Kanabo looks fully valued

It took nearly two years to complete but the reversal of Israel-based cannabis-based products supplier Kanabo Research into standard list shell Spinnaker Opportunities, but it has been well received by investors. Kanabo Group (LON: KNB) has a significant valuation, but is there more to go in the short-term?

The reverse takeover was first announced on 27 February 2019 and completed on 16 February 2021. The initial value of the deal is £15m in shares and the company also raised £6m at a share price of 6.5p. Kanabo was valued at £23.4m when it was admitted to trading.

The share price has risen to 31p – having at one point reached 50.75p – and that values Kanabo at £111.7m.  

One of the investors in Kanabo is AIM-quoted Vela Technologies (LON: VELA) and it invested £150,000 at 6.5p a share. This stake is currently worth more than 5% of Vela’s market capitalisation of £12.1m.

Any value?

Kanabo sells a range of THC-free retail CBD products and it is developing medical cannabis products. It has developed and licenced the technology for VapePod (a Kanabo-owned registered trademark) devices. Retail CBD oils Reload, Relax and Repair are sold in the form of cartridges for the VapePod.

Management wants to spend cash on increasing the profile of its Kanabo brand and build up retail sales. There is a growing market here but Kanabo needs to show that it can generate substantial revenues from its products.

A pilot scheme is being undertaken to assess the demand and supply chain for its CBD products. So far, there has been a 40% customer retention rate. The information will be used to further build sales. This is something that needs to happen for the company to prosper.

Kanabo Research had revenues of £82,000 in 2019. The loss was £1.37m. There was cash of £347,000 at the end of 2019. Revenues for the first half of 2020 were £14,000 and the loss was £345,000. Warrants being exercised meant that cash improved to £445,000, although it owed Spinnaker £310,000. This loan subsequently increased to £400,000.

Unlicensed treatments

Further in the future is the potential unlicensed medical cannabis oils, which would be given to patients with a special need. There are no plans for expensive trials in order to gain marketing authorisations. There will be £1m invested in development.

The most advanced medical CBD oil is Nabinnol, which is a potential treatment for insomnia. This has shown safety and efficacy in animal trials. Nabinnol would be delivered via the VapePod and a human study could start in 2022 and be completed the following year.

There are plans to gain a CE mark for the VapePod medical device. That could be obtained by the summer. There will then be a study that will not be completed until 2022.

This part of the business appears to be where the real upside is for Kanabo. Retail products could generate cash to reinvest in this part of the group, but that will not happen in the near-term. The cash raised in the reversal will cover requirements for the time being.

There appears to have been some profit-taking given the share price decline from the high during last Thursday. The lack of choice of cannabis-related investments could provide further demand, but the share price appears high enough.