Cannabis One: Why the Slide?

As of late, cannabis public entities have been hit hard due to several macro economic events that have occurred recently. Coupled with the beginnings of the expected “summer selloff”, some equities within the space have been hit particularly hard relative to their peers for reasons unknown, despite consistent positive news flow. One such example, would be that of Cannabis One Holdings (CSE: CBIS), a fresh face in the multi state operator segment of the market.

Since hitting a new fifty two week high a couple weeks ago at a price of $4.68, Cannabis One has since dropped 17% from this mark, closing yesterdays session at $3.86 – although it fell as far as $3.70 during intraday trading. Comparatively, over the same time period the US Marijuana Index has only fallen 7.5%.

This drop however appears to be more of a sign of overall market conditions more than anything else. Over this same time period, the firm has released news positive in nature with actions that should bolster its operational assets on a go forward basis.

The first announcement pertains to an agreement signed with Colorado based Itachi Advisory Group to pursue acquisitions related to a suite of assets in the cannabis space. Although the release identified that the assets consist of seven cannabis retail locations, seven cultivation operators, and 18,000 square feet of manufacturing space, it is admittedly vague on the terms of such agreements and the expected pricing of the acquisitions. Cannabis One did however identify that collectively, these assets are expected to generate US$53.7mm in system-wide revenue for FY19.

Following this release, Cannabis One announced that they had closed the acquisition of Honu Enterprises, a Washington-based cannabis infused edibles brand. The firm currently produces and sells concentrates, edibles, flowers, and topicals for consumption within the states of Washington and Colorado. Upon this closing, it is expected that Honu will shortly have its brand launched in the states of Nevada, Oregon, and California through the Cannabis One House of Brands strategy.

Total consideration for this purchase amounted to US$10.28mm, provided certain conditions are met under earn-out provisions. Upon closing, an equivalent of US$2.8mm was issued in the form of Class B shares of Cannabis One Holdings. The remainder is subject to certain revenue targets. Additionally, all shares issued will be subject to an eighteen month lockup period, with 33% of all shares being released at each six month interval.

Based on Honu management estimates, the company has provided guidance for fiscal 2019 for these assets totalling US$20.3mm in system-wide revenue, indicating that Cannabis One has paid a 0.5X multiple for the assets on estimated FY19 revenues.

While broader markets continue to cause turmoil across all sectors and the summer selloff continues to eat away at public cannabis equity valuations, we’ll remain focused on entities that continue to execute in line with their business plan. The continuance of acquisition execution by Cannabis One Holdings is one such example.

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FULL DISCLOSURE: Cannabis One Holdings is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover Cannabis One Holdings on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.