Can potential growth aid this cannabis stock? + strategic planning alternative

Chart showing Kanabo shares on London Stock Exchange

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Deal of the Week / In partnership with Viridian Capital Advisors

Is potential growth enough to right Kanabo’s share trend?

If you can’t beat ’em, join ’em.

Smaller companies are merging with larger competitors to survive in a challenging cannabis business environment.

Typical of this trend: London-based Kanabo Group (LSE: KNB), a European medical cannabis company, said Feb. 22 it had acquired telemedicine provider The GP Service for $13.8 million in stock and the assumption of $1.8 million in debt.

GP Service connects doctors with patients online to diagnose and treat common conditions. The company’s physicians can order prescriptions at more than 4,000 pharmacies

Kanabo, the first medical cannabis company to list on the London Stock Exchange through an IPO, closed several deals last year, including:

  • A supply agreement with Greek cultivation facility Hellenic Dynamic.
  • A new European Union production line with Pure Origins.
  • A production-line deal with PharmaCann for VapePod cartridges.

Kanabo’s most important deal, however, has yet to close. In July, it agreed to buy Materia for $16 million in stock, with future earnouts of up to $32 million.

Materia’s assets include a Maltese manufacturing facility through which the company can import and process cannabis flower. Kanabo expects this facility to process any new extracts it develops.

Materia also owns a German wholesaler that can import and sell medical cannabis products directly to German pharmacies.

Kanabo gave a progress report late last year but has not closed the deal or updated investors on its progress. The company’s shares rose when the deal was announced and then again after an upbeat progress report in November.

A downtrend since in shares since might reflect concern the deal might not go through.

Industry analyst Prohibition Partners projects the medical cannabis market in the United Kingdom to grow at a compound annual growth rate of 47%, from $190,000 in 2019 to $1.3 billion in 2024.

Growth so far has been slow: Clinicians’ current focus is on treating multiple sclerosis, chemotherapy-induced nausea, treatment-resistant childhood epilepsy and weight loss.

Importantly, however, regulations legalizing cannabis products for human medicinal use also allow doctors to prescribe cannabis for chronic pain.

Opening up chronic pain as an approved use typically opens the floodgates.

The growth has not turned exponential because there has been neither government guidance nor cannabis education for doctors.

As a result, doctors have followed the narrow advice published by the National Institute for Care and Excellence.

Recent polling indicates more than half of U.K. adults favor cannabis legalization in some form.

Enormous growth for cannabis lies ahead, but the race favors larger, better-capitalized companies.

Dealing with the high costs of strict regulation while waiting for the market to liberalize might require more resources than a $30 million company such as Kanabo can muster.

As larger competitors, including the Canadians (especially Aurora Cannabis), position themselves to supply the European medical marijuana market, Kanabo probably should be angling to be an M&A target rather than an acquirer.

Luckily, the company appears to have enough liquidity to be picky – for now.

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When strategic planning isn’t enough, break out scenarios

Strategic planning is a great tool for any company, but when your business operates in as volatile a space as cannabis, it can be very difficult to see far enough out to build those five-year plans.

An alternative approach? Scenario planning, a tactic highlighted by our guest on last week’s episode of “Seed to CEO” podcast, Akerna CEO Jessica Billingsley.

Strategic planning tends to have a singular set of specific goals in place that you create a road map to reach.

Scenario planning, on the other hand, forces you to look at several potential outcomes that could result from today’s decisions.

For example, when the COVID-19 pandemic hit, no one knew how the path ahead would unfold, so any strategic road map likely would be tossed quickly.

Scenario planning looks at the situation and maps out potential forks in the road and establishes operating procedures to respond to those potential choices.

The simplest version of scenario planning asks you to lay out the base, best and worst cases.

The base case is similar to what you’d come up with during a standard strategic planning session.

The best case is everything coming up rainbows — which can, in itself, create problems. The worst case, well, I’d say the pandemic comes close to that as a good example.

Here are the questions to ask yourself to plan for such scenarios:

  • What could happen to drive us down any one of these paths? This could be losing a critical customer or gaining a large supply contract. Or it could be far less obvious, such as a malicious attack on your computer systems, an experience Billingsley talked about on the podcast.
  • What tools do we have in place that would help us respond to the situation? Create a nimble operation to address the challenges that arise. Do you have a plan in place for scaling rapidly if demand increases? Can you shift responsibilities to accommodate slowdowns or disruptions?
  • Who is responsible for tracking activity to determine when a change needs to be made?

Don’t go crazy with your pool of scenarios. Usually, three to five will suffice to create a plan that can be adjusted as needed.

You can’t plan for everything, but you can create an organization that is prepared to respond to anything.

– Jenel Stelton-Holtmeier