Exclusive Interview with KushCo CEO Nick Kovacevich
Cannabis ancillary company KushCo has demonstrated the ability to successfully adapt over the course of its 10-year history. CEO Nick Kovacevich last spoke with New Cannabis Ventures at the beginning of the year. Since then, the company has undergone a strategic shift in order to achieve profitability. Kovacevich checked in to discuss the company’s new approach and how he sees KushCo moving forward with growth. The audio of the entire conversation is available at the end of this written summary.
Earlier this year, KushCo underwent a right-sizing process. The company made significant cuts to its staff, and it formed a leaner C-suite team. Today, the leadership team is made up of a blend of entrepreneurial talent and executive experience, the right combination to help the company execute on its strategy, according to Kovacevich.
In March, the company named Stephen Christoffersen as CFO. Kovacevich also highlighted Chief People Officer Rhiana Barr, COO Rodrigo de Oliveira and General Counsel Amir Sadr as vital members of the leadership team.
The Path to Profitability
KushCo was relying on capital to fund an aggressive growth plan, and it significantly increased sales by putting that capital to work, according to Kovacevich. But, then the vape crisis hit the industry at the beginning of the last fiscal year, followed by COVID-hit at the beginning of 2020. Capital dried up.
The company needed a new plan. KushCo opted for a lower cost structure and decided to operate as if no more capital would be coming into the company. The company is now in a position to self-sustain without outside capital.
KushCo also made the decision to shift its focus to a customer base of MSOs, publicly traded companies and large brand operators. The capital that is available in the industry is consolidating around those companies, according to Kovacevich. He expects to see more value as the company offers a higher quality level of products and services to this set of customers.
Thus far, KushCo has made significant progress with this strategy. It has had nearly 20 percent growth from Q3 to Q4, and in the fourth quarter, it had profits for the first time in three years, according to Kovacevich.
Focusing on Core Competencies
As a part of its current approach, KushCo is pulling back its focus and sticking to its three core competencies: packaging, paper and supplies; vape hardware and energy and solvents.
While narrowing its focus to those areas, the company plans to expand and innovate within each category. KushCo plans to offer more packaging variety while maintaining its competitive pricing. Within the vape category, the company is leveraging its partnership with CCELL to offer more innovative products. Within its energy business, it has launched stainless steel tanks for butane, which minimize the risk of chipping, flaking and erosion that comes with traditional carbon steel tanks.
KushCo is also focusing on quality. It is working with GMP-certified factories to meet the needs of the MSO market.
MSO clients have been increasingly seeking customized packaging options, and KushCo is capitalizing on this trend, according to Kovacevich. MSOs are thinking about packaging in terms of their branding and in terms of automation and efficiency. How can they standardize the type of packaging they want?
KushCo’s team, working both domestically and overseas, is able to work with these clients to design something custom that allows them to differentiate their brand while delivering on the price that they want. These projects can take six months to a year. KushCo is currently working on several, and it expects more in the future.
At the beginning of the year, KushCo entered the equipment financing space. It took an approximately 20 percent stake in Xtraction Services (CSE: XSF) (OTC: XSHLF), now XS Financial, to help cannabis operators free up cash that is tied up in equipment.
This aspect of the company’s business is going well, but there could be more upside if XS Financial had more capital at its disposal, according to Kovacevich. While there is still room for growth, equipment financing currently represents a cross-selling opportunity for the company. If it helps finance extraction equipment for an MSO, there is the possibility to earn that company’s energy business or vape hardware business.
COVID-19 has put a damper on the CBD market, with traditional retailers prioritizing products like toilet paper and hand sanitizer over CBD. While the pandemic has been disruptive, KushCo still believes in the long-term opportunity of CBD.
The company operates in the CBD space with a capital-light model. It offers CBD retail services and hemp trading. The commodity market is oversupplied, so KushCo is working on building the demand channel instead, according to Kovacevich. With little cost associated with these operations and a partnership with food broker C.A. Fortune, Kovacevich sees significant opportunities in the future as retail stores begin to show more interest in CBD products again.
The California Market
In the past, KushCo overextended in California and took on too much risk. But, it is now refocusing on that market with a more careful approach. It is aggressively pursuing the companies that still owe it money through litigation. It is also working with companies that can pay cash and being more selective about extending credit terms. The company does see continued growth in the California market, but it will be more measured. Kovacevich also sees an increasing participation by MSOs as likely to allow it to participate in the the market.
Managing Through the Pandemic
The COVID-19 pandemic began in China, resulting in widespread factory shutdowns. KushCo imports goods from China, which meant it had to manage through a major supply chain disruption. While it was able to manage, the price to ship goods and tariffs are still a challenge. Kovacevich expects the supply chain to continue to normalize as the world adjusts to the reality of COVID-19.
Despite these challenges and the inability to do face-to-face business, KushCo excels at managing customer relationships, and Kovacevich believes the company has been able to strengthen those relationships during the pandemic.
Given the vape crisis and overall capital crunch, KushCo knew its ability to raise capital would be impacted. So, the company has positioned itself to self-sustain. It has over $10 million in cash on hand as of Q4 (8/31), and it has an available $35 million revolving credit line with Monroe Capital.
With positive cash flow in the fourth quarter and a budget for next year that works with the resources on hand, KushCo does not need to seek outside capital. But, the company will still evaluate any opportunities that arise. For example, a potential accretive acquisition could require some additional capital.
KushCo released guidance of $120 to $150 million in net revenue for fiscal year 2021. The company is confident in the lower end of this range without any new states coming online. It is aligned with many top MSOs, and it is ramping up its sales efforts. But, there are five new states launching cannabis programs, which could help the company hit the ender end of its guidance.
As KushCo grows, its team carefully looks at sales, margins, customer retention, growing its existing accounts and cross-selling. It also focuses on operational metrics like inventory accuracy.
Kovacevich believes that if the company executes and delivers on its plan, the stock price will take care of itself over time.
KushCo is also actively participating in initiatives to improve social equity in the cannabis space. For example, the company has partnered with Project Mission Green, an initiative that advocates for nonviolent cannabis offenders who have been arrested and convicted. The initiative is backed by Weldon Angelos, who was sentenced to 55 years in prison for cannabis-related crimes. KushCo is selling Mission Green products and donating some of the proceeds to help support social equity initiatives.
Aligning with Industry Winners and Managing Risk
The company is looking for ways to expand its MSO customer base while carefully managing risk. There is more visibility into which companies are the clear winners in the space, and KushCo wants to align with them. The company has learned from its past, and it is poised to continue executing on its strategy going forward.
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