New Cannabis Ventures hosted a webinar with Nick Kovacevich, CEO of Kush Bottles (OTCQB: KSHB), on July 19th. The company, a leader in the cannabis packaging industry that serves as a dynamic sales platform of products and services for both businesses and consumers, published its FY17-Q3 results last week, with reported sales of $4.7mm and pro forma sales of $7.2mm (including a full quarter contribution from recently acquired CMP Wellness). Cowen and Company analyst Vivien Azer projects FY18 sales of $46mm and EPS of $0.05.
In his prepared remarks, Kovacevich provided an industry overview, discussed his company’s operations, shared its growth strategy, highlighted its management leadership and reviewed financial highlights. His key takeaways were that Kush Bottles has unique relationships with growers, dispensaries, manufacturers and ancillary companies that give it a first-mover advantage as it expands, the company has made extensive investments into its team, systems and infrastructure and it is positioned to consolidate the industry.
Readers can watch the presentation and download the slides that Kovacevich discussed before taking Q&A. We have provided a summary below of some of the key points as well.
Download the presentation slides
Kush Bottles remains primarily a B2B-focused company but now also is beginning to focus on consumers as well, with offerings including Terps on Terps, Roll-uh-Bowl and Midnight Toke. Importantly, the company’s e-commerce offerings don’t overlap the products it is selling to its cannabis industry clients. The company has almost 2000 SKUs of packaging, supplies and accessories that it offers to its customers in the U.S. and internationally. The company has been building a portfolio of branded products:
Kovacevich discussed the company’s broad and diversified client base, which has quadrupled since 2015 to over 4000. Kush Bottles, which has facilities in California, Washington and Colorado, has a physical presence in Hawaii and Puerto Rico through distribution agreements and is looking to establish a relationship in Alaska. The company’s growth strategy involves staying on top of industry trends, being a first mover in new markets, growing its share of wallet with existing customers, leveraging strategic partnerships and making strategic acquisitions.
As it relates to acquisitions, the company, which as closed three acquisitions over the past two years, is able to provide growth capital to founders who want join forces. Kovacevich discussed several ways Kush Bottles can add value to the companies it acquires, including its marketing, technology, its cloud-based ERP, supply chain, graphic designers and accounting, all of which are internal to the company.
Nick discussed his background as well as the backgrounds of President & COO Ben Wu, who has private equity background and leads the M&A activity, and CFO Chris Martin, who oversaw the Form 10 process the company used to go public.
Kush Bottles Q3 revenue of $4.7mm included a month of contribution from the recently acquired CMP Wellness and represented 103% growth. The company is optimistic that the dynamics of California, Nevada and Massachusetts will continue to fuel robust growth. The company has $43.7mm in assets, about 90% of which are goodwill from CMP Wellness, with working capital of $4.2mm.
In the Q&A, Kovacevich discussed the recent growth, suggesting that the recent acquisition boosted the third quarter (with one month of sales), but he believes demand for custom packaging has been driving growth along with its Oregon operations. With respect to future acquisitions, he expects the company will continue to use its stock the way it did with CMP Wellness, where the $21mm purchase price was paid with cash of only $1.5mm and the balance in stock. Kush Bottles is looking for unique products, manufacturing relationships, internal expertise, and different customer lists.
I asked Nick about how the company is managing the bandwidth of its leadership, and he pointed to some recent hires that have leveraged different skill sets from outside industries, including Ed Pratt, VP of Operations and Sales, and Kevin Nguyen, who now runs the supply chain. Kovacevich pointed to a dramatic change in the ability of the company to hire talent over the past 18 months as stigma has eroded. He believes the company being public, having a seven-year operating history and a strong balance sheet make the company attractive to those entering the industry.
Kovacevich explained how Kush Bottles is differentiated from its peers, pointing to its multiple facilities, its large number of relationships developed over years, the ability of the company to manage compliance issues and even help guide regulation at the state-level. He also said that the brands and intellectual property also play a big role in how the company competes.
One interesting observation Nick shared is that the company might consider a Canadian exchange at some point in the future, as he sees the U.S. capital markets development for cannabis-related companies as lagging. Presently, the company is just short of fulfilling quantitative and qualitative requirements that would allow it to uplist from the OTC, but it expects to meet them over the next six months. He clearly believes that ancillary companies should have a clearer path to the higher exchanges and is working on educating the exchanges, and emphasized how the company protects shareholders by not getting close to the line of “touching the plant”. He specifically pointed to turning away equity deals from potential clients until cannabis is federally legal.
Looking ahead, the company expects to have substantial cross-selling opportunities with CMP Wellness. In the first month of operations, May, the company had not yet begun this effort beyond its largest customers, but it has invested heavily in training. In general, Kush Bottles is seeing its existing customers spend more with the company as they grow.
Somewhat paradoxically, Kush Bottles sees the current uncertainty at the federal level as a positive for the company, as new entrants are likely to be slow to join the industry. He is counting on the Republicans honoring the concept of state’s rights.
While Kovacevich wouldn’t share a specific growth outlook for FY18, he believes that the company’s historical growth rates are sustainable given the changes ahead in California, Nevada and Massachusetts. The biggest driver will likely be California, which is moving from a low-level of regulation to a more robust system, especially as it relates to packaging. He is very excited about the introduction of child-resistant packaging for the first time. The company is investing in feet on the ground and is considering a facility on the East Coast to accommodate legalization in Massachusetts.
Kush Bottles currently has some business in Canada, but he expects that when the country evolves from mail-order medical-only to an adult-use market next year, the company will be more active, especially as branding and differentiated products will be more important. As it relates to international expansion, the company is monitoring developments and already has a small amount of sales from outside North America, but it thinks that the most value will come from California, Nevada and Massachusetts and wants to be focused. He also tied in the ability to raise more capital as influencing the company’s international strategy.
Link – New Cannabis Ventures
