Hypha Labs, Inc 10-Q for FY2022 Q3
Hypha Labs, Inc. (FUNI)
About this 10-Q
Hypha Labs, Inc filed this 10-Q on August 15, 2022, covering the quarter ended June 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended June 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $682.67K
- down 10.6% from $764.02K a year earlier
- Net loss
- $576.73K
- compared with a net loss of $177.21K a year earlier
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.
| ☒ | 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| ☒ | 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 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 15, 2022 was .
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | September 30, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Note receivable | ||||||||
| Other current assets | ||||||||
| Deposits | ||||||||
| Total current assets | ||||||||
| Right-of-use asset | ||||||||
| Fixed assets, net | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of finance lease liabilities | ||||||||
| Current maturities of convertible notes payable | ||||||||
| Current maturities of notes payable | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Notes payable | ||||||||
| Convertible notes payable, net of discounts of $- | ||||||||
| Total non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| Series B convertible preferred stock, $ par value, shares authorized; and shares issued and outstanding as of June 30, 2022 and September 30, 2021 respectively | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Series A convertible preferred stock, $ par value, shares authorized; and shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding at June 30, 2022 and September 30 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ 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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Credit loss | ( | ) | ( | ) | ||||||||||||
| Other Income | ||||||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding – basic | ||||||||||||||||
| Weighted average number of common shares outstanding – fully diluted | ||||||||||||||||
| Net loss per share – basic and fully diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share – basic and fully diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to financial statements.
| 4 |
DIGIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| Series B Convertible Preferred Stock | Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Deficit | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Purchase of Series B Preferred shares | - | - | ||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred into Series B Preferred | ( | ) | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Common Shares issued for settlement of AP | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Series B Convertible Preferred Stock | Series A Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Deficit | ||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock sold for cash | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation - related parties | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation - related parties | - | - | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Net Income (loss) | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
See accompanying notes to financial statements.
| 5 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ( |
) | ||||||
| Credit loss | ||||||||
| Depreciation and amortization expense | ||||||||
| Loss on disposal of fixed assets | ||||||||
| Gain on early extinguishment of debt | ( |
) | ||||||
| Stock-based compensation | ||||||||
| Amortization of debt discounts | ||||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Other current assets | ( |
) | ( |
) | ||||
| 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 | ||||||||
| Purchase of fixed assets | ( |
) | ( |
) | ||||
| Advance of note receivable | ( |
) | ||||||
| Proceeds from sale of collateralized assets | ||||||||
| Net cash (used) in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities | ||||||||
| Principal payments on finance lease | ( |
) | ( |
) | ||||
| Principal payments on note payable, equipment financing | ( |
) | ( |
) | ||||
| Proceeds from short term advances | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from convertible notes | ||||||||
| Payments on convertible notes | ( |
) | ||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from sale of preferred stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( |
) | ( |
) | ||||
| Cash - beginning | ||||||||
| Cash - ending | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for debt conversion | $ | $ | ||||||
| Common stock issued for settlement of accounts payables | $ | $ | ||||||
| Conversion of Series A preferred into Series B preferred | $ | $ | ||||||
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 Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and hopes to open labs in other states that have legalized the sale of cannabis, beginning with California or Arizona.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021. 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, 2022:
Schedule of Entities Under Common Control and Ownership
| 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.
| 7 |
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.
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 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.
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.
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.
Note 2 – Going Concern
As
shown in the accompanying condensed consolidated financial statements, as of June 30, 2022, 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 – 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.
| 8 |
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 June 30, 2022 and September 30, 2021, respectively:
Summary of Financial Instruments at Fair Value on Recurring Basis
| Fair Value Measurements at June 30, 2022 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Lease liabilities | ||||||||||||
| Notes payable | ||||||||||||
| Convertible notes payable | ||||||||||||
| Fair Value Measurements at September 30, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Lease liabilities | ||||||||||||
| Notes payable | ||||||||||||
| Convertible notes payable, net of discounts of $ | ||||||||||||
The fair value of our intellectual properties are deemed to approximate book value, and are considered Level 3 inputs as defined by ASC Topic 820-10-35.
There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the nine months ended June 30, 2022 or the year ended September 30, 2021.
Note 4 – Note Receivable
On
various dates between December 28, 2018 and June 13, 2019, we loaned Northwest Analytical Labs, Inc. a total of $
On
various dates between August 23, 2021 and June 30, 2021, we loaned C3 Labs, Inc. (“C3 Labs”) a total of $
| 9 |
The
loans were made in connection with a potential acquisition of a controlling interest in C3 Labs pursuant to a letter of intent. On March
11, 2022, the Company notified the current owners of C3 Labs of its termination of the letter of intent. The Company is currently in
possession of equipment of C3 Labs, which it is in the process of liquidating. The Company anticipates that the proceeds of such liquidation
will be insufficient to repay the Company in full all amounts owed to it by C3 Labs, and as such has recorded an allowance of
Note 5 – Fixed Assets
Fixed assets consist of the following at June 30, 2022 and September 30, 2021:
Schedule of Fixed Assets
| June 30, 2022 | September 30, 2021 | |||||||
| Software | $ | $ | ||||||
| Office equipment | ||||||||
| Furniture and fixtures | ||||||||
| Lab equipment | ||||||||
| Leasehold improvements | ||||||||
| Lab equipment held under capital leases | ||||||||
| Fixed assets, gross | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation
and amortization expense totaled $
Note 6 – 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:
Schedule of Components of Lease Expense
| For the Nine | For the Nine | |||||||
| Months Ended | Months Ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information
| June 30, 2022 | September 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 liabilities | $ | $ | ||||||
| Noncurrent finance lease liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance lease | % | % | ||||||
| 10 |
Supplemental cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information
| For the Nine | For the Nine | |||||||
| Months Ended | Months Ended | |||||||
| June 30, 2022 | 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 | $ | $ | ||||||
| Leased assets obtained in exchange for lease liabilities: | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Total finance lease liabilities | $ | $ | ||||||
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 June 30, 2022:
Schedule of Future Minimum Annual Lease Commitments Under Operating Leases
| Fiscal Year Ending | Minimum Lease | |||
| September 30, | Commitments | |||
| 2022 (for the three months remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total future undiscounted lease payments | ||||
| Less interest | ||||
| Present value of lease payments | ||||
| Less current portion | ||||
| Long-term operating lease liabilities | $ | |||
There Company does not have any obligations under finance leases as of June 30, 2022:
Note 7 –Notes Payable
Notes payable consists of the following at June 30, 2022 and September 30, 2021, respectively:
Schedule of Notes Payable
| June 30, 2022 | September 30, 2021 | |||||||
| On September 10, 2021, the Company, entered into a Secured Promissory note for $ | $ | $ | ||||||
| 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 $
| 11 |
Note 8 – Convertible Notes Payable
Convertible notes payable consists of the following at June 30, 2022 and September 30, 2021, respectively:
Schedule of Convertible Notes Payable
| June 30, 2022 | September 30, 2021 | |||||||
| 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 | ( | ) | ( | ) | ||||
| Total convertible debt | ||||||||
| Less: current maturities | ||||||||
| Convertible notes payable | $ | $ | ||||||
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.
| 12 |
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, 2022 and 2021, respectively, as follows:
Schedule of Interest Expense
| June 30, 2022 | June 30, 2021 | |||||||
| Interest on short term loans | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Interest on notes payable | ||||||||
| Amortization of beneficial conversion features | ||||||||
| Interest on convertible notes | ||||||||
| Total interest expense | $ | $ | ||||||
Note 9 - Changes in Stockholders’ Deficit
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”) and have been designated as Series B Convertible Preferred Stock (“Series B Preferred”), with the remaining shares available for designation from time to time by the Board as set forth below. As of June 30, 2022, there were shares of Series A Preferred issued and outstanding and shares of Series B 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 and each share of Series B Preferred is currently convertible into twenty-five shares of common stock.
Series A
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, 2022 are convertible into shares of the common stock of the Company.
Additional terms of the Series A Preferred and 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 |
| ● | 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, |
| ● | 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. |
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| ● | 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 |
| ● | 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. |
During
the nine months ended June 30, 2022,
Series B
The
Series B Preferred were designated on December 29, 2021. Each share of Series B Preferred has a
Stated Value of $ and is currently convertible into common stock at a conversion price equal to $
Additional terms of the Series B Preferred and include the following:
| ● | The shares of Series B Preferred are not entitled to dividends, provided that if dividends are paid on the shares of common stock of the Company, the Series B Preferred will be entitled to dividends based on the number shares of common stock which the Series B Preferred may then be converted. |
| ● | |
| ● | Each share of Series B Preferred carries a number of votes equal to the number of shares of common stock into which such Series B Preferred may then be converted. |
Due to the change in control provision of the Series B Preferred, the Series B Preferred is classified as temporary equity on the balance sheet.
On December 30, 2021, the Company entered into an Exchange Agreement with one of the Company’s institutional investors (the “Investor”), pursuant to which the Investor exchanged shares of the Series A Preferred for shares of the Series B Preferred. In addition, on December 30, 2021, the Investor purchased shares of Series B Preferred Stock at a price of $ per share, resulting in gross proceeds to the Company of $.
Common Stock
Common stock consists of $ par value, shares authorized, of which shares were issued and outstanding as of June 30, 2022.
During
the nine months ended June 30, 2022, the Company issued shares of its common stock in exchange for services rendered to the
Company, by the chairman of the board of directors, with a total fair value $
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During
the nine months ended June 30, 2022, the Company issued shares of its common stock in exchange for services rendered to the
Company, by third party consultants, with a total fair value $
During
the nine months ended June 30, 2022, the Company issued shares of its common stock to settle outstanding payables in the amount
of $
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. Options to purchase a total of shares of common stock were outstanding as of June 30, 2022.
During
the nine months ended June 30, 2022, the Company issued to an unrelated third party, options to purchase shares of its common
stock in exchange for services rendered to the Company with a total fair value $
Amortization of Stock-Based Compensation
A
total of $ and $ of stock-based compensation expense was recognized during the nine months ended June 30, 2022 and 2021,
respectively, as a result of the vesting of common stock options issued. As of June 30, 2022 a total of $
Summary of Common Stock Options Outstanding
| 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 | |||||||||||||||
| $ | – $ | years | $ | $ | ||||||||||||||||
The following is a summary of activity of outstanding common stock options:
Schedule of Activity of Outstanding Common Stock Options
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2021 | $ | |||||||
| Options issued | $ | |||||||
| Options forfeited | ( | ) | $ | |||||
| Balance, June 30, 2022 | $ | |||||||
| Exercisable, June 30, 2022 | $ | |||||||
As of June 30, 2022, these options in the aggregate had no intrinsic value as the per share market price of $ of the Company’s common stock as of such date was less than the weighted-average exercise price of these options of $.
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Note 11 – Common Stock Warrants
Warrants
to purchase a total of
The following is a summary of information about our warrants to purchase common stock outstanding at June 30, 2022.
Summary of Common Stock Warrants Outstanding
| 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 | |||||||||||||||
| $ | - | years | $ | $ | ||||||||||||||||
The following is a summary of activity of outstanding common stock warrants:
Schedule of Outstanding Common Stock Warrants Activity
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2021 | $ | |||||||
| Warrants granted | ||||||||
| Warrants expired | ( | ) | ||||||
| Balance, June 30, 2022 | $ | |||||||
| Exercisable, June 30, 2022 | $ | |||||||
As of June 30, 2022, these warrants in the aggregate had no intrinsic value as the per share market price of $ of the Company’s common stock as of such date was less than the weighted-average exercise price of these warrants of $.
Note 12 – Commitments and Contingencies
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 13 – Subsequent Events
On July 25, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Todd Denkin, the Company’s President, pursuant to which Mr. Denkin purchased shares of the Company’s newly designated Series C Preferred Stock (“Series C Preferred Stock”) for a purchase price of $ per share of Series C Preferred Stock.
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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, 2021 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, 2021 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, 2022 and 2021:
The following table summarizes selected items from the statement of operations for the three months ended June 30, 2022 and 2021.
| Three Months Ended June 30, | Increase / | |||||||||||
| 2022 | 2021 | (Decrease) | ||||||||||
| Revenues | $ | 682,665 | $ | 764,015 | $ | (81,350 | ) | |||||
| Cost of sales | 414,299 | 551,976 | (137,677 | ) | ||||||||
| Gross profit | 268,366 | 212,039 | 56,327 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 278,765 | 278,082 | 683 | |||||||||
| Professional fees | 81,108 | 91,001 | (9,893 | ) | ||||||||
| Change in allowance for doubtful accounts | 66,712 | (10,960 | ) | 77,672 | ||||||||
| Total operating expenses: | 426,585 | 358,123 | 68,462 | |||||||||
| Operating income (loss) | (158,219 | ) | (146,084 | ) | (12,135 | ) | ||||||
| Total other income (expense) | (418,514 | ) | (31,130 | ) | (387,384 | ) | ||||||
| Net loss | $ | (576,733 | ) | $ | (177,214 | ) | $ | (399,519 | ) | |||
Revenues
Aggregate revenues for the three months ended June 30, 2022 were $682,665, compared to revenues of $764,015 during the three months ended June 30, 2021, an decrease of $81,350 or 11%. The decrease in revenue was due to a decrease in cannabis production resulting from excess supply in the markets during the current period as opposed to the same period in 2021.
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Cost of Sales
Cost of sales for the three months ended June 30, 2022 were $414,299, compared to $551,976 during the three months ended June 30, 2021, a decrease of $137,677, or 25%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to our sales decrease of 11% as well as reducing our outsourced testing fees incurred during the current period. Our gross margins were approximately 39% during the three months ended June 30, 2022, compared to 28% during the three months ended June 30, 2021, which translated to $56,327 of increased gross profit in the current period.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2022 were $278,765 compared to $278,082 during the three months ended June 30, 2021, an increase of $683, or 0%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $0 and $16,952 during the three months ended June 30, 2022 and 2021, respectively.
Professional Fees
Professional fees for the three months ended June 30, 2022 were $81,108, compared to $91,001 during the three months ended June 30, 2021, a decrease of $9,893, or 11%. Professional fees included non-cash, stock-based compensation of $8,306 and $90,190 during the three months ended June 30, 2022 and 2021, 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, 2022 resulted in $66,712 of bad debt expense, compared to $10,960 of bad debt recovery during the three months ended June 30, 2021, a decrease of $77,672, or 709%. Our change in allowance for doubtful accounts was a result of collection issues from various customers.
Operating Loss
Our operating loss for the three months ended June 30, 2022 was $158,219, compared to operating loss of $146,084 during the three months ended June 30, 2021, an increase of $12,135, or 8%. Our operating loss increased primarily due to our increased allowance for doubtful accounts.
Other Income (Expense)
Other expense, on a net basis, for the three months ended June 30, 2022 was $418,514, compared to other expense, on a net basis, of $31,130 during the three months ended June 30, 2021, a net increase of $387,384. Other expense consisted of interest expense of $72,230 and credit losses of $358,670 for the three months ended June 30, 2022, partially offset by other income, consisting of $12,386 of interest income.
Net Loss
Net loss for the three months ended June 30, 2022 was $576,733, compared to net loss of $177,214 during the three months ended June 30, 2021, an increase of $399,519 or 225%. The net loss was primarily due to our decreased revenues, increased interest expense, and the increase in our doubtful accounts from the June 30, 2021 period.
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Results of Operations for the Nine Months Ended June, 2022 and 2021:
The following table summarizes selected items from the statement of operations for the nine months ended June 30, 2022 and 2021.
| Nine Months Ended June 30, | Increase / | |||||||||||
| 2022 | 2021 | (Decrease) | ||||||||||
| Revenues | $ | 1,986,985 | $ | 1,897,560 | $ | 89,425 | ||||||
| Cost of sales | 1,232,932 | 1,389,776 | (156,844 | ) | ||||||||
| Gross profit | 754,053 | 507,784 | 246,269 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 755,199 | 715,093 | 40,106 | |||||||||
| Professional fees | 635,969 | 313,364 | 322,605 | |||||||||
| Change in allowance for doubtful accounts | 64,589 | (28,945 | ) | 93,534 | ||||||||
| Total operating expenses: | 1,455,757 | 999,512 | 456,245 | |||||||||
| Operating loss | (701,704 | ) | (491,728 | ) | (209,976 | ) | ||||||
| Total other income (expense) | (538,950 | ) | (57,922 | ) | (481,028 | ) | ||||||
| Net loss | $ | (1,240,654 | ) | $ | (549,650 | ) | $ | (691,004 | ) | |||
Revenues
Aggregate revenues for the nine months ended June 30, 2022 were $1,986,985, compared to revenues of $1,897,560 during the nine months ended June 30, 2021, an increase of $89,425, or 5%. The increase in revenue was due to the Nevada tourism market beginning to open up again and our customers’ cash flows improved during the current period.
Cost of Sales
Cost of sales for the nine months ended June 30, 2022 were $1,232,932, compared to $1,389,776 during the nine months ended June 30, 2021, a decrease of $156,844, or 11%. Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. The decreased cost of sales in the current period was primarily due to our decrease in outsourcing to other labs. Our gross margins of approximately 38% and 27% during the nine months ended June 30, 2022 and 2021, respectively, translated to $246,269 of increased gross profit in the current period.
General and Administrative Expenses
General and administrative expenses for the nine months ended June 30, 2022 were $755,199, compared to $715,093 during the nine months ended June 30, 2021, an increase of $40,106, or 6%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of $0 and $50,856 during the nine months ended June 30, 2022 and 2021, respectively. General and administrative expenses increased due primarily to increased corporate overhead activities offset by the discontinuation of rents on warehouse space that we were previously subleasing.
Professional Fees
Professional fees for the nine months ended June 30, 2022 were $635,969, compared to $313,364 during the nine months ended June 30, 2021, an increase of $322,605, or 103%. Professional fees included non-cash, stock-based compensation of $210,449 and $238,123 during the nine months ended June 30, 2022 and 2021, respectively. Professional fees increased primarily due to increased use of corporate consulting services during the current period.
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts resulted in $64,589 of expense for the nine months ended June 30, 2022, compared to income of $28,945 during the nine months ended June 30, 2021, an increase of $93,534, or 323%. Our change in allowance for doubtful accounts was a result of collection issues from various customers.
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Operating Loss
Our operating loss for the nine months ended June 30, 2022 was $701,704, compared to $491,728 during the nine months ended June, 2021, an increase of $209,976, or 43%. Our operating loss increased primarily due to a large increase in professional fees.
Other Expense
Other expense, on a net basis, for the nine months ended June 30, 2022 was $538,950, compared to other expense, on a net basis, of $57,922 during the nine months ended June 30, 2021, a net increase of $481,028. Other expense consisted of $217,341 of interest expense and credit losses of $383,345, as offset by interest income of $37,061, compared to $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, during the six months ended June 30, 2021.
Net Loss
Net loss for the nine months ended June 30, 2022 was $1,240,654, compared to $549,650 during the nine months ended June 30, 2021, an increase of $691,004, or 126%. The increased net loss was due primarily to larger professional fees and an increase in other expenses.
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, 2022 and 2021:
| 2022 | 2021 | |||||||
| Operating Activities | $ | (168,917 | ) | $ | (139,096 | ) | ||
| Investing Activities | (646,895 | ) | (1,206 | ) | ||||
| Financing Activities | 745,113 | 130,362 | ||||||
| Net Decrease in Cash | $ | (70,699 | ) | $ | 9,940 | |||
Net Cash Used in Operating Activities
During the nine months ended June 30, 2022, net cash used in operating activities was $168,917, compared to net cash used in operating activities of $139,096 for the same period ended June 30, 2021. The decrease in cash used in operating activities was primarily attributable to our increased net loss, offset by the change in allowance for doubtful accounts and credit losses.
Net Cash Used in Investing Activities
During the nine months ended June 30, 2022, net cash used in investing activities was $646,895, compared to $1,206 for the same period ended June 30, 2022. The increase in cash used in investing was a result of loans we made in connection with a potential acquisition, offset by proceeds received from the sale of equipment held as collateral securing the loan.
Net Cash Provided by Financing Activities
During the nine months ended June 30, 2022, net cash provided by financing activities was $745,113, compared to net cash provided by financing activities of $130,362 for the same period ended June 30, 2021. The current period consisted primarily of $390,000 of proceeds received on debt financing, $402,765 proceeds from convertible debt financing, proceeds of $55,600 from the sale of preferred stock, as offset by $42,873 of principal payments on an equipment lease and $20,379 of principal payments on an equipment loan, compared to $110,000 of net proceeds received on convertible debt financing, $65,000 of proceeds from short term advances and proceeds of $20,250 from the sale of common stock, as offset by $40,445 of principal payments on an equipment lease and $24,443 of principal payments on an equipment loan in the comparative period.
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Ability to Continue as a Going Concern
As of June 30, 2022, our balance of cash on hand was $225,233, and we had negative working capital of $2,189,146 and an accumulated deficit of $19,192,307 resulting from recurring losses. 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.
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 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.
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.
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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
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022. 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, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not 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 nine-month period ended June 30, 2022:
Common Stock Issued for Services
On February 11, 2022, the Company issued 2,166,667 shares of its common stock in exchange for services rendered to the Company by third party consultants, with a total fair value $65,000 based on the closing price of the Company’s common stock on the dates of grant.
On February 11, 2022, the Company issued 250,000 shares of its common stock to settle outstanding payables in the amount of $7,500.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| 23 |
* Filed herewith.
| 24 |
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 15, 2022
| DIGIPATH, INC. | ||
| By: | /s/ Todd Denkin | |
| Name: | Todd Denkin | |
| Title: | Chief Executive Officer | |
| By: | /s/ A. Stone Douglass | |
| Name: | A. Stone Douglass | |
| Title: | Chief Financial Officer | |
| 25 |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Todd Denkin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2022 of Digipath, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Dated: August 15, 2022
| /s/ Todd Denkin | |
| Todd Denkin, Principal Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, A. Stone Douglass, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2022 of Digipath, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Date: August 15, 2022
| /s/ A. Stone Douglass | |
| A. Stone Douglass, Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Digipath, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2022 (the “Report”) I, Todd Denkin, Principal Executive Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: August 15, 2022
| /s/ Todd Denkin | |
| Todd Denkin, Principal Executive Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Digipath, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2022 (the “Report”) I, A. Stone Douglass, Chief Financial Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: August 15, 2022 | ||
| /s/ A. Stone Douglass | ||
| A. Stone Douglass, Chief Financial Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.