UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
Quarterly Period Ended
or
For the transition period from __________ to __________
Commission
File Number
(Exact name of registrant issuer as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (zip code) |
(Registrant’s telephone number, including area code)
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 |
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.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 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 | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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
☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
The number of shares of registrant’s common stock outstanding as of August 13, 2021 was .
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other current assets | ||||||||
| Deposits | ||||||||
| Total current assets | ||||||||
| Right-of-use asset | ||||||||
| Fixed assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Short term advances | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of finance lease liabilities | ||||||||
| Current maturities of notes payable | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Finance lease liabilities | - | |||||||
| Notes payable | ||||||||
| Convertible
notes payable, net of discounts of $- | ||||||||
| Total non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Series A convertible preferred stock, $ par value, shares authorized; shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding at June 30, 2021 and September 30, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated (deficit) | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to financial statements.
| 3 |
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Change in allowance for doubtful accounts | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Other income | - | |||||||||||||||
| Loss on disposal of fixed assets | - | ( | ) | - | ( | ) | ||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding - basic and fully diluted | ||||||||||||||||
| Net loss per share - basic and fully diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to financial statements.
| 4 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Series A Convertible | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | (Deficit) | |||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Common stock issued for services | - | ( | ) | - | ||||||||||||||||||||||||||||
| Common stock options issued for services | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2020 | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| For the Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Series A Convertible | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | (Deficit) | |||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for services, related parties | - | - | - | |||||||||||||||||||||||||||||
| Common stock options issued for services | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net income for the three months ended June 30, 2021 | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| For the Nine Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Series A Convertible | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | (Deficit) | |||||||||||||||||||||||||
| Balance, September 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Common stock sold for cash | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for acquisition of VSSL Enterprises, Ltd. | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||
| Common stock options issued for services | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common stock warrants issued for services | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss for the nine months ended June 30, 2020 | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | - | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| For the Nine Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Series A Convertible | Additional | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Subscriptions | Accumulated | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Payable | (Deficit) | (Deficit) | |||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | - | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Common stock sold for cash | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for debt conversions | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | |||||||||||||||||||||||||||||
| Common stock issued for services, related parties | - | - | - | |||||||||||||||||||||||||||||
| Common stock options issued for services | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss for the nine months ended June 30, 2021 | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
See accompanying notes to financial statements.
| 5 |
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Change in allowance for doubtful accounts | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Loss on disposal of fixed assets | ||||||||
| Gain on early extinguishment of debt | ( | ) | - | |||||
| Stock issued for services | ||||||||
| Options and warrants granted for services | ||||||||
| Amortization of debt discounts | ||||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other current assets | ( | ) | ( | ) | ||||
| Inventory | - | ( | ) | |||||
| Deposits | ( | ) | ||||||
| Right-of-use assets | ||||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash acquired from affiliate in acquisition of VSSL | - | |||||||
| Cash paid for purchase of VSSL Enterprises, Ltd. | - | ( | ) | |||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from short term advances | ||||||||
| Repayments of short term advances | - | ( | ) | |||||
| Principal payments on finance lease | ( | ) | ( | ) | ||||
| Principal payments on note payable, equipment financing | ( | ) | ( | ) | ||||
| Proceeds from notes payable | - | |||||||
| Proceeds from convertible notes | ||||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash - beginning | ||||||||
| Cash - ending | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Fair value of net assets acquired from affiliate in business combination | $ | $ | ||||||
| Fair value of common stock paid to affiliate in business combination | $ | $ | ||||||
| Fixed assets acquired with capitalized finance lease | $ | $ | ||||||
| Fixed assets acquired with note payable, equipment financing | $ | $ | ||||||
Fair value of common shares issued for conversion of debt | - | |||||||
See accompanying notes to financial statements.
| 6 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digipath,
Inc. was incorporated in
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control and ownership at June 30, 2021:
| Jurisdiction of | |||||||
| Name of Entity(1) | Incorporation | Relationship | |||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
| (6) |
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.
| 7 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Segment Reporting
ASC
Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management
approach model is based on the way a company’s management organizes segments within the company for making operating decisions
and assessing performance. The Company operates as a
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of lab testing services through our subsidiary Digipath Labs, Inc.
Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
Adoption of New Accounting Standards and Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In August 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-06, Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging–Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2021, with early adoption permitted. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or related disclosures.
In November 2019, the FASB issued ASU 2019-12 – Income Taxes (“Topic 740”): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are part of an initiative to reduce complexity in accounting standards and simplify the accounting for income taxes by removing certain exceptions from Topic 740 and making minor improvements to the codification. ASU 2019-12 and its related amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The provisions of this update did not have a material impact on the Company’s financial position or results of operations.
No other new accounting pronouncements, issued or effective during the period ended June 30, 2021, have had or are expected to have a significant impact on the Company’s financial statements.
| 8 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2 – Going Concern
As shown in the accompanying condensed consolidated financial statements,
as of June 30, 2021, the Company had negative working capital of $
The consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Related Party Transactions
Board of Directors Compensation
On March 25, 2021, the Board of Directors approved changes to the compensation arrangements for each of Edmond A. DeFrank and Dennis Hartmann for serving as directors of the Company, as follows:
| ● | Effective
April 1, 2021, annual compensation is increased from $ to $, payable in quarterly
installments of $ |
| ● | Such compensation may now be paid in shares of common stock of the Company instead of cash, at the discretion of the Company. |
In connection with the foregoing, the Board of Directors of the Company also approved changes to the compensation arrangements for Bruce Raben for serving as the Company’s Chairman of the Board, as follows:
| ● | Effective
April 1, 2021, annual compensation has been increased from $ to $, payable in
quarterly installments of $ |
| ● | Such compensation may now be paid in shares of common stock of the Company instead of cash, at the discretion of the Company. |
Common Stock Sold for Cash
On
December 30, 2020, the Company sold shares of its common stock to its Chairman of the Board in exchange for proceeds of $
Common Stock Issued for Services
On
June 25, 2021, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment agreement.
The fair value of the common stock was $
On June 25, 2021, the Board approved the issuance of shares of
common stock to Bruce Raben for services rendered. The fair value of the common stock was $
On June 25, 2021, the Board approved the issuance of shares of
common stock to Dennis Hartmann for services rendered. The fair value of the common stock was $
On June 25, 2021, the Board approved the issuance of shares of common
stock to Edmond A. DeFrank for services rendered. The fair value of the common stock was $
On June 2, 2021, the Board approved the issuance of shares of common
stock to Bruce Raben for services rendered. The fair value of the common stock was $
| 9 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On
March 25, 2021, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $
On
March 25, 2021, the Board also approved the issuance of shares of common stock as a bonus to each of Edmond A. DeFrank, Dennis
Hartmann and Bruce Raben, or shares in the aggregate. The aggregate fair value of the common stock was $
On
December 25, 2020, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. The aggregate fair value of the common stock was $
Note 4 – Fair Value of Financial Instruments
The Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement (“ASC 820”). Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
| 10 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of June 30, 2021 and September 30, 2020, respectively:
| Fair Value Measurements at June 30, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Total assets | - | - | ||||||||||
| Liabilities | ||||||||||||
| Short term advances | - | - | ||||||||||
| Lease liabilities | - | - | ||||||||||
| Notes payable | - | - | ||||||||||
| Convertible notes payable | - | - | ||||||||||
| Total liabilities | - | |||||||||||
| $ | $ | ( | ) | $ | ( | ) | ||||||
| Fair Value Measurements at September 30, 2020 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Total assets | - | - | ||||||||||
| Liabilities | ||||||||||||
| Short term advances | - | - | ||||||||||
| Lease liabilities | - | - | ||||||||||
| Notes payable | - | - | ||||||||||
| Convertible notes payable,
net of discounts of $ | - | - | ||||||||||
| Total liabilities | - | |||||||||||
| $ | $ | ( | ) | $ | ( | ) | ||||||
The fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by ASC Topic 820-10-35.
Level
3 liabilities consist of lease liabilities and a total of $
There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June 30, 2021 or the year ended September 30, 2020.
Note 5 – Accounts Receivable
Accounts
receivable was $
Note 6 – Other Current Assets
Other current assets consist of the following:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Other receivable | ||||||||
| Total other current assets | $ | $ | ||||||
| 11 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7 – Fixed Assets
Fixed assets consist of the following at June 30, 2021 and September 30, 2020:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| Software | $ | $ | ||||||
| Office equipment | ||||||||
| Furniture and fixtures | ||||||||
| Lab equipment | ||||||||
| Leasehold improvements | ||||||||
| Lab equipment held under capital leases | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
On
March 31, 2021, we distributed fixed assets with an aggregate net book value of $
Depreciation
and amortization expense totaled $
Note 8 – Leases
The
Company leases its operating and office facility under
a non-cancelable real property lease agreement that expires on
The components of lease expense were as follows:
| For the Nine | ||||
| Months Ended | ||||
| June 30, | ||||
| 2021 | ||||
| Finance lease cost | $ | |||
| Operating lease cost: | ||||
| Amortization of assets | ||||
| Interest on lease liabilities | ||||
| Total lease cost | $ | |||
| 12 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Supplemental balance sheet information related to leases was as follows:
| June 30, | ||||
| 2021 | ||||
| Operating leases: | ||||
| Operating lease assets | $ | |||
| Current portion of operating lease liabilities | $ | |||
| Noncurrent operating lease liabilities | ||||
| Total operating lease liabilities | $ | |||
| Finance lease: | ||||
| Equipment, at cost | $ | |||
| Accumulated amortization | ( | ) | ||
| Equipment, net | $ | |||
| Current portion of finance lease liability | $ | |||
| Noncurrent finance lease liability | - | |||
| Total finance lease liability | $ | |||
| Weighted average remaining lease term: | ||||
| Operating leases | ||||
| Finance leases | ||||
| Weighted average discount rate: | ||||
| Operating leases | % | |||
| Finance lease | % | |||
Supplemental cash flow and other information related to leases was as follows:
| For the Nine | ||||
| Months Ended | ||||
| June 30, | ||||
| 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows used for operating leases | $ | |||
| Financing cash flows used for finance leases | $ | |||
Future minimum lease commitments on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases are as follows as of June 30, 2021:
| Fiscal Year Ending | Minimum Lease | |||
| September 30, | Commitments | |||
| 2021 (for the three months remaining) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total minimum lease payments | ||||
| Less interest | ||||
| Present value of lease liabilities | ||||
| Less current portion | ||||
| Long-term lease liabilities | $ | |||
| 13 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Future minimum annual lease payments required under the finance lease and the present value of the net minimum lease payments are as follows at June 30, 2021:
| Finance | ||||
| Leases | ||||
| 2021 (for the three months remaining) | $ | |||
| 2022 | ||||
| Total minimum lease payments | ||||
| Less interest | ||||
| Present value of lease liabilities | ||||
| Less current portion | ||||
| Long-term lease liabilities | $ | |||
Note 9 – Short Term Advances
Short term advances consist of the following at June 30, 2021 and September 30, 2020, respectively:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| On April 29,
2021, we received $ | $ | $ | ||||||
| On March 23, 2021, we received
$ | ||||||||
| On July 20, 2020, we received
$ | ||||||||
| On January 21, 2020, we
received $ | ||||||||
| Total short term advances | $ | $ | ||||||
The
Company recorded interest expense pursuant to the stated interest rates on the short term loans in the amount of $
| 14 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 10 –Notes Payable
Notes payable consists of the following at June 30, 2021 and September 30, 2020, respectively:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| On June 22,
2020, the Company, borrowed $ | $ | $ | ||||||
| On May 13, 2020, the Company,
through its wholly-owned subsidiary Digipath Labs, Inc. (“Labs”), borrowed $ | ||||||||
| On December 26, 2019, the
Company financed the purchase of $ | ||||||||
| Total notes payable | ||||||||
| Less: current maturities | ( | ) | ( | ) | ||||
| Notes payable | $ | $ | ||||||
The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $
| 15 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 11 – Convertible Notes Payable
Convertible notes payable consists of the following at June 30, 2021 and September 30, 2020, respectively:
| June 30, | September 30, | |||||||
| 2021 | 2020 | |||||||
| On February
11, 2020, the Company completed the sale to an accredited investor of a | $ | $ | ||||||
| On February 11, 2020, the
Company completed the sale to an accredited investor of a | ||||||||
| On February 10, 2020, the
Company completed the sale to an accredited investor of a | ||||||||
| On September 23, 2019,
the Company received proceeds of $ | ||||||||
| On November 8, 2018, the
Company received proceeds of $ | ||||||||
| On November 5, 2018, the
Company received proceeds of $ | ||||||||
| Total convertible notes payable | ||||||||
| Less: unamortized debt discounts | ( | ) | ||||||
| Less: current maturities | ||||||||
| Convertible notes payable | $ | $ | ||||||
| 16 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In addition, the Company recognized and measured the embedded beneficial conversion feature present in the convertible notes by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment date using the effective conversion price of the convertible notes. This intrinsic value is limited to the portion of the proceeds allocated to the convertible debt.
The
aforementioned accounting treatment resulted in a total debt discount equal to $
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 % of the Company’s issued and outstanding shares.
The
Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $
The Company recognized interest expense for the nine months ended June 30, 2021 and 2020, respectively, as follows:
| June 30, | June 30, | |||||||
| 2021 | 2020 | |||||||
| Interest on short term loans | $ | $ | ||||||
| Interest on capital leases | ||||||||
| Interest on notes payable | ||||||||
| Amortization of beneficial conversion features | ||||||||
| Interest on convertible notes | ||||||||
| Total interest expense | $ | $ | ||||||
Note 12 - Changes in Stockholders’ Equity
Convertible Preferred Stock
The Company is authorized to issue shares of preferred stock with a par value of $ per share, of which have been designated as Series A Convertible Preferred Stock (“Series A Preferred”), with the remaining shares available for designation from time to time by the Board as set forth below. As of June 30, 2021, there were 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 shares of Series A Preferred outstanding
at June 30, 2021 are convertible into 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
Common Stock
Common stock consists of $ par value, shares authorized, of which shares were issued and outstanding as of June 30, 2021.
Common Stock Sales
On
December 30, 2020, the Company sold shares of its common stock to its Chairman of the Board in exchange for proceeds of $
Debt Conversions
On
February 22, 2021, a convertible noteholder converted $
On
December 29, 2020, the three holders of the Company’s
Common Stock Issued for Services, Related Parties
On
June 25, 2021, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment agreement.
The fair value of the common stock was $
| 17 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On June 25, 2021, the Board approved the issuance
of shares of common stock to Bruce Raben for services rendered. The fair value of the common stock was $
On June 25, 2021, the Board approved the issuance
of shares of common stock to Dennis Hartmann for services rendered. The fair value of the common stock was $
On June 25, 2021, the Board approved the issuance
of shares of common stock to Edmond A. DeFrank for services rendered. The fair value of the common stock was $
On June 2, 2021, the Board approved the issuance of shares of common
stock to Bruce Raben for services rendered. The fair value of the common stock was $
On
March 25, 2021, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. The fair value of the common stock was $
On March 25, 2021, the Board approved the issuance of shares of
common stock as a bonus to each of Edmond A. DeFrank, Dennis Hartmann and Bruce Raben, or shares in the aggregate. The aggregate
fair value of the common stock was $
On
December 25, 2020, the Company issued shares of common stock to its former CFO for services rendered pursuant to his employment
agreement. The fair value of the common stock was $
Common Stock Issued for Services
On
March 25, 2021, the Company issued shares of common stock to a consultant as a bonus for services rendered. The aggregate fair
value of the common stock was $
On
December 28, 2020, the Company issued shares of common stock to a consultant for services rendered pursuant to his consulting
agreement. The aggregate fair value of the common stock was $
Amortization of Stock-Based Compensation
A total of $ of stock-based compensation expense was recognized from the amortization of options and warrants over their vesting period during the nine months ended June 30, 2021.
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 shares of common stock pursuant to the grant of options or other awards, including stock grants, to employees, officers or directors of, and consultants to, the Company and its subsidiaries. Options granted under the 2012 Plan may either be intended to qualify as incentive stock options under the Internal Revenue Code of 1986, or may be non-qualified options, and are exercisable over periods not exceeding ten years from date of grant.
A total of options were outstanding as of June 30, 2021. During the nine months ended June 30, 2021, options to purchase an aggregate total of shares of common stock at a weighted average exercise price of $ per share expired.
| 18 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Options Granted
On June 2, 2021, we granted to A. Stone Douglass, a consultant of ours
at the time of grant, and currently our Chief Financial Officer, options to purchase shares of the Company’s common stock,
having an exercise price of $ per share, exercisable over a -year term. The options vest as to one quarter on July 1, 2021, and
quarterly over the next seven quarters as to the remaining shares, beginning on October 1, 2021. The estimated value using the Black-Scholes
Pricing Model, based on a volatility rate of % and a call option value of $
On
March 25, 2021, we granted options to an individual to purchase shares of the Company’s common stock, having an exercise
price of $ per share, exercisable over a -year term. The options are fully vested. The estimated value using the Black-Scholes
Pricing Model, based on a volatility rate of % and a call option value of $
Options Forfeited
On December 30, 2020, a total of options with a weighted average exercise price of $ were forfeited.
Note 14 – Common Stock Warrants
Warrants
to purchase a total of
During
the nine months ended June 30, 2021, warrants to purchase an aggregate total of
Note 15 – Other Income (Expense)
Other income (expense) for the nine months ended June 30, 2021 and 2020 consisted of the following:
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Gain on early extinguishment of debt | $ | $ | ||||||
| Settlement of accrued wages owed to former CEO with distribution of assets | - | |||||||
| Rental income on subleases | - | |||||||
| Loss on disposal of fixed assets | - | ( | ) | |||||
| Interest expense | ( | ) | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | |||
| 19 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 16 - Income Tax
The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the nine months ended June 30, 2021 and the year ended September 30, 2020, the Company incurred a net operating loss and, accordingly,
no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of
the realization of any tax assets. At June 30, 2021, the Company had approximately $
Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at June 30, 2021 and September 30, 2020, respectively.
In accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note 17 – Subsequent Events
Termination of Equipment Purchase Agreement
On July 22, 2021, the Company elected to terminate its asset
purchase agreement with PharmaLabs San Diego. In addition to the $
Common Stock Issued for Services
On July 1, 2021, the Company issued shares of common
stock to Todd Denkin in conjunction with his appointment as the Company’s President. The aggregate fair value of the common stock
was $
| 20 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 2020 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 2020 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.
Overview
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) 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 that have legalized the sale of cannabis, beginning with California.
Results of Operations for the Three Months Ended June 30, 2021 and 2020:
The following table summarizes selected items from the statement of operations for the three months ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Increase / | |||||||||||
| 2021 | 2020 | (Decrease) | ||||||||||
| Revenues | $ | 764,015 | $ | 407,229 | $ | 356,786 | ||||||
| Cost of sales | 551,976 | 347,724 | 204,252 | |||||||||
| Gross profit | 212,039 | 59,505 | 152,534 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 278,082 | 328,128 | (50,046 | ) | ||||||||
| Professional fees | 91,001 | 177,835 | (86,834 | ) | ||||||||
| Change in allowance for doubtful accounts | (10,960 | ) | 25,420 | (36,380 | ) | |||||||
| Total operating expenses: | 358,123 | 531,383 | (173,260 | ) | ||||||||
| Operating income (loss) | (146,084 | ) | (471,878 | ) | (325,794 | ) | ||||||
| Total other income (expense) | (31,130 | ) | (48,809 | ) | (17,679 | ) | ||||||
| Net loss | $ | (177,214 | ) | $ | (520,687 | ) | $ | (343,473 | ) | |||
Revenues
Aggregate revenues for the three months ended June 30, 2021 were $764,015, compared to revenues of $407,229 during the three months ended June 30, 2020, an increase of $356,786, or 88%. The increase in revenue was due to the increase in tourism in Nevada during the current period, in comparison to the prior year period in which Nevada tourism was significantly depressed because of the COVID-19 coronavirus pandemic.
| 21 |
Cost of Sales
Cost of sales for the three months ended June 30, 2021 were $551,976, compared to $347,724 during the three months ended June 30, 2020, an increase of $204,252, or 59%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The increased cost of sales in the current period was primarily due to our increased labor and outsourced testing fees incurred during the current period. Our gross margins were approximately 28% during the three months ended June 30, 2021, compared to 15% during the three months ended June 30, 2020, which translated to $152,534 of increased gross profit from our $356,786 of increased revenues received in the current period. Our margins increased in the current period due to the increase in revenues, which increased at a greater rate than our labor costs and equipment servicing costs.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2021 were $278,082, compared to $328,128 during the three months ended June 30, 2020, a decrease of $50,046, or 15%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $16,952 and $33,976 during the three months ended June 30, 2021 and 2020, respectively. General and administrative expenses decreased primarily due to decreased corporate overhead activities and the discontinuation of rents on warehouse space that we were previously subleasing.
Professional Fees
Professional fees for the three months ended June 30, 2021 were $91,001, compared to $177,835 during the three months ended June 30, 2020, a decrease of $86,834, or 49%. Professional fees included non-cash, stock-based compensation of $90,190 and $54,749 during the three months ended June 30, 2021 and 2020, respectively. Professional fees decreased primarily due to decreased corporate consulting services during the current period as we focused primarily on the lab operations during the current period.
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts for the three months ended June 30, 2021 resulted in $10,960 of income, compared to $25,420 of expense during the three months ended June 30, 2020, an improvement of $36,380, or 143%. Our change in allowance for doubtful accounts improved during the current period primarily as our allowance for doubtful accounts decreased from $110,147 to $96,282 during the quarter, as the Nevada tourism market began to open up again and our customers’ cash flows improved.
Operating Loss
Our operating loss for the three months ended June 30, 2021 was $146,084, compared to an operating loss of $471,878 during the three months ended June 30, 2020, a decrease of $325,794, or 69%. Our operating loss decreased primarily due to our increased gross profit, as tourism returned in Nevada after we navigated through the height of the effects of the COVID-19 coronavirus pandemic during the comparative period, as we continued to pare our general and administrative and professional fee costs, and decreased our allowance for doubtful accounts and overhead cost saving measures we implemented in response to Covid-19 that we initiated in the three months ended June 30, 2020.
Other Income (Expense)
Other expense, on a net basis, for the three months ended June 30, 2021 was $31,130, compared to other expense, on a net basis, of $48,809 during the three months ended June 30, 2020, a net decrease of $17,679. Other expense consisted of interest expense of $31,130 for the three months ended June 30, 2021. Other expense consisted of $41,571 of interest expense and a loss of $28,238 on the disposal of fixed assets, as partially offset by other income, consisting of $21,000 of subleased rental income for the three months ended June 30, 2020.
Net Loss
Net loss for the three months ended June 30, 2021 was $177,214, compared to a net loss of $520,687 during the three months ended June 30, 2020, a decrease of $343,473, or 66%. The decreased net loss was primarily due to our increased revenues, as the returning tourism in Nevada improved, compared to the prior period when we navigated through the height of the effects of the COVID-19 coronavirus pandemic.
| 22 |
Results of Operations for the Nine Months Ended June 30, 2021 and 2020:
The following table summarizes selected items from the statement of operations for the nine months ended June 30, 2021 and 2020.
| Nine Months Ended June 30, | Increase / | |||||||||||
| 2021 | 2020 | (Decrease) | ||||||||||
| Revenues | $ | 1,897,560 | $ | 1,971,141 | $ | (73,581 | ) | |||||
| Cost of sales | 1,389,776 | 1,250,234 | 139,542 | |||||||||
| Gross profit | 507,784 | 720,907 | (213,123 | ) | ||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 715,093 | 1,123,479 | (408,386 | ) | ||||||||
| Professional fees | 313,364 | 688,902 | (375,538 | ) | ||||||||
| Change in allowance for doubtful accounts | (28,945 | ) | 186,540 | (215,485 | ) | |||||||
| Total operating expenses: | 999,512 | 1,998,921 | (999,409 | ) | ||||||||
| Operating loss | (491,728 | ) | (1,278,014 | ) | (786,286 | ) | ||||||
| Total other income (expense) | (57,922 | ) | (72,243 | ) | (14,321 | ) | ||||||
| Net loss | $ | (549,650 | ) | $ | (1,350,257 | ) | $ | (800,607 | ) | |||
Revenues
Aggregate revenues for the nine months ended June 30, 2021 were $1,897,560, compared to revenues of $1,971,141 during the nine months ended June 30, 2020, a decrease of $73,581, or 4%. The decrease in revenue was due to the impact the COVID-19 coronavirus pandemic had on the tourism industry in Nevada during the current period.
Cost of Sales
Cost of sales for the nine months ended June 30, 2021 were $1,389,776, compared to $1,250,234 during the nine months ended June 30, 2020, an increase of $139,542, or 11%. Cost of sales consist primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The increased cost of sales in the current period was primarily due to our increased labor and outsourced testing fees incurred during the current period. Our gross margins of approximately 27% and 37% during the nine months ended June 30, 2021 and 2020, respectively, translated to $213,123 of decreased gross profit in the current period. Our margins in the nine months ended June 30, 2021 were significantly affected by the decline in revenues, and our inability to reduce labor costs and decrease our equipment servicing costs, in addition to having to outsource a portion of our testing services.
General and Administrative Expenses
General and administrative expenses for the nine months ended June 30, 2021 were $715,093, compared to $1,123,479 during the nine months ended June 30, 2020, a decrease of $408,386, or 36%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $50,856 and $72,060 during the nine months ended June 30, 2021 and 2020, respectively. General and administrative expenses decreased due primarily to decreased corporate overhead activities and the discontinuation of rents on warehouse space that we were previously subleasing.
Professional Fees
Professional fees for the nine months ended June 30, 2021 were $313,364, compared to $688,902 during the nine months ended June 30, 2020, a decrease of $375,538, or 55%. Professional fees included non-cash, stock-based compensation of $187,267 and $179,678 during the nine months ended June 30, 2021 and 2020, respectively. Professional fees decreased primarily due to decreased corporate consulting and legal services during the current period as we focused primarily on the lab operations during the current period.
| 23 |
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts resulted in $28,945 of income for the nine months ended June 30, 2021, compared to $186,540 of expense during the nine months ended June 30, 2020, an improvement of $215,485, or 116%. Our change in allowance for doubtful accounts improved during the current period primarily as our allowance for doubtful accounts decreased from $128,132 to $96,282 during the period, as the Nevada tourism market began to open up again and our customers’ cash flows improved.
Operating Loss
Our operating loss for the nine months ended June 30, 2021 was $491,728, compared to $1,278,014 during the nine months ended June 30, 2020, a decrease of $999,409, or 50%. Our operating loss decreased primarily due to our decreased general and administrative expenses and professional fees, which in part reflect overhead cost saving measures we implemented in response to Covid-19, and improvements in the collection of our accounts receivable that reduced our change in allowance for doubtful accounts by $215,485, that were not reflected in the nine months ended June 30, 2021, compared to the nine months ended June 30, 2020.
Other Income (Expense)
Other expense, on a net basis, for the nine months ended June 30, 2021 was $57,922, compared to other expense, on a net basis, of $72,243 during the nine months ended June 30, 2020, a net decrease of $14,321. Other expense consisted of $105,840 of interest expense, as offset by a gain on early extinguishment of debt in the amount of $40,338 and a gain on the distribution of $7,580 of previously impaired inventory to our former CEO, compared to $107,005 of interest expense and a loss of $28,238 on the disposal of fixed assets, as offset by $63,000 of sublet rental income, during the nine months ended June 30, 2020.
Net Loss
Net loss for the nine months ended June 30, 2021 was $549,650, compared to $1,350,257 during the nine months ended June 30, 2020, an improvement of $800,607, or 59%. The decreased net loss was due primarily to overhead cost savings, as offset in part by reduced sales and diminished profit margins, as we focused all of our efforts on operating the lab due to the effects of Covid-19, as described above, during the nine months ended June 30, 2021, compared to the nine months ended June 30, 2020.
| 24 |
Liquidity and Capital Resources
The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the nine-month periods ended June 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Operating Activities | $ | (139,096 | ) | $ | (614,937 | ) | ||
| Investing Activities | (1,206 | ) | (341,008 | ) | ||||
| Financing Activities | 130,362 | 759,068 | ||||||
| Net Decrease in Cash | $ | (9,940 | ) | $ | (196,877 | ) | ||
Net Cash Used in Operating Activities
During the nine months ended June 30, 2021, net cash used in operating activities was $139,096, compared to net cash used in operating activities of $614,937 for the same period ended June 30, 2020. The decrease in cash used in operating activities was primarily attributable to our decreased net loss.
Net Cash Used in Investing Activities
During the nine months ended June 30, 2021, net cash used in investing activities was $1,206, compared to $341,008 for the same period ended June 30, 2020. The decrease is attributable to fewer investments made for cannabis testing equipment in the current period, and the $200,000 purchase of VSSL Enterprises, Ltd. in the prior period.
Net Cash Provided by Financing Activities
During the nine months ended June 30, 2021, net cash provided by financing activities was $130,362, compared to net cash provided by financing activities of $759,068 for the same period ended June 30, 2020. The current period consisted primarily of $175,000 of proceeds received on debt financing, proceeds of $20,250 from the sale of stock, as offset by $24,443 of principal payments on an equipment lease and $40,445 of principal payments on an equipment loan, compared to $770,034 of net proceeds received on debt financing and proceeds of $56,500 from the sale of stock, as offset by $41,824 of principal payments on an equipment lease and $25,642 of principal payments on an equipment loan in the comparative period.
Ability to Continue as a Going Concern
As of June 30, 2021, our balance of cash on hand was $72,809, and we had negative working capital of $417,788 and an accumulated recurring losses of $17,814,800. We currently may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial capital expenditure and working capital needs.
The Company has incurred recurring losses from operations resulting in an accumulated deficit, and, as set forth above, the Company’s cash on hand is not sufficient to sustain operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution to existing stockholders.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 25 |
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations and require management’s subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of lab testing services through our subsidiary Digipath Labs, Inc.
Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item
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ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our President and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any legal or administrative proceedings that we believe, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following issuances of equity securities by the Company were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of the Securities Act of 1933 during the three-month period ended June 30, 2021:
Common Stock Issued for Services
On June 25, 2021, we issued an aggregate 375,000 shares of common stock, restricted in accordance with Rule 144, to two of our directors as payment in lieu of cash for services rendered.
On June 25, 2021, we issued 83,333 shares of common stock, restricted in accordance with Rule 144, to a former director as payment in lieu of cash for services rendered.
On June 25, 2021, we issued 250,000 shares of common stock, restricted in accordance with Rule 144, to our former CFO for services rendered pursuant to his employment agreement.
On June 2, 2021, we issued 840,000 shares of common stock, restricted in accordance with Rule 144, to one of our directors as payment in lieu of cash for settlement of services rendered.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 16, 2021
| DIGIPATH, INC. | ||
| By: | /s/ Todd Denkin | |
| Name: | Todd Denkin | |
| Title: | President | |
| By: | /s/ A. Stone Douglass |
|
| Name: | A. Stone Douglass |
|
| Title: | Chief Financial Officer | |
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