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

• 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 April, KushCo reported 2Q 2021 revenue that rose 23% quarter over quarter to $32.9 million, driven by increased sales to the company’s top customers, including leading multi-state operators (MSOs) and licensed producers (LPs).

KushCo’s cash position at quarter’s end was about $35 million as of February 28, compared with $5.7 million in the previous quarter, boosted by the company’s $40 million equity raise.

The company’s net revenue increased 9% year over year.

KushCo also noted its adjusted EBITDA loss in the second quarter narrowed to $700,000 from a deficit about $14.8 million during the same period last year, following corporate rightsizing initiatives that included headcount reductions and lower travel and entertainment expenses.  

As well, the company said it secured a long-term supply contract with a leading West Coast operator during the quarter and was awarded 38 supply contracts for its stainless steel tanks.

Earlier, KushCo announced it had agreed to merge with Greenlane Holdings Inc (NASDAQ:GNLN), which the companies said will result in $15 million to $20 million of annual run-rate cost synergies within two years.

The combined company is expected to have pro forma revenue of more than $250 million for 2021 and a pro forma market capitalization in excess of $350 million based on the respective share prices of Greenlane and KushCo as of March 30. Following the merger, the entity is expected to generate pro forma revenue of between $310 million and $330 million for 2021.

Under the terms of the merger agreement, KushCo shareholders will receive roughly 0.25 shares of Greenlane Class A common stock for each share of KushCo share held.

KushCo will become a wholly-owned subsidiary of Greenlane once the merger closes.

In February this year, the company announced 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.

What the broker says:

In an April 9 note to clients, Roth Capital Partners analysts commented on KushCo’s  2Q 2021 financial results, in which the company reported another quarter of sequential growth (23%) and returned to year over year revenue growth, driven by strength in the vape segment and several key US markets.  

“We are encouraged by the top-line growth, despite the approximate $3 million in sales leaking into 2Q on continued freight issues which have yet to be fully-resolved,” the analysts said.

“We expect the closure of the Greenlane Holdings merger (expected late 2Q/early 3Q) to enhance the cross-selling opportunity as Greenlane brings leading brands in vape (PAX, Storz & Bickel & Grenco Science) and a leading, proprietary packaging solution in Pollen Gear,” they added.

The Roth Capital analysts also noted that KushCo management anticipates $15 million to $20 million in annual cost synergies following the company’s consolidation with Greenlane within 24 months of closing, which they believe will help KushCo achieve its 2021 pro forma revenue guidance of between $310 million and $330 million.

“We are accounting for increased near-term vape mix and high cost inventory to impact margins, but believe top-line growth should return to the mid-teen range in 2H21 for the KushCo business,” the analysts concluded.

“We expect 2021 and 2022 sales of $141.7 million and $220.2 million, respectively, leading to EBITDA of $1.7 million and $14.2 million.” 

Roth Capital Partners reiterated its ‘Buy’ rating and $2.25 per share price target on KushCo Holdings.   

Inflection points:

• Pending merger with Greenlane Holdings 
• Fiscal 2021 pro forma revenue of between $310 million and $330 million expected 
• Anticipating pro forma adjusted EBITDA to climb to $14.2 million by 2022 

What the boss says:

Commenting on the company’s 2Q 2021 financial results, KushCo Holdings CEO Nick Kovacevich said in a statement: “We are thrilled to have not only achieved meaningful sequential revenue growth in fiscal Q2 2021, but more importantly, to return to generating robust year-over-year revenue growth, as we make further progress on our strategy of aligning deeper with the top MSOs, LPs, and leading brands.”  

Kovacevich added: “In fact, our top 25 customers together made up 77% of our total revenue for the quarter, up from 61% in the prior year period, demonstrating our success in deepening our relationships with these elite customers who are continuing to rapidly scale and consolidate the industry.” 

Contact Sean at [email protected]

Story by ProactiveInvestors