Kanabo Group (LSE:KNB) made its debut on the London Stock Exchange last month in exceptional fashion. Within the first few days of trading, the Kanabo share price increased from its issue price of 6.5 pence to over 40 pence. That’s more than a 500% increase in a matter of days!

But this growth appears to have been short-lived. While the share price is still firmly above its issue price, it has declined by over 50% since its highest point. What caused this drop? And should I consider adding the stock to my portfolio?

Kanabo Group: what is the business model?

Kanabo is a new addition to the stock market, but the business has been around for many years. During that time, it has developed several CBD-based products and inhalers, as well as performed extensive R&D for medical-cannabis oils.

But, the company has only recently begun generating revenue through a 3-month pilot programme that is still ongoing. It is selling a small collection of retail products to determine the level of demand, supply chain effectiveness and production quality controls.

Kanabo’s long term strategy is to produce a wide range of unlicensed medical cannabis oils to be used in combination with its vaporisation devices. It intends to use the sale of its retails products to fund this endeavour. And if successful, it could form a highly profitable razor-and-blades business model that could propel Kanabo’s share price to new highs.

There are several dangers ahead for the Kanabo share price

Excluding the pilot programme, Kanabo has no other source of income. And just like any other start-up, the company has yet to create any proven products or establish a well known and respected brand.

I think doing so will be essential for Kanabo and its share price as it attempts to penetrate into the healthcare industry. As previously stated, the long-term strategy is to create unlicensed medical-cannabis products. The advantage of developing an unlicensed medical product is no extensive clinical trials, or regulatory approval is needed before making it publicly available. As a result, the development process is significantly faster and cheaper.

However, because licensed equivalents of Kanabo’s proposed products already exist, it’s doubtful they will be prescribed by the NHS. Therefore the company will have to rely heavily on its currently undeveloped brand to sell these products to customers in the future.

Another potential risk arises from regulations surrounding vaporisation devices. In late 2019, the FDA concluded an investigation into e-cigarettes that sparked some concern. Evidence was discovered which showed the use of e-cigarettes has led to a rise in severe pulmonary illnesses. And even led to California outright banning these devices.

While Kanabo’s vaporisation devices are not e-cigarettes, they might fall under the same category in the eyes of regulators. If this were to happen, it would severely impact the stocks long term strategy.

Why is the Kanabo share price falling?

Growth stocks, in general, have seen recent pull-back in the market due to fears of rising inflation. But despite Kanabos’ falling share price, the business hasn’t published any new information that would suggest it’s in any kind of trouble. 

In fact, it recently announced that it has signed a new distribution agreement with Astral Health for its medical products. This is excellent news, in my opinion.

Even though the medical cannabis industry is expected to grow by nearly 18% a year until 2027, Kanabo is not a stock I will be adding to my portfolio today. Currently, there isn’t enough information about the quality and popularity of its retail products. When the final results of its pilot programme are published, a clearer picture of the business’s future will form, allowing for a more informed decision. For now, I’ll be keeping Kanabo on my watchlist.