Kush Supply Co. (fka KSHB)

[JohnCM]

KushCo Holdings Inc Makes Its Case

By James Hudson - March 17, 2020
Oracle Dispatch

The story for KushCo Holdings Inc (OTCMKTS:KSHB) may be changing after the company just announced preliminary revenue results for its fiscal second quarter ended February 29, 2020. The Company also provides general corporate updates regarding the business and the recent outbreak of COVID-19.

According to the release, “KushCo expects its fiscal second quarter 2020 revenue to be approximately $30 million, compared to $35.0 million in its fiscal first quarter 2020. The 14% sequential decrease in revenue was driven primarily by a slower-than-expected rebound in demand for the Company’s vape hardware products, continued weakness in the California market, a slower-than-anticipated rollout of its hemp trading business, the extension of the Chinese New Year holiday, and a delay in the rollout of cannabis 2.0 products in Canada, especially due to some provincial bans and taxes on vape products.”

KushCo Holdings Inc (OTCMKTS:KSHB) is the parent company to a diverse group of business units that are transformative leaders in the cannabis, CBD and other related industries. KushCo Holdings’ subsidiaries and brands provide exceptional customer service, product quality, compliance knowledge and a local presence in serving its diverse customer base.

KushCo Holdings’ brands include Kush Bottles, a dynamic sales platform that is the nation’s largest and most respected distributor of packaging, supplies, and accessories, Kush Energy, which provides ultra-pure hydrocarbon gases and solvents to the cannabis and CBD sector, Hybrid Creative, a premier creative design agency for cannabis and non-cannabis ventures, and Koleto Packaging Solutions, the research and development arm driving intellectual property development and acquisitions.

Founded in 2010, KushCo Holdings has now sold more than 1 billion units and regularly services more than 5,000 legally operated medical and adult-use dispensaries, growers, and producers across North America, South America, and Europe. KushCo Holdings subsidiaries maintain facilities in the five largest U.S. cannabis markets as well as having a local sales presence in every major U.S. cannabis market.

According to its materials, “KushCo Holdings, strives to be the industry leader for responsible and compliant products and services in the legal cannabis and CBD industry. The Company has been featured in media nationwide, including CNBC, Los Angeles Times, TheStreet.com, Entrepreneur, and business magazine Inc. While KushCo Holdings services all facets of the cannabis and CBD industries, it has no direct involvement with the cannabis plant or any products that contain THC or CBD.”

As noted above, KSHB just announced preliminary revenue results for its fiscal second quarter ended February 29, 2020.

While this is a clear factor, it has been incorporated into a trading tape characterized by a pretty dominant offer, which hasn’t been the type of action KSHB shareholders really want to see. In total, over the past five days, shares of the stock have dropped by roughly -45% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities. Moreover, the name has seen interest climb, with an increase in recent trading volume of 62% beyond what we have been seeing over the larger time frame.

“Our revenue for fiscal Q2 was negatively impacted by several short-term factors, but we are fortunately seeing strong fundamental trends across the business that give us confidence for a stronger second half of the fiscal year and beyond,” said Nick Kovacevich, KushCo’s Co-founder, Chairman and Chief Executive Officer. “For one, despite a challenging near-term market backdrop in California, we have been actively tightening our customer credit terms, ramping up our collection efforts, and continuing to move away from the smaller and less financially stable customers that historically comprised a core part of our business.

In fact, over the past few years, this regional customer base, especially in recent months due to their heightened liquidity challenges, is gradually comprising a smaller part of our business, whereas our business with our larger MSOs and LPs, which each spend more than $500,000 on a trailing twelve months basis, has ballooned from less than 20% of sales in fiscal 2017 to more than 60% in fiscal 2019. While it will take some time for this transition to fully scale, we are encouraged with the progress thus far in securing and entrenching ourselves even further with these larger and more financially stable customers.

With respect to the broader demand for our vape products, we were disappointed to see a roughly flat quarter-over-quarter contribution from this category, but are encouraged with the underlying trends in our business that show continued robust growth in many of our key markets, such as Illinois, Michigan, Massachusetts, and Canada. As consumer sentiment and the regulatory environment around vape continues to improve, we expect this category to rebound and drive our revenue growth as well.”

Currently trading at a market capitalization of $64M, KSHB has a significant war chest ($14.7M) of cash on the books, which is balanced by about $31.5M in total current liabilities. KSHB is pulling in trailing 12-month revenues of $158.6M. In addition, the company is seeing major top-line growth, with y/y quarterly revenues growing at 38.1%.