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As the Worm Turns: CEO Nicholas Kovacevich is Bullish on KushCo/Greenlane’s Future

For KushCo CEO Nick Kovacevich, the cannabis industry is evolving at warp speed and scale, and companies that mean to succeed need to adapt in kind if they have not done so already. Many are not going to make it, and it was in that serious vein that the deal was announced in late March to combine KushCo Holdings Inc. (OTCQX: KSHB) and Greenlane Holdings Inc. (NASDAQ: HNLN) into one transformative company that intends to meet the ancillary services needs of the burgeoning cannabis industry no matter how large or pervasive it gets.

The merger, in which KushCo will become a wholly owned subsidiary of Greenlane, is expected to close in the late second quarter or early third quarter, with Kovacevich to become CEO of the new entity that will continue to trade on NASDAQ under Greenlane. With a combined market cap of $350 million, anticipated annual synergies of $15 million to $20 million within two years, and a significantly higher ceiling for margins for the combined company, Kovacevish explained during a recent interview with CBE why it was so essential for KushCo to scale up in the current environment.

“This deal was several years in the making,” he said, “but it all kind of lined up this year. We saw what some of the larger companies like GrowGeneration (GRWG) and Hydrofarm (HYFM) are doing on NASDAQ with these multibillion-dollar valuations. When you look at our two businesses, putting them together from a revenue standpoint, we are similar in size to those two players. From a market cap standpoint, however, we’re trading at a fraction.” He added that last year’s combined revenue for KushCo and Greenlane, about $250 million, was similar to “what it was for Hydrofarm and GrowGeneration.”

Does that mean the two larger companies are overvalued? “No, I would argue that we are significantly undervalued. This is an unprecedented growth industry. Companies like that, with size and scale that are listed on NASDAQ, are growing tremendously year-over-year and are positioned really well in this market. I think companies like that deserve a higher multiple.”

The reasons why KushCo is not getting a higher multiple are many, he continued. “One being that we’re listed on the OTC; that’s always been a big knock, whereas with the [Greenlane] deal, when it closes, we will be listed on NASDAQ, which we think is going to be a huge catalyst for stock value.”

The situation with Greenlane’s valuation is more nuanced, explained Kovacevich. “I think the position they’re in has been that folks have looked at them as a company that’s losing money, and we just turned around KushCo and got it back to positive EBITDA territory for the first time in three years. Given our track record of improving P&L, me coming over to run the combined company, combined with the synergies and the cost savings, I think people see the path to profitability more than ever with the combined company. [Greenlane] also had some super voting shares, which investors of course never love, and we were able to get them all exchanged for shares with a single vote. I think cleaning up that corporate governance structure is also a big motivator for investors to take a another look.”

The goal is clear. “We’ve done a lot of things to position the company to now get the type of valuation and multiple that we’re seeing other similar companies get,” he said. “Obviously, it remains to be seen if we’re going to get that, but I think we put ourselves in a position to demand those same type of economics when the deal closes.”

Regarding the makeup of executive management for the new Greenlane, Kovacevich said people are in for a big surprise. “Obviously, the goal for the board of directors on both sides is to get the best talent from both organizations, put them together and create an all-star team. While we can only talk about what’s been publicly announced in terms of management – Bill Mote as CFO, and obviously, [Greenlane co-founders] Aaron LoCascio and Adam Schoenfeld staying on the board of directors and in management roles – there will be more announcements to come.

“Something a lot of people probably don’t know is that outside of the Greenlane founders, there has been a lot of high caliber talent brought into the company in recent months, so a lot of their senior leadership team is relatively new,” he added. “Whereas people know our management team and what we were able to execute on over the past 18 months, during a challenging macro environment with the vape crisis and COVID, when we were able to significantly improve the business from a P&L and balance sheet standpoint. I think investors are less familiar with the management team [at Greenlane]. But again, putting the best of both together is how we’re going to create an all-star team that is going to take the combined company to the next level.

Notably, the new company also combines B2B and B2C business models into a paradigm that could pose some complications, such as competing with clients. Kovacevich is not concerned. “It’s a KushCo principle that we don’t compete with our clients, and we certainly expect to continue to be a partner to our clients and not a competitor,” he said. “The products we sell are different than what our clients sell for the most part, and we’re looking to complement them by giving them additional products that they can sell at their retail stores.

“Where KushCo currently provides products more upstream – packaging, vape products and solvents that operators use in cultivating, processing, and bringing products to market,” he elaborated, “Greenlane’s products are built more for the consumer downstream. Traditionally, they accessed consumers through smoke shops, specialty retail, and direct econ business. In the future, we’re going to load up our MSO and operator partners with an arsenal of products that they can use in their storefronts to further capture revenue from their consumers and to further build out their value proposition. From that standpoint, we’re going to be more of a partner than a competitor. We look to enable them, not to take anything away from them. Their core business is providing cannabis products, while we remain committed to being an ancillary provider, and not somebody who is going to move into their lane and provide cannabis products.

“Will they sell in a retail store some of the products that we also sell online? Yes, but that is a different consumer,” he concluded. “A consumer who wants to order online can order online; a consumer who happens to be in a dispensary can buy off the shelf. It’s the best of both worlds.”

Kovacevich sees the best-of-both-worlds scenario and size as essential components to success in an industry growing exponentially. “There has been a concern among MSOs as the industry is growing up that not everybody is growing up as quickly and as big as everybody else,” he said. “If you’re a leading MSO and you’ve gone from $20 million a quarter to $60 million a quarter to $100 million to $150 million, and your next stop is a billion-dollar run rate, how can you expect an ancillary provider that has the capabilities to support you at $20 million a quarter to suddenly be able to now support you at $250 million?”

This was the imperative that drove the merger. Scale or die, here and abroad. “With New York coming online, and New Jersey, Arizona, New Mexico, this is moving so fast, and everyone is just drinking from a firehose trying to digest the U.S. business,” said Kovacevich. “Nobody is even factoring in how quickly this is going to expand globally, and we think Europe is next. Well, Greenlane is already positioned in Europe, where they have a very robust distribution business based out of Amsterdam, so we’re now positioned to not only capitalize on the macro stateside in North America, but also in Europe when that inevitably comes around the corner.”

The combined company overnight basically doubles in size, with “a NASDAQ listing that will bring the ability to access capital when needed down the road. So, all these things are positioning us to take advantage of that macro where a lot of the smaller private companies we traditionally competed with will not be able to do that.”

Other significant challenges face ancillary service providers, such as the Pact Act, first passed in 2009, which prohibits traditional parcel shipping companies from shipping cigarettes directly to consumers. “It was updated recently to include e-cigarettes, which cannabis vapes fall under,” said Kovacevich, adding that the policy should be in place at all carriers by the end of April. “This is huge news in our industry. Companies are extremely worried about how they are going to navigate this immense regulation. They won’t be able to ship products using USPS, DHL, UPS, or FedEx, so how are they going to get their vape pens and devices to the consumer? People are panicked, and we’re even seeing companies wave the white flag and decide to sell their business.”

Another regulation further complicates matters for smaller companies. “There’s still more information we need, but another interesting component is that you’re now going to be required to register with the ATF to sell EC liquid e-cigarette products,” added Kovacevich. “For the small private companies, they’ve now got a lot to deal with. ‘How am I going to get my product to the consumer when I can’t use FedEx and UPS? Now I’ve got to register with the ATF and pay tax tobacco tax in every state?’ It’s extremely onerous, but Greenlane has been dealing with it all along. They’ve been ultra-compliant because they list on NASDAQ and have already registered for tobacco in every state because they have historically sold JUUL products, so they’re in a great position with size and scale to set up a regional carrier network and be able to deliver goods.”

Not everyone is as well positioned. “Everyone’s panicking and trying to figure it out,” said Kovacevich. “We’re still learning exactly what you’ll have to do to remain compliant, but it’s complex and there’s risk. Take a lot of traditional cannabis guys that have expanded into the vape business. Do they want to register with the ATF? Do the clients they ship to want to be registered with the ATF and have their address on there?”

It is a situation that will accrue benefit to MSOs and other players of scale, the very companies the combined Greenlane will cater to. “We’ve focused our business on doing business with MSOs, LPs, leading operators, and all these companies that are in our realm have to be ultra-compliant,” said Kovacevich. “This is business as usual for large players, but for small players it’s a gigantic problem, and quite frankly a headache many of them would prefer not to deal with unless they have no other means of exiting and moving on to a different venture.

“It’s going to be very interesting,” he added. “We are confident we will be able to turn what on its face is an obvious challenge into a significant opportunity given our positioning, our robust infrastructure, size and scale, our client base, and all the things that we’ve been talking about. That presents material upside to the story that quite frankly is still too early to quantify, but the macro dynamics make sense: In a highly regulated environment, the large companies with capital structure are going be able to navigate, whereas the smaller companies won’t.”

In this brutal environment, KushCo core business has consistently been to service the larger MSOs even when they were in development. “Back in 2018 and 2019, even though you knew they were going to be large because of their license footprint and their public listing, the revenues weren’t there yet for these MSOs. A lot of California brands were driving more revenue than the MSOs, but that has completely shifted. MSOs are far and away the winner. We’ve been strategically positioning with MSOs, but last year we made the decision to focus our efforts almost exclusively on them. We’ve doubled down on that demographic.

“There are a lot of great small businesses out there that will continue to be around,” he added, “but they’re not going to be growing anywhere near the rate that the MSOs are, and we’re also seeing MSOs able to use acquisition. So, from our perspective, you spend all this time, energy, and effort to cultivate relationships with a smaller company only to find out that they’re getting acquired by a larger company. If you’re not doing business with the larger company, all those efforts are now gone to waste.”

Sourcing consistently has been an issue over the past year and was mentioned in the earnings call as the main explanation for any disruptions, but in our interview Kovacevich said they were flush with options going forward. “Supply chains are stretched,” he said, “but we’re not that big that we can’t find the capacity to produce the products we need. We’re going to continue to look to diversify out of China, because of tariffs, because of macro geo-political stuff, but we’ve got some great partners in China that we will continue to invest in.

“But we want to be diversified,” he added. “At the end of the day, technology will continue to improve and enable other countries, even potentially the U.S., to compete with cheap labor because we can automate. We have some factory partners stateside we are going to continue to invest in, as well. We want to take a broad approach to make sure we have the right partners with the capacity we need and that we are not super-dependent on any one factory partner.”

Out of time, we ended the interview. Before ringing off, I suggested that next time we should discuss the industry’s carbon footprint.

“Yes, that’s very important,” agreed Kovacevich.

Tom Hymes

Tom Hymes

Tom Hymes is a Los Angeles-based writer and editor with over 20 years’ experience covering highly regulated industries. He was born and raised in New York City. He can be reached at [email protected].

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