HYPHA LABS, INC. 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 endedSeptember 30, 2022 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 endedSeptember 30, 2022 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. OverviewDigipath, Inc. was incorporated inNevada onOctober 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 inNevada since 2015 and has plans to open labs in other states that have legalized the sale of cannabis, beginning withCalifornia .
Results of Operations for the Three Months Ended
The following table summarizes selected items from the statement of operations
for the three months ended
Three Months Ended December 31, Increase /
2022 2021 (Decrease)
Revenues $ 726,755 $ 699,585 $ 27,170
Cost of sales 422,835 422,601 234
Gross profit 303,920 276,984 26,936
Operating expenses:
General and administrative 306,483 240,964 65,519
Professional fees 69,969 255,749 (185,780 )Change in allowance for doubtful accounts 13,685
(2,139 ) 15,824 Total operating expenses: 390,137 494,574 (104,437 ) Operating loss (86,217 ) (217,590 ) 131,373 Total other income (expense) (154,113 ) (60,013 ) (94,100 ) Net loss$ (240,330 ) $ (277,603 ) $ 37,273 19 Revenues
Aggregate revenues for the three months ended
Cost of Sales Cost of sales for the three months endedDecember 31, 2022 were$422,835 , compared to$422,601 during the three months endedDecember 31, 2021 , an increase of$234 . Cost of sales consists primarily of labor, depreciation, maintenance on lab equipment, and supplies consumed in our testing operations. Our gross margins were approximately 42% during the three months endedDecember 31, 2022 , compared to 40% during the three months endedDecember 31, 2021 , which translated to$26,936 of increased gross profit. Our margins increased in the current period due to the increase in revenues.
General and Administrative Expenses
General and administrative expenses for the three months endedDecember 31, 2022 were$306,483 , compared to$240,964 during the three months endedDecember 31, 2021 , an increase of$65,519 , or 27%. The expenses consisted primarily of marketing, rent, salaries and wages, and travel expenses. General and administrative expenses included non-cash, stock-based compensation of$0 during the three months endedDecember 31, 2022 and 2021, respectively. General and administrative expenses increased primarily due to increased corporate overhead activities and increased audit fees fromNevada's Cannabis Control Board . Professional Fees Professional fees for the three months endedDecember 31, 2022 were$69,969 , compared to$255,749 during the three months endedDecember 31, 2021 , a decrease of$185,780 , or 73%. Professional fees included non-cash, stock-based compensation of$8,603 and$33,457 during the three months endedDecember 31, 2022 and 2021, respectively. Professional fees decreased primarily due to decreased corporate consulting services during the current period as we decreased our focus on expansion efforts.
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts for the three months endedDecember 31, 2022 resulted in$13,685 of expense, compared to$2,139 of income during the three months endedDecember 31, 2021 , a decline of$15,824 , or 740%. Our change in allowance for doubtful accounts declined during the current period primarily as our allowance for doubtful accounts increased from$139,279 to
$155,141 during the quarter. Operating Loss Our operating loss for the three months endedDecember 31, 2022 was$86,217 , compared to an operating loss of$217,590 during the three months endedDecember 31, 2021 , a decrease of$131,373 , or 60%. Our operating loss decreased primarily due to our decreased professional fees. Other Income (Expense)
Other expense, on a net basis, for the three months endedDecember 31, 2022 was$154,113 , compared to other expense, on a net basis, of$60,013 during the three months endedDecember 31, 2021 , a net increase of$94,100 . Other expense consisted of interest expense of$99,113 and an impairment on equipment of$55,000 for the three months endedDecember 31, 2022 .
Liquidity and Capital Resources
The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the three-month periods
endedDecember 31, 2022 and 2021: 2022 2021 Operating Activities$ 17,234 $ (177,158 ) Investing Activities 97,334 (408,482 ) Financing Activities (14,904 ) 380,013 Net Decrease in Cash$ 99,664 $ (205,627 ) 20
Net Cash Provided by (Used in) Operating Activities
During the three months endedDecember 31, 2022 , net cash provided by operating activities was$17,234 , compared to net cash used in operating activities of$177,158 for the same period endedDecember 31, 2021 . The increase in cash provided by operating activities was primarily attributable to our decrease in net loss and accounts receivable, along with increases in accounts payable
and accrued expenses.
Net Cash Provided by (Used in) Investing Activities
During the three months endedDecember 31, 2022 , net cash provided by investing activities was$97,334 , compared to$408,482 used in investing activities for the same period endedDecember 31, 2021 . The cash provided by investing activities in the current period was a result of the sale of the collateralized assets from the note receivable compared to cash used in investing activities for the prior period which was a result of loans we made in connection with
a potential acquisition.
Net Cash Provided by (Used in) Financing Activities
During the three months endedDecember 31, 2022 , net cash used in financing activities was$14,904 , compared to net cash provided by financing activities of$380,013 for the same period endedDecember 31, 2021 . The current period consisted of$14,904 of principal payments on an equipment loan, compared to$400,000 of proceeds received on debt financing, proceeds of$55,600 from the sale of preferred stock, as offset by$8,467 of principal payments on an equipment lease and$14,142 of principal payments on an equipment loan and$52,978 of principal payments made on convertible notes in the comparative period in the prior year.
Ability to Continue as a Going Concern
As ofDecember 31, 2022 , our balance of cash on hand was$155,832 , and we had negative working capital of$1,465,346 and an accumulated deficit of$20,249,101 resulting from recurring losses. We currently may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations and expand our lab testing business. As we continue to develop our lab testing business and attempt to expand operational activities, we expect to experience net negative cash flows from operations in amounts not now determinable, and will be required to obtain additional financing to fund operations through common stock offerings to the extent necessary to provide working capital. We have and expect to continue to have substantial capital expenditure and working capital needs. The Company has incurred recurring losses from operations resulting in an accumulated deficit, and, as set forth above, the Company's cash on hand is not sufficient to sustain operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management is actively pursuing new customers to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives, becoming profitable or continuing our business without either a temporary interruption or a permanent cessation. In addition, additional financing may result in substantial dilution to existing stockholders. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe 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
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 ofNevada 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.
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