Kush Bottles Inc. of Santa Ana has a $110 million market cap and a chip on its shoulder.
A number of entities don’t like its industry, including bankers, institutional investors and U.S. Customs. Heck, even the parents of Kush executives were skeptics.
That’s because it supplies legal products to the cannabis industry.
“I’m young. I want to build something that’s great,” Chief Executive Nick Kovacevich, 31, said while touring his 15,000-square-foot facility in Santa Ana. “This is my best chance to do it.”
Business is booming so much that it’s moving into a Garden Grove warehouse that’s twice as big and planning on adding 20 employees to its workforce of 60.
And it has a big, hairy audacious goal of growing to $100 million in annual sales within a few years from the $8 million it reported in fiscal 2016.
Sales may reach $46 million next year from an estimated $17 million this year, according to a forecast by Cowen & Co. analyst Vivien Azer, the only Wall Street analyst covering the company. She has a target price of $4.50 a share, more than double its current price.
“We’re looking for a healthy acceleration in sales,” Azer said in an interview. “New markets coming online like Nevada and California should drive improvement.”
It’s not the only Orange County-based publicly traded company trying to cash in on pot. Terra Tech Corp., an Irvine-based cannabis-focused agriculture company, last week reported cannabis sales climbed 58% to $6 million and that sales should accelerate in the second half this year, “boosted by adult-use cannabis sales in Nevada.” However, Terra Tech’s shares have fallen by half in the past year to 27 cents.
Potent Strand
Kush is named after a particular strain of marijuana known in the industry for its potency.
Kush is best known for supplying bottles that adhere to consumer safety regulations, such as the Colorado rule that pot be stored in childproof containers.
The company believes it’s the largest supplier of tubes to the U.S. cannabis industry. The names of its online websites sound like a college dorm room’s dream, such as “Midnight Toke” and “Roll-Uh-Bowl.” Altogether, it has about a dozen categories, each with a few hundred products and about 2,000 SKUs.
To escape being categorized as merely a distributor, an industry that traditionally has thin margins, the company is expanding into new products, like vaporizers. It wants to be a one-stop shop for any business looking to get started in the legal cannabis trade. It touts its ability to provide small companies with market expertise, such as logos and high-quality packaging that satisfy the requirements of the laws of the states where the clients are doing business.
“This is a relatively new industry in terms of legalized sales,” said Chief Operating Officer Ben Wu, 38. “We have to teach people the value of branding.”
At its Santa Ana facility, which includes a warehouse with $1 million worth of products, the smell of marijuana didn’t permeate the air because the company doesn’t permit its employees to toke on the job.
Instead, the warehouse has a showroom featuring black leather chairs and sofa next to a glass counter full of the company’s products, including bongs, vaporizers, water pipes and rolling paper.
“This is our opportunity to showcase what we have,” Kovacevich said.
Summa Cum Laude
Kovacevich, who the company prospectus said graduated summa cum laude in 2009 from Southwest Baptist University in Missouri with a bachelor’s degree in sports management, began the company in 2010 with Dallas Imbimbo, 31, who is company chairman.
Both have demonstrated entrepreneurship. Imbimbo in 2007 founded PackMyDorm, a moving company operating at universities in Northern California. The pair founded 3 Kings Ventures LLC in 2011 to develop distressed real estate, and BigRentz Inc. in 2012 for an online network of equipment rentals.
They have hired executives with prior business experience. Wu worked at WedBush Capital Partners and Bear Stearns as an investment banking analyst. This month it hired Chief Financial Officer Jim McCormick, 50, who worked for 16 years in management roles at British American Tobacco.
Colorado High
When pot became legal in Colorado in 2014, Kush’s sales in the state climbed 20-fold, Wu said. The executives wanted to prepare for further expansion, but selling a stake to private equity might have meant giving up half of the company.
The strategy of a straightforward public offering has worked out well. The founding partners put in about $400,000 altogether, and the company now has a $110 million market cap. Wu’s Wall Street experience showed when the company avoided the stigma of going public through a reverse merger, in which there is a perception of some pot stocks as pump-and-dump schemes.
“When we looked to the public market, we saw companies valued way above where they really should have been based on fundamentals like revenue and EBITDA,” Kovacevich said. “They weren’t even that sexy. Our story was sexier. We had a real business model. We had nice revenue and a cool brand.
“We tried our chances with this route. It’s worked out really well for us. We’ve been able to raise $6 million in capital, giving away only 10% of our business to do that.”
Just as important, the company has used its equity for acquisitions. Kush Bottles in May paid $21 million, of which $19.5 million was stock and $1.5 million cash, to acquire CMP Wellness to expand into the vaporizing business.
Kovacevich and Imbimbo each own about 20% of the company, each stake valued around $22 million.
Roadblocks and Moats
The company faces many roadblocks, such as banks, which by federal law are prohibited from handling money from drugs deemed illegal. That poses problems for Kush’s clients that deal in a lot of cash; also, bankers sometimes don’t want to be associated with Kush because of the industry.
U.S. Customs last year seized about $150,000 worth of its products under the premise that it was drug-related. Kush spent $30,000 to get the products released and had a “quasi-settlement,” Kovacevich said.
Another obstacle is that Kush has zero institutional investors, according to NASDAQ.
“It’s difficult for people to get comfortable with this space,” Kovacevich said. “People are still afraid.”
On the other hand, the quasi-illegality may be creating a moat for Kush. Smaller competitors are facing a lack of access to capital, while bigger competitors may not want to be involved, he said.
“This industry is only going to get bigger and bigger,” Kovacevich said. “At a certain point, national companies are going to start turning their attention to this.”
“We’ve always focused on the long game,” Wu said. “This is going to become a national platform eventually. We believe cannabis will be legalized nationally, and we want to be a part of that.”
