Three more U.S. states legalized marijuana in some form in November, and Canada's recreational market opened nationwide in October. The pro-pot momentum was a boon for marijuana suppliers, including KushCo Holdings (KSHB), a company that offers packaging and branding solutions to marijuana growers and dispensaries.

On Jan. 8, KushCo Holdings updated investors on its progress, reporting sales that accelerated rapidly last quarter. Here's what you need to know about this marijuana supplier's results. 

A dropper next to an open bottle resting on a marijuana leaf.

Image source: Getty Images.

KushCo Holdings results: The raw numbers

Metric Q1 Fiscal Year 2019 Q1 Fiscal Year  2018 Year-Over-Year Change
Sales $25.3 Million $8.8 Million 186%
Cost of goods sold $22.1 Million $5.8 Million 281%
Gross profit $3.2 Million $3.1 Million 3.2%
Gain (loss) from operations ($8.1 Million) $151,443 N/A
Net income (loss) ($8.2 Million) $94,615 N/A

Data source: KushCo Holdings.

What happened with KushCo?

KushCo's quarterly sales growth is the result of tailwinds associated with marijuana legalization efforts and its recent acquisition strategy, which has allowed it to enter new markets, including chemical solvents for extracting marijuana's chemical cannabinoids, and marijuana marketing. The company's most significant accomplishments in the quarter included:

  • Engaging Manhattan Associates as its warehouse management system provider and as consultants to boost its operating efficiency.
  • Establishing an office in the Jiangbei District of Ningbo, China, to better coordinate international manufacturing.
  • Appointing Christopher Tedford as chief financial officer to expand its C-suite.
  • And forming an advisory board that will offer strategic advice to accelerate growth and enhance operational performance.

The moves are important because the company is managing its way through growing pains that are taxing its supply chain and, unfortunately, increasing its costs. For example, problems with suppliers forced the company to use overnight shipping to vendors, increasing transport costs that, in turn, weighed down profitability. In the quarter, KushCo's gross profit margin was 12.8%, down from 34.8% one year ago. 

The drop-off in profitability and an increase in costs associated with scaling to meet growing demand more than offset the 186% increase in sales to $25.3 million, resulting in a net loss of $8.2 million. 

What management had to say

CEO Nick Kovacevich acknowledged the company's supply struggles, saying, "While we are confident in the Company's upward trajectory, we acknowledge the impact that our dramatic growth has had on our gross margins, in particular, the utilization of air freight and additional cost incurring quality-control measures at our receiving warehouse to meet demand."

He added, "We have implemented a number of strategic operational initiatives that will drive our gross margins back toward 30% as we scale the business, with improvements in margins expected in the second half of fiscal 2019."

Kovacevich then switched to focus on the opportunity that lies ahead, particularly following the passage of the farm bill in the U.S. last month: 

We continue to develop our transformed business model, investing in the growth and retention of our robust customer base, continuously adding new product and service offerings, and driving effective cross-selling opportunities across the business. New opportunities continue to rapidly emerge in the industry. With the recent signing of the 2018 farm bill into law on Dec. 20 to legalize industrial hemp, we expect to see more large-scale production and sale of [cannabidiol], oil, and related products, fueling demand for our packaging, supplies and labeling solutions, as well as for our solvents and marketing and branding services. We also expect to see an increase in adult vaping of CBD, which is a major component of our business and a key driver behind our expanding customer base as vape sales attract new customers onto our sales platform. We are focused on building out a scalable, sustainable business and, as 2019 unfolds and new markets and geographies open up, we will continue to expand our presence as a primary supply-chain partner to the industry. 

Looking forward

KushCo's biggest problem could be fulfilling demand. The company works with over 5,000 customers, and the wave of large markets opening, including in California and Canada, has strained the company's operations and drawn down its cash. As of the end of November, it had just $3 million in cash and equivalents on its books, down from $13.5 million exiting August.

Assuming the company can overcome its recent operational challenges, too much demand isn't a bad thing. California and Canada's markets are still emerging. And nascent markets in Massachusetts, where sales commenced in November, and Michigan, where recreational marijuana won approval in November, suggest this company has plenty of profit opportunities ahead of it.

Check out all our earnings call transcripts.