Can the Kanabo share price explode over the long term?

Investors who bought into the hype surrounding Kanabo (LSE:KNB) and its share price potential when it went public earlier this year have been suffering. The company has made some strategic progress. But it still remains in its early days of operations with a lot to prove. Recently, management released its interim results for 2021. And the market’s response was pretty lacklustre, with the stock falling around 1% on the news.

Let’s take a closer look at what this business has achieved so far. And whether I should be considering it for my portfolio at its currently reduced price.

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The Kanabo share price versus earnings

Looking at the recently published half-year results, there wasn’t much to be excited about. Most of the progress and numbers included in the report had been previously announced, so there weren’t any major surprises. During the first six months of 2021, the group completed its reverse takeover of Kanabo Research Ltd, raising £6m in the process. After going public, the firm raised an additional £1.37m. And after deducting expenses, the total cash balance at the end of June this year was £5.9m.

This is undoubtedly a notable amount of liquidity for the group. But given the underdeveloped product pipeline during the period, revenue for the first six months came in at a grand total of £15,000. What’s more, due to the fixed part of the manufacturing expense structure, the cost of acquiring these sales actually outweighed what they brought in. And gross losses stood at £4,000.

To make matters worse, an additional £1.2m of operating costs were incurred, with a further £1.17m in one-time expenses related to the reverse takeover. In the end, Kanabo’s net losses came in at £2.38m. That’s obviously not a great-looking business. So, seeing the Kanabo share price underperform since going public is not surprising to me.

Growth on the horizon

As underwhelming as these results may be, I do see some promising signs ahead. Firstly, in July, management successfully signed a non-binding term sheet with Materia to acquire its European operations. An acquisition at this stage may seem odd. But if successful, it grants Kanabo immediate access to a network of pharmacies that have the capacity to distribute up to €35m worth of medicinal cannabis products each year.

A month later, Kanabo successfully shipped its first batch of cannabis cartridges to the UK. While the group has been selling goods online, this shipment marks the start of its primary revenue channel. The magnitude and value of this achievement remains unknown as management hasn’t been too generous with the details. But its effects will be captured in the next earnings report.

Assuming these products are as popular as they were during the pilot programme, Kanabo’s revenue stream may be about to grow considerably. And, in turn, the Kanabo share price may finally start heading up over the long term.

The bottom line

All things considered, I’m still not tempted to add this company to my portfolio. The deal with Materia is far from confirmed. And with no sales data regarding its first shipment, it’s hard to judge just how successful Kanabo or its share price will eventually be. So, for now, this cannabis stock is staying on my watchlist.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This post was originally published on Motley Fool

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