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Thursday, October 29, 2020

Here’s What’s Wrong With Kush Bottles Inc (OTCMKTS:KSHB)

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Kush Bottles Inc (OTCMKTS:KSHB) is an interesting case study. The stock has consistently failed to perform over the past four months. But a superficial glance reveals a mystery on that score. After all, the company has plenty of cash, no immediate liabilities or major debt servicing costs, revenues growing at nearly 50% y/y, and an established brand tethered to the cannabis boom. So, why is the stock acting like a value trap on the chart?

A closer look reveals a dynamic that may be instructive for parsing the field in many newly established areas of the cannabis patch: costs of revenues have recently begun to grow even faster than sales. If you think about it, this makes sense for a company like KSHB. The main thing we have witnessed in the niche of “tools and accessories related to medical marijuana” is a large increase in investment capital focus. That represents a natural force pressuring competition higher for low-cost goods like containers. The company just announced a network expansion at the frontier edge of the market, Hawaii and Puerto Rico. The move helps the cause, but is it enough?

Kush Bottles Inc (OTCMKTS:KSHB) provides packaging products and solutions to producers, processors, and retailers operating in the regulated medical and recreational cannabis industry.

KSHB sells primarily into the b2b market, which includes legally operating medical and adult-use dispensaries, growers, and MIP producers (Marijuana Infused Products) in states with marijuana programs.

It offers pop top bottles; child resistant exit, paper exit, and foil barrier bags; tubes; and polystyrene, polypropylene, or silicone containers to urban farmers, greenhouse growers, and medical and recreational cannabis dispensaries.

According to the company’s press messaging, “Founded in 2010, Kush Bottles has sold more than 100 million bottles and regularly services thousands of customers across the United States and Canada. The company primarily services the business-to-business market, which includes legally operated medical and adult-use dispensaries, growers and marijuana-infused product manufacturers. Kush Bottles aims to be the gold standard for responsible branding and packaging in the cannabis industry.”

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As noted above, KSHB is potentially in a game of attrition where future margins are concerned. However, branding and leading-edge network expansion among distributors is one natural defense. As such, it should be good news that the company just pressed the pedal in Hawaii and Puerto Rico.

According to their latest release, the company’s Hawaii distribution partner will service the island’s dispensaries that provide products to registered patients. Hawaii’s reciprocity program will also allow sales to patients with valid medical marijuana cards who are visiting from other states. According to the Hawaii Department of Business, Economic Development and Tourism, Hawaii had approximately 9 million tourists visit in 2016.

At the same time, the company’s Puerto Rico distribution partner will service what could potentially be a large cannabis market due in part to its reciprocity clause, which allows product sales to any medical cannabis patient with a valid permit regardless of their state of residency.

“We are pleased to add important new distributors in these emerging medical marijuana markets,” said Nick Kovacevich, CEO of Kush Bottles, Inc. “Helping cannabis businesses operate responsibly and in accordance with local regulations is a key part of our mission and strategy. These two new partnerships will allow us to offer this enhanced level of service to clients in both Hawaii and Puerto Rico.

Before the November 8 vote, and all its surrounding hype, KSHB was effectively a big fish in a small pond. Very little capital was chasing after the medical marijuana container niche. The nature of the game has changed, and the result is a context where profits will be just that much harder to come by for players like KSHB unless this company can rise above the fray and become truly “special” in terms of its distribution network and brand identity.

The chart has not been the company’s biggest fan lately. The stock has tailed off another 5% during the past week even with this news. But we are talking about a small float (16.7M shares) and a history of dramatic rallies. We wouldn’t count them out just yet.

KSHB is pulling in trailing 12-month revenues of $9M. In addition, the company is seeing major top line growth, with y/y quarterly revenues growing at 43.7%. And, as noted at the outset, the balance sheet is in great shape according to the company’s latest reports. That said, this story is going to come down to either innovation or branding if we are to see the stock’s glory days of $5/share revisited any time soon. For continuing coverage on shares of $KSHB stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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