Packaging Products & Solutions
HQ: Garden Grove, California, USA
Founded: 2010 as Kush Bottles (updated name in 2018)
Facilities: It has 18 sales and distribution facilities throughout the U.S. and Canada, including Massachusetts (hub), Michigan (hub), California, Washington, Colorado and others.
KushCo Holdings, Inc. is a wholesale distributor of packaging supplies, vaporizer parts, and gases in the US, Canada, Europe, and South America, primarily serving the cannabis industry. It has no direct contact with the plant or its THC and CBD ingredients.
It began as a packaging company but now derives less than 20% from that channel. It earns over 60% of revenue from vaporizer parts, and 11% from gases.
Its divisions include Kush Supply Co., a distributor of packaging, supplies, and accessories; Kush Energy, which provides hydrocarbon gases and solvents to the cannabis sector; and Koleto Packaging Solutions, its R&D arm developing intellectual property and pursuing acquisitions.
Kushco also runs Hybrid Creative, a marketing and design agency for cannabis and non-cannabis firms, providing brand strategy, design and marketing, web development, and e-commerce services.
Market Cap: US $430 mil
Enterprise value: $420 mil
# of employees: 200
Primary: 28 states and Canada
Secondary: South America, China, Europe
The company’s products are used by urban farmers, green house growers, and medical and recreational cannabis dispensaries. It regularly services more than 6,000 medical and adult-use dispensaries, growers, and producers across North America, South America, and Europe.
They maintain facilities in the five largest U.S. cannabis markets and have a local sales presence in most major cannabis markets across the US and Canada.
They source products from China and distributes them in North America, Europe, and South America.
It has a 66,000 sf Massachusetts distribution warehouse as its East Coast hub, and a 40,000 Michigan distribution facility as its Midwest hub.
Direct sales: Yes (website and re-distributors)
Store networks: No
Supply Agreements: Yes
Vertically integrated: No
Horizontally diversified: Yes
They have 10 major accounts billing over $1 mil per year
Outstanding shares (diluted): 107 mil
Revenue last year: $122 mil
Revenue rank in cannabis industry: 4th
Founder/CEO: Nicholas Kovacevich
CFO: Christopher Tedford, over 20 yrs experiene
COO: Rodrigo de Oliveira: oversees manufacturing, operations, global supply chain and logistics. Has 18 years of experience in global supply chain and operations
VP Sales: Jason Vegotsky
Kushco main packaging products are bottles, bags, tubes, and containers. Specifically, it offers pop-top bottles; child resistant exit, paper exit, and foil barrier bags; tubes; and polystyrene, silicone-lined polystyrene or glass containers.
It also offers vaporizer cartridges, heating technologies, batteries, and disposable units; and hydrocarbon gases, including isobutene, n-butane, propane, ethanol, pre-mixes, custom blends, and other solvents.
It is now moving into the business of helping small brands achieve nationwide distribution.
Current share price: US $4.85
Price to Sales: 3.8
52 Week Low/High: $3.76 to $7.20
EV / Revenue: 3.45
It has a cash intensive business and must raise money regularly. It recently secured $21.3 million in senior unsecured notes. Previously it sold 6.5 million units at $5.25.
The risks of investing in any cannabis company is currently high given the volatility of the market. The risks of investing in this company do not seem to have more risk than other cannabis companies.
Kushco management did a great job early on of carving out a strong niche in the new cannabis industry as a leader in packaging. Over the past 4 years, its revenue has shown incredible growth, from $4 million in 2015, to $8 million, $19 million and $52 million in the following three years through August, 2018.
In the four most recent quarters into 2019, revenue has continued growing, with QoQ gains of 26%, 39% and 17%. It finished its most recent quarter ending May 2019 with revenue of $41 million—4th highest in the cannabis industry, trailing only giants such as Canopy Growth, Aurora Cannabis, and Trulieve.
This is incredible growth. However, it is just revenue. Expenses are another matter.
It turns out this is a very tricky niche in which to lock in profits, especially at this early stage in the cannabis industry. KushCo sources hundreds of different products and SKUs mainly from China. Demand in its diverse, spread-out markets in the N America, and Europe is growing fast but is not predictable, so they often have to spend too much on expensive shipping to get products where they need to be, on time for their clients’ needs.
Their gross margin has dropped to 13% recently. On top of that, their operating expenses continue to mount, driving operating losses higher. They need a lot of cash to run the business, and at the bottom line, they continue to lose about $10 million per quarter.
While they have shown many strengths, they haven’t quite yet proven this is a viable long-term profitable business. And if they don’t develop relevant proprietary IP, they may not have a defensible moat.
The CEO believes the company will solve these issues in 2020 as it reaches scale and automates facilities. But questions exist among industry analysts about whether the business can produce enough cash to provide strong profits.
Management continues to do smart things to keep revenue growing. The packaging channel’s growth has slowed, yet management has quickly pivoted recently to make vaporizer parts its major revenue source now, in time to ride the crest of the vaporizer wave. This will remain a strong channel as vaporizers grow, but could peak and slow after that.
Management continues to find new opportunities. It recently formed a partnership with LA Fortune, a marketing and sales company also serving the CBD and cannabis industry. Together they will leverage their distribution strength, offering CBD clients faster and great access to major distribution. They hope to develop this into a strong new revenue stream to give it needed diversification.
Nick Kovacevich, CEO, said, “We remain committed to investing in the expansion of the business through initiatives targeting high-demand, high-margin opportunities that will facilitate increased cross-selling… We expect demand to increase for (our) core products as the cannabis and hemp markets expand… We will increase efficiency and add new verticals…”
At Cannin, we applaud the management’s efforts that have made Kushco a creative, agile, evolving player in the cannabis market, and so far, a revenue leader in the industry. But we want to see how they solve the cash and expense issues over the next year before we recommend investing.
Given the continued challenges ahead for the company, we give the stock a Neutral rating now. We do not think it has a guaranteed path to higher stock value at the moment, but we plan to watch it for interesting and new developments.