Pharmadrug Signs LOI To Form New Business Combination

After the cannabis blow up of 2019 that particularly impacted CSE-listed stocks, there are many stocks of Pharmadrug’s (CA:BUZZ – $0.03 & US:LMLLF – $0.02) ilk that have lost a lot of value and appear to be cheap.

However, few of those cannabis-related companies actually generate revenues. In the third quarter of 2019 however Pharmadrug reached sales of no less than $271,000 with gross margins of $67,000, or 25%.

While those numbers prove the value of BUZZ’s strategy, the Company’s outlook is even much brighter. It already has two supply agreements in place with plans to close a third. These agreements will supply the Company with medical cannabis starting in Q2 2020 under the Company’s ‘Cannabion’ brand. Management’s goal is to have a run-rate of 1,000 kg of medical cannabis supply by Q4 2020 with 3,000 to 5,000 kg of medical cannabis in 2021.

The demand side also looks robust as Pharmadrug currently distributes its products to nearly 100 of the approximately 20,000 pharmacies in Germany in just four months. At that pace, we expect the Company to be in several hundred pharmacies by the end of 2020. Pharmadrug recently expanded its sales team to boost sales.

Letter Of Intent Signed

Despite the outstanding and realistic outlook, Pharmadrug is trading at a shell valuation of around $3 million in market cap. The more than $500,000 in revenue achieved in less than half a year in 2019, implies an annualized revenue multiple of less than 3x and things are just getting started. Even if it were to execute on half of the production and sales goal for 2021, BUZZ would be trading at around 0.1x of expected 2021 revenue.

As a result of this discrepancy, Pharmadrug’s management sought a solution. It has now entered into a LOI with a bigger entity in regards to a potential business combination transaction. Both parties are in the process of negotiating the terms of such transaction and completing their respective due diligence. If all goes well, the deal could be finalized in a matter of weeks.

In connection with the proposed transaction, the other party has provided BUZZ a loan of $250,000. The Loan carries an interest rate of 9% per annum accruing every 90 days. No further information was released at this moment, but it would be logical that the transaction is executed at a higher valuation than BUZZ’s current share price. Smallcaps Recommendation: BUY.

Smallcaps Recommendation: Buy	Price Target: $0.21	Latest Company Report (pdf)
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