Borislav Tonev

Digipath Inc (OTCMKTS:DIGP) Explodes on Marijuana Hype

by Borislav Tonev July 29, 2014

Like so many other penny stock enterprises, Digipath Inc (OTCMKTS:DIGP, DIGP message board) too announced their intentions to enter the cannabis industry at the beginning of 2014 when the pot craze was flooding the OTC Markets. Curiously, investors didn't seem all that excited by this fact.

Trading was sporadic and unlike many other pot tickers, DIGP simply refused to make any sort of significant climb up the charts. Which is something of a shame.

Many small cap enterprises ditched their previous plans and jumped on the marijuana bandwagon with the sole purpose of attracting attention to themselves. DIGP, on the other hand, already had an established business and they still maintain that the cannabis operations will simply provide one more source of revenues. Their latest 10-Q doesn't look too horrific as well. Here's what the company had on June 30:

  • cash: $5.9 million
  • current assets: $6.2 million
  • current liabilities: $163 thousand
  • quarterly revenues: $217 thousand
  • quarterly net loss: $654 thousand

The net loss is indeed pretty big and profitability appears to be nothing more than a distant dream, but on the bright side, the revenues are growing, there's no shortage of cash, and the debt is kept in check. All in all, DIGP appears to be the sort of company that might actually do something in the marijuana industry. And investors didn't seem interested in it at all... until yesterday, that is.

The stock opened the new week at $0.55 (7.8% above Friday's close) and during the first half of the session, it showed very little in terms of price movement. Then, around 1:30PM, it absolutely exploded. The volume spiked and DIGP stormed out of the sub-dollar levels. Less than an hour later, an all-time high of $6 was hit, but, predictably, these sort of levels proved to be unsustainable and slowly but surely, the stock settled down. When the closing bell rang, DIGP was sitting at $2.50 per share (390% above Friday's close).

You're probably wondering: “What's the reason for all the commotion?”.

That's a tricky question. There doesn't appear to be a paid promotion, there are no filings worth talking about and the latest press release came out on Friday when it had virtually no effect on the market.

It said that DIGP is well positioned to profit from the booming marijuana industry because it managed to raise $8.2 million during Q2 and because it has a permit to open a cannabis testing facility in Nevada. It should be noted at this point that the PR in question wasn't actually published by the company. If you scroll down to the bottom of it, you'll see that it's been released by an entity called Emerging Growth dba TDM Financial. Sure enough, there is also a link to a disclaimer and once you go through a few more clicks, you will find yourself looking at another disclaimer published on a website called secfilings.com. It too is owned by Emerging Growth who, the fine print says, received 1 million DIGP shares in exchange for marketing services.

So, Emerging Growth does have its reasons to published articles about DIGP and to try and draw attention to the stock. We can't help but think, however, that they've overlooked some rather important details. Like, for example, the means through which Digipath managed to raise $8.2 million. Here's how they did it.

Two transactions were completed during Q2. The first one involved a series of stock purchase agreements during which DIGP sold a total of 6,000,000 Series A preferred shares at $1 a piece. The Q2 report says that the preferred shares are convertible into 300,000,000 common ones. The second transaction was a private placement during which “certain accredited investors” purchased 44,220,000 common shares for total proceeds of $2,210,000 ($0.05 a piece).

As you can see, the people who took part in the two transactions now stand to make quite a lot of money if they decide to release their holdings on the open market. Will they do it? It's up to you to weigh the odds.

Comments 0

Type the characters that you see in the box (5 characters).