Power Players: KushCo CEO Nick Kovacevich
Founded in 2010, KushCo is am0ng the best known ancillary companies nationwide. Originally called Kush Bottles, it is probably best known as a packaging company. But it businesses have expanded to include revenue streams as diverse as solvent sales and even a hemp-trading exchange.
KushCo was an early entrant to the public markets. And it’s been a bumpy ride. For the quarter ending November 30, the company reported a net loss of $12.5M on net revenue of $35M and investors have not been forgiving. With the capital markets drying up, CEO Nick Kovacevich says KushCo and other companies need to focus on profitability.
Here he talks to WeedWeek about what the coronavirus means for weed, why KushCo is leaning away from California and what it’s like running a company when its stock is in the tank,.
This interview has been edited for length and clarity.
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KushCo is best known as a packaging company. Can you tell us a bit more about what your business does?
KushCo started as a packaging company, but over almost a decade we’ve evolved into offering three other major buckets. It’s all geared around supporting cannabis businesses. We don’t touch the plant; we sell supplies, materials and devices to companies that do.
Our four buckets are: 1) Child resistant packaging and compliant packaging 2)Vape hardware. We partner with CCell, which is best in class hardware manufacturer and distribute it out to cannabis brands. 3) Our energy and natural products division is where we sell butane, ethanol, propane: solvents that the processors use to extract cannabis oil.
4) The last bucket is services, which includes Hemp Trading, a brokerage division where we’re actually able to broker hemp and [related commodities.] It also includes our retail services division, which helps CBD brands get placed into mainstream retail outlets.
How have you been hit by the Covid-19 crisis?
We import [vape hardware and packaging] from China. When the virus first appeared it affected the ability for factory workers to come back to work after Chinese New Year. Every year for Chinese New Year, workers go home. After 10 or 14 days, most of them return, some of them don’t. And then the factories start running. This year, because of the coronavirus, the government prevented the return to work.
Instead of planning for a four to five week disruption to the supply chain, like we do every year, this year it ended up being about double that. It’s very limited in it’s impact on us. We’re one of the larger companies and we’re able to stock up on inventory. Would we like to get the custom stuff that we ordered? Sure. Instead of arriving in early March, it’s going to be arriving in early April.
So the Chinese factories are up and running?
The factories, they got up and running February 24th. Originally they were supposed to be up in early February. Now, they’re all back to about 75, 80% capacity. We don’t expect a further delay. So that’s one of the areas that coronavirus is impacting the industry, but we think it’s pretty temporary and short-lived.
As you look at the broader industry, how do you see the virus affecting it? We’ve seen a jump in sales in some places.
There’s really three ways that the coronavirus it’s going to be impacting cannabis. One we just talked about with the supply chain, and, again, we think that that’s pretty limited.
The second area is going to what’s happening domestically with the lockdown. Currently most states and local municipalities are deciding cannabis dispensaries are essential. Some people need their medicine from a pharmacy, they also need it from a cannabis dispensary.
In the near term, this actually looks to be a positive for the industry. And we’re seeing record sales numbers: People are in stocking up on these goods to prepare for their lockdown. Right now it looks like the cannabis industry is actually coming out ahead on the coronavirus.
The third area that is going to impact the industry is consumer spending. We know that people are spending a lot of money right now. But a lot of people are in the process of losing their jobs, if they haven’t already. Millions and millions of jobs will be lost because restaurants are closed and retail stores are closed.
That’s going to affect consumer spending, and cannabis is an expensive product. We don’t know yet how it’s going to impact the industry. But what we can project that it certainly will. We do know that cannabis, like alcohol, is something that people buy even in recessions, but certainly if people have less dollars to spend, it’s going to have a trickle down, negative effect on cannabis.
Do you see the slow down hurting the illegal market?
I think the coronavirus is actually more of a threat to the legal market, than it is to the illegal market. The illegal market continues to produce and sell product. They have no rules and regulations. There’s zero liability. Legal businesses are taking a lot of caution right now. Some of them are even voluntarily closing.
You won’t see that with the black market. Black market [operators] are going to keep pumping, and I think the black market would love nothing more for their legal competition to close up shop. This will create a huge opportunity for them to take over even more of the market. It’s smart that the regulators are keeping legal cannabis businesses open because if they were to do the opposite, they would just drive people further into the black market.
Leaning Away from California
Obviously the California market has a lot of tumult and a lot of problems. How does that affect you as an ancillary company?
I’m from California. We started here almost 10 years ago and we’ve done a lot of business in the state. And right now we’re moving away from this state. The reason why is because the market is, as you mentioned, [difficult], and we’re worried about the impact it’s going to have on the small businesses. We’ve traditionally served as a lot of companies in the state, and we’ve given a lot of credit to them, and right now we’re having a tough time getting companies to pay us. And that’s across the board.
People aren’t’ getting paid by their retailers, so they’re not paying their vendors, which includes us. A lot of these companies relied on outside funding to support their businesses. That funding is going away, especially in light of this coronavirus. It was already bad enough after the downturn in the cannabis market last summer. These companies aren’t going to be getting bailed out with investor dollars.
So if they’re not profitable and they’re burning money, they’re in a world of hurt. And we, of course, don’t want to get left holding the bag. We want to help, but we can’t get stuck holding the bag. We need to get our business profitable. We’re moving away from California, and we’re focusing more on companies that have solid financial footing, can do larger amounts of business and ensure that we’re going to get paid.
It’s unfortunate. We’re hoping that the California market can turn around so we can really come back full force with our efforts in the state.
What are you looking for in customers these days?
Well, we’re certainly looking for customers that did pay their bills. That’s number one. We like companies that have a strong balance sheet, companies that are executing on their plan, expanding their business and growing. We want to grow with the customers. So that’s our ideal profile today. And what we’re seeing is that that’s less and less likely in California.
Unless you’re servicing the black market. We’re seeing is a lot of companies inside the industry and outside the industry continuing to service the black market. Weedmaps finally shut down [advertising from unlicensed business.] But they’re not the only one.
Think about it. Even power companies are giving power to black market grow houses. You go to 3rd Street downtown [Los Angeles], and you’ll see businesses that are lined up ready to sell, packaging, vape pens, even butane gas, all the stuff we sell to the black market. Not only are they not caring about compliance or trying to check if they’re dealing with a compliant operator, they’re specifically targeting [unlicensed companies] with counterfeit packaging.
They’re blatantly doing it, and nobody’s cracking down on it. My hope is that the industry will start to realize that they shouldn’t be supporting companies that don’t have compliance policies in place. We take a lot of time, energy, effort and resources to ensure that we’re actually collecting licenses from the companies we do business with. We’re making sure that we’re doing business with legal cannabis businesses, and our competition, and a lot of other ancillary players, aren’t doing that. Some of them are even worse. They’re targeting the black market [as customers].
“This industry is struggling because of lack of capital.”
Cannabis stocks have taken a real beating, yours included. For a company like KushCo, which has several revenue generating businesses, how does it affect your business to have a stock that’s been so hard hit?
It’s not good. This industry is struggling because of lack of capital. A lot of the reason companies rushed into the public markets was to access outside capital. This is an industry that’s building from the ground up and has massive capital requirements.
And where is that money going to come from? Well, the venture capital firms, they can’t invest in cannabis because it’s federally illegal. Real Institutional capital is not going to invest in the sector because they can only invest in companies that are listed on major exchanges like the NYSE or NASDAQ. So we’re only able to get capital from a very small group of investors. The problem is so many companies went public, so much capital was consumed, and the sector ran out of eligible investors.
What we’re now waiting on is federal legality which will unlock major stock exchanges and unlock major additional capital. That’s what’s needed to support these stocks. A lot of companies haven’t executed and now they’re in the penalty box. And they’re not going to be able to raise additional capital if stocks keep going down.
KushCo is in a position where we can’t even afford to raise capital using our stock. So we’re really going to be relying on executing the business, and getting profitable on our own, because the capital has really dried up. If we do that and other companies do that, eventually the stock will sort itself out.
Do you see the companies trading on the major exchanges as in a much stronger position and why?
There’s really two sides to the story. There’s the operating business, and then there’s capital market size. We’ve seen companies that have zero operations in the U.S. and have the luxury of utilizing the best capital markets in the world, the NYSE and NASDAQ. These are typically Canadian operators that are also looking to expand globally. And they have the freedom to go and list on these big exchanges, and raise capital from real institutions.
The problem is, they have no market. Canada, as a whole, is not even as large as California. And globally, there’s no market that has really expanded to any meaningful size and scale. So they’re missing the ability to generate meaningful revenue. That’s why, even though those companies have done tremendously well in the capital markets and have raised a lot of capital, they’re struggling to find sales right now.
The other problem, which is arguably worse, is what U.S. companies are experiencing. They have a phenomenal market, far and away larger than the rest of the entire global market combined. And so we see companies generating real sales growth and building real brands, but they have no access to capital. But the U.S. companies are catching up. They’re executing, and they’re getting profitable, and they’re going to start generating their own cash. And once they become federally legal, they can go and access the real exchanges and the real institutional capital.
It’s so weird how this bifurcation works.
It really is. It’s a pretty unique situation and at some point you got to hope people think enough’s enough. Why are we not letting a great domestic industry, that, dollar for dollar, is generating more jobs in the U.S than any other industry in the world [to operate]?
Think about it. Every ounce, every gram of cannabis sold in the U.S. is produced right here in the U.S. You can’t say that about almost any other industry. So we’re creating jobs for the U.S. economy. We’re generating huge amounts in taxes, but we can’t get the capital needed to really accelerate growth. I think at some point people are going to figure this out, and they’re going to make it legal so that they can open up some avenues further, and net the economic benefits this industry brings.
The Senate Matters
What’s your read on the situation in Washington D.C.? Do you think the Safe Banking Act will pass before the election?
There’s an outside shot of the Safe Banking Act passing. We meet with a lot of political people, and basically the strategy is to engage the Senate Republicans to think that one potential shot at saving Sen. Cory Gardner’s (R) seat in Colorado would be [passing the bill with] his name on it. Certainly Colorado is a big supporter of the cannabis industry, and maybe that would generate donations or votes for Cory.
The strategy might work, but I’m doubtful. And it’s also a double edged sword because, really, more beneficial legislation will likely come if the Republicans lose the Senate. A Democratic Senate is more likely to also pass cannabis bills and send them to the President. I think whoever the President is, whether it’s Trump or Biden or Sanders, they will ultimately sign some sort of cannabis legislation if it comes to their desk. So I think the big question about November is the Senate. That’s going to determine how likely or how quickly we are to get some real progress at the federal level.