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Cannabis-Industry Company

This U.S.-based company saw its revenue jump nearly 200% in the latest quarter—largely fuelled by the spreading legalization of medical and recreational pot across the U.S. The company’s move into selling the chemical solvents used to extract cannabinoids also contributed to the rapid increase. Those and other investments contributed to a loss in the latest quarter.

KUSHCO HOLDINGS, $5.37, symbol KSHB on the U.S. over-the-counter bulletin board (Shares outstanding: 78.6 million; Market cap: $421.2 million; TSI Cannabis Quality Rating (CQR):  ; www.kushco.com), specializes in the wholesale distribution of packaging, vaping products and rolling papers for the cannabis industry.

The company is not a marijuana grower; however, its fortunes are directly linked to the cannabis industry as it focuses on products for companies that produce and distribute marijuana products. They include farmers, greenhouse growers, and medical and recreational cannabis dispensaries.

KushCo has managed to increase its customer base rapidly over the past 3 years. In 2018, the company served 171 customers, who spent more than $50,000 annually on its products. This compares to 54 in 2017 and 13 in 2016.

The largest portion of revenue comes from selling vaping products (53%); this is followed by packaging (29%) and papers and supplies (12%). California is the largest market (49% of revenues), followed by Washington (14%) and Colorado (11%).

KushCo sells a wide range of vaporizer cartridges, vaporizer batteries and hydrocarbon gases, including isobutene, n-butane, propane ethanol and other solvents. These substances are essential for extracting cannabis oils and concentrate.

Vaporizing, also known as vaping, refers to the conversion of a substance from a solid or liquid state into gas by the application of heat. As it relates to medical cannabis, vaping involves the use of convection or conduction heating methods to safely bring dried cannabis to an optimal temperature (just below the heat required to cause combustion). It then releases cannabis compounds in the form of a vapour. Vaping cannabis is perceived to be a cleaner, safer and less-harmful alternative to smoking marijuana.

The company’s packaging business primarily consists of bottles, bags, tubes, and containers. Products are sourced from third-party suppliers around the world, including China. However, KushCo aims to play a role in ensuring that the products comply with federal food and drug safety regulations and consumer safety standards. The company also offers labelling services. It believes that adds significant value to the packaging design services it offers its customers.

KushCo makes acquisitions to expand its product offerings. Among its recent purchases is Hybrid Creative, a specialist design agency. It paid about $3 million in cash and shares. In May 2018, the company also acquired Summit Innovations, a hydrocarbon distributor for about $7 million in cash and shares.

Before that, it spent at least $40 million in cash and shares to purchase CMP Wellness, a distributor of vaporizers, cartridges, and accessories.

KushCo’s first year as a public company was fiscal 2017 (year ended August 31). Revenue was $18.8 million and increased 177.0% to $52.1 million for 2018. As the company invested heavily to meet its rapid growth, KushCo moved from a profit of $69,464 (nil per share) in 2017 to a loss of $10.2 million ($0.16 per share) in 2018.

For the three months ended November 30, 2018, revenue jumped 186.2%, to $25.3 million from $8.6 million a year earlier. The higher sales came as more U.S. states legalized cannabis for medical and/or recreational use. The company’s acquisitions and expansion into selling the chemical solvents used to extract cannabinoids also contributed.

KushCo lost $8.2 million, or $0.10 a share, in the latest quarter, compared to a profit of $94,615, or nil per share, a year earlier. The loss was mostly due to much higher sales and marketing expenses. On November 30, 2018, it held cash of $3.0 million and its total debt was a low $6.8 million.

The company increasingly faces competition from dozens of rivals producing and selling similar products. It also needs to successfully expand its supply chains and distribution networks to meet rapidly rising demand for its products. Meanwhile, KushCo has built a strong brand in the cannabis industry. In particular, its established presence in the large markets of California, Washington, Nevada, Colorado and Canada should also help it retain and attract customers.

KushCo Holdings has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.