The information contained in this Form 10-Q is intended to update the
information contained in our Annual Report on Form 10-K for the year ended
September 30, 2021 and presumes that readers have access to, and will have read,
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information contained in such Form 10-K. The following
discussion and analysis also should be read together with our financial
statements and the notes to the financial statements included elsewhere in this
Form 10-Q.
The following discussion contains certain statements that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements appear in a number of places in
this Report, including, without limitation, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These statements are
not guarantees of future performance and involve risks, uncertainties and
requirements that are difficult to predict or are beyond our control.
Forward-looking statements speak only as of the date of this quarterly report.
You should not put undue reliance on any forward-looking statements. We strongly
encourage investors to carefully read the factors described in our Annual Report
on Form 10-K for the year ended September 30, 2021 in the section entitled "Risk
Factors" for a description of certain risks that could, among other things,
cause actual results to differ from these forward-looking statements. We assume
no responsibility to update the forward-looking statements contained in this
quarterly report on Form 10-Q. The following should also be read in conjunction
with the unaudited Financial Statements and notes thereto that appear elsewhere
in this report.
Overview
Digipath, Inc. was incorporated in Nevada on October 5, 2010. Digipath, Inc. and
its subsidiaries ("Digipath," the "Company," "we," "our" or "us") supports the
cannabis industry's best practices for reliable testing, cannabis education and
training. Our mission is to provide pharmaceutical-grade analysis and testing to
the cannabis industry, under ISO-17025:2017 guidelines, to ensure consumers and
patients know exactly what is in the cannabis they ingest and to help maximize
the quality of our clients' products through research, development, and
standardization. Digipath has been operating a cannabis-testing lab in Nevada
since 2015 and has plans to open labs in other states that have legalized the
sale of cannabis, beginning with California.
Results of Operations for the Three Months Ended June 30, 2022 and 2021:
The following table summarizes selected items from the statement of operations
for the three months ended June 30, 2022 and 2021.
Three Months Ended June 30, Increase /
2022 2021 (Decrease)
Revenues $ 682,665 $ 764,015 $ (81,350 )
Cost of sales 414,299 551,976 (137,677 )
Gross profit 268,366 212,039 56,327
Operating expenses:
General and administrative 278,765 278,082 683
Professional fees 81,108 91,001 (9,893 )
Change in allowance for doubtful accounts 66,712 (10,960 ) 77,672
Total operating expenses: 426,585 358,123 68,462
Operating income (loss) (158,219 ) (146,084 ) (12,135 )
Total other income (expense) (418,514 ) (31,130 ) (387,384 )
Net loss $ (576,733 ) $ (177,214 ) $ (399,519 )
Revenues
Aggregate revenues for the three months ended June 30, 2022 were $682,665,
compared to revenues of $764,015 during the three months ended June 30, 2021, an
decrease of $81,350 or 11%. The decrease in revenue was due to a decrease in
cannabis production resulting from excess supply in the markets during the
current period as opposed to the same period in 2021.
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Cost of Sales
Cost of sales for the three months ended June 30, 2022 were $414,299, compared
to $551,976 during the three months ended June 30, 2021, a decrease of $137,677,
or 25%. Cost of sales consists primarily of labor, depreciation, maintenance on
lab equipment, and supplies consumed in our testing operations. The decreased
cost of sales in the current period was primarily due to our sales decrease of
11% as well as reducing our outsourced testing fees incurred during the current
period. Our gross margins were approximately 39% during the three months ended
June 30, 2022, compared to 28% during the three months ended June 30, 2021,
which translated to $56,327 of increased gross profit in the current period.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2022
were $278,765 compared to $278,082 during the three months ended June 30, 2021,
an increase of $683, or 0%. The expenses consisted primarily of marketing, rent,
salaries and wages, and travel expenses. General and administrative expenses
included non-cash, stock-based compensation of $0 and $16,952 during the three
months ended June 30, 2022 and 2021, respectively.
Professional Fees
Professional fees for the three months ended June 30, 2022 were $81,108,
compared to $91,001 during the three months ended June 30, 2021, a decrease of
$9,893, or 11%. Professional fees included non-cash, stock-based compensation of
$8,306 and $90,190 during the three months ended June 30, 2022 and 2021,
respectively. Professional fees decreased primarily due to decreased corporate
consulting services during the current period as we focused primarily on the lab
operations during the current period.
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts for the three months ended June
30, 2022 resulted in $66,712 of bad debt expense, compared to $10,960 of bad
debt recovery during the three months ended June 30, 2021, a decrease of
$77,672, or 709%. Our change in allowance for doubtful accounts was a result of
collection issues from various customers.
Operating Loss
Our operating loss for the three months ended June 30, 2022 was $158,219,
compared to operating loss of $146,084 during the three months ended June 30,
2021, an increase of $12,135, or 8%. Our operating loss increased primarily due
to our increased allowance for doubtful accounts.
Other Income (Expense)
Other expense, on a net basis, for the three months ended June 30, 2022 was
$418,514, compared to other expense, on a net basis, of $31,130 during the three
months ended June 30, 2021, a net increase of $387,384. Other expense consisted
of interest expense of $72,230 and credit losses of $358,670 for the three
months ended June 30, 2022, partially offset by other income, consisting of
$12,386 of interest income.
Net Loss
Net loss for the three months ended June 30, 2022 was $576,733, compared to net
loss of $177,214 during the three months ended June 30, 2021, an increase of
$399,519 or 225%. The net loss was primarily due to our decreased revenues,
increased interest expense, and the increase in our doubtful accounts from the
June 30, 2021 period.
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Results of Operations for the Nine Months Ended June, 2022 and 2021:
The following table summarizes selected items from the statement of operations
for the nine months ended June 30, 2022 and 2021.
Nine Months Ended June 30, Increase /
2022 2021 (Decrease)
Revenues $ 1,986,985 $ 1,897,560 $ 89,425
Cost of sales 1,232,932 1,389,776 (156,844 )
Gross profit 754,053 507,784 246,269
Operating expenses:
General and administrative 755,199 715,093 40,106
Professional fees 635,969 313,364 322,605
Change in allowance for doubtful accounts 64,589 (28,945 ) 93,534
Total operating expenses: 1,455,757 999,512 456,245
Operating loss (701,704 ) (491,728 ) (209,976 )
Total other income (expense) (538,950 ) (57,922 ) (481,028 )
Net loss $ (1,240,654 ) $ (549,650 ) $ (691,004 )
Revenues
Aggregate revenues for the nine months ended June 30, 2022 were $1,986,985,
compared to revenues of $1,897,560 during the nine months ended June 30, 2021,
an increase of $89,425, or 5%. The increase in revenue was due to the Nevada
tourism market beginning to open up again and our customers' cash flows improved
during the current period.
Cost of Sales
Cost of sales for the nine months ended June 30, 2022 were $1,232,932, compared
to $1,389,776 during the nine months ended June 30, 2021, a decrease of
$156,844, or 11%. Cost of sales consists primarily of labor, depreciation,
maintenance on lab equipment, and supplies consumed in our testing operations.
The decreased cost of sales in the current period was primarily due to our
decrease in outsourcing to other labs. Our gross margins of approximately 38%
and 27% during the nine months ended June 30, 2022 and 2021, respectively,
translated to $246,269 of increased gross profit in the current period.
General and Administrative Expenses
General and administrative expenses for the nine months ended June 30, 2022 were
$755,199, compared to $715,093 during the nine months ended June 30, 2021, an
increase of $40,106, or 6%. The expenses consisted primarily of marketing, rent,
salaries and wages, and travel expenses. General and administrative expenses
included non-cash, stock-based compensation of $0 and $50,856 during the nine
months ended June 30, 2022 and 2021, respectively. General and administrative
expenses increased due primarily to increased corporate overhead activities
offset by the discontinuation of rents on warehouse space that we were
previously subleasing.
Professional Fees
Professional fees for the nine months ended June 30, 2022 were $635,969,
compared to $313,364 during the nine months ended June 30, 2021, an increase of
$322,605, or 103%. Professional fees included non-cash, stock-based compensation
of $210,449 and $238,123 during the nine months ended June 30, 2022 and 2021,
respectively. Professional fees increased primarily due to increased use of
corporate consulting services during the current period.
Change in Allowance for Doubtful Accounts
Our change in allowance for doubtful accounts resulted in $64,589 of expense for
the nine months ended June 30, 2022, compared to income of $28,945 during the
nine months ended June 30, 2021, an increase of $93,534, or 323%. Our change in
allowance for doubtful accounts was a result of collection issues from various
customers.
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Operating Loss
Our operating loss for the nine months ended June 30, 2022 was $701,704,
compared to $491,728 during the nine months ended June, 2021, an increase of
$209,976, or 43%. Our operating loss increased primarily due to a large increase
in professional fees.
Other Expense
Other expense, on a net basis, for the nine months ended June 30, 2022 was
$538,950, compared to other expense, on a net basis, of $57,922 during the nine
months ended June 30, 2021, a net increase of $481,028. Other expense consisted
of $217,341 of interest expense and credit losses of $383,345, as offset by
interest income of $37,061, compared to $105,840 of interest expense, as offset
by a gain on early extinguishment of debt in the amount of $40,338 and a gain on
the distribution of $7,580 of previously impaired inventory to our former CEO,
during the six months ended June 30, 2021.
Net Loss
Net loss for the nine months ended June 30, 2022 was $1,240,654, compared to
$549,650 during the nine months ended June 30, 2021, an increase of $691,004, or
126%. The increased net loss was due primarily to larger professional fees and
an increase in other expenses.
Liquidity and Capital Resources
The following is a summary of the Company's cash flows provided by (used in)
operating, investing, and financing activities for the nine-month periods ended
June 30, 2022 and 2021:
2022 2021
Operating Activities $ (168,917 ) $ (139,096 )
Investing Activities (646,895 ) (1,206 )
Financing Activities 745,113 130,362
Net Decrease in Cash $ (70,699 ) $ 9,940Net Cash Used in Operating Activities
During the nine months ended June 30, 2022, net cash used in operating
activities was $168,917, compared to net cash used in operating activities of
$139,096 for the same period ended June 30, 2021. The decrease in cash used in
operating activities was primarily attributable to our increased net loss,
offset by the change in allowance for doubtful accounts and credit losses.
Net Cash Used in Investing Activities
During the nine months ended June 30, 2022, net cash used in investing
activities was $646,895, compared to $1,206 for the same period ended June 30,
2022. The increase in cash used in investing was a result of loans we made in
connection with a potential acquisition, offset by proceeds received from the
sale of equipment held as collateral securing the loan.
Net Cash Provided by Financing Activities
During the nine months ended June 30, 2022, net cash provided by financing
activities was $745,113, compared to net cash provided by financing activities
of $130,362 for the same period ended June 30, 2021. The current period
consisted primarily of $390,000 of proceeds received on debt financing, $402,765
proceeds from convertible debt financing, proceeds of $55,600 from the sale of
preferred stock, as offset by $42,873 of principal payments on an equipment
lease and $20,379 of principal payments on an equipment loan, compared to
$110,000 of net proceeds received on convertible debt financing, $65,000 of
proceeds from short term advances and proceeds of $20,250 from the sale of
common stock, as offset by $40,445 of principal payments on an equipment lease
and $24,443 of principal payments on an equipment loan in the comparative
period.
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Ability to Continue as a Going Concern
As of June 30, 2022, our balance of cash on hand was $225,233, and we had
negative working capital of $2,189,146 and an accumulated deficit of $19,192,307
resulting from recurring losses. We currently may not have sufficient funds to
sustain our operations for the next twelve months and we may need to raise
additional cash to fund our operations and expand our lab testing business. As
we continue to develop our lab testing business and attempt to expand
operational activities, we expect to experience net negative cash flows from
operations in amounts not now determinable, and will be required to obtain
additional financing to fund operations through common stock offerings to the
extent necessary to provide working capital. We have and expect to continue to
have substantial capital expenditure and working capital needs.
The Company has incurred recurring losses from operations resulting in an
accumulated deficit, and, as set forth above, the Company's cash on hand is not
sufficient to sustain operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management is actively
pursuing new customers to increase revenues. In addition, the Company is
currently seeking additional sources of capital to fund short term operations.
In the event sales do not materialize at the expected rates, management would
seek additional financing or would attempt to conserve cash by further reducing
expenses. There can be no assurance that we will be successful in achieving
these objectives, becoming profitable or continuing our business without either
a temporary interruption or a permanent cessation. In addition, additional
financing may result in substantial dilution to existing stockholders.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the
normal course of business. The unaudited consolidated financial statements do
not include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency contracts. We do not engage in trading
activities involving non-exchange traded contracts.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any. We have identified certain accounting policies that are significant to the
preparation of our financial statements. These accounting policies are important
for an understanding of our financial condition and results of operations.
Critical accounting policies are those that are most important to the
presentation of our financial condition and results of operations and require
management's subjective or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management's current judgments.
While our significant accounting policies are more fully described in notes to
our consolidated financial statements appearing elsewhere in this Form 10-Q, we
believe that the following accounting policies are the most critical to aid you
in fully understanding and evaluating our reported financial results and affect
the more significant judgments and estimates that we used in the preparation of
our financial statements.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 - Revenue from
Contracts with Customers. Under ASC 606, the Company recognizes revenue from the
commercial sales of products, licensing agreements and contracts to perform
pilot studies by applying the following steps: (1) identify the contract with a
customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each
performance obligation in the contract; and (5) recognize revenue when each
performance obligation is satisfied.
Revenue is primarily generated through our subsidiary, Digipath Labs, Inc.,
which recognizes revenue from the analytical testing of cannabis products for
licensed producers and cultivators within the state of Nevada on a determinable
fixed fee per test, or panel of tests basis. Revenue from the performance of
those services is recognized upon completion of the tests, at which time test
results are delivered to the customer, provided collectability of the fee is
reasonably assured. We typically require payment within thirty days of the
delivery of results. Management estimates an allowance for doubtful accounts
based on the aging of its receivables.
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Stock-Based Compensation
The Company accounts for equity instruments issued to employees in accordance
with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based
Payments to Non-employees pursuant to ASC 2018-07 (ASC 2018-07). All
transactions in which the consideration provided in exchange for the purchase of
goods or services consists of the issuance of equity instruments are accounted
for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. The
measurement date of the fair value of the equity instrument issued is the
earlier of the date on which the counterparty's performance is complete or the
date at which a commitment for performance by the counterparty to earn the
equity instruments is reached because of sufficiently large disincentives for
nonperformance.
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