Marijuana growers win most of investors' attention, but they aren't the only companies enjoying a green rush because of marijuana legalization efforts. Suppliers are also benefiting from increasing demand as sales shift from the shadows to regulated marketplaces.

One of the largest of the marijuana suppliers, KushCo Holdings (OTC:KSHB), has enjoyed particularly good growth. Demand for packaging, such as vaporizers, solvents used in extracting chemical cannabinoids, and expansion into new markets has been a boon to its financials.

A marijuana leaf on a green background.


On Tuesday, management unveiled its latest quarterly results, including a 221% year-over-year improvement in revenue to $41.5 million. Here's what you should know about this pot stock's progress.

KushCo Holdings results: The raw numbers

Metric Fiscal Q3 2019 Fiscal Q2 2018 Change
Sales $41.5 million $12.9 million 221%
Cost of goods sold $34.1 million $9.2 million 271%
Gross profit $7.4 million $3.7 million 100%
Gain (loss) from operations ($16.3 million) ($9.1 million) N/A
Net income (loss) ($10.6 million) ($9.2 million) N/A

Data source: KushCo Holdings.

What happened with KushCo this quarter?

KushCo's quarterly sales growth has accelerated in part because of acquisitions. However, the bulk of its top-line expansion is the result of increasing demand in Canada following marijuana's national legalization for recreational use last fall and greater demand in the U.S., where 11 states have legalized recreational use.

In addition to reporting significant sales growth last quarter, the company also:

  • Launched a biodegradable packaging solution with SunGrown;
  • Finished implementing a warehouse management system;
  • Secured $21.3 million in senior unsecured note; and
  • Signed a development and distribution agreement with IEKO to make biodegradable and compostable plastics products.

The steps toward environmentally conscious packaging should help differentiate KushCo from other suppliers, helping it to serve more customers. Meanwhile, the additional cash is critical to management moving quickly to keep its fast-growing customers happy.

The company's gross margin has slipped in the past year because of increasing costs associated with tariffs on products it makes in China and air freight costs associated with meeting customers' needs. However, steps to boost production, lower shipping costs, and better manage inventory appear to be kicking in because gross margin jumped 4.9% quarter over quarter to 17.8%. Long term, KushCo's goal is to get back to 30% gross margins and profitability in fiscal 2020.

What management had to say

CEO Nick Kovacevich highlighted the strong top-line performance and struck an encouraging tone regarding the margin tailwind:

Revenue for the third fiscal quarter of 2019 saw strong growth of 221% year over year, reaching a record $41.5 million, compared with $12.9 million in the third fiscal quarter of 2018 and $35.2 million in the second fiscal quarter of 2019. More importantly, we saw gross margins move up around 490 bps [basis points] on a GAAP [generally accepted accounting principles] basis quarter over quarter, which is a testament to our commitment of profitable and sustainable growth over time. The Company's organic revenue growth and overall performance were attributable to the growth of our customer base and effective cross-selling of our offerings.

Kovacevich also said that investors ought to expect more investments in products and industry partnerships that can help KushCo win market share:

We remain committed to investing in the expansion of the business through initiatives targeting high-demand, high-margin opportunities that will facilitate increased cross-selling throughout our robust customer base. Partnerships will help us achieve those revenue and margin goals, including our recently announced deal with CA Fortune, which opens an entirely new vertical that will facilitate access to a distribution network unlike anything ever experienced by the cannabis and hemp industries before. We continue to evaluate accretive business opportunities and anticipate more partnerships coming online soon that service our vast network and power the cannabis ecosystem.

Looking forward

While many cannabis companies can't list on the U.S. stock exchange because U.S. federal laws continue to prohibit marijuana, KushCo has filed an application to move itself from the less-regulated over-the-counter market to the Nasdaq. Since KushCo is a supplier to the industry rather than a grower, it thinks it can win approval for its listing, opening itself up to a larger base of potential investors who otherwise shy away from over-the-counter issues.

KushCo didn't issue an update in its press release to guidance for fiscal 2019, but it did say last quarter that sales should eclipse $140 million. That's a big jump from the $52.1 million reported in fiscal 2018 -- but it may be only the tip of the iceberg because sales of high-demand products such as vapes could begin later this year in Canada and more U.S. states could pass pro-pot laws in 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.