Phil Carlson - KCSA Strategic Communications Nick Kovacevich - Chairman & CEO Jim McCormick - CFO

Thank you. Good afternoon and welcome to Kush Bottles fiscal year-end 2017 financial results conference call.

The replay of this call will be archived in the Investor Relations section of the Kush Bottles website. Before we begin, please let me remind you that during the course of this conference call, Kush Bottles management may make forward-looking statements.

The forward-looking statements are based on current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the risk factor section of our SEC filings.

Any forward-looking statements should be considered in light of these factors. Also please note, as a Safe Harbor any outlook we present is as of today, the management does not undertake any obligation to revise any forward-looking statements in the future.

With me on the call today are Mr. Nick Kovacevich, Kush Bottles' Chairman and Chief Executive Officer, and Mr.

Jim McCormick, who became Kush Bottles' Chief Financial Officer in the fiscal fourth quarter and will later in the call go into the detail about the Company's financial results for the year. With that, I would now like to hand the call over to Nick.

Nick, please go ahead.

Thank you, Phil, and welcome to everyone who's listening in to our fiscal year-end earnings conference call here today. Fiscal 2017 was a pivotal year for Kush Bottles as we began a new and exciting chapter.

Our sales growth steadily gained momentum throughout the year, resulting in record revenues of $18.8 million for the full fiscal year 2017, an increase of 129% compared with fiscal 2016. Given the rapid pace at which the Company is expanding, we felt that this was the right time to start hosting quarterly conference calls to update shareholders about the Company's recent achievements and to give further clarity about our strategy to drive Kush Bottles' future growth.

We believe we have created one of the largest product libraries of packaging, supplies, vaporizers, accessories and branding solutions in the cannabis industry. Our products include pop top bottles, vaporizer cartridges and accessories, exit bags, barrier bags, tubes and other containers.

Our products are customizable and compliant with the state mandated requirements, allowing us to offer comprehensive branding and compliant solutions to the regulated industry. Our client base consists of legal cannabis businesses, ranging from cannabis growers to producers to processors or manufactures of infused products, to medical dispensaries and retail store fronts.

As I'm sure many of you are aware of cannabis is a rapidly growing market, both domestically and internationally. Increased awareness of both the medical benefits of cannabis and the social benefits of legalization has increasingly turned public sentiment in favor of supporting a regulated and controlled cannabis sector.

50 years ago, only 10% of American supported legalized cannabis use. The most recent polls now showed the record highs of 64% of U.S.

population support cannabis legalization for adult use purposes. This shift in perception has led to very real policy changes with 29 states in the District of Colombia currently having laws in place that legalize cannabis in some form or fashion.

Positive changes and public perception have helped drive regulatory reform, which is now presenting an unprecedented opportunity for commercial cannabis commerce. U.S.

legal cannabis sales including medical are expected to reach over $20 billion in the year 2020, as more markets move away from the black market and into the regulated legal market, most analysts expect this number to rise as high as $50 billion within the next decade. As one of the early entrants into the legal cannabis market, Kush Bottles expect the benefit greatly from this explosive growth by continuing to provide value added and unique products and services to power businesses in this space.

With this new era of cannabis legalization has come a raft of new legislation designed to ensure safe and responsible use of the plant. Much of this legislation is focused on packaging, transporting and marketing cannabis.

Proper labeling and packaging is now vital to ensure cannabis companies are in compliance with state guidelines. Cannabis companies in many markets must ensure that their packages are tamper evident, child resistant, properly labeled and in general accordance with local regulation.

Furthermore because the laws are constantly evolving, businesses are forced to keep up with the perpetual changes in regulation to remain in compliant. This adds another layer of complexity for cannabis businesses as they struggle to adapt to ever changing laws and regulations.

However, it also presents a unique opportunity for Kush Bottles to provide value added services to our clientele and establish itself as a partner of cannabis processers, producers and retailers that are looking to navigate this complicated regulatory landscape while also establishing their own unique brand identity. We continue to educate the marketplace about compliance while working with rule makers in several states to craft sensible legislation around cannabis packaging and consumption.

Throughout 2017, we implemented a series of growth initiatives intended to leverage our position in the market and solidify the Company as a leading provider of ancillary products and solutions to the rapidly growing cannabis market. We've made significant progress throughout the year by diversifying our product offering to capture additional market share in the cannabis sector including the launch of several new SKUs.

We also expanded our unique product offering by launching the proprietary Kush Canister, a wide-mouth container and we also secured a patent on the customizable feature of one of our top selling products, the child resistant pre-roll tube. As a result of our expanded comprehensive line of solutions, our clients see us as not only a packaging provider but also as a branding partner to help support their marketing strategy.

And it's hard to overemphasize the importance of marketing and branding for many of our clients, unlike other industries where products are protected by trade secrets, unique technologies or patents, cannabis is a highly commoditized product. In order to differentiate from the competition, cannabis producers are heavily investing and developing their own unique brand, while they aim -- they aim of instilling brand loyalty in their customers and increasing the value of their businesses.

In this way, it mimics alcohol and tobacco industry where brand recognition is paramount to sustain power of a product. Many of our packaging solutions are tailored to allow our clients to maintain their brand integrity while also providing a safe and reliable product, which complies with the stringent requirements of the state in which they're operating.

This market positioning has enabled us to significantly grow our geographic footprint, broaden our target client base and build an industry leading reputation, especially in the cannabis market where traditional forms of advertising and marketing are forbidden. Custom branded packaging is the best way to influence consumer purchasing decisions and build brand value in the marketplace.

We've started working with prominent names in this sector as well such as HIGH TIMES where we have an agreement to provide our premium cannabis packaging to their renowned Cannabis Cup events. The Cannabis Cup events are the most established in the industry and have been operating for almost three decades, making the HIGH TIMES brand one of the most established names in the sector.

We've also signed an agreement with CannaKorp to provide customized packaging for their Wisp device. The world's first single used pod-based vaporizing system.

CannaKorp is one of the most innovative companies in the legal cannabis industry and is led by several former Keurig executives. Its system has been dubbed, The Keurig for Cannabis, and we are proud to provide packaging solutions for this company.

These are just two examples of our ability to form strong client relationships and strategic partnerships and we look forward to continuing to grow our market reach throughout fiscal 2018 and beyond. To support sales of our expanded product line, we also launched a national sales program late in the full year.

Including hiring a national ahead of sales and regional sales managers supported by highly efficient distribution facilities, credit costs, three of the largest cannabis market California, Colorado and Washington. Increasing headcount in conjunction with a renewed focus on client service and building strong relationship is expected to improve our ability to reach current and new clients as we enter fiscal 2018.

Our growth efforts are predominantly focused on the West Coast with Nevada and California representing the states with the largest immediate opportunity and we have established a strong platform from which to grow the business in these markets. To handle the rapidly growing legal cannabis market in Nevada, we hired a new sales and support team based in Las Vegas.

As a result, we were ready to ramp commercial activity when adult-use sales commenced in July 2017, contributing in part to the record revenues of approximately 8.6 million, which we reported in Q4 2017. With California adult-use sales expected to start in early 2018, we are poised for even more rapid growth and a significant scaling in our business.

California is the largest cannabis producing state, cultivating at least 13.5 million pounds of cannabis last year. It is also our home market where Kush Bottles was formed and we already have reputation, client based and unrivaled local knowledge of the market dynamics.

Looking ahead, we expect B2B California sales to fuel a substantial portion of our growth. As an example of the extent to which we have established our presence in California’s cannabis sector, in October this year, our President, Ben Wu, was appointed to the state's new cannabis advisory committee under the Bureau of Cannabis Control known as the BCC.

This is a huge honor, as the BCC has hundreds of applicants to choose from, and it demonstrates Kush Bottles reputation and influence in the industry. We are excited about the California’s adult-use sales coming online in 2018 and look forward to leveraging this opportunity to drive forward Kush Bottles growth.

To accelerate our growth in California and anticipation of the adult-use legalization, we are also actively pursuing an M&A strategy. As the market matures and professionalizes, we are witnessing market consolidation as company seeks to rapidly scale their operations and gain market share.

As in early participant and a major player in the market, we are in a strong position to acquire smaller businesses with complementary offerings to grow and diversify our client based. We have already made headway with the strategy.

And in May 2017, we acquired CMP Wellness, which propelled us into California’s fast-growing vaporizer market and drove the strong revenue growth reported in Q4 2017. CMP is a profitable business and therefore the acquisition has immediately been accretive to our earnings.

It is also allow us to participate in an area of the market, we did not have a presence and before and bring significant revenue and growth opportunities in the vapor category as well as synergies which expand our ability to grow the core business of packaging and accessory. Looking ahead, we will continue to be alert to potentially M&A opportunities targeting financially sound businesses that have the potential to broaden our product portfolio and further build out the value of our business.

We are at all times driven by our mission to maximize value for our loyal shareholders. I like to compare Kush Bottles to the merchants that provided picks and shovels to gold miners in the gold rush.

Our positioning as a packaging, branding, ancillary and compliance partner to cannabis companies enables us to participate in the growth of the industry both with several distinct advantages over companies that due directly touch the plant. For starters, federal law prevents the transportation of cannabis across stateliness which hinders the Company that touch the plant from achieving economies of scale as they growth their growth.

No such limitation exists for Kush Bottles, as it provides our supplies and accessories to the market. And as a result, we have been able to successfully establish a sales presence in every U.S.

state that has legalized cannabis market. We also have some sales in Canada and are expanding in other international market.

As we do not touch the plant, it is easier to attract talent to our management team. And this year we appointed a Director of Supply Chain, a VP of Sales and several senior sales reps, all of whom have excellent track record and we believe will help to ensure our operational platform is in place to support the Company's growth.

Our business model also has several other strengths. Many of the products we sale are disposables, meaning that once we have established the client relationship, we can generate a repeat sales from this client indefinitely.

Furthermore, we have no clients to represent over 10% of our sale, which supports stable sales activity and reduces client concentration risk. For these reasons we believe Kush Bottles can successfully participate in the multi-billion dollar emerging cannabis market while as avoiding many of the challenges that other cannabis companies face.

With that, I will now turn the call over to Jim McCormick, who will talk through the financial results for the fiscal year. We welcomed Jim to our team as Chief Financial Officer in August.

Jim has extensive CFO experience at both Stardust and Global companies. He also has lobbying experience and a strong network from his time working in both the cannabis and tobacco sectors, and we are delighted to have him working with us at Kush Bottles.

Jim, the floor is yours.

Thank you, Nick. I'm very pleased to be here in my capacity as CFO and have the opportunity to be part of the Kush Bottles' team.

As Nick mentioned prior to joining the Kush Bottles, I served as a management consultant in California's cannabis sector. However, I spent the majority of my career in British American Tobacco in a range of senior managerial positions including multiple GM, CFO roles globally.

I'm excited to join Kush Bottles at the time when it is on the cost of achieving rapid growth and I hope that leveraging my experience from related industries the Company will go on to achieve consistently strong financial results. I'll now go into details about this year's financial results.

This can be found on our Form 10-K, which we filed with the Securities and Exchange Commission today. Total revenues increased to 129% to $18.8 million in the fiscal year 2017, up from $8.2 million in fiscal 2016.

This includes four months of sales from the acquisition CMP Wellness, which was concluded on May 1, 2017. This generated approximately $5.6 million in revenue.

The remaining increase is due to continued organic growth in a number of customers, average order size and order volume specifically in the states of California, Washington and Nevada. Gross profits increased to $6.2 million in fiscal year 2017, up from $2.7 million in fiscal year 2016, as a result of the overall growth in sales.

Gross margins were also steady at around 33% for both years. Operating expenses in fiscal 2017 were $5.8 million compared with $2.6 million in fiscal 2016.

The increase in operating expenses was primarily due to higher SG&A cost, which were $4.6 million compared with $2.4 million in the prior year. This supported the expansion of our operation including our dedicated sales force.

Stock compensation expense increased by 800,000 due to the amortization of stock option and stock payment issued in exchange for services. Depreciation and amortization expense increased by 275,000 as a result of the amortization of intangible assets associated with Roll-uh-Bowl acquisition and the acquisition of CMP Wellness.

Year end at profit which includes a provision for income tax of 219,000 totaled 69,000 for the fiscal year 2017 compared to a net profit of 72,000 in the prior year. At August 31, 2017, we had cash of approximately 917,000 and a working capital surplus of 3.4 million, this compared to a cash balance of 1 million and working capital of 2 million on August 31, 2016.

Looking ahead, we intend to continue to practice a financially disciplined approach to driving the business and seizing this unique opportunity. With that, I'll now turn the call back to Phil Carlson for the Q&A session.

Thank you, Jim. The first question is for Nick.

How does the Company view the regulatory risk in the current market?

We actually prefer this regulatory climate. We think it creates an interesting dynamic where we have a dichotomy between state legalization and federal illegality.

It presents a market where company like Kush Bottles can operate and a lot of more established companies, what we call the $1 billion balance sheet yet to come in and operate in this marketplace. We think that the industry is going to continue to evolve state-by-state.

We see a lot of growth in even the more established state market and we certainly have some exciting markets coming online here very soon. In terms of at the federal level and a lot of people look at Jeff Sessions, and Department of Justice stands on cannabis, ultimately it looks like, they're going to stick with policies that have been in place with the Cole Memo.

There are some protections in place such as the Rohrabacher-Blumenauer Amendment which prevents any federal funds from being used to prosecute state legal medical cannabis. And then there's also the idea of the amount of infrastructure that's now behind cannabis and adult-use cannabis in some of these larger markets and the amount of cash revenue that it produces, makes it highly unlikely that someone at the federal government level is going to come in and try to disrupt that especially when the states have some ammo and their arsenal to be able to prevent and deter that from happening.

So, this regulatory climate actually presents a lot of unique opportunities and I think we're excited to see this thing continue to unfold state-by-state here.

Perfect. Second question is for Nick.

Does the Company have any plans to do any further M&A activity?

Well. I think first and foremost.

the Company is going to be and remained focused on our organic growth. We're continuing to grow in all facets of our business and that's the most important thing that we are reinvesting and getting that organic growth.

In terms of M&A, we're certainly going to look at opportunities that present themselves. Our focus is going to be to look at companies that provide either new additional exciting products or new additional markets.

So, these are companies that are either, have unique products or they're protected with IP, companies that are in a new sector like CMP Wellness was in the vaporizer sector, more companies that have big books of business, potentially in other markets where Kush Bottles is currently not as strong. So, those are kind of the folks that we're going to be looking at.

And again, we're going to focus on organic growth, but as a market leader as a public company in the space, we would certainly be remitted if we weren't evaluating all the opportunities that came across.

Nick as most of the revenue growth come from increasing revenue with existing customers are winning new accounts/opening into new market?

Most of our revenues have come from additional products and services that we’re able to drive through our existing client based. The growth of our existing clients as they grow, we grow.

As they expand the new markets, we expand the new markets. And then the additional growth has come from these new markets coming online, when a state like Nevada commenced adult-use sales in July of 2017 that was a major catalyst event for the businesses in Nevada and certainly for the ancillary suppliers like Kush Bottles in that market.

We know that there is going to be another major catalysts event here in California finalizing their temporary rules to rollout adult-use cannabis on January 1, 2018. We also know the California for the first time since this had legal cannabis 1996 is going to actually require regulation around packaging and laboring.

We saw this regulation create a tremendously positive effect in our business in State Colorado, and we expect now with California market being in our backyard that we should be able to take advantage of this opportunities is going to come about here again January 1, 2018.

Okay. Jim, who are the Company’s main competitors?

And are there barriers to entry?

Right now, Kush Bottles sees really two competitors on a national scale. They have similar product offering as we do.

When you move beyond those companies, it’s really drop off quite quickly to regional and local players some of which haven't been around very long, and it’s highly fragmented. We get the question about people coming into the space and why well funded company that currently does distribution of some sort of just doesn’t come in and just move in and do it themselves.

And the unique things in the cannabis market today, that's been highlighted on the call is that, each state is different, regulations are different, the routes to market in the cannabis market by the dispensary model is totally different from what your traditional consumer goods routes to market might be. So, it’s very difficult to replicate.

And I certainly can’t underestimate the strength that we have with our relationships. And those are relationships have been built over the years.

In many cases, both through our company as well as CMP Wellness and the relationships that they have with their customer. So we believe there are fairly substantial barriers to entry in gaining scale in our sector.

Okay. Nick, is there anything unique or patent protected about your products?

Well, our business is definitely unique. We look at several competitive advantages that we have, one being a first mover that has been around since 2010, and other being a public company that has access to capital, the ability to make acquisition.

Our product offering being very vast, we have over 2,000 SKUs that we offer, so we're sort of one stop shop for the marketplace. Our highly dynamics were involving not only with the trends of the cannabis industry, so as the product mix differentiates certainly different products on the shelves of dispensaries today than you saw two years ago and certainly five years ago.

So, we have to be evolving and dynamic as part of that process. One of the few companies that has multiple facilities across all the major market so, we can get distribution very efficient for our clients.

But in terms of our product specifically one of our long-term goal to build-up a suite of products that’s proprietary, that’s protected with some sort of IP whether it’s patent or trademark. And we’re starting to do that.

We launched this year the proprietary Kush Canister, which is the wide-mouth container that uses our manufacturers' IP and again exclusive to Kush Bottle. We also were granted a patent on the customizable feature of our pre-roll tube.

That was huge something we've been in application with for few years. We also purchased rollable which is the patent pending unique product.

We've also created several unique brands like BudGloves. So, we're going to look to continue to develop the strategy, and we believe that long-term building a defensible portfolio of products is going to be the best barrier to entry to the marketplace.

Okay. Nick, does Kush manufacture its product in-house?

Or do you have contract manufacturers hit the ladder? Where are those partners located?

So because of our diverse product portfolio that we have, we have to use a lot of different sources to procure this new products. Again, we've create a lot of value by having those products on our shelves, so we have inventory in stocks, so there is no delay when clients are ordering.

And we also have a variety of products so we can be a place where clients can go and get everything they need at once. We do manufacture with contract manufacturers.

We have several partners here domestically. So we're bringing a lot of these plastic productions state side as we can actually effectively compete with overseas markets on those product lines.

But then there is also a wide array of products that we offer that are simply not cost effective to produce domestically, and we work with manufacturing partners overseas dozens of different partners that we work with across the various product lines.

Okay. Jim, what do you see as one of the major obstacles for achieving your growth objectives in 2018?

We know that there is going to be a tremendous opportunity in the sector in the upcoming year and beyond. And really as we see it, our greatest obstacle would be risk of execution.

So to that end, we know the opportunity will be here and it's our ability to go out there and get it. To that end, the Company has been very aggressive in building out its business model such that scalable examples will be leveraging our ERP system in-house, building world-class supply chain management capabilities, and implementing best practices for example companies that I worked in Global Fortune 500 type companies.

And implementing those types of processes now, such that we are in the best position possible to maximize the opportunity that's out there, and we work at that every single day. So as I see it it's really about execution, we've done everything to this point, will continue to build out our capabilities and then we just have to go get it.

Okay. Last question, Jim.

What are the expectations for the future equity issuance/dilution of current shareholders?

We get the question on this all the time and it's a fair question. I'll just say as a company we take the matter of dilution very seriously.

And we understand that it's on the minds of investors. However, we have to understand that this is a unique category that's going basically from zero to $25 plus billion in unprecedented amount of time.

So within that environment, do come opportunities such as CMP Wellness, and we need to be in a position to take advantage of those opportunities in an accretive way to the Company, not just financially, but from leveraging our internal processes, product lines et cetera, as Nick highlighted earlier on the call. So we have an internal process of review.

We again will take a very hard look at any potential situation that's where you might have issuance of shares. We just -- it's top of mind with us, but we don't want to miss an opportunity that would be great for the Company as a whole as well as the investors.

Okay. Nick, we'll turn the call back over to you for closing remarks.

Alright, thank you to everyone for taking the time to join us on our first earnings call and for all your ongoing support of Kush Bottles, as we work to become the leading cannabis supplier and provider for businesses in the cannabis industry. Before we conclude the call, I would like to once again reiterate how excited we are about the opportunity we have to build an extremely successful business.

The past 18 months have been pivotal for the cannabis sector, both in terms of shifts in public opinion and the effective changes in government policy. We've used this time to build a first-mover advantage which we plan to capitalize on very aggressively to expand our footprint in the states that have legalized cannabis and have made great strides to gain market share in new emerging cannabis markets such as Nevada and California, two areas we expect to remain at large focus in the fiscal year 2018.

Already, we're receiving more and more client increase from businesses looking for high quality branding and packaging solutions and we are pleased -- and we're pleased with the excellent progress we've made both financially and operationally. We experienced strong sales growth in every quarter of 2017, leading to us reporting record revenues of approximately 8.6 million in the fourth quarter and over 18 million in the full fiscal year.

Today, we believe the Kush Bottles not only has a strong operational and financial platform necessary to achieve our vision, but we believe that we have developed an infrastructure that can scale, especially in new surging markets like Nevada and California. Our strategy for 2018 is to effectively leverage our current position to drive top line sales and achieve net income growth.

This is an exciting juncture for Kush Bottles and I look forward to updating you all on our progress at our next quarterly conference call. Thank you.