issued     2,345,000       0.12  
Options repurchased/expired     (4,797,500 )     (0.20 )
                 
Balance, September 30, 2019     6,085,000       0.13  
Options issued     3,700,000       0.10  
Options expired     (6,215,000 )     (0.13 )
                 
Balance, September 30, 2020     3,570,000     $ 0.11  
                 
Exercisable, September 30, 2020     2,070,000     $ 0.11  

 

Amortization of Stock Options

 

A total of $141,659 and $186,938 of stock-based compensation expense was recognized from the amortization of options over their vesting period during the years ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, these options in the aggregate had no intrinsic value as the per share market price of $0.018 of the Company’s common stock as of such date was less than the weighted-average exercise price of these options of $0.11.

 

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Note 16 – Common Stock Warrants

 

Warrants to purchase a total of 4,274,269 shares of common stock were outstanding as of September 30, 2020.

 

On March 9, 2020, we granted a ten-year warrant to purchase 1,500,000 shares of common stock at a price of $0.10 per share to a consultant as compensation for services. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of 110% and a call option value of $0.0467, was $70,012.

 

On February 21, 2020, warrants to purchase 642,857 shares of common stock at $0.26 per share expired.

 

The following is a summary of information about our warrants to purchase common stock outstanding at September 30, 2020 (including those issued to both investors and service providers).

 

      Shares Underlying  
Shares Underlying Warrants Outstanding     Warrants Exercisable  
                             
          Weighted                  
    Shares     Average   Weighted     Shares     Weighted  
Range of     Underlying     Remaining   Average     Underlying     Average  
Exercise     Warrants     Contractual   Exercise     Warrants     Exercise  
Prices     Outstanding     Life   Price     Exercisable     Price  
                             
$ 0.10 – $0.30       4,274,269     3.99 years   $ 0.20       4,274,269     $ 0.20  

 

The fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:

 

    September 30,     September 30,  
    2020     2019  
             
Average risk-free interest rates     0.46 %     N/A  
Average expected life (in years)     10.00       N/A  
Volatility     110 %     N/A  

 

No warrants were issued during the year ended September 30, 2019. The weighted average fair value of warrants granted with exercise prices at the current fair value of the underlying stock during the year ended September 30, 2020 was approximately $0.20 per warrant.

 

The following is a summary of activity of outstanding common stock warrants:

 

          Weighted  
          Average  
    Number     Exercise  
    of Shares     Price  
Balance, September 30, 2018     6,450,462     $ 0.28  
Warrants expired     (3,033,336 )     (0.30 )
                 
Balance, September 30, 2019     3,417,126       0.25  
Warrants granted     1,500,000       0.10  
Warrants expired     (642,857 )     (0.26 )
                 
Balance, September 30, 2020     4,274,269     $ 0.20  
                 
Exercisable, September 30, 2020     4,274,269     $ 0.20  

 

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Note 17 – Commitments and Contingencies

 

Lease Commitment

 

The Company leases space for its lab operations in Las Vegas, Nevada. The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases:

 

Fiscal Year Ending   Minimum Lease  
September 30,   Commitments  
2021   $ 111,782  
2022     115,550  
2023     119,468  
2024     123,543  
2025     116,891  
    $ 587,234  

 

Rent expense was $207,772 and $201,050 for the years ended September 30, 2020 and 2019, respectively.

 

Legal Contingencies

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

Note 18 – Impairment Expense

 

Impairment expense for the years ended September 30, 2020 and 2019 consisted of the following:

 

    September 30,  
    2020     2019  
Inventory impairment   $ 37,900     $ -  
Goodwill impairment     592,621       -  
    $ 630,521     $ -  

 

On September 30, 2020, the Company decided to no longer pursue its SabIR technology, which was intended to use MicroNIR devices to test cannabis for THC, CBD and CBG. Accordingly, the Company wrote off its inventory, consisting of five MicroNIR devices, each costing $7,580 for a total impairment cost of $37,900.

 

Goodwill consisted of the consideration paid in excess of the net fair value of assets acquired and liabilities assumed in the VSSL transaction. On September 30, 2020, the Company performed an impairment analysis and determined the asset to be impaired due to the lack of significant revenues, and the Company’s inability to fund the necessary research and development to develop its assets.

 

Note 19 – Other Income

 

Other income for the years ended September 30, 2020 and 2019 consisted of the following:

 

    September 30,  
    2020     2019  
Settlement income on note receivable   $ -     $ 30,000  
Rental income on subleases     79,285       83,400  
Gain on modification of operating leases     1,724       -  
    $ 81,009     $ 113,400  

 

Note 20 - 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 years ended September 30, 2020 and 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 September 30, 2020, the Company had approximately $14,150,000 of federal net operating losses. The net operating loss carry forwards, if not utilized, will begin to expire in 2031.

 

The effective income tax rate for the years ended September 30, 2020 and 2019 consisted of the following:

 

    September 30,  
    2020     2019  
Federal statutory income tax rate     21 %     21 %
State income taxes