The legalization wave has put cannabis in the spotlight, making the industry expand more. The global cannabis industry is booming. An increasing number of companies are venturing into the market to build up industry alliances. One of these companies is KushCo Holdings Inc (OTCMKTS:KSHB) based in California, US. Shares of KSHB are down almost 30% with a January peak price of $7.20. Let’s analyze the company’s recent developments.
How Are Their Revenues?
The wholesaler is responsible for providing companies in the industry with supplies. These supplies include vaporizer parts, solvents, pre-roll papers and packages, and labels. Their packaging services have seen a fall in revenue in the latest quarter to merely 14% of the company’s total revenue generated. In spite of this, sales have grown vastly over the past three years. Vaporizers contribute 69% of the revenue followed by extracts of solvents and oil bases contributing 11% of revenue last quarter. This is mainly due to the higher growth rate of concentrates than marijuana flowers in the US markets.
KushCo’s revenue grew by 240% year-over-year and 39% quarter-over-quarter standing at $35.2 million. The sales figure had doubled over 2018 compared to the 2017 figures. It appears the high growth rate is not ending anytime soon which could increase the number of satisfied customers.
However, KushCo seems to lack behind to keep up with its growth. To lower costs, they use Chinese contract manufacturers and transports. This costs the company over five weeks of lead time. Further implying that the company needs to accurately forecast the expected demand to not fall short of goods. But, with the growth being unpredictable, forecasting gets tough. In order to exploit the growth opportunities, they would require setting up new factories and stock up their distribution centers. Both actions would be very costly.
Diluting The Existing Shareholder
Last quarter, KushCo had to issue shares. As a result, they were diluting existing shareholders to meet inventory demands and have the cash to meet its operations expectations. Another concern is the increasing tariffs due to the US-China trade war. Further escalation would mean a drastic increase in costs. When it comes to delivering to its customers, the company uses air freight. This uses over 5% of its revenue (as per Q1 figures) and the company also directly delivers to its customers. This costly affair has led to a 19% fall in gross margin in the first half of 2019.
The growth seems rampant and the company is working on coming out at the top. However, the breakneck growth requires heavy cash. However, the company currently has a negative cash flow. KushCo’s stock prices have also not shown much improvement due to all of the outstanding shares. They have increased by 40% since last year. The growing market also means heavy competition which would require the company to diversify. On the other hand, KushCo claims that it will be able to come out victorious. However, it is an investment only to those willing to take a huge risk. A careful reading of the company’s performance and cash flow statements over the years is what an investor should do before putting their money in the company.