KushCo Holdings Inc. sees the legal cannabis industry as a pot of gold—and apparently so does a New York-based institutional investor, who late last month bet $21.3 million on the Garden Grove-based company, which sells packaging, containers, and other cannabis-related products.
Despite the disclosure that they were the recipient of new funding—one which its chief executive said signifies “dramatic improvement in our ability to secure financing”—KushCo (OTC: KSHB) is finding out the industry is not always a smooth, steady California high; at least 20 law firms are questioning KushCo’s finances.
The recent spur of legal interest is not directly related to the investment; rather their attention first arose when KushCo on April 9 revised its fiscal filings for noncash items in 2017 and 2018, related in large part to three local acquisitions in Southern California.
“We found it, we disclosed it, we’re transparent,” KushCo Chief Executive Nick Kovacevich told the Buisness Journal last week.
“It was an honest mistake from a former CFO. We replaced the CFO and the new CFO found the mistake.”
That mistake resulted in the company having to adjust the company’s 2018 loss to $24.3 million—more than double its initial report of $10.2 million. It also boosted its 2017 net income to $1.7 million from $100,000.
The company said the restatement did not affect its cash flow from operations.
Still, in the next trading session following that report, the company’s shares slid 7.8% to $5.35.
Lawsuits soon followed.
“When the market learned the truth about KushCo, investors suffered damages,” Los Angeles-based Schall Law Firm, which specializes in securities class-action lawsuits, said in a statement.
“The company’s public statements were false and materially misleading throughout the class period.”
Shares have since fallen a bit more the past few weeks to under $5.
KushCo has a market value of about $430 million. Despite the recent stock drop, its shares are still up nearly double from two years ago.
It is the largest publicly traded cannabis-related company in Orange County.
Investors Unfazed
Securities-related lawsuits aside, the company itself is on a roll.
KushCo recently elevated its projected fiscal 2019 revenue forecast to a range of $140 million to $150 million, which comes after a prior prediction range of $110 million to $120 million.
The company’s latest earnings report cited “a number of long-term supply arrangements-in-principle with several new large, well-known customers” that boosted its projected sales.
The company supplies a variety of paraphernalia to the cannabis industry and vape products that use child-resistant packing. Their wholesale approach makes them an economical choice for many local cannabis suppliers. It wants to be a one-stop shop for any business looking to get started in the legal cannabis trade.
Lawsuits are uncharted waters for the company. Its April 11 quarterly filing said, “to the best of the company’s knowledge and belief, no material legal proceedings are currently pending or threatened.”
Kovacevich said his attorneys have assured him not to worry about the lawsuits.
“It is something that happens all the time, so investors don’t fret too much about it because they know” it is not a pressing concern, he said.
KushCo is seeking to have the cases dismissed.
“We’re engaged—we do take it seriously,” Kovacevich said, adding that “there is a high level of scrutiny—we have to be proactive, go above and beyond—one, because it is the right thing to, but also because we have extra eyes on us” due to the nature of the industry.
Investor Insight
A New York-based investment manager also appears to have quietly set its eyes on KushCo.
The company at the end of April got a $21.3 million private placement from an unidentified institutional investor.
The offering pads KushCo’s cash reserves; it had $17.9 million in cash as of Feb. 28.
Proceeds from the 18-month senior note will be used for general corporate purposes, according to the company.
“We are thrilled to announce this unsecured, non-dilutive financing structure to support our company’s rapid growth,” Kovacevich said in a statement.
The note “represent[s] a dramatic improvement in our ability to secure financing with a lower cost of capital and is indicative of more attractive financing alternatives within the cannabis industry.”
KushCo and its industry peers have complained in recent years that hedge funds and institutional investment funds have been unable or unwilling to invest in their firms due to federal restrictions.
Irvine-based Terra Tech Corp. (OTC: TRTC), a vendor of marijuana products, placed a full-page ad in the Wall Street Journal last year in an appeal to President Donald Trump to loosen restrictions.
KushCo has a bit more leeway in finding sources of funding, since it focuses on selling cannabis paraphernalia, not legal marijuana itself.
While KushCo’s initial press release did not name the institutional investor, a subsequent regulatory filing identified the firm as HB Sub Fund II LLC with an authenticating signature from George Antonopoulos.
New York City-based Hudson Bay Capital, which has $7.8 billion in investments directly and through affiliated funds, lists Antonpoulos as its management partner and portfolio manager. The firm declined to comment.
Less than 1% of KushCo’s investors were institutional firms as of early last month, according to Nasdaq.com.
