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KushCo Expects Growth in Its Core Cannabis Business as It Expands Into CBD Market – New Cannabis Ventures

January 22, 2020

Exclusive Interview with KushCo CEO Nick Kovacevich

Ancillary company KushCo Holdings (OTCQX: KSHB) is expanding its core business and focusing on new business divisions to drive its strong revenue projections for 2020. Co-Founder, CEO and Chairman Nick Kovacevich, who last spoke with New Cannabis Ventures in December 2018, checked in to talk about his companys growing platform, funding and KushCos long-term vision. The audio of the entire conversation is available at the end of this written summary.

Finding talent is a major focus in the cannabis industry, and KushCo has worked to find the right people to drive its growth. The companys management team is a blend of people with entrepreneurial experience and people with decades of corporate experience, according to Kovacevich.

A Company-Wide Meeting at KushCo

The Opportunity in the Vaping Crisis

Vape has been a significant segment of KushCos business, and the company did experience short-term effects from the vaping crisis. According to Kovacevich, the stock sold off due to uncertainty around how sales would be affected as consumer demand declined. Now, the health issues related to vaping have been tied to vitamin e acetate, an additive largely found in black market products.

Already, Kovacevich is seeing retailers regaining confidence and ordering more products as consumers become comfortable again. In the long-term, he sees the vaping crisis having a positive effect on the industry. More consumers will likely migrate from the illicit market to legal outlets. Meanwhile, operators in the space are going to turn toward premium products, like those that KushCo provides, to boost consumer confidence in their products, according to Kovacevich.

A KushCo Vape Capsule

KushCo also has a brand protection and anti-counterfeiting offering on its platform through an exclusive distribution agreement with De La Rue. De La Rues anti-counterfeiting sticker serves to authenticate products throughout the cannabis supply chain, helping to combat illicit operators and counterfeit products.

KushCo in the Hemp and CBD Ecosystem

KushCo is building a holistic approach to the CBD supply chain. Over the past decade, the company has built a network of cultivators, processors, and brands. Leveraging that network, KushCo’s hemp trading division can facilitate transactions within that network. The company is helping growers sell hemp biomass to processors, assisting processors sell their crude, distillate, and oil, enabling formulators to connect with brands and connecting brands with distribution channels. KushCo has designed a transparent model that spans seed to sale, according to Kovacevich. The hemp trading division is already gaining significant tractionthe company is projecting $25 million in sales in its first year of operation.

The companys recently launched retail services division is helping CBD brands enter mainstream outlets. In partnership with sales and marketing agency C.A. Fortune, KushCo is facilitating CBD brand entry into mainstream grocery channels. C.A. Fortune has access to 500,000 retail doors, according to Kovacevich. Sales and marketing agencies are a common strategy in traditional CPG, and KushCo is applying that strategy in the CBD space. KushCo has also launched an internal retail services team to target other channels such as beauty, pet, and convenience.

Downstream, this model will continue to drive growth for KushCo. Its brand partners will need more formulated products, and KushCo will be there to connect brands with formulators and those formulators with processors and farmers.

With so many opportunities in the CBD space, KushCo has also launched a new line of CBD packaging with approximately 500 SKUs.

More Growth

Hemp trading and retail services are big initiatives for KushCo in FY 2020, but the company is also eyeing equipment financing. The company will be able to help finance various types of equipment (such as extraction or drying equipment) through a capital partner so that operators will be able to allocate cash to initiatives like sales and marketing rather than a fixed cost, according to Kovacevich.

KushCo is also targeting growth in markets like Michigan and Illinois (recent entrants into the recreational space) and Canada, which is rolling out Cannabis 2.0 products. The company is keeping an eye on new states expected to allow adult-use.

KushCo’s Current U.S. Footprint

In the past, KushCo has entered new product and service categories (such as vape and energy) via acquisition. Now, the company is expecting to focus more on organic growth and partnerships with large companies like C.A. Fortune. It may vet EBITDA-accretive deals where the seller takes primarily stock, but the company has reached a large enough scale that it can likely enter new categories on its own rather than via acquisition, according to Kovacevich.

Compliance also plays a key role in the companys approach to potential acquisitions. Many companies that could be interested in being acquired arent operating at the level of compliance KushCo requires.

Monroe Capital Credit Facility

Over the summer, KushCo secured a $35 million credit facility with a $15 million accordion from Monroe Capital. The scalable credit facility is tied to the companys receivables and inventory, according to Kovacevich. The funding will help the company as it continues to scale up its operations.

2020 Revenue Projections

KushCo has doubled its business each year over the past several years, and it is projecting similar growth for FY2020. In Q4 of 2019, the company did $45 million in sales through its core businessan annual run-rate would take that number to close to $200 million. The company is planning to grow its core business to about $200 million in sales and add an additional $30 to $50 million in revenue from new businesses, such as hemp trading, retail services, and CBD packaging. In total, KushCo is expecting to go from $150 million to $230 to $250 million in FY 2020.

Achieving true valuations in the current market is difficult, but Kovacevich anticipates that will change following the expected market shakeout.

Long-Term Vision

Going forward, KushCo is keeping in mind risk management. As capital markets continue to be a challenge, many companies may struggle to sustain their business. If KushCo sells its branded products to a company that can no longer pay, it will experience a detrimental effect on its cash flow. The company is carefully considering who to do business with and extend credit to, according to Kovacevich.

Inside KushCo’s Garden Grove, California Warehouse

With this in mind, the company is aiming to align with long-term winners in the space, companies that drive consolidation in the space. Over the next few years, those large companies will likely spend more and more with KushCo to meet their needs, according to Kovacevich. Ultimately, the company is looking for ways to touch as many transactions in the space as possible: brokering raw biomass and crude oil deals, packaging, branding, retail services, and more. KushCo will continue to focus on effective cross-selling to help its customers achieve effective market penetration.

While it can be difficult to predict what the industry and its companies will look like in even just a few short years, Kovacevich is keeping in mind the opportunity that the eventual federal legality of THC represents. Federal illegality prevents KushCo from doing so now, but, when it can, it will have the chance to do with the THC supply-chain what it is doing in the CBD ecosystem.

New Cannabis Ventures provides an Investor Dashboard for KushCo, which is a client of New Cannabis Ventures. Listen to the entire interview: