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viewKushCo Holdings Inc.

KushCo has positioned itself as a premier ‘picks and shovels’ provider of cannabis and CBD-related ancillary products

Snapshot

The company has sold more than 1 billion of its products and is transitioning to positive cash flow

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Quick facts: KushCo Holdings Inc.

Price: 1.26 USD

OTCQX:KSHB
Market: OTCQX
Market Cap: $166.5 m
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  • Long-term relationship with industry leaders
  • Has sold more than 1 billion of its products 
  • Transitioning to positive cash flow  

What KushCo Holdings does:

North America’s burgeoning cannabis sector has sparked rapid growth for California-based KushCo Holdings Inc (OTCQX:KSHB), which has established itself as a premier provider of ancillary products and services to the global cannabis and CBD industries.

The company has been operating for more than 10 years, selling more than one billion units to growers, processors, producers, and brands across North America, South America, and Europe.

KushCo’s products and services include: 

  • Vaporizer hardware and technology (about 60% of the company’s revenue), producing cartridges, pod systems and batteries with a variety of core materials and heating technologies  
  • Packaging, papers and supplies (about 30% of the company’s revenue), which encompasses manufacturing child-resistant compatible, fully customizable and CBD packaging plus compliant labels and processing supplies  
  • Energy and natural products (approximately 10% of the company’s revenue), which includes cannabis and CBD-based hydrocarbons, solvents and food-safe oils as well as investments in stainless steel storage tanks
  • CBD services, such as retail execution, merchandising, and sales management for compliant hemp-derived CBD products, along with hemp trading solutions for growers and processors
  • Equipment financing through the company’s strategic partnership with XS Financial, in which KushCo owns an approximate 19.5% equity stake

KushCo Holdings is led by CEO Nick Kovacevich, a serial entrepreneur with success launching BigRentz, Alpha West Holdings, and KushCo, each having generated more than $50 million in annual revenue.

How is it doing:

In early 2020, KushCo launched a strategic plan to achieve positive adjusted EBITDA, which included reducing its overhead, streamlining warehouse operations, reducing its inventory, and drastically altering its sales strategy and resources to rely less on the smaller operators, while doubling down on efforts to solidify and strengthen its core base of large multistate operators (MSOs), licensed producers (LPs) and leading brands.

To that end, the company announced in February the pricing of a $40 registered direct offering, selling some 24.2 million shares of common stock along with the warrant to buy nearly 9.7 million more. The shares and warrants will have a combined offering price of $1.65 per share pursuant to a registered direct offering, the company said, and the warrants will be exercisable at $2 per share with a purchase window of five years. KushCo plans to use the net proceeds to pay down its debt and for general corporate purposes.

Also in February, KushCo renewed its partnership with Abstrax Tech (ABSTRAX), a provider of research, development, and production of cannabis and botanically-derived terpenes. The company said it will receive commissions for any referrals it makes to ABSTRAX, representing 100% gross margin to KushCo, and KushCo customers will also receive discounted ABSTRAX pricing. 

The company also recently partnered with Mascot Books to deliver more than 100,000 books to children in the US. KushCo said the partnership represents the latest initiative from its KushCares platform, which has helped strengthen local communities, empower KushCo employees, and positively impact the legal cannabis and CBD industries through various ESG and CSR initiatives.

KushCo’s investee company, XS Financial Inc, reported in December that it has agreed to provide Columbia Care with an equipment lease facility of up to US$5.0 million to purchase new equipment.  

In January, the company announced fiscal 2021 first-quarter revenue of $26.8 million along with its second consecutive quarter of positive adjusted EBITDA, as the company achieved record December sales of $14.7 million.

KushCo also increased its net revenue guidance for its fiscal year 2021 to be between $130 million and $160 million, from between $120 million and $150 million previously, and reiterated its expectation for adjusted EBITDA for the fiscal year to be between $5 million and $7 million.

The company ended 1Q 2021 with approximately $5.7 million in cash as of November 30, 2020.

What the broker says:

 

On February 23, analysts at Roth Capital Markets reiterated its "Buy" rating and $2.25 price target after the company priced a $40 million registered direct offering. 

“KSHB remains well positioned in the cannabis industry as a lead supplier of packaging, exclusive vape hardware, and ancillary services to leading MSOs, LPs, and brands,” the analysts wrote. “KSHB has developed a leading position in its ancillary service niche, but was costly to build out with a significant amount of dilution and debt to finally reach profitability and a right-sized expense structure.”

Despite the share dilution, the firm said the offering strengthens KushCo’s balance sheet and sets it up for potentially transformative moves. 

“We expect the company to pay down its debt and look to accelerate product development and new initiatives to grow its revenue base,” the firm added. “With secured financing in place, the next catalyst for KSHB is to move toward an uplisting or even a speculative bigger transformative deal within the industry.”

 

Inflection points:

  • M&A opportunities
  • Fiscal 2021 net revenue of between $130 million and $160 million expected
  • Anticipating 2021 adjusted EBITDA of between $5 million and $7 million

What the boss says:

Commenting on the company’s 1Q 2021 financial results, KushCo Holdings CEO Nick Kovacevich said months of work on high-value projects has begun to pay off. 

“We're starting to see some of our higher value custom packaging projects finally come to fruition, after months of hard work with our customers to bring these products to life," Kovacevich said in January. "We recognized initial revenue from these projects in Q1, but have a strong backlog of projects that are expected to ship in Q2 and throughout the remainder of the fiscal year."

Kovacevich said the company now has a total of four customer supply contracts in place and several more in progress. 

“With some of the early sales trends we're seeing in fiscal Q2, we believe we're in a strong position to continue gaining momentum going into the second half of the fiscal year, which should coincide with several new adult use programs going live, as well as our customers continuing to ramp up their footprint both organically and inorganically," he added. "Fiscal Q2 is shaping out to be a much stronger quarter, as we further penetrate the leading MSOs and LPs with supply contracts, higher-margin custom projects, and a wider array of products and solutions through our cross-selling efforts."

Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com

Follow him on Twitter @andrew_kessel

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