The Canadian and American cannabis industry was one of the most exciting sectors in the year 2017. After the Government of Canada and some states in the U.S. accepted to regulate the sale and cultivation of some forms of marijuana, its demand has increased astonishingly. That’s not all. There is a few licensed sellers and growers to provide marijuana, so it is expected that these few companies will make a lot of revenues. We believe that this is a market opportunity and we have been writing about this sector extensively. For starters, please check our articles on the subject before you go on with the report.
The market has been pushing up the share prices of many marijuana companies in 2017, but in this piece, we will focus only on one in particular; Digipath Inc (OTCMKTS:DIGP). We want to highlight this company, since it holds business interests in marijuana companies operating in the state of California, wherein from January 1, 2017, the sale of some of the forms of cannabis is allowed.
Some in the market seem to have figured out this opportunity and have been acquiring shares. We formed this impression due to the recent share price volatility was seen in the exchange. From $0.25, the share price increased to hit the one-year highs of $0.55 in a short period. But, that’s not all. The trading volume also increased right before the authorities officially allowed people of California to grow and consume marijuana.
Have a look at the recent share price action before we provide more details:
DIGP was created in Nevada on October 5, 2010. The company has two subsidiaries:
-Digipath Labs, Inc.: it provides pharmaceutical-grade analysis and testing to other operators. The company helps clients know the type of marijuana that they are ingesting, and provide services to increase its quality. The first testing lab was opened in Las Vegas, Nevada, in May of 2015 to serve the new State approved and licensed medical marijuana industry. Digipath has worked so far for over 96 cultivators and producers in and around Clark and Nye County. We could read in the company materials that “a steady stream of new Nevada MMEs is expected to become operational and licensed throughout 2017 and into 2018.,” which should help the company get new clients.
-The National Marijuana News Corp.: it provides cannabis news, interviews, and education with a news/talk radio show, app, national marijuana news website, and social media presence among other services. The most interesting is the new online radio program called “The National Marijuana News,” which was created in May 2014. It seems to be quite successful. Its Facebook page has received over 172,000 likes. In our opinion, it clearly gives the impression that a large number of people are interested in the content provided by DIGP.
From the latest announcements, we believe that the Joint Venture signed with Mr. Don Ashley is among the most interesting. He is an experienced real estate developer and cannabis entrepreneur operating a cannabis testing laboratory in California. The name of the new company will be “Digipath Botanical Testing,” and was said to be an opportunity to enter the largest cannabis market in the United States.
Undoubtedly, the fact that this Joint Venture is located in California was the origin of the share price spike in the last week of December 2017. In our opinion, after this violent share price move, market participants commenced selling shares to capture the profits, which created the share price decline.
As per the Joint Venture agreement, Mr. Ashley will finance the operations with $2 million, while Digipath will be managing and supervising the operations of the laboratory. Don Ashley noted that they are already working on the project and the teams hope the lab to be operational in early Q1 2018. Be ready to assess the news about this new project. We believe that it is the most significant catalyst on the stock.
Regarding the new regulatory framework in California, Todd Denkin, President of Digipath, said the following:
“The state of California is estimated to be the single largest cannabis market in the U.S. Adult-use cannabis legislation was approved by California residents last November, and we expect these new regulations to be implemented in 2018. The good news for the industry is that the requirements for cannabis testing will be significant” Source
There is more.
On January 2, 2018, the company released its financial and operating results for the fiscal year ended September 30, 2017. Revenues were $1,898,172, showing an increase of 132% on a year-over-year basis. Additionally, fourth quarter sales were also good amounting to $602,057, showing 93% increase as compared to the fourth quarter of 2016. Finally, the EBITDA for the year was equal to $375,377, which is better than the previous year of $949,946. The market usually prefers to focus on the revenue growth for the startup companies, which is what is driving the share price appreciation in the case of DIGP. Check its historical revenue line in the following chart:
Now compare that chart with the following stock chart:
We believe that the most interesting said recently by the management was that they are anticipating “a continued significant increase in demand for cannabis lab testing services in 2018.” This is very positive and, in our opinion, may have motivated some market participants to follow the stock closely. We encourage readers to do the same.
Currently trading with a market cap of $11 million, DIGP is an exciting story among small caps. With $178,177 in cash, $1,027,049 in fixed assets, $1,571,236 in total assets and only $163,998 in total liabilities, the balance sheet also seems stable. Additionally, we could read that the CFO and the President & COO of the company acquired a lot of stock in December.
To sum up, there seems to be a lot to like in this company; be sure to follow this name.
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Disclosure: We have no position in DIGP and have not been compensated for this article.
Image courtesy of Rusty Blazenhoff via Flickr