Easton Pharmaceuticals Inc (OTCMKTS:EAPH) is trading down on the price at which we last highlighted the company and, at the Thursday close last week, traded for a little over $0.021 a piece. By the close of the session on Friday, however, the company had boosted to $0.027, a close to 7% appreciation across the session, and looks set to sprint out of the gates as the session on Monday gets under way in the US.
This is a stock that we’ve put forward as one to keep an eye on on a number of occasions over the past twelve months. For those new to the stock, it’s a biotechnology play and it’s current focusing on (from a development perspective) the bringing of a variety of treatments to market based on the active compounds in cannabis.
Specifically, Easton has spent the majority of 2017 trying to lay down a framework for expansion into the medical marijuana spaces in the US and Canada. Subsequent to the recreational legalization ballots in the US at the end of last year, the medical space in North America has drawn a lot of attention and – by proxy – a large degree of speculative volume.
The US is pretty much ready to go and the market is already growing. Canada, on the other hand, is around eighteen months behind its neighbor in terms of recreational legalization. By summer next year, the legal framework should be in place to allow companies like Easton to cultivate and sell relatively freely.
The latest news feeds into this forward development. Specifically, Easton announced at the end of last week that it has advanced $575,000 CDN towards its acquired interest in 45 acres of a 135-acre fully owned parcel of land for the cultivation, production and sale of medical/recreational marijuana to the cannabis industry and towards other revenue producing businesses. This is the first tranche of what amounts to a $1.3 million CDN deal, with Easton on one side and a Toronto entity called Alliance Group. The deal sees Alliance sort out the logistics side of the operation, arranging things like permitting, operational infrastructure construction, staffing, all that sort of thing. Easton is the money behind the deal and – in return for the capital support – will pick up a revenue share from the operations.
Until the operation generates revenues, Easton will also pick up a 50% portion of Alliance’s current and aggregate operational revenues, which will start generating revenues within the next 30 days with contracts and purchase orders currently in place which will be announced on a subsequent release.
We don’t yet know exactly how much this deal will mean for Easton’s bottom line. What we do know, however, is the the operation that is currently being put in place on the back of this Easton/Alliance deal is estimated to generate several millions of dollars in its first year with significant profit margins.
So how does this play into a long-term thesis?
When considered against current financials (little to no revenues and a running operational loss), the Alliance deal could be a real winner for Easton and its shareholders going forward. The company is positioning itself to benefit from what should prove a wave of speculative capital flowing into the Canadian cannabis market (both the recreational and the medical side of the industry) and it’s only going to be a matter of time before the companies that are at this end of the space start to run. Sure, there’s the standard runway risk and anyone that’s thinking about picking up an exposure to the stock needs to consider the impact an equity raise (which we could see between now and the end of this year) might have on the value of their holdings, but given the upside potential, any dilution is likely to be negated by appreciation.
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Disclosure: We have no position in EAPH and have not been compensated for this article.