10-K/A: Digipath Inc. Files Amended 10-K After Auditor Restatement, Announces Asset Sale

Digipath, Inc. has filed an amended annual report to correct a prior audit opinion and disclosed the pending sale of its cannabis testing lab for $2.3 million.

Summary

• Digipath, Inc. filed an amended annual report on Form 10-K/A to correct the audit opinion of its predecessor auditor, which means the previously filed financial statements for the year ended September 30, 2022, should no longer be relied upon.
• The company has agreed to sell substantially all of its assets related to its cannabis testing lab to DPL NV, LLC for $2.3 million in cash, subject to adjustments and regulatory approval.
• The sale is expected to close as early as January 2024, with a deadline for approval by the Nevada Cannabis Compliance Board (CCB) by June 30, 2024.
• Digipath has entered into a Management Services Agreement with the buyer, where the buyer manages the lab operations, subject to CCB approval which was obtained on October 17, 2023.
• The company intends to seek to acquire another business after the asset sale is completed.
• As of September 30, 2023, Digipath had 17 employees and is not subject to seasonality.
• The company's auditor has expressed substantial doubt about its ability to continue as a going concern due to recurring net losses and insufficient cash reserves.
• The company's common stock is traded on the OTCQB and OTCBB, with limited trading activity.
• The company has outstanding shares of Series A and Series B preferred stock with liquidation rights superior to common stock.
• The company has a history of raising funds primarily through the sale of equity securities and may need additional funds to operate its business.

Sentiment

Score: 3

Explanation: The document highlights significant financial challenges, including a going concern warning from the auditor, restatement of financials, and reliance on future capital raises. While there is a pending asset sale, the overall tone is negative due to the company's financial instability and operational risks.

Positives

• The sale of the cannabis testing lab for $2.3 million provides a potential cash infusion.
• The management services agreement allows for continued operation of the lab during the transition.
• The company intends to seek to acquire another business, indicating a forward-looking strategy.
• The company has a diverse array of tests combined with lab equipment and analytical instrumentation to accurately test cannabis and hemp.
• The company is committed to follow FDA, DEA, EPA, and USDA guidelines, proprietary standard operating procedures (SOP), and Good Lab Practices (GLP).

Negatives

• The company's auditor has expressed substantial doubt about its ability to continue as a going concern.
• The company has incurred recurring losses from operations and has insufficient cash reserves.
• The company's previous financial statements for the year ended September 30, 2022, should no longer be relied upon.
• The company's common stock has limited trading activity and is considered a penny stock.
• The company has a history of raising funds primarily through the sale of equity securities, which may lead to dilution.
• The company's business is dependent on state laws pertaining to the cannabis industry, which are subject to change.
• The company may have difficulty obtaining insurance due to its involvement in the cannabis industry.
• The company has had difficulty maintaining banking relationships due to the nature of its business.

Risks

• The company's ability to continue as a going concern is dependent on raising additional capital and achieving sustainable revenues.
• The cannabis industry is subject to evolving regulations and interpretations, which could require the company to incur substantial costs.
• The company's business is dependent on state laws pertaining to the cannabis industry, which are subject to change.
• The company may be deemed to be aiding and abetting illegal activities through the services that it provides.
• The company may have difficulty obtaining insurance due to its involvement in the cannabis industry.
• The company has had difficulty maintaining banking relationships due to the nature of its business.
• The company's operating results may fluctuate, causing volatility in its stock price.
• The company's common stock has limited trading activity, and purchasers may be unable to sell their shares.
• The company has outstanding shares of preferred stock with rights and preferences superior to those of its common stock.
• The company may be subject to enforcement actions by law enforcement authorities due to its involvement in the cannabis industry.

Future Outlook

The company intends to seek to acquire another business after the asset sale is completed. The company's ability to continue as a going concern is dependent on raising additional capital and achieving sustainable revenues and profitable operations.

Management Comments

• Management believes that the transaction may close as early as January 2024.
• Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
• Management believes it is more likely than not that the net deferred tax assets will not be fully realizable.

Industry Context

The cannabis industry is rapidly expanding and evolving, with increasing legalization at the state level. The lab-testing sector is expected to experience substantial growth, with the market projected to reach approximately $2.5 billion in 2025. The company faces competition from local enterprises and well-established laboratory testing companies.

Comparison to Industry Standards

• The document mentions that the cannabis testing market is expected to reach approximately $2.5 billion in 2025, with an estimated CAGR of 11.9% from 2017-2025, according to The Insight Partners.
• New Frontier Data projects the hemp CBD business worldwide will grow to over $14.7 billion by 2026, and the worldwide cannabis industry will reach $44.8 billion in 2024.
• Total legal sales of cannabis in current legal states are projected to grow at a compound annual growth rate (CAGR) of 14% over the next six years, reaching nearly $30 billion by 2025.
• Annual sales of medical cannabis are projected to grow at a 17% CAGR through 2025, to an estimated $13.1 billion by 2025; adult-use sales are projected to grow at a 16% CAGR, to $16.6 billion.
• The document does not provide specific comparisons to individual competitors, but it does note that the cannabis industry is highly fragmented and rapidly expanding.

Related Party Transactions

• During the year ended September 30, 2023 the Company incurred compensation expense of $ 60,000 for services provided by its CFO and paid its CFO $ 111,437 for accrued compensation related to services provided in prior periods.
• During the year ended September 30, 2023 the Company incurred fees of $ 34,000 for services provided by its directors and paid its directors $ 30,000 for services provided, and its directors waived the payment of $ 138,000 that had been accrued for services provided.
• As of September 30, 2023, the Company has accrued a total of $ 10,000 in fees for services provided by its directors.
• As of September 30, 2023, the Company has accrued a total of $ 2,390 in reimbursable expenses owed to the officers and directors.
• During the year ended September 30, 2023, the Company granted 3,400,000 and 1,400,000 shares of its common stock to the officers and directors as compensation for services performed with a fair value of $ 24,820 and $ 9,860 , respectively.

Stakeholder Impact

• Shareholders face significant risk due to the company's financial instability and the potential for dilution.
• Employees may be affected by the company's financial challenges and the pending asset sale.
• Customers may experience changes in service due to the sale of the lab and the management services agreement.
• Creditors face increased risk due to the company's financial instability and going concern warning.

Next Steps

• The company intends to seek to acquire another business after the asset sale is completed.
• The company needs to obtain approval from the Nevada Cannabis Compliance Board (CCB) for the asset sale by June 30, 2024.
• The company needs to raise additional capital to continue operations.

Key Dates

Keywords

cannabis testing, hemp testing, laboratory, asset sale, financial restatement, going concern, preferred stock, convertible notes, OTCBB, OTCQB