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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
Quarterly Period Ended
or
For the transition period from __________ to __________
Commission
File Number
(Exact name of registrant issuer as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (zip code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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☒ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Smaller reporting company |
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| Emerging growth company |
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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 | ☐ |
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☒ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
The number of shares of registrant’s common stock outstanding as of February 14, 2024 was .
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS .
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2023 | September 30, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ |
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$ |
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Note receivable, net of allowance of $
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| Other current assets |
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| Assets held for sale - current |
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| Total current assets |
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| Assets held for sale – long term |
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| Total non-current assets |
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| Total Assets | $ |
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$ |
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| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ |
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$ |
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| Accrued expenses |
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| Accrued expenses – related party |
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| Current maturities of notes payable |
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| Current maturities of convertible notes payable, net of discounts |
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| Current maturities of convertible notes payable related parties, net of discounts |
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| Liabilities held for sale - current |
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| Total current liabilities |
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| Non-current liabilities: | ||||||||
| Liabilities held for sale – long term |
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| Total non-current liabilities |
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| Total Liabilities |
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| Series B convertible preferred stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2023 and September 30, 2023 |
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| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit: | ||||||||
| Series A convertible preferred stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2023 and September 30, 2023 |
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| Series C convertible preferred stock, $ par value, shares authorized; shares issued and outstanding as of December 31, 2023 and September 30, 2023, respectively | ||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding at December 31, 2023 and September 30, 2023, respectively |
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| Additional paid-in capital |
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| Accumulated deficit |
(
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(
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| Total Stockholders’ Deficit |
(
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(
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| Total Liabilities and Stockholders’ Deficit | $ |
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$ |
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See accompanying notes to unaudited consolidated financial statements.
| 3 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative |
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| Professional fees |
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| Total operating expenses |
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| Operating loss |
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| Other income (expense): | ||||||||
| Other Expense |
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| Other income |
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| Interest expense |
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| Total other expense |
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| Net loss from continuing operations |
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| Net income from discontinued operations |
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| Net income (loss) | $ |
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$ |
(
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| Weighted average number of common shares outstanding – basic |
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| Weighted average number of common shares outstanding – fully diluted |
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| Net loss per share from continuing operations – basic | $ |
(
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) | $ |
(
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| Net income per share from discontinued operations – basic | $ |
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$ |
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| Net income (loss) per share – basic | $ |
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$ |
(
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| Net loss per share from continuing operations – diluted | $ |
(
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) | $ |
(
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| Net income per share from discontinued operations – diluted | $ |
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$ |
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| Net income (loss) per share – diluted | $ |
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$ |
(
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See accompanying notes to unaudited consolidated financial statements.
| 4 |
DI GIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
|
Series B Convertible
Preferred Stock |
Series A Convertible
Preferred Stock |
Series C
Preferred Stock |
Common Stock | Stock |
Additional
Paid-in |
Accumulated |
Total
Stockholders’ |
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| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Payable | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ | $ |
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$ |
(
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) | $ |
(
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) | |||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - |
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| Net income | - | - | - | - |
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| Balance, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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) | $ |
(
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) | ||||||||||||||||||||||||||||||
|
Series B Convertible
Preferred Stock |
Series A Convertible
Preferred Stock |
Series C
Preferred Stock |
Common Stock | Stock |
Additional
Paid-in |
Accumulated |
Total
Stockholders’ |
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| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Payable | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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| Issuance of common shares to settle stock payable | - | - | - |
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| Warrants issued as debt financing costs | - | - | - | - |
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| Stock-based compensation | - | - | - | - |
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| Net loss | - | - | - | - |
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| Balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
(
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) | $ |
(
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See accompanying notes to unaudited consolidated financial statements.
| 5 |
DIGIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss from continuing operations | $ |
(
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) | $ |
(
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| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation |
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| Amortization of debt discounts |
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| Impairment of fixed assets |
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| Decrease (increase) in assets: | ||||||||
| Other current assets |
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| Increase (decrease) in liabilities: | ||||||||
| Accounts payable |
(
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| Accrued expenses |
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| Accrued expenses – related parties |
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| Net cash used in operating activities from continuing operations |
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| Net cash provided by operating activities from discontinued operations |
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| Net cash provided by operating activities |
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| Cash flows from investing activities | ||||||||
| Proceeds from sale of collateralized assets |
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| Net cash provided by (used in) investing activities from continuing operations |
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| Net cash used in investing activities from discontinued operations |
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| Net cash provided by (used in) investing activities |
(
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| Cash flows from financing activities | ||||||||
| Net cash used in financing activities from continuing operations | ||||||||
| Net cash used in financing activities from discontinued operations |
(
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(
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| Net cash used in financing activities |
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| Net increase (decrease) in cash |
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| Cash – beginning |
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| Cash – ending | $ |
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$ |
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| Supplemental disclosures: | ||||||||
| Interest paid | $ |
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$ |
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| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for settlement of stock payable | $ | $ |
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| Warrants issued for debt financing | $ | $ |
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| Receipt of assets on deposit | $ | $ |
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| Accounts payable and accrued interest added to note principal balance | $ |
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$ | |||||
See accompanying notes to unaudited consolidated financial statements.
| 6 |
DIGIPATH, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) is a service-oriented independent testing laboratory, data analytics and media firm focused on the developing cannabis and hemp markets, and supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Intercompany accounts and transactions have been eliminated.
The unaudited condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. Such adjustments are of a normal, recurring nature. The Condensed Consolidated Financial Statements, and the accompanying notes, are prepared in accordance with GAAP and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023. The interim Condensed Consolidated Financial Statements should be read in conjunction with that Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the following entities, all of which were under common control and ownership at December 31, 2023:
| Jurisdiction of | ||||
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The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company and subsidiaries will be collectively referred to herein as the “Company”, “Digipath” or “DIGP”. The Company’s headquarters are located in Las Vegas, Nevada and substantially all of its customers are within the United States.
| 7 |
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.
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. (“Digipath Labs”), 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.
For the three months ended December 31, 2023 and 2022, all revenues are classified as part of Net income from discontinued operations in the accompanying consolidated statement of operations
Discontinued Operations
On
April 20, 2023, the Company and Digipath Labs entered into an Asset Purchase Agreement (the “Purchase Agreement”) with DPL
NV, LLC (“Buyer”), pursuant to which Digipath Labs has agreed to sell substantially all of its assets to Buyer for a cash
purchase price of $
Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations in the Consolidated Balance Sheets as of December 31, 2023 and September 30, 2023. The results of discontinued operations are aggregated and presented separately in the Consolidated Statements of Operations as net income from discontinued operations for the periods ended December 31, 2023 and 2022. The cash flows of the discontinued operations are reflected as cash flows of discontinued operations within the Company’s Consolidated Statements of Cash Flows for the periods ended December 31, 2023 and 2022.
Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, results of operations, and cash flows of Digipath Labs. The discontinued operations exclude general corporate allocations.
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 three months ended December 31, 2023 and 2022, potential dilutive securities of shares issuable upon conversion of convertible notes payable, and , respectively, shares issuable upon exercise of options, shares issuable upon exercise of warrants, and shares issuable upon conversion of our Preferred A and Preferred B shares, respectively, had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
| 8 |
Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications had no effect on our previously reported results of operations or accumulated deficit.
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations, or cash flows.
Note 2 – Going Concern
As
shown in the accompanying consolidated financial statements,
as
of December 31,
2023, the Company had negative working capital of $
The consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Fair Value of Financial Instruments
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 December 31, 2023 and September 30, 2023, respectively:
| Fair Value Measurements at December 31, 2023 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ |
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$ | $ | ||||||||
| Liabilities | ||||||||||||
| Notes payable |
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Convertible notes payable, net of discounts of $
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| Fair Value Measurements at September 30, 2023 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ |
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$ | $ | ||||||||
| Liabilities | ||||||||||||
| Notes payable |
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Convertible notes payable, net of discounts of $
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There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the three months ended December 31, 2023.
| 9 |
Note 4 – Related Party Transactions
During
the three months ended December 31, 2023 the Company incurred compensation expense of $
During
the three months ended December 31, 2023 the Company accrued fees of $
As
of December 31, 2023, the Company has accrued a total of $
Note 5 – 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 $
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 and took possession of the equipment of C3 Labs (“C3 Equipment”).
On
December 8, 2022, the Company entered into an Asset Purchase Agreement with Invictus Wealth Group (“Invictus”), whereby the
Company agreed to sell the C3 Equipment to Invictus for a total purchase price of $
The Company recorded a full allowance against the Invictus Note, as of the transaction date, as collectability was not reasonably assured at of the transaction date.
| 10 |
Note 6 – Notes Payable
Notes payable consists of the following at December 31, 2023 and September 30, 2023, respectively:
|
December
31,
2023 |
September
30,
2023 |
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On
September 10, 2021, the Company issued a Secured Promissory note in the principal amount of $
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$ |
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$ |
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| Total notes payable |
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| Less: current maturities |
(
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(
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| Notes payable | $ | $ | ||||||
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The
Company recorded interest expense pursuant to the stated interest rate and closing costs on the notes payable in the amount of $
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| Notes payable – discontinued operations | ||||||||
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On
December 26, 2019, the Company financed the purchase of $
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Note 7 – Convertible Notes Payable
Related party convertible notes payable consist of the following at December 31, 2023 and September 30, 2023, respectively:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
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On February 10, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $
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$ |
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$ |
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| Total related party convertible notes payable |
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| Less: unamortized debt discounts |
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| Less: current maturities |
(
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(
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| Related party convertible notes payable | $ | $ | ||||||
| 11 |
Convertible notes payable consist of the following at December 31, 2023 and September 30, 2023, respectively:
| December 31, | September 30, | |||||||
| 2023 | 2023 | |||||||
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On February 11, 2020, the Company completed the sale to an accredited investor of a 9% Secured Convertible Promissory Note in the principal amount of $
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$ |
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$ |
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On February 11, 2020, the
Company completed the sale to an accredited investor of a 9% Secured Subordinated Convertible Promissory Note in the principal amount
of $
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On September 23, 2019,
the Company received proceeds of $
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On November 8, 2018, the
Company received proceeds of $
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On October 1, 2022,
the
Company entered into a senior secured convertible note that carries an
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On
November 5, 2018, the Company received proceeds of $
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| Total convertible notes payable |
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| Less: unamortized debt discounts |
(
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(
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| Less: current maturities |
(
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(
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| Convertible notes payable | $ | $ | ||||||
| 12 |
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 (except the related party convertible note) 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 three months ended December 31, 2023 and 2022, respectively, as follows:
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Interest on notes payable |
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| Amortization of beneficial conversion features |
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| Interest on convertible notes |
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| Total interest expense | $ |
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$ |
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Note 8 – 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 December 31, 2023, 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 the number of series into which the undesignated shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock. Each share of Series A Preferred is currently convertible into five shares of common stock and each share of Series B Preferred is currently convertible into twenty-five shares of common stock.
Series A
The
conversion price is adjustable in the event of stock splits and other adjustments in the Company’s capitalization, and in the event
of certain negative actions undertaken by the Company. At the current conversion price, the
shares of Series A Preferred outstanding
at December 31, 2023 are convertible into
shares of the common stock of the Company.
| 13 |
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. |
| ● |
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 , voting separately as a class, 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 various 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. |
Series C
The
shares of
Series C Preferred were designated on July 20, 2022
and
each share has a Stated Value of $
. The principal feature of the Series C Preferred Stock is that it provides
each
holder thereof, so long as he or she is an executive officer of the Company, with the ability to vote with the holders of
Additional terms of the Series C Preferred include the following:
| ● | The shares of Series C Preferred are not entitled to dividends. |
| ● |
|
| ● | The shares of Series C Preferred have no conversion rights. |
| 14 |
Common Stock
The Company has shares of common stock, par value $ per share, authorized of which shares were issued and outstanding as of December 31, 2023.
Note 9 – Mezzanine Equity
Series B
The
shares of
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 of shares of common stock into 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 shares of 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.
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.
| 15 |
Amortization of Stock-Based Compensation
A total of $ and $ of stock-based compensation expense was recognized during the three months ended December 31, 2023 and 2022, respectively, as a result of the vesting of common stock options issued in prior periods. As of December 31, 2023 additional amounts of unamortized expense remains to be amortized over the vesting period.
| Shares Underlying Options Outstanding | Shares Underlying 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 | $ | $ | ||||||||||||||||
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2023 | $ | |||||||
| Options issued | ||||||||
| Options forfeited | ||||||||
| Balance, December 31, 2023 |
|
$ | ||||||
| Exercisable, December 31, 2023 |
|
$ | ||||||
As of December 31, 2023, these options in the aggregate had $ of intrinsic value for the outstanding and exercisable options, based on the per share market price of $ of the Company’s common stock as of such date.
Note 11 – Common Stock Warrants
Warrants
to purchase a total of
The following is a summary of information about our warrants to purchase common stock outstanding at December 31, 2023 (including those issued to both investors and service providers).
| Shares Underlying | ||||||||||||||||||||
| Shares Underlying Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Shares | Average | Weighted | Shares | Weighted | ||||||||||||||||
| Range of | Underlying | Remaining | Average | Underlying | Average | |||||||||||||||
| Exercise | Warrants | Contractual | Exercise | Warrants | Exercise | |||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | - |
|
years | $ | $ | |||||||||||||||
| 16 |
The following is a summary of activity of outstanding common stock warrants:
| Weighted | ||||||||
| Average | ||||||||
| Number | Exercise | |||||||
| of Shares | Price | |||||||
| Balance, September 30, 2023 |
|
$ |
|
|||||
| Warrants granted | ||||||||
| Warrants expired | ||||||||
| Balance, December 31, 2023 |
|
$ |
|
|||||
| Exercisable, December 31, 2023 |
|
$ |
|
|||||
As of December 31, 2023, these warrants in the aggregate had $ of intrinsic value as the per share market price of $ of the Company’s common stock as of such date was greater than the exercise price of certain warrants.
Note 12 – Discontinued Operations
On
April 20, 2023, the Company
and Digipath Labs entered into the Purchase Agreement with DPL NV, LLC (“Buyer”),
pursuant to which Digipath Labs has agreed to sell substantially all of its assets to Buyer for a cash purchase price of $
The Purchase Agreement includes a number of representations, warrantees, covenants and conditions to closing customary for this type of transaction. In addition, the closing of the transaction is subject to the approval of the Nevada Cannabis Compliance Board (the “CCB”). Subsequent to December 31, 2023, the Company received approval from the CCB. See Note 14 .
Pursuant
to the Purchase Agreement, the Buyer deposited $
In
connection with the transactions contemplated by the Purchase Agreement, Digipath, Digipath Labs and Buyer entered into a Management
Services Agreement (the “Management Services Agreement”), dated as of April 30, 2023, pursuant to which Buyer was engaged
to manage the operation of Digipath Labs’ cannabis testing laboratory (the “Lab”).
| 17 |
The balance sheets of Digipath Labs are summarized below:
| December 31, 2023 | September 30, 2023 | |||||||
| Current assets: | ||||||||
| Accounts receivable, net | $ |
|
$ |
|
||||
| Deposits |
|
|
||||||
| Other current assets |
|
|
||||||
| Total current assets |
|
|
||||||
| Right-of-use asset |
|
|
||||||
| Fixed assets, net |
|
|
||||||
| Total long term assets |
|
|
||||||
| Total Assets | $ |
|
$ |
|
||||
| Current liabilities: | ||||||||
| Accounts payable | $ |
|
$ |
|
||||
| Accrued expenses |
|
|
||||||
| Current portion of operating lease liabilities |
|
|
||||||
| Current maturities of notes payable |
|
|
||||||
| Total current liabilities |
|
|
||||||
| Operating lease liabilities |
|
|
||||||
| Notes payable |
|
|
||||||
| Total long term liabilities |
|
|
||||||
| Total Liabilities | $ |
|
$ |
|
||||
The statements of operations of Digipath Labs combined are summarized below:
| For the Three Months Ended | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ |
|
$ |
|
||||
| Cost of sales |
|
|
||||||
| Gross profit |
|
|
||||||
| Operating expenses: | ||||||||
| General and administrative |
|
|
||||||
| Professional fees |
|
|
||||||
| Total operating expenses |
|
|
||||||
| Operating income |
|
|
||||||
| Other income (expense): | ||||||||
| Interest expense |
(
|
) |
(
|
) | ||||
| Total other income (expense) |
(
|
) |
(
|
) | ||||
| Net income | $ |
|
$ |
|
||||
Note 13 – 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 14 – Subsequent Events
On
January 3, 2024
,
the Company amended the Invictus Note for a second time to extend the maturity date to
On January 18, 2024, the Company received approval from the CCB to transfer the assets pursuant to the Purchase Agreement. The Company expects the transaction to close by the end of February 2024.
| 18 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended September 30, 2023 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended September 30, 2023 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.
Overview
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and its subsidiaries (“Digipath,” the “Company,” “we,” “our” or “us”) supports the cannabis industry’s best practices for reliable testing, cannabis education and training. Our mission is to provide pharmaceutical-grade analysis and testing to the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and patients know exactly what is in the cannabis they ingest and to help maximize the quality of our clients’ products through research, development, and standardization. Digipath has been operating a cannabis-testing lab in Nevada since 2015.
Results of Operations for the Three Months Ended December 31, 2023 and 2022:
The following table summarizes selected items from the statement of operations for the three months ended December 31, 2023 and 2022.
| Three Months Ended December 31, | Increase / | |||||||||||
| 2023 | 2022 | (Decrease) | ||||||||||
| Revenues | $ | - | $ | - | $ | - | ||||||
| Cost of sales | - | - | - | |||||||||
| Gross profit | - | - | - | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 14,743 | 39,524 | (24,781 | ) | ||||||||
| Professional fees | 55,821 | 67,812 | (11,991 | ) | ||||||||
| Total operating expenses: | 70,564 | 107,336 | (36,772 | ) | ||||||||
| Operating loss | (70,564 | ) | (107,336 | ) | 36,772 | |||||||
| Total other income (expense) | (70,417 | ) | (152,152 | ) | 81,735 | |||||||
| Net loss from continuing operations | (140,981 | ) | (259,488 | ) | 118,507 | |||||||
| Net income from discontinued operations | 292,627 | 19,158 | 273,469 | |||||||||
| Net income (loss) | $ | 151,646 | $ | (240,330 | ) | $ | 391,976 | |||||
| 19 |
General and Administrative Expenses
General and administrative expenses for the three months ended December 31, 2023 were $14,743, compared to $39,524 during the three months ended December 31, 2022, a decrease of $24,781, or 63%. The expenses consisted primarily of salaries and wages and included $1,153 and $6,171 of non-cash stock-based compensation, respectively. General and administrative expenses decreased primarily due to decreased corporate overhead activities.
Professional Fees
Professional fees for the three months ended December 31, 2023 were $55,821, compared to $67,812 during the three months ended December 31, 2022, a decrease of $11,991, or 18%. Professional fees included non-cash, stock-based compensation of $0 and $2,135 during the three months ended December 31, 2023 and 2022, respectively. Professional fees decreased primarily due to decreased consulting and accounting fees.
Operating Loss
Our operating loss for the three months ended December 31, 2023 was $70,564, compared to an operating loss of $107,336 during the three months ended December 31, 2022, a decrease of $36,772, or 34%. Our operating loss decreased primarily due to our decreased general and administrative expenses.
Other Income (Expense)
Other expense, on a net basis, for the three months ended December 31, 2023 was $70,417, compared to other expense, on a net basis, of $152,152 during the three months ended December 31, 2022, a net decrease of $81,735. Other expense consisted of interest expense of $84,313 and an insurance claim received for the three months ended December 31, 2023.
Liquidity and Capital Resources
The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the three months ended December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Operating Activities | $ | 64,697 | $ | 17,234 | ||||
| Investing Activities | (11,667 | ) | 97,334 | |||||
| Financing Activities | (15,784 | ) | (14,904 | ) | ||||
| Net increase in Cash | $ | 37,246 | $ | 99,664 | ||||
Net Cash Provided by Operating Activities
During the three months ended December 31, 2023, net cash provided by operating activities was $64,697, compared to net cash provided by operating activities of $17,234 for the same period ended December 31, 2022, including cash provided by operating activities from discontinued operations of $176,503 for the three months ended December 31, 2023 compared to cash provided by operating activities from discontinued operations of $149,017 for the three months ended December 31, 2022. The increase in cash provided by operating activities was primarily attributable to our increase in cash provided by discontinued operations.
Net Cash Provided by (Used in) Investing Activities
During the three months ended December 31, 2023, net cash used in investing activities was $11,667, compared to $97,334 provided by investing activities for the same period ended December 31, 2022, including cash used in investing activities from discontinued operations of $11,667 for the three months ended December 31, 2023 compared to cash used in investing activities from discontinued operations of $2,666 for the three months ended December 31, 2022. The cash provided by investing activities in the previous period was a result of the sale of the collateralized assets from the note receivable.
| 20 |
Net Cash Used in Financing Activities
During the three months ended December 31, 2023, net cash used in financing activities was $15,784, compared to net cash used in financing activities of $14,904 for the same period ended December 31, 2022, including cash used in financing activities from discontinued operations of $15,784 for the three months ended December 31, 2023 compared to cash used in financing activities from discontinued operations of $14,904 for the three months ended December 31, 2022.
Ability to Continue as a Going Concern
As of December 31, 2023, our balance of cash on hand was $308,252, and we had negative working capital of $2,216,869 and an accumulated deficit of $19,610,351 resulting from recurring losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Until the agreement to sell the assets of the lab testing business, management was actively pursuing new customers to increase revenues. In addition, the Company was seeking additional sources of capital to fund short term operations. The Company is currently evaluating future investments into potential acquisition targets. There can be no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution to existing stockholders.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations and require management’s subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
While our significant accounting policies are more fully described in notes to our consolidated financial statements appearing elsewhere in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we used in the preparation of our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the sale of lab testing services through our subsidiary Digipath Labs, Inc.
| 21 |
Revenue is primarily generated through our subsidiary, Digipath Labs, Inc., which recognizes revenue from the analytical testing of cannabis products for licensed producers and cultivators within the state of Nevada on a determinable fixed fee per test, or panel of tests basis. Revenue from the performance of those services is recognized upon completion of the tests, at which time test results are delivered to the customer, provided collectability of the fee is reasonably assured. We typically require payment within thirty days of the delivery of results. Management estimates an allowance for doubtful accounts based on the aging of its receivables.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterparty’s performance is complete or the date at which a commitment for performance by the counterparty to earn the equity instruments is reached because of sufficiently large disincentives for nonperformance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. 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 December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
| 22 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any legal or administrative proceedings that we believe, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS .
| 23 |
* Filed herewith.
| 24 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 14, 2024
| DIGIPATH, INC. | ||
| By: | /s/ Todd Denkin | |
| Name: | Todd Denkin | |
| Title: | Chief Executive Officer | |
| By: | /s/ A. Stone Douglass | |
| Name: | A. Stone Douglass | |
| Title: | Chief Financial Officer | |
| 25 |