Nanalyze

An OTC Marijuana Penny Stock That’s Not a Scam?

Ever since we first opened Nanalyze, we’ve been emphatic about exposing retail investors to the dangers of over-the-counter (OTC) stocks. Unfortunately the excitement over many emerging technologies means that OTC companies will inevitably sprout up claiming to be your next path to riches. It’s not just emerging technologies, but really any theme that’s generating a lot of interest from investors – like marijuana legalization. We’ve literally seen 100s of these scams and exposed many over the years, even in the face of being harassed, threatened with lawsuits and even physically threatened (yawn). Perhaps no other theme right now has more OTC stock scams than marijuana penny stocks. As we tell our readers, the solution to this is simple. Never invest in any marijuana penny stock. Ever.

We’re still going to stick to our guns on that, but since we’ve been asked so many times by our readers about which marijuana penny stocks to invest in, we decided to dig into one that actually might have some substance behind it. That company is called Kush Bottles (OTCMKTS:KSHB).

The best way to analyze publicly traded companies is to bypass all the investor relations noise on their websites and go directly to their SEC filings. For KSHB, we’re looking at their latest 10-Q for the period ending February 28, 2017. As we often see with OTC companies, we immediately dive into a mish-mash of holding companies, shares swapping hands, and generally a lot of unnecessary noise which looks something like this:

  • Kush Bottles incorporates in Nevada in 2014 (like most OTC companies decide to do for whatever reason)
  • Hy Gro Economics Corporation incorporates as a California corporation in 2010
  • Hy Gro Changes names to KIM International Corporation in 2012
  • Kush acquires KIM for 32,400,000 shares
  • Kush acquires Dank Bottles (a Colorado corporation) for $373,725 and 3,500,000 shares

After all that, Kush Bottles ended up with a $93 million market cap business with three locations (California, Washington, California) which turns a small profit selling custom packaging to producers and various paraphernalia to dispensaries. Here’s a look at some basic financials from their last 10-Q filing:

If we extrapolate out their current revenues, we can project that in 2017 they should see over $10 million in revenues. In the most recent quarter, they showed a small profit which is very promising considering most the cash burning car wrecks we see trading on the OTC exchanges. As with any company that reports such information to the SEC, we’re assuming this is all accurate and audited. So what exactly is Kush Bottles selling? Mainly, custom packaging like this:

Kush Bottles states that they are “the nation’s largest and most respected distributor of marijuana packaging and supplies“. We haven’t sold weed since college, so we don’t know too much about their brand recognition, but if they sell as much as they say they do then every single dispensary owner should know who they are. Kush Bottles states that they’ve sold their products to over 10,000 dispensaries (we had no idea that were that many) with quantities of various products seen below:

The most recent news from Kush Bottles is their acquisition of a company called CMP Wellness which produces vaporizers. The acquisition price was $1.5 million in cash along with 7.8 million shares of KSHB stock (equating to a total consideration of around $17 million based on KSHB share price today). According to the press release by Kush Bottles, CMP Wellness had $4.4 million in revenues for the six month period ending February 28, 2017. If we try to estimate pro-forma revenues for Kush Bottles post-acquisition, this means that Kush should see close to $19 million in revenues for the two combined companies in 2017.

As for the company’s leadership, the CEO Nick Kovacevich has prior experience as an entrepreneur. None of the company executives appear to have been involved in any penny stocks before so that’s a huge positive. Their choice to list their company on the OTC as opposed to raising funding through venture capital channels is unusual, but we’re happy they did because we can get a good look at perhaps the first cannabis “picks and shovels” play that’s publicly traded.

Because cannabis is still an illegal drug at the federal level, KSHB may not be able to uplist to a proper exchange any time soon. We’ve also had readers ask us if they can get in trouble for buying stocks like this. We’re the last people you should ask for legal advice, but the fact that this company sells packaging means that it’s probably not going to raise too many eyebrows. Also, we would speculate that any clampdown would result in delisting the company or preventing people from trading shares by regulating the brokers as opposed to going after retail investors.

We wouldn’t invest in KSHB, not because of the current valuation or the fact that it’s not traded on a proper exchange, but mainly because the business model has few barriers to entry. Sure, they have some intellectual property around child proof bottles, but that’s not exactly something new. Their core competency is custom packaging and they are counting on their relationships with the “10,000 dispensaries” they sell their products to in order to keep their market share.

Just a few days ago, a reader emailed us with some kind words about our content and the question “when do you think marijuana stocks will take off”? He had amassed a portfolio of about 15 marijuana stocks (hopefully not penny stocks) so he understands diversification which is good. The only problem is, he might not understand that marijuana stocks could never “take off”. At any time legislation could change and the industry could get smacked. Alternatively, the industry may have been significantly overvalued and now it’s returning to normal. At any rate, we only have a small holding in a cannabis ETF because it’s just a very risky space to invest and we see lots of other opportunities in other areas (AI, genomics, etc.). Since cannabis presents a growth opportunity that even institutional investors like, we’ll make sure to keep covering as long as there is interest from our lovely readers.

Worried about transaction costs when you're buying stocks every month? Ally charges just $4.95 a trade which is one of the cheapest prices of any broker out there. Saving money makes sense.

Subscribe to the Nanalyze Weekly Digest

Subscribe to our Nanalyze Weekly Digest to receive a summary of all articles every week.

We’ll never use your email for anything other than sending you great articles about investing in disruptive technologies.

  • This field is for validation purposes and should be left unchanged.

6K Shares
Tweet18
Share1
Share6K
Reddit
+12
Buffer