Digipath provides testing services for cannabis plants and extracts. The company tests for residual solvents (for non-CO2 extracts), pesticides,heavy metals (including mercury, arsenic, lead, and cadmium), mold and yeast, biological toxins (such as mycotoxins, aflatoxins, and ocratoxins), microbial contaminants (including E. coli, salmonella, Aspergillus, and fungi), total aerobic bacteria count, gram negative bacteria.
The testing is necessary to ensure consistency and quality in consumer products and medicinal-grade cannabis.
The company reported record sales in the first quarter of 2018. Revenues were $1,118,785, an increase of of $516,728 quarter-over-quarter (approximately 86% from the previous quarter’s net sales of $602,057), and a 173% increase on a year-over-year basis.
The company realized positive net cash flow from operating activities of $182,156 for the first fiscal quarter, an increase of approximately $152,000, or 506%, from the comparative three months ended December 31, 2016. The company had EBITDA of $371,753, compared to Adjusted EBITDA of $(86,637) for the comparative three months ended December 31, 2016, an improvement of approximately $458,390 on a year over year basis. The gross margin increased to 66.3%, from 50.2% in the prior year’s first fiscal quarter.
We’re always on the lookout for cannabis companies that are well positioned to grow with the industry, and DigiPath caught our attention. The cannabis industry is expected to generate over $8 billion in sales this year, and $25 billion in sales by 2025.
Experts predict that roughly 62% (or $5 billion) of this years’ sales will be driven by the recreational market. Currently, consumers seem to be fairly indifferent to the cannabis quality they ingest, but we believe that will change over time as recreational marijuana becomes more main stream. Just like we want the USDA to inspect our beef, sooner or later consumers will want to ensure their weed or CBD oil is free from toxic agents like heavy metals and pesticides.
Additionally, the FDA is likely to approve its first cannabis based drug this year. Epidiolex recently received unanimous approval by the FDA’s advisory board, setting the stage for approval before the end of June. Were that to happen, the DEA would likely remove cannabis from Schedule I, and downgrade it to a Schedule II or Schedule III substance. Once that happens, we believe that lots of biotech companies will begin to test cannabis compounds for medical use. That eventuality will require the plants be tested for purity, and DigiPath is the market leader in Nevada.
DigiPath is already cash flow positive with tipple digit year over year growth – a rare find in small cap. We believe this company will continue to grow along with the booming cannabis industry.