FUNI 10-K
Hypha Labs, Inc. (FUNI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|||
For
the fiscal year ended
OR |
|||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|||
| For the transition period from ____________ to ____________ | |||
| Commission
file number: |
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices and 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 | N/A |
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| Yes ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
| Yes ☐ |
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 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | 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 ☐ |
The
aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based upon the closing price of
$0.023 per share as of March 31, 2022 was approximately $
As of January 13, 2023, there were shares of registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
PART I
Forward Looking Statements
This Form 10-K contains “forward-looking” statements including statements regarding our expectations of our future operations. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control.
These risks and uncertainties include demand for our products and services, governmental regulation of the cannabis industry, our ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of our liquidity and financial strength to support our growth, general economic and market conditions; our ability to sustain, manage, or forecast growth, our ability to successfully make and integrate acquisitions, new product development and introduction, existing government regulations and changes in, or the failure to comply with, government regulations, adverse publicity, difficulty in forecasting operating results, change in business strategy or development plans, business disruptions, and the ability to attract and retain qualified personnel. Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory and data analytics company focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing. 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.
Business
Our cannabis testing business is operated through our wholly owned subsidiary, Digipath Labs, Inc., which performs all cannabis related testing using FDA-compliant laboratory equipment and processes. We opened our first testing lab in Las Vegas, Nevada in May of 2015 to serve the new State approved and licensed medical marijuana industry. We have plans to open labs in other legal states, assuming resources permit.
We seek to be the nation’s highest standard, full-service testing lab for cannabis, hemp and ancillary cannabis and hemp infused products. We are a third party independent testing laboratory facility for cannabis, cannabis infused products, hemp and other botanical nutraceuticals to serve growers, dispensaries, caregivers, producers, patients and eventually all end users of cannabis and botanical products.
Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis and hemp industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis and hemp they ingest and to help maximize the quality of our client’s products through research, development and standardization.
| 1 |
As a premier cannabis and hemp testing laboratory with ISO-17025:2017 accreditation, we take a careful, strategic approach to all of our cannabis and hemp testing. A diverse array of tests combined with our lab equipment and analytical instrumentation enable us to accurately test cannabis and hemp for potency, the presence of pesticides, microbial contamination, metals and heavy metals, which include, but are not limited to, substances like arsenic, cadmium, lead, or mercury. Not only is testing for potency and Cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”) content important, we recognize that more profound testing is needed particularly as a true national standard is developed. Digipath Labs is committed to follow Food and Drug Administration (“FDA”), Drug Enforcement Agency (“DEA”), Environmental Protection Agency (“EPA”), US Department of Agriculture (“USDA”) guidelines, proprietary standard operating procedures (“SOP”), and Good Lab Practices (“GLP”) that are in line with current Federal and State governing bodies. We utilize a variety of tests to safely and effectively share enhanced understanding of the cannabis plant with caregivers, dispensaries and patients. We are committed to the advancement of science by offering a method of standardization for cannabis that is intricate and accurate. This approach and our investment in state-of-the-art testing equipment are of the utmost importance.
Digipath Labs screens medicinal and recreational cannabis for potentially harmful contaminants, including:
- Residual Solvents (for extracts)
- Moisture
- Water Activity
- Visual Inspection
- Pesticides
- Heavy metals, including mercury, arsenic, lead, cadmium, chromium and nickel
- Biological toxins, such as aflatoxin and ocratoxins
- Microbial contaminants including E. coli, salmonella, coliforms, aspergillus, gram negative bacteria, total aerobic bacteria and mold and yeast
Digipath Labs also tests cannabis and hemp for its quality, potency, and cannabinoid and terpene profiles, which determine the suitability of specific chemoprofiles for the treatment of specific ailments.
We utilize one of our two Ultra-High Performance Liquid Chromatographs (“UPLC”), which accurately separates and measures the cannabinoid content of any sample of flower, edible, concentrate or other cannabis products. Our Inductively Coupled Plasma Mass Spectrometer (“ICP-MS”) is utilized for heavy metals testing, and provides accurate readings for harmful metals ensuring that the Parts Per Billion (“PPB”) are substantially below the regulated and accepted trace amounts. Our laboratory testing equipment is calibrated using third party reference standards to ensure precision measurements throughout the testing process and has been certified by ISO-17025:2017 standards.
With accurate science becoming a major part of the cannabis and hemp industry, the major question is one of standards; we hold ourselves accountable and provide efficient and accurate research and results to our clients. Our test results are meant to help dispensaries, caregivers and patients know the concentration and quality of their cannabis without having to question the credibility of the data.
Market Overview
According to New Frontier Data, a cannabis researcher based in Washington, D.C., the hemp CBD business worldwide will grow from $4.4 billion in 2018 to over $14.7 billion by 2026, and the worldwide cannabis industry in 2019 generated $15 Billion. In 2024 that will increase to $44.8 Billion. Total legal sales of cannabis in current legal states are projected to grow at a compound annual growth rate (CAGR) of 14% over the next six years, reaching nearly $30 billion by 2025. This figure takes into account the likely projection that more states will legalize. Currently, thirty-nine states and the District of Columbia have passed some kind of medical and/or adult use marijuana laws.
| * | Annual sales of medical cannabis are projected to grow at a 17% CAGR through 2025, to an estimated $13.1 billion by 2025; adult-use sales are projected to grow at a 16% CAGR, to $16.6 billion. | |
| * | An estimated 38.4 million U.S. adults consume cannabis at least once annually, from either a legal or illicit source. | |
| * | 36% of cannabis consumers report using cannabis daily, and 59% use cannabis at least once a week. |
With increased legalization nationwide, the lab-testing sector is expected to experience substantial growth. According to The Insight Partners, the cannabis testing market is expected to reach approximately $2.5 billion in 2025, with an estimated CAGR of 11.9% from 2017-2025. The data troves collected through the testing process are already creating value and could become an increasingly valuable asset and generate substantial revenue for the most accomplished laboratories. This data could also be used to determine specific genetic attributes of targeted cannabinoids and assist with maximizing medicinal benefits and individualized medicine in the future.
| 2 |
Competition
The cannabis industry in the United States is highly fragmented, rapidly expanding and evolving. The industry is characterized by new and potentially disruptive or conflicting legislation promulgated on a state-by-state basis. Our competitors include local enterprises, some of which may have financial, technical, sales, marketing and other resources greater than ours. These companies also compete with us in recruiting and retaining qualified personnel and consultants.
Our competitive position depends on our ability to attract and retain qualified scientists and other personnel, develop effective proprietary products and solutions, the personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We compete in this area on the basis of price, regulatory compliance, vendor relationships, usefulness, availability, excellent customer service and ease of use of our services.
Government Regulation
Marijuana is categorized as a Schedule-I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow, possess and consume under Federal law. A Schedule-I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” However, since 1995, thirty-nine states and the District of Columbia have passed some kind of medical and/or adult use marijuana laws. This has created an unpredictable business-environment for dispensaries and collectives that legally operate under state-laws but in violation of Federal law. On August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States Attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under state law, so long as:
| ● | cannabis is not being distributed to minors and dispensaries are not located around schools and public buildings; | |
| ● | the proceeds from sales are not going to gangs, cartels or criminal enterprises; | |
| ● | cannabis grown in states where it is legal is not being diverted to other states; | |
| ● | cannabis-related businesses are not being used as a cover for sales of other illegal drugs or illegal activity; | |
| ● | there is not any violence or use of fire-arms in the cultivation and sale of marijuana; | |
| ● | there is strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and | |
| ● | cannabis is not grown, used, or possessed on Federal properties. |
The Cole Memo was meant only as a guide, not a rule of law, for United States Attorneys and did not alter in any way the Department of Justice’s Federal authority to enforce Federal law, including Federal laws relating to cannabis, regardless of state law. Moreover, the Cole Memorandum also provided that it could not be used as a defense to any criminal prosecution.
On January 4, 2018, United States Attorney General Jefferson Sessions issued a Memorandum to United States Attorneys rescinding the Cole Memorandum, stating that prosecutors should follow well-established principles in effect prior to the issuance of the Cole Memorandum that govern all federal prosecutions in deciding which activities to prosecute under existing federal laws. Federal legislation has been proposed over the years to reschedule or de-schedule cannabis, as well as to transform the Cole Memorandum into a rule of law.
Customers
We provide cannabis and hemp lab testing services in Las Vegas to Nevada licensed Medical Marijuana Enterprises (“MMEs”), and have expanded to recreational use facilities with the recently passed legislation that allows for the recreational use of marijuana in Nevada. We sell our services to these enterprises on a fixed fee per test or panel of tests, and offer a discounted price for customers based on volume. On June 17, 2014, Clark County initially approved a total of 117 special use permits for cultivation and 87 production applicants. Since the inception of legalized adult-use marijuana, Nevada has issued 288 cannabis-related licenses, including those for retail stores, cultivation, production, and testing labs, according to the state taxation department. We have worked with over 90 cultivators and producers in and around Clark and Nye County. As new harvests come to market, we anticipate further customer growth, especially with the relatively recent legalization of recreational cannabis in the State of Nevada in 2017.
| 3 |
Marketing, Sales and Support
We use a range of communication platforms to reach our target customers. The goal of the marketing strategy is to position us as the leading testing company in the botanical, nutraceutical, and cannabis industries in the country. Our marketing efforts include digital/online, industry conferences and affiliations, media outreach, direct response and public relations. We believe that these efforts have the ability to deliver our brand message in a powerful way to maximize audience reach.
Seasonality
Our business is not subject to seasonality.
Insurance
We maintain property, business interruption and casualty insurance.
Employees
As of September 30, 2022, we had seventeen employees. None of our employees are members of a trade union. We believe that we maintain good relationships with our employees and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.
Corporate Information
Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our website is located at http://www.digipath.com. The content on our website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Report.
ITEM 1A. Risk Factors
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
An investment in the Company is highly speculative in nature and involves an extremely high degree of risk.
Our auditor has expressed substantial doubt about our ability to continue as a going concern. We may be unable to obtain additional capital required to implement our business plan. As a result of recurring net losses and insufficient cash reserves, our independent certified public accountant has added a paragraph to its report on our financial statements for the year ended September 30, 2022 questioning our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations. We have a limited operating history. Our operations are subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
| 4 |
Our plans are dependent upon key individuals and the ability to attract qualified personnel. In order to execute our business plan, we will be dependent on upon our executive officers and directors, as well as other key personnel. The loss of any of the foregoing individuals could have a material adverse effect upon our business prospects. Moreover, our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training, and retaining such personnel in the future. If we are unable to hire, assimilate and retain such qualified personnel in the future, our business, operating results, and financial condition could be materially adversely affected. We may also depend on third party contractors and other partners, to assist with the execution of our business plan. There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with such third parties. The failure to succeed in these endeavors would have a material adverse effect on our ability to consummate our business plans.
Risks Related To Cannabis Related Businesses
Our business is dependent on state laws pertaining to the cannabis industry. As of November, 2022, thirty-eight states and the District of Columbia allow its citizens to use medical cannabis. Additionally, twenty-one states and the District of Columbia have legalized cannabis for adult recreational use, and additional recreational measures are expected to be pursued by other states in the future. Continued development of the cannabis industry is dependent upon continued legislative authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area. Further, progress in the cannabis industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business.
Cannabis remains illegal under federal law and a change in federal enforcement practices could significantly and negatively affect our business. Despite the development of a cannabis industry legal under state laws, state laws legalizing medicinal and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies cannabis as a Schedule-I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that legalize its use. While the Obama Administration’s Department of Justice adopted a policy (known as the Cole Memorandum) that effectively stated that it was not an efficient use of resources to direct Federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis, on January 4, 2018, the United States Attorney General rescinded the Cole Memorandum. The Federal government’s enforcement of Federal laws could cause significant financial damage to us and our shareholders.
The loss or temporary suspension of one or more of our licenses could significantly reduce our revenues. Our ability to operate our cannabis testing lab is dependent upon maintaining licenses issued by state and local regulators in Nevada. Our cannabis testing and business licenses were briefly suspended by Nevada regulators on January 19, 2018 and were reinstated on January 31, 2018. This significantly affected our financial results for the second and third fiscal quarters of 2018. In order to retain our licenses, we are required to comply with ongoing compliance and reporting requirements and ongoing regulation and oversight by governmental authorities. Any failure to comply with any such regulatory requirements or any failure to maintain any required licenses would have a material adverse effect on our business, financial condition, results of operation and, in the extreme case, require us to discontinue operations.
| 5 |
As the possession and use of cannabis is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide. As a result, we may be subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business. Under Federal law, and more specifically the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” 18 U.S.C. §2(a). As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.
Laws and regulations affecting the cannabis and marijuana industries are constantly changing, which could detrimentally affect our business, and we cannot predict the impact that future regulations may have on us. Local, state and federal cannabis laws and regulations are constantly changing and they are subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our service offerings. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Any change in law or interpretation could have a material adverse effect on our business, financial condition, and results of operations.
Federal enforcement practices could change with respect to services providers to participants in the cannabis industry, which could adversely impact us. If the federal government were to change its practices, or were to expand its resources attacking providers in the cannabis industry, such action could have a materially adverse effect on our operations, our customers, or the sales of our products. It is possible that additional Federal or state legislation could be enacted in the future that would prohibit our customers from selling cannabis, and if such legislation were enacted, such customers may discontinue the use of our services. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Expansion by well-established laboratory testing companies into the cannabis industry could prevent us from realizing anticipated growth in customers and revenues. Traditional laboratory testing companies may expand their businesses into cannabis testing. If they decided to expand into cannabis testing, this could hurt the growth of our business and cause our revenues to be lower than we expect.
Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities. Insurance that is otherwise readily available, such as workers’ compensation, general liability, and directors and officers insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. We currently have adequate coverage, however, there are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Participants in the cannabis industry have difficulty accessing the service of banks, which makes it difficult for us to operate. Despite rules issued by the United States Department of the Treasury mitigating the risk to banks that do business with cannabis companies permitted under state law, as well as guidance from the United States Department of Justice, banks remain wary to accept funds from businesses in the cannabis industry. Our prior bank at which we maintained deposit accounts forced us to close our accounts. While after much difficulty we were recently able find a replacement banking institution, there can be no assurance that we will able to maintain this banking relationship. Since the use of cannabis remains illegal under Federal law, there remains a compelling argument that banks may be in violation of Federal law when accepting for deposit, funds derived from the sale or distribution of cannabis. Consequently, businesses involved in the cannabis industry, including us, continue to have trouble establishing and maintain banking relationships. An inability to open and maintain bank accounts may make it difficult for us and our customers to do business. In addition, our inability to maintain a bank account previously resulted in our holding large sums of cash. Although we store our cash in a secure safe, holding large sums of cash exposes us to a greater risk of theft.
The outbreak of the COVID-19 coronavirus has negatively impacted and could continue to negatively impact our business and the global economy. In addition, the COVID-19 pandemic could negatively impact our ability to obtain financing when required.
The COVID-19 coronavirus has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that we or our employees, customers, and other commercial partners may be prevented from conducting business activities for an indefinite period of time, including due to the spread of the disease or shutdowns requested or mandated by governmental authorities. During portions of our year ended September 30, 2022, the Company’s cannabis testing operations significantly declined due to the decline in the Nevada cannabis markets, which resulted in turn from the substantial decline in Nevada tourism due to COVID-19. While our operations have recently improved due to the reopening of Nevada casinos and increased tourism compared to its recent depressed levels, there can be no assurance that this trend will continue. COVID-19 has also had an adverse impact on global economic conditions, which could impair our ability to raise capital when needed.
| 6 |
Risks Related To Our Common Stock
Our operating results may fluctuate causing volatility in our stock price. Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. The following factors may affect our operating results causing volatility in our stock price:
| ● | Our ability to execute our business plan, compete effectively and attract customers; | |
| ● | Our ability to respond effectively to a rapidly evolving regulatory and competitive landscape; | |
| ● | The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our business, operations and infrastructure; | |
| ● | Our ability to obtain working capital financing; | |
| ● | Our ability to attract, motivate and retain top-quality employees; | |
| ● | Investors’ general perception of us; and | |
| ● | General economic conditions and those economic conditions specific to cannabis industry. |
Trading in our common stock has been limited, there is no significant trading market for our common stock, and purchasers of our common stock may be unable to sell their shares. Our common stock is currently eligible for quotation on the OTCQB and OTCBB, however trading to date has been limited. If activity in the market for shares of our common stock does not increase, purchasers of our shares may find it difficult to sell their shares. We currently do not meet the initial listing criteria for any registered securities exchange, including the Nasdaq Stock Market. The OTCQB and OTCBB are often characterized by low trading volume and significant price fluctuations. These and other factors may further impair our stockholders’ ability to sell their shares when they want to and/or could depress our stock price. As a result, stockholders may find it difficult to dispose of, or obtain accurate quotations of the price of our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our Company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares of common stock.
Applicable sec rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price our common stock. Our common stock is a “penny stock” as defined under Rule 3a51-1 of the Exchange Act, and is accordingly subject to SEC rules and regulations that impose limitations upon the manner in which our common stock can be publicly traded. Penny stocks generally are equity securities with a per share price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, of our common stock and reducing the liquidity of an investment in our common stock.
We have outstanding shares of preferred stock with rights and preferences superior to those of our common stock. The issued and outstanding shares of Series A Convertible Preferred Stock and Series B Preferred Stock grant the holders of such preferred stock liquidation rights that are superior to those held by the holders of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock. We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock depends on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.
ITEM 1B. Unresolved Staff Comments
None.
| 7 |
ITEM 2. Properties
Our principal executive offices are located at 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118, Telephone No.: (702) 527-2060. Our leased premises are 6,000 square feet and are utilized for corporate business offices and a cannabis testing lab. Our premises are subject to a lease agreement expiring August 31, 2025. The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases:
| 2023 | 119,468 | |||
| 2024 | 123,543 | |||
| 2025 | 116,891 | |||
| 2026 | - | |||
| Total | $ | 359,902 |
We believe that our current facilities are adequate for our current needs. We intend to secure new facilities or expand existing facilities as necessary to support future growth. We believe that suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.
ITEM 3. Legal Proceedings
There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
| 8 |
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Shares of our common stock trade on the over-the-counter market and are quoted on the OTCBB and OTCQB under the symbol “DIGP”. As of January 12, 2023, the closing price of our common stock on the OTCQB was $0.01.
The following table sets forth, for the fiscal quarters indicated, the high and low bid information for our common stock, as reported on the OTCQB. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| High | Low | |||||||
| Fiscal Year Ended September 30, 2021 | ||||||||
| First Quarter | $ | 0.03 | $ | 0.01 | ||||
| Second Quarter | $ | 0.08 | $ | 0.02 | ||||
| Third Quarter | $ | 0.07 | $ | 0.04 | ||||
| Fourth Quarter | $ | 0.06 | $ | 0.04 | ||||
| Fiscal Year Ended September 30, 2022 | ||||||||
| First Quarter | $ | 0.04 | $ | 0.3 | ||||
| Second Quarter | $ | 0.04 | $ | 0.02 | ||||
| Third Quarter | $ | 0.28 | $ | 0.11 | ||||
| Fourth Quarter | $ | 0.02 | $ | 0.01 | ||||
As of January 13, 2023, there were approximately 121 shareholders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”. As of January 13, 2023, there were 75,146,820 shares of common stock outstanding on record.
Dividends
We have not declared or paid any dividends on our common stock since our inception and do not anticipate paying dividends for the foreseeable future. The payment of dividends is subject to the discretion of our board of directors and depends, among other things, upon our earnings, our capital requirements, our financial condition, and other relevant factors. We intend to reinvest any earnings in the development and expansion of our business. Any cash dividends in the future to common shareholders will be payable when, as and if declared by our board of directors, based upon the board’s assessment of our financial condition and performance, earnings, need for funds, capital requirements, prior claims of preferred stock to the extent issued and outstanding, and other factors, including income tax consequences, restrictions and applicable laws. There can be no assurance, therefore, that any dividends on our common stock will ever be paid.
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) | |||||||
| (a) | (b) | (c) | ||||||||
| Equity compensation plans approved by security holders (1) | 3,520,000 | $ | 0.09 | N/A | ||||||
| Equity compensation plans not approved by security holders (2) | 4,035,001 | $ | 0.07 | N/A | ||||||
| Total | 7,520,000 | N/A | ||||||||
(1) Represents awards under our 2012 Stock Incentive Plan which was initially adopted with shareholder approval, and amended on June 21, 2016 without shareholder approval (as amended, the “2012 Incentive Plan”). Below is a brief description of the material terms of the 2012 Incentive Plan and the awards that may be granted thereunder.
(2) Consists of options and warrants issued to consultants of the Company in consideration of services with exercise prices between $0.05 and $0.10 per share. For additional details see Note 11 to the accompanying financial statements.
| 9 |
2012 Incentive Plan
Effective Date and Expiration. The 2012 Incentive Plan, as amended, became effective on March 5, 2012, and terminated on March 5, 2022. No award may be made under the Incentive Plan after its expiration date, but awards made prior thereto may extend beyond that date.
Share Authorization. The maximum aggregate number of Shares which may be issued pursuant to awards granted under the 2012 Incentive Plan is Eleven Million Five Hundred Thousand (11,500,000) shares. Prior to its amendment in June 2016, Three Million shares had been authorized for issuance under the 2012 Plan.
General; Types of Awards. The 2012 Incentive Plan provides for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights (“SARs”) and restricted stock units (rights to receive, in cash or stock, the market value of one share of our commons stock). Incentive stock options (“ISOs”) may be granted only to employees. Nonstatutory stock options and other stock-based awards may be granted to officers, employees, non-employee directors and consultants.
Administration. The 2012 Incentive Plan will be administered by our board of directors or a committee of our board of directors (the “Administrator”) as provided in the 2012 Incentive Plan. The Administrator will have the authority to select the eligible participants to whom awards will be granted, to determine the types of awards and the number of shares covered and to set the terms, conditions and provisions of such awards, to cancel or suspend awards under certain conditions, and to accelerate the exercisability of awards. The Administrator will be authorized to interpret the 2012 Incentive Plan, to establish, amend, and rescind any rules and regulations relating to the 2012 Incentive Plan, to determine the terms of agreements entered into with recipients under the 2012 Incentive Plan, and to make all other determinations that may be necessary or advisable for the administration of the 2012 Incentive Plan.
Eligibility. Options and other awards may be granted under the 2012 Incentive Plan to directors, officers, employees and consultants of our company and any of our subsidiaries, provided that the services of such consultants are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for our securities. At the date of this prospectus, all of our officers, directors and employees would have been eligible to receive awards under the 2012 Incentive Plan.
Stock Options. The exercise price per share of our common stock purchasable upon exercise of any stock option or SAR will be determined by the Administrator, but cannot in any event be less than 100% of the fair market value of our common stock on the date the award is granted. The Administrator will determine the term of each stock option or SAR (subject to a maximum term of 10 years) and each option or SAR will be exercisable pursuant to a vesting schedule determined by the Administrator. The grants and the terms of ISOs will be restricted to the extent required for qualification as ISOs by the U.S. Internal Revenue Code of 1986, as amended. Subject to approval of the Administrator, options or SARs may be exercised by payment of the exercise price in cash, shares of common stock or pursuant to a “cashless exercise” through a broker-dealer under an arrangement approved by the Administrator. The Administrator may require the grantee to pay to us any applicable withholding taxes that we are required to withhold with respect to the grant or exercise of any option. The withholding tax may be paid in cash or, subject to applicable law, the Administrator may permit the grantee to satisfy these obligations by the withholding or delivery of shares of our common stock. We may withhold from any shares of our common stock that may be issued pursuant to an option or from any cash amounts otherwise due from us to the recipient of the option an amount equal to such taxes.
Restricted Stock. Restricted shares may be sold or awarded for consideration determined by the Administrator, including cash, full-recourse promissory notes, as well as past and future services. Any award of restricted shares will be subject to a vesting schedule determined by the Administrator. Any restricted shares that are not vested will be subject to rights of repurchase, rights of first refusal or other restrictions as determined by the Administrator. In general, holders of restricted shares will have the same voting, dividend and other rights as our other stockholders.
Adjustments upon Changes in Capitalization. In the event of any change affecting shares of our common stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distribution to stockholders other than cash dividends, the Administrator will make substitutions or adjustments in the aggregate number of shares that may be distributed under the 2012 Incentive Plan, and in the number and types of shares subject to, and the exercise prices under, outstanding awards granted under the 2012 Incentive Plan, in accordance with Section 10 and other provisions of the 2012 Incentive Plan.
Assignment. Unless otherwise permitted by the 2012 Incentive Plan and approved by the Administrator as permitted by the 2012 Incentive Plan, no award will be assignable or otherwise transferable by the grantee other than by will or the laws of descent and distribution and, during the grantee’s lifetime, an award may be exercised only by the grantee.
Amendment. Our board of directors may amend the 2012 Incentive Plan in any and all respects without stockholder approval, except as such stockholder approval may be required under applicable law or pursuant to the listing requirements of any national market system or securities exchange on which our equity securities may be listed or quoted.
Recent Sales of Unregistered Securities
On July 25, 2022, we sold 1,000 shares of our newly designated Series C Preferred Stock to Todd Denkin, our President, for a purchase price of $0.10 per share, in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof.
ITEM 6. Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| 10 |
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended September 30, 2022 and 2021. The discussion and analysis that follows should be read together with the section entitled “Forward Looking Statements” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K.
Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report.
Overview
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) supports the cannabis industry’s best practices for reliable testing, cannabis education and training, and brings unbiased cannabis news coverage to the cannabis industry. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
Critical Accounting Policies
The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions.
Basis of Accounting
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. Intercompany accounts and transactions have been eliminated. All references to GAAP are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Fair Value of Financial Instruments
The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
| - | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| - | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| - | Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
| 11 |
The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
Fixed Assets
Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:
| Software | 3 years | |||
| Office equipment | 5 years | |||
| Furniture and fixtures | 5 years | |||
| Lab equipment | 7 years | |||
| Leasehold improvements | Term of lease |
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.
Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Revenue Recognition
Effective October 1, 2018, the Company adopted ASC 606 - Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 - Revenue Recognition. Under ASC 605, revenue was recognized when the following criteria had been met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
Our revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.
Advertising Costs
The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $58,739 and $28,066 for the years ended September 30, 2022 and 2021, respectively.
| 12 |
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2022 and 2021, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
The Company accounts for equity-based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Uncertain Tax Positions
In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
| 13 |
Results of Operations
The following table shows operating results for the years ended September 30, 2022 and 2021.
| Years Ended September 30, | Increase / | |||||||||||
| 2022 | 2021 | (Decrease) | ||||||||||
| Revenues | $ | 2,699,920 | $ | 2,503,800 | $ | 196,120 | ||||||
| Cost of sales | 1,633,972 | 1,788,635 | (154,663 | ) | ||||||||
| Gross profit | 1,065,948 | 715,165 | 350,783 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 1,359,005 | 934,143 | 424,862 | |||||||||
| Professional fees | 656,860 | 581,635 | 75,225 | |||||||||
| Bad debts expense (recovery) | 64,427 | (28,165 | ) | 92,592 | ||||||||
| Total operating expenses: | 2,080,292 | 1,487,613 | 592,679 | |||||||||
| Operating loss | (1,014,344 | ) | (772,448 | ) | (241,896 | ) | ||||||
| Total other income (expense) | (1,042,774 | ) | 85,945 | (1,128,719 | ) | |||||||
| Net loss | $ | (2,057,118 | ) | $ | (686,503 | ) | $ | (1,370,615 | ) | |||
Revenues
Aggregate revenues for the year ended September 30, 2022 were $2,699,920, compared to revenues of $2,503,800 during the year ended September 30, 2021, an increase of $196,120, or 8%. The increase in revenue was due to an increase in Nevada tourism and our customers’ cash flows during the current period.
Cost of Sales
Cost of sales for the year ended September 30, 2022 were $1,633,972, compared to $1,788,635 during the year ended September 30, 2021, a decrease of $154,663, or 9%. Cost of sales consists primarily of labor, depreciation and 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 40% and 29% during the years ended September 30, 2022 and 2021, respectively, translated to $350,783 of increased gross profit in the current period.
General and Administrative Expenses
General and administrative expenses for the year ended September 30, 2022 were $1,359,005, compared to $934,143 during the year ended September 30, 2021, an increase of $424,865, or 45%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included stock-based compensation paid to officers of $454,238 during the year ended September 30, 2022, compared to $50,856 during the year ended September 30, 2021, an increase of $403,382. 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 year ended September 30, 2022 were $656,860, compared to $581,635 during the year ended September 30, 2021, an increase of $75,225, or 13%. Professional fees increased primarily due to increased use of corporate consulting services during the current period. Stock-based compensation was $106,994 during the year ended September 30, 2022, compared to $241,582 during the year ended September 30, 2021, a decrease of $134,588.
| 14 |
Bad Debt Expense
Bad debt expense for the year ended September 30, 2022 was $64,427, compared to bad debt recovery for the year ended September 30, 2021 of $28,165, an increase of $92,592. Our change in allowance for doubtful accounts was a result of collection issues from various customers. Our allowance for doubtful accounts on trade receivables was $139,279 and $87,795 at September 30, 2022 and 2021, respectively, or approximately 5% and 4% of sales for the years ended September 30, 2022 and 2021, respectively.
Operating Loss
Operating loss for the year ended September 30, 2022 was $1,014,344, compared to $772,448 during the year ended September 30, 2021, an increase of $241,896, or 31%. Operating loss increased primarily due to increased general and administrative, professional fees and bad debts expense, during the year ended September 30, 2022, compared to the year ended September 30, 2021.
Other Income (Expense)
Other expense, on a net basis, for the year ended September 30, 2022 was $1,042,774, compared to other income of $85,945 during the year ended September 30, 2021, a decrease of $1,128,719. Other expense during the year ended September 30, 2022 consisted of $260,274 of interest expense and a credit loss of $782,500. Other income during the year ended September 30, 2021 consisted of a $222,393 gain on the settlement of debt, interest income of $929, and settlement of accounts payable of $7,580, as offset by $144,957 of interest expense.
Net Loss
Net loss for the year ended September 30, 2022 was $2,057,118, compared to $686,503 during the year ended September 30, 2021, an increase of $1,370,615, or 200%. The increased net loss was due primarily to larger professional fees and an increase in other expenses.
Liquidity and Capital Resources
As of September 30, 2022, the Company had current assets of $562,104, comprising of cash of $56,168, accounts receivable of $335,085, other assets of $45,710, a note receivable of $100,000 and deposits of $25,141. The Company’s current liabilities as of September 30, 2022 were $2,953,909, consisting of $550,467 of accounts payable, $378,368 of accrued expenses, the current portion of operating lease liabilities in the amount of $100,685, the current maturities of convertible notes payable of $1,198,469, and the current maturities of notes payable in the amount of $725,920
The following table summarizes our total current assets, liabilities and working capital at September 30, 2022 and 2021.
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Current Assets | $ | 562,104 | $ | 826,865 | ||||
| Current Liabilities | $ | 2,953,909 | $ | 2,014,384 | ||||
| Working Capital | $ | (2,391,805 | ) | $ | (1,187,519 | ) | ||
| 15 |
The following table summarizes our cash flows during the years ended September 30, 2022 and 2021, respectively.
| Years Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used) in operating activities | $ | (184,786 | ) | $ | (135,968 | ) | ||
| Net cash (used) in investing activities | (660,371 | ) | (286,206 | ) | ||||
| Net cash provided by financing activities | 605,393 | 635,357 | ||||||
| Net change in cash | $ | (239,764 | ) | $ | (135,968 | ) | ||
Net Cash Used in Operating Activities
The increase in funds used in operating activities for the year ended September 30, 2022, compared to the year ended September 30, 2021, 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
The increase in funds used in investing activities for the year ended September 30, 2022, compared to the year ended September 30, 2021, was due primarily to loans we made in connection with a potential acquisition that we did not close, offset by proceeds received from the sale of equipment held as collateral securing that loan.
Net Cash Provided by Financing Activities
The decrease in funds provided by financing activities for the year ended September 30, 2022, compared to the year ended September 30, 2021, was primarily due to increased payments we made on our outstanding convertible notes in the year ended September 30, 2022.
Satisfaction of our Cash Obligations for the Next 12 Months
As of September 30, 2022, our balance of cash on hand was $56,168. We do not currently have sufficient funds to fund our operations at their current levels for the next twelve months. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to continue to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to achieve sustainable revenues and profitable operations. Since inception, we have raised funds primarily through the sale of equity securities. We will need and are currently seeking additional funds to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. If we are unable to obtain additional funds, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
| 16 |
ITEM 8. Financial Statements and Supplementary Data
DIGIPATH, INC. & SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2022 AND 2021
TABLE OF CONTENTS
| 17 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Digipath, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Digipath, Inc. (“the Company”) as of September 30, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended September 30, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has recurring losses from operations and insufficient working capital, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Black Scholes Calculations
As discussed in Note 10 of the consolidated financial statements, the Company utilizes Black Scholes calculations to determine fair value of the Company’s stock compensation.
Auditing management’s calculations of fair value of stock options involves significant judgements and estimates to determine the proper value. Volatility and term are the major assumptions used by management in determining the value of the stock options.
To evaluate the appropriateness of the fair value calculation, we evaluated management’s significant judgements and estimates in what inputs were utilized within the Black Scholes calculations.
| /s/
| |
| We have served as the Company’s auditor since 2017. | |
| January 17, 2023 | |
| F-1 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | September 30, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Deposits | ||||||||
| Note receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Right-of-use asset | ||||||||
| Fixed assets, net | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of finance lease liabilities | ||||||||
| Current maturities of notes payable | ||||||||
| Current maturities of convertible notes payable, net of discounts of $ | ||||||||
| 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 September 30, 2022 and 2021 respectively | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Series A convertible preferred stock, $ par value, shares authorized; and shares issued and outstanding at September 30, 2022 and 2021, respectively | ||||||||
| Series C convertible preferred stock, $ par value, shares authorized; and shares issued and outstanding as of September 30, 2022 and 2021 respectively | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding at September 30, 2022 and 2021, respectively | ||||||||
| Common stock Payable | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Professional fees | ||||||||
| Bad debts expense (recovery) | ( | ) | ||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Gain on settlement of debt | ||||||||
| Other income | ||||||||
| Credit loss | ( | ) | ||||||
| Total other income (expense) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Preferred deemed dividend | ( | ) | ||||||
| Net loss to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Net loss to common shareholders per share - basic and fully diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding - basic and fully diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| Series B Convertible | Series A Convertible | Series C | Additional | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Payable | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
| Common stock sold for cash | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible notes payable | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Series B Preferred shares | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred into Series B Preferred | ( | ) | ( | ) | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred C Shares | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of accounts payable | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Common shares to be issued for debt discount | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend on preferred exchange | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended | ||||||||
| September 30, | ||||||||
| 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 | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Gain on settlement of debt | ( | ) | ||||||
| Credit loss | ||||||||
| 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 | ||||||||
| 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 | ||||||||
| Repayments of notes payable | ( | ) | ||||||
| Proceeds from convertible notes | ||||||||
| Repayments 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 settlement of payables | $ | $ | ||||||
| Conversion of Series A preferred into Series B preferred | $ | $ | ||||||
| Deemed dividend on preferred exchange | $ | 192,154 | $ | - | ||||
| Subscription receivable for Series C preferred stock | $ | $ | ||||||
| Fixed assets transferred to settle accounts payable | $ | $ | ||||||
| Common stock issued for debt conversion | $ | $ | ||||||
| Transfer of notes payable and accrued interest into convertible notes payable | $ | $ | ||||||
| Stock payable issued for debt discounts on convertible notes payable | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
DIGIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory and data analytics company focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015 and has plans to open labs in other states and countries that have legalized the sale of cannabis, beginning with California.
Basis of Accounting
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”). Intercompany accounts and transactions have been eliminated. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control and ownership at September 30, 2022:
| Jurisdiction of | ||||
| Name of Entity | Incorporation | Relationship | ||
| (1) | |
| (2) | |
| (3) | |
| (4) |
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.
| F-6 |
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Segment Reporting
ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Fair Value of Financial Instruments
The Company adopted ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
| - | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
| - | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
| - | Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. |
The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
Accounts Receivable
Accounts
receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability
based on past credit history with customers and their current financial condition. The Company had an allowance for doubtful accounts
of $
The
Company had two customers representing
Notes Receivable
Notes receivable are reported in our consolidated balance sheets at the outstanding principal balance, plus costs incurred to originate the loans, net of any unamortized premiums or discounts on purchased loans. We use the effective interest rate method to recognize finance income, which produces a constant periodic rate of return on the investment. Unearned income, discounts and premiums are amortized to finance income in our consolidated statements of operations using the effective interest rate method. Interest receivable related to the unpaid principal is recorded together with the outstanding balance in our consolidated balance sheets. Upon the prepayment of a note receivable, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as part of finance income in our consolidated statements of operations.
| F-7 |
Fixed Assets
Fixed assets are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy:
| Software | ||
| Office equipment | ||
| Furniture and fixtures | ||
| Lab equipment | ||
| Leasehold improvements |
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation and amortization are eliminated and any resulting gain or loss is reflected in operations.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations.
Our intellectual property is comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
Revenue Recognition
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.
Our revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.
Advertising Costs
The
Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended September 30, 2022 and 2021, potential dilutive securities of and shares issuable upon conversion of convertible notes payable, and shares issuable upon exercise of options, and shares issuable upon exercise of warrants, and and upon conversion of Preferred A and Preferred B shares, respectively, had an anti-dilutive effect and were t included in the calculation of diluted net loss per common share.
| F-8 |
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Uncertain Tax Positions
In accordance with ASC 740, “Income Taxes” (“ASC 740”), the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU 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 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact that this ASU may have on its consolidated financial statements.
Note 2 – Going Concern
As
shown in the accompanying consolidated financial statements, the Company has incurred recurring losses from operations resulting in an
accumulated deficit of $
The consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
| F-9 |
Note 3 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has certain financial instruments that must be measured under the new fair value standard. The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2022 and 2021, respectively:
| Fair Value Measurements at September 30, 2022 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Lease liabilities | ||||||||||||
| Notes payable | ||||||||||||
| Convertible notes payable, net of discounts of $ | ||||||||||||
| 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 is 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 years ended September 30, 2022 or 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 September 30, 2022, we loaned C3 Labs, Inc. (“C3 Labs”) a total of $
| F-10 |
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. As of September 30, 2022, the Company had sold a portion
of C3 Labs’ equipment for proceeds of $
Note 5 – Fixed Assets
Fixed assets consist of the following at September 30, 2022 and 2021:
| As of | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| 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 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:
| For the | For the | |||||||
| Year Ended | Year Ended | |||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
| Total net lease cost | ||||||||
| F-11 |
Supplemental balance sheet information related to leases was as follows:
| September 30, | September 30, | |||||||
| 2022 | 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 | $ | $ | ||||||
| Total finance lease liabilities | $ | $ | ||||||
| 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 | For the | |||||||
| Year Ended | Year Ended | |||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows provided by sublet operating leases | $ | $ | ||||||
| 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 | $ | $ | ||||||
| F-12 |
The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities on a fiscal year basis, including common area maintenance fees, under non-cancelable operating leases as of September 30, 2021:
| Fiscal Year Ending | Minimum Lease | |||
| September 30, | Commitments | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total future undiscounted lease payments | ||||
| Less interest | ||||
| Present value of lease payments | ||||
| Less current portion | ||||
| Long-term operating lease liabilities | $ | |||
Note 7 –Notes Payable
Notes payable consists of the following at September 30, 2022 and 2021, respectively:
| September 30, 2022 | September 30, 2021 | |||||||
| On September 10, 2021, the Company issued a Secured Promissory note in the principal
amount of $ | $ | $ | ||||||
| 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 $
| F-13 |
Note 8 – Convertible Notes Payable
Convertible notes payable consist of the following at September 30, 2022 and 2021, respectively:
| September 30, | September 30, | |||||||
| 2022 | 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 | ( | ) | ( | ) | ||||
| Less: current maturities | ||||||||
| Convertible notes payable | $ | $ | ||||||
| F-14 |
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 years ended September 30, 2022 and 2021, respectively, as follows:
September 30, 2022 | September 30, 2021 | |||||||
| 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 9 – Stockholders’ Equity
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”), have been designated as Series B Convertible Preferred Stock (“Series B Preferred”), and shares have been designated as Series C Preferred Stock (“Series C Preferred”) with the remaining shares available for designation from time to time by the Board as set forth below. As of September 30, 2022, there were shares of Series A Preferred issued and outstanding, shares of Series B Preferred issued and outstanding and shares of Series C 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. The Series C Preferred is not convertible into common stock.
Series A Preferred
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 September 30, 2022 are convertible into shares of the common stock of the Company.
Additional terms of the Series A Preferred include the following:
| ● | The shares of Series A
Preferred are entitled to dividends when, as and if declared by the Board as to the shares of the common stock of the Company into
which such Series A Preferred may then be converted, subject to the |
| ● | 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. |
| F-15 |
| ● | 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 year ended September 30, 2022,
Series B Preferred
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 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 $.
| F-16 |
Series C Preferred
The
Series C Preferred were designated on July 20, 2022. The principal feature of the Series C Preferred is that it provides the holder thereof,
so long as he or she is an executive officer of the Company, with the ability to vote with the holders of the Company’s common
stock on all matters presented to the holders of common stock, whether at a special or annual meeting, by written action in lieu of a
meeting or otherwise, on the basis of
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 Series C Preferred for a purchase price of $ per share. The Company determined that the shares had value in excess of the stated value in the amount of $, which the Company recorded as compensation expense to the officer
Common Stock
Common stock consists of $ par value, shares authorized, of which shares were issued and outstanding as of September 30, 2022.
Common Stock Transactions for the Year Ended September 30, 2022
During
the year ended September 30, 2022, the Company issued shares of its common stock in exchange for services rendered to the Company,
by its chief financial officer, with a total fair value of $
During
the year ended September 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 year ended September 30, 2022, the Company issued
In
connection with the Convertible Note extensions as described in Note 8, the Company was to issue,
shares of common stock to the lenders as additional incentive. As of September 30, 2022, these shares have not yet been issued and
as such are recorded as a stock payable with a fair value of $
Common Stock Transactions for the Year Ended September 30, 2021
On
December 30, 2020, the Company sold shares of its common stock to its Chairman of the Board in exchange for proceeds of $
During
the year ending September 30, 2021 the Company issued shares of its common stock in exchange for services rendered to the Company
with a total fair value of $
During
the year ending September 30, 2021 the Company issued shares of its common stock upon the conversion of $
Amortization of Stock-Based Compensation
A total of $of stock-based compensation expense was recognized during the year ended September 30, 2022 as a result of the issuance of shares of common stock, as amortized over the requisite service period.
| F-17 |
A total of $ of stock-based compensation expense was recognized during the year ended September 30, 2021 as a result of the issuance of shares of common stock, as amortized over the requisite service period.
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 terminated on March 5, 2022. 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.
Common Stock Option Issuances
During the year ended September 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 $. The Company estimated the fair value using the Black-Scholes Pricing Model, based on a volatility rate of % and call option values of $ and exercise prices of $, and vesting immediately.
During
the year ending September 30, 2021 the Company issued 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 year ended September 30, 2022 and 2021, respectively, as a result of the vesting of common stock options issued. As of September 30, 2022 a total of $ of unamortized expense remains to amortized over the vesting period.
| 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 | $ | $ | ||||||||||||||||||
| F-18 |
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Average risk-free interest rates | % | % | ||||||
| Average expected life (in years) | ||||||||
| Volatility | % | % | ||||||
The Black-Scholes option pricing model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company’s common stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its common stock options. During the years ended September 30, 2022 and September 30, 2021, there were options granted with an exercise price below the fair value of the underlying stock at the grant date.
The weighted average fair value of options granted with exercise prices at the current fair value of the underlying stock during the year ended September 30, 2022 was approximately $ per option.
The following is a summary of activity of outstanding common stock options:
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2020 | $ | |||||||
| Options issued | ||||||||
| Options repurchased/expired | ) | ) | ||||||
| Balance, September 30, 2021 | $ | |||||||
| Options issued | ||||||||
| Options forfeited | ( | ) | ) | |||||
| Balance, September 30, 2022 | $ | |||||||
| Exercisable, September 30, 2022 | $ | |||||||
As of September 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 $.
Note 11 – Common Stock Warrants
Warrants
to purchase a total of
During
the year ended September 30, 2022, warrants to purchase an aggregate total of
During
the year ended September 30, 2021, warrants to purchase an aggregate total of
The following is a summary of information about our warrants to purchase common stock outstanding at September 30, 2022 (including those issued to both investors and service providers).
| F-19 |
| 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 fair value of each warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plan:
The following is a summary of activity of outstanding common stock warrants:
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2020 | $ | |||||||
| Warrants granted | ||||||||
| Warrants expired | ( | ) | ( | ) | ||||
| Balance, September 30, 2021 | $ | |||||||
| Warrants granted | ||||||||
| Warrants expired | ( | ) | ( | ) | ||||
| Balance, September 30, 2022 | $ | |||||||
| Exercisable, September 30, 2022 | $ | |||||||
As of September 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 - Income Tax
The Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences.
For
the years ended September 30, 2022 and 2021, the Company incurred a net operating loss and, accordingly, no provision for income taxes
has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets.
At September 30, 2022, the Company had approximately $
| F-20 |
The effective income tax rate for the years ended September 30, 2022 and 2021 consisted of the following:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Federal statutory income tax rate | % | % | ||||||
| State income taxes | % | % | ||||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Net effective income tax rate | ||||||||
The components of the Company’s deferred tax asset are as follows:
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry forwards | $ | $ | ||||||
| Net deferred tax assets before valuation allowance | $ | $ | ||||||
| Less: Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
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 September 30, 2022 and 2021, respectively.
In accordance with FASB ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note 14 – Subsequent Events
On
October 1, 2022, the Company amended the outstanding convertible promissory notes dated September 30, 2021 to extend the maturity date
of December 30, 2022 to
On
October 1, 2022, the Company amended the outstanding convertible promissory notes dated November 18, 2018 to extend the maturity date
of December 30, 2022 to
On
October 1, 2022, the Company issued a convertible promissory note in exchange for various advances made to the Company in the aggregate
amount of $
On
December 5, 2022, the Company entered into an Asset Purchase Agreement in which the Company sold the remaining collateralized assets
held under the C3 Labs note receivable for a total purchase price of the $
| F-21 |
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022 (the “Evaluation Date”). 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 September 30, 2022, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our Principal Executive Officer and our Principal Accounting Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of Evaluation Date. Management’s assessment of internal control over financial reporting was conducted using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we have identified the following material weaknesses in our internal control over financial reporting as of the Evaluation Date.
| - | Lack of segregation of duties in financial reporting, as our financial reporting and all accounting functions are performed by our Officers. | |
| - | Lack of a formal review process that includes multiple levels of review, as all accounting and financial reporting functions are performed by our Officers and the work is not reviewed by anyone. |
We have thus concluded that our internal control over financial reporting was not effective as of the Evaluation Date.
| 18 |
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
There have been no 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 fourth fiscal quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Set forth below are the present directors and executive officers of the Company. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer.
| Name | Age | Position | ||
| Todd Denkin | 60 | President | ||
| A. Stone Douglass | 75 | Chairman and CFO | ||
| Bruce Raben | 70 | Director | ||
| Dennis Hartman | 67 | Director |
Biographies
Set forth below are brief accounts of the business experience of each director and executive officer of the Company.
Todd Denkin was appointed as President on July 1, 2021. Mr. Denkin has many years of experience in the “legal” marijuana industry, and has in the past been an integral part of the Company’s management. Mr. Denkin originally joined the Company in April 2014 as President, and served as the Company’s Chief Executive Officer from October 2014 until June 21, 2016. He then served as the Company’s President and Chief Operating Officer until September 26, 2019, and was thereafter a consultant to the Company until December 2019. From January 2020 until December 2020 when he was re-engaged by the Company as a consultant, Mr. Denkin provided consulting services to cannabis producers, and was active as a cannabis testing educator and content provider. Prior to joining the Company in April 2014, Mr. Denkin served as co-founder and president of both 10 Mile and Growopp, LLC where he created controlled environmental indoor hydroponic grow chambers from 2011 to 2013.
A. Stone Douglass was appointed a director of the Company on July 1, 2021, as our Chief Financial Officer on August 16, 2021, and as Chairman of the Board of Directors on October 21, 2021 Mr. Douglass has been: the Chief Executive Officer of GeoSolar Technologies, Inc., a company planning to install natural energy systems, since December 2020; the Chief Financial Officer of David Kind, Inc., a Venice, California based online eyewear brand, since June 2013; the Chairman and Chief Executive Officer of Sealand Natural Resources, Inc., a manufacturer and purveyor of Sealand Birk birch water and other alternative beverages, since March 2016; the Chief Financial Officer of P5 Systems, Inc., a San Diego based technology platform known as the Craig’s List of cannabis, servicing the legal cannabis value chain, since March 2018;; and the principal owner of Ducks Nest Investments Inc, a private investment company, since September 1990. We believe that Mr. Douglass’s financial and business experience qualify him to serve as our director.
| 19 |
Bruce Raben was appointed to our Board of Directors on September 12, 2018. Mr. Raben is the Managing Member of Hudson Capital Advisors BD, LLC, a registered broker dealer that he founded in 2004. Mr. Raben has been an investment banker, merchant banker and private investor for approximately 30 years. Starting in 1979 at Drexel Burnham Lambert, he worked on many leveraged buyouts and recapitalizations including Mattel Toys, SFN Co.’s, Magma Copper, Warnaco, Mellon Bank and John Fairfax. Mr. Raben then went on to co-found the Corporate Finance Department at Jeffries & Co. in 1990. Mr. Raben opened a west coast office for CIBC’s high yield finance and merchant banking activities in 1996. Mr. Raben received his A.B. from Vassar College in 1975 and his MBA from Columbia University in 1979. We believe that Mr. Raben’s investment banking and financial experience qualify him to serve as our director.
Dennis Hartmann was appointed to our Board of Directors on September 25, 2019 and as Interim President on August 14, 2020. Mr. Hartmann resigned as Interim President on July 1, 2021. Mr. Hartmann had been an attorney engaged in private practice in the State of California for over 35 years. Mr. Hartmann holds a B.S. from the University of Alabama and a J.D. from the University of Texas School of Law. We believe that Mr. Hartmann’s legal experience qualifies him to serve as our director.
Family Relationships
None.
Board Committees and Audit Committee Financial Expert
We do not currently have a standing audit, nominating or compensation committee of the board of directors, or any committee performing similar functions. Our board of directors performs the functions of audit, nominating and compensation committees. As of the date of this prospectus, no member of our board of directors qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act.
Director Nominations
As of September 30, 2022, we did not affect any material changes to the procedures by which our shareholders may recommend nominees to our board of directors. We have not established formal procedures by which security holders may recommend nominees to the Company’s board of directors.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10% of a registered class of the Company’s securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors, executive officers and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. To our knowledge, based solely on the review of the copies of these forms furnished to us and representations that no other reports were required, the Company believes that all forms required to be filed under Section 16 of the Exchange Act for the year ended September 30, 2022 were filed timely.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officers, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our code of ethics may be obtained free of charge by contacting us at the address or telephone number listed on the cover page hereof.
| 20 |
ITEM 11. Executive Compensation
Summary Compensation Table
The following summary compensation table sets forth the aggregate compensation we paid or accrued during the fiscal years ended September 30, 2022 and September 30, 2021 to persons serving as our Chief Executive Officer and Chief Financial Officer during our year ended September 30, 2022 (our “Named Executive Officers”), who were our only executive officers during 2022, as none of our other officers earned total compensation in excess of $100,000 during our last completed fiscal year.
| Fiscal | Stock | Option | All Other | ||||||||||||||||||||
| Name and Financial Position | Year | Salary | Awards(6) | Awards | Compensation | Total | |||||||||||||||||
| Todd Denkin(1) | 2022 | $ | 150,000 | $ | - | $ | - | $ | - | $ | 150,000 | ||||||||||||
| President | 2021 | 37,500 | 107,975 | (2) | 48,000 | (3) | 193,475 | ||||||||||||||||
| A. Stone Douglass(4) | 2022 | 50,000 | 52,500 | (5) | - | - | 102,500 | ||||||||||||||||
| Chief Financial Officer | 2021 | - | - | - | - | - | |||||||||||||||||
| (1) | Mr. Denkin was appointed President on July 1, 2021. |
| (2) | Amount relates to 1,500,000 shares of Common Stock issued to Mr. Denkin on July 1, 2020 upon his appointment as President and 500,000 shares of Common Stock issued to Mr. Denkin under his Consulting Agreement with the Company during the year ended September 30, 2021 for services rendered prior to his appointment as President. |
| (3) | Consists of consulting fees paid to TD Media, an entity controlled by Todd Denkin, prior to his appointment as President of Company. |
| (4) | Mr. Douglass was appointed Chief Financial Officer on August 16, 2021. |
| (5) | Amount relates to 1,500,000 shares of Common Stock issued to Mr. Douglass on October 21, 2021 upon his appointment as Chief Financial Officer. |
Employment Agreements
We are not party to an employment agreement with Todd Denkin
Outstanding Equity Awards
The following table sets forth information with respect to unexercised stock options, stock that has not vested, and equity incentive plan awards held by our Named Executive Officers at September 30, 2022.
| 21 |
| Outstanding Option Awards at Fiscal Year-End | ||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price | Option Expiration Date | ||||||||||
| Todd Denkin, President | - | - | $ | - | N/A | |||||||||
| A. Stone Douglass | 678,571 | 321,429 | 0.06 | June 2, 2031 | ||||||||||
Option Exercises and Stock Vested
None of our Named Executive Officers exercised any stock options or acquired stock through vesting of an equity award during the year ended September 30, 2022.
Director Compensation
The following table summarizes the compensation paid or accrued by us to our directors that are not Named Executive Officers for the year ended September 30, 2022.
| Name | Fees Earned or Paid in Cash | Stock Award | Option Awards | Non-Equity Incentive Compensation | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All other Compensation | Total | |||||||||||||||||||||
| Bruce Raben(1) | $ | 30,000 | $ | - | $ | $ | - | $ | - | $ | 36,000 | $ | 92,260 | |||||||||||||||
| Dennis Hartmann(2) | $ | 18,000 | $ | - | $ | $ | - | $ | - | $ | - | $ | 18,000 | |||||||||||||||
| (1) | We have agreed to compensate Mr. Raben a total of $7,500 in cash per quarter for his service as a director. “All other compensation” consists of cash payments for consulting fees. |
| (2) | We have agreed to compensate Mr. Hartmann a total of $4,500 in cash per quarter for his service as a director. |
Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors.
| 22 |
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 27, 2021, certain information with regard to the record and beneficial ownership of the Company’s common stock by (i) each person known to the Company to be the record or beneficial owner of 5% or more of the Company’s common stock, (ii) each director of the Company, (iii) each of the named executive officers, and (iv) all executive officers and directors of the Company as a group. The address of each of our directors and executive officers named in the table is c/o Digipath, Inc., 6450 Cameron Street, Suite 113, Las Vegas, Nevada 89118:
| Series A | ||||||||||||||||
| Common Stock | Preferred Stock | |||||||||||||||
| Name of Beneficial Owner(1) | Number of Shares | % of Class(2) | Number of Shares | % of Class | ||||||||||||
| Officers and Directors: | ||||||||||||||||
| Dennis Hartmann Director(3) | 575,000 | * | - | - | ||||||||||||
| Todd Denkin, President | 2,308,824 | 3.1 | % | - | - | |||||||||||
| Bruce Raben, Director(4) | 3,890,000 | 5.1 | % | - | - | |||||||||||
| A. Stone Douglass, Chairman and CFO(5) | 2,392,857 | 3.2 | % | |||||||||||||
| Directors and Officers as a Group (4 persons) | 8,591,681 | 11.1 | % | - | - | |||||||||||
* less than 1%
| (1) | Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock or Series A Preferred Stock owned by such person. |
| (2) | Percentage of beneficial ownership is based upon 75,146,820 shares of Common Stock outstanding as of December 15, 2022. For each named person, this percentage includes Common Stock that the person has the right to acquire either currently or within 60 days of December 15, 2022, including through the exercise of an option; however, such Common Stock is not deemed outstanding for the purpose of computing the percentage owned by any other person. |
| (3) | Includes options to purchase 250,000 shares of common stock exercisable at $0.10 per share. |
| (4) | Includes options to purchase 500,000 shares of common stock exercisable at $0.13 per share, and options to purchase 1,000,000 shares of common stock exercisable at $0.10 per share. |
| (5) | Includes options to purchase 892,857 shares of common stock exercisable at $0.06 per share, |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Our board of directors currently consists of Bruce Raben, Dennis Hartmann and A. Stone Douglass. Our Board of Directors has determined that Mr. Raben and Mr. Hartmann, constituting a majority of our directors, are “independent” in accordance with the NASDAQ Global Market’s requirements. However, as our common stock is currently quoted on the OTCQB, we are not currently subject to corporate governance standards of listed companies.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
All audit work was performed by the full-time employees of M&K CPAS, PLLC (“M&K”) for the years ended September 30, 2022 and 2021. Our board of directors does not have an audit committee. The functions customarily delegated to an audit committee are performed by our full board of directors. Our board of directors approves in advance, all services performed by M&K. Our board of directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence and has approved such services.
The following table sets forth fees billed by our auditors during the last two fiscal years for services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, services by our auditors that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as audit fees, services rendered in connection with tax compliance, tax advice and tax planning, and all other fees for services rendered.
| 23 |
| Years Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Audit fees:(1) | $ | 41,200 | $ | 49,500 | ||||
| Audit related fees | - | - | ||||||
| Tax fees | - | - | ||||||
| All other fees | - | - | ||||||
| Total | $ | 41,200 | $ | 49,500 | ||||
(1) Audit fees were principally for audit services and work performed in the review of the Company’s quarterly reports on Form 10-Q
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
| 24 |
| 25 |
* Filed herewith.
| 26 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| DIGIPATH, INC. | ||
| (Registrant) | ||
| By: | /s/ Todd Denkin | |
| Todd Denkin | ||
| President | ||
| Dated: January 17, 2023 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ Todd Denkin | President | January 17, 2023 | ||
| Todd Denkin | (Principal Executive Officer) | |||
| /s/ A. Stone Douglass | Chief Financial Officer, Secretary and Chairman | January 17, 2023 | ||
| A. Stone Douglass | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Bruce Raben | Director | January 17, 2023 | ||
| Bruce Raben | ||||
| /s/ Dennis Hartman | Director | January 17, 2023 | ||
| Dennis Hartman |
| 27 |