Phil Carlson - Managing Director, KCSA Nick Kovacevich - Chairman and CEO Jim McCormick - CFO and COO

Thank you. Good afternoon and welcome to Kush Bottles' third quarter fiscal 2018 financial results conference call.

A replay of this call will be archived on the Investor Relations section of the Kush Bottles' website; ir.kushbottles.com. Before we begin, please let me remind you that during the course of this conference call, Kush Bottles' management may make forward-looking statements.

These forward-looking statements are based on current expectations that 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 Factors section of our SEC filings.

Any forward-looking statements should be considered in light of these factors. Please also note, as a Safe Harbor, any outlook we present is as of today and 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, Chief -- Kush Bottles' Chief Financial Officer and Chief Operating Officer. With that, I would now like to hand the call over to Nick.

Nick, please go ahead.

Thank you, Phil and thank you to everyone who has joined our call to discuss the results from our third quarter of fiscal 2018. Since our last call, we have had several exciting development including completing the acquisition of Summit Innovations, the just announced acquisition of The Hybrid Creative, a $36 million capital raise, the restructuring of Kush Bottles' Inc.

into a holding company structure, adding additional world-class talent, and delivering some very solid operating results. You can see we've been very busy and I'm going to discuss all of these events in detail on today's call and explain how they position us for major growth both in the short and long-term.

First, I will provide a high level recap of our topline results. We are very pleased with the financial results we achieved in the third quarter.

Revenues were $12.9 million, representing a 173% growth compared to $4.7 million in quarter three of fiscal 2017. Looking at the nine-month results, we achieved an even stronger growth rate of 216% with revenue of $32.1 million compared to $14.9 million in 2017.

These very strong topline revenue numbers were the result of our continued investment and expanding our product and service offerings as well as expanding our geographic operating footprint. As a result of these investments, we are now one of the most respected and well known providers of ancillary products and solutions to license cannabis CBD and hemp businesses.

However, our primary focus remains on organic sales growth. We expect to both significantly increase our market share and ensure a strong client retention rate as a means to drive shareholder value.

Our mission is to position the company as a one-stop shop for the businesses in the cannabis industry by providing a diverse range of products and services allowing us to leverage cross-selling opportunities and scale the company. As we execute on this strategy, we have expanded into several other industry verticals through a combination of both organic growth and strategic acquisition.

As our results demonstrate, we are making significant progress toward this objective. Before moving on, I would like to take a moment to discuss our recently announced new corporate restructuring.

In order to provide a more appropriate corporate structure to support our aggressive growth strategy, we have chosen to restructure the company under a holding company platform with several wholly-owned subsidiaries underneath. These subsidiaries include Kush Bottle, the sales marketing distribution arm of the company; The Hybrid Creative, which provides branding and design services to both cannabis and non-cannabis clients; and Koleto Packaging Solutions, which I will discuss in detail in a moment.

The new structure is expected to better support and drive organic growth by leveraging operational synergies and cross-selling opportunities at the same time, providing a framework to allow for additional accretive and strategic acquisition. Each operating company will be led by the President of that entity and it will leverage the shared services of the holding company which creates efficiencies and economies of scale.

Having just announced the acquisition of Hybrid Creative, I would like to outline our acquisition approach and how it plays into our overall strategy. Firstly, we are going to continue to seek acquisitions that will complement our core business and diversify our existing offerings.

And secondly, we are making acquisitions that can function as fully-owned operating companies under our holding company umbrella. By using this approach, we are creating an ecosystem of businesses that provide products and services to cannabis operators.

This will continue to drive organic growth engine while at the same time expanding our product and services offerings from which we can support our customers' need. Let me now speak about an exciting new initiative to drive organic growth.

We have just launched a new division, Koleto Packaging Solutions, which will be our -- which will be a separate fully-owned operating company under KushCo Holdings. Koleto will be our innovation arm focused on designing, developing, and bringing to market unique proprietary products.

Koleto will also be tasked to obtain intellectual property and build brands that can leverage the Kush Bottles' distribution platform. In addition, the company will be developing products that can serve traditional industries such as pharmaceutical, veterinary, and others.

Looking ahead, we will continue to expand our product offerings through both organic and acquisitive growth and position Kush Bottles as an important resource for the cannabis industry supply chain. Koleto will play a key role in ensuring we anticipate and meet the needs of our customers faster and more effectively than anyone else in the industry by leveraging Kush Bottles' robust distribution platform.

Now, I would like to discuss The Hybrid Creative. As disclosed in yesterday's announcement, we have just closed our acquisition of Zack Darling Creative Associates which owns The Hybrid Creative, a leading branding and design agency which provides full spectrum digital creative services to both cannabis and non-cannabis companies across the U.S., Canada, and Europe.

Going forward, the branding company will operate under the DBA, The Hybrid Creative. Through our experience in providing our customers with core ancillary products, we realize there is a real need in the cannabis industry for building brands as a means of differentiating their products to ensure customer loyalty and to improve their profit margins.

We have identified The Hybrid Creative as one of the top brand builders in the industry and we know this is a service that can benefit many Kush Bottles' existing client. This acquisition will expand our branding and design capabilities in a space where branding has become more critical than ever.

Moreover it is expected to generate additional cross-selling opportunities as the companies that we have been providing packaging solutions to are often in need of branding services. At the same time, companies that use our branding -- companies that use our branding development process ultimately end up requiring packaging solutions to showcase their brand.

By completing this acquisition, we are now able to provide full value-added services to our clients. Furthermore, The Hybrid Creative client base includes many companies that are not in the cannabis industry including one of the world's biggest solar brands, which further enhances the firm's appeal and growth potential.

I would now like to provide a short update on Summit Innovations. On April 10th, we entered into a merger agreement to acquire Summit Innovations, a hydrocarbon gas and solvent distributor to the legal cannabis industry, which we discussed in detail on our last quarterly earnings call.

Since then, we have successfully closed that transaction and have integrated the business into the Kush Bottles sales and distribution platform to capture operating efficiency. The business is performing well and providing the expected synergies across our business platform.

We believe that significant organic growth opportunities exist in the space and we have just hired a new Vice President for this business unit, Anthony Pham, to lead the expansion of the business and to capture the growth opportunities. Jason Vegotsky, who is the Co-Founder of Summit Innovations and its Head of Business Development, joined Kush Bottles as Vice President of Sales and has since demonstrated his ability to add value across the entire Kush Bottles' business.

As a result upon the formation of KushCo Holdings, Jason will be appointed President of the Kush Bottles' operating company where he will oversee the various business units and support their continued growth. In addition to these new business lines, we continue to drive organic growth, which I will now discuss.

This includes expanding operations to meet growing demand from the consumer market. An example includes the signing of a lease for a new 13,000 square-foot warehouse facility in Las Vegas, Nevada.

This will allow Kush Bottles to more effectively service our customers in the key markets. We also recently announced new labeling capabilities.

Our newly launched labeling capabilities, in-house printing, and other application services will add efficiencies to the Kush Bottles supply chain and allow our clients to benefit from improved speed-to-market. These investments allow us to provide top tier printing and labeling services to our clients.

Mike Alejos, a packaging industry veteran has been hired as Director of Production to oversee these new labeling capabilities. I would now like to spend some time discussing a topic that many of you have questions about.

I'm referring to the capital raised in June which generated net proceeds for the company of approximately $33 million. This capital raised was a significant milestone not just for our company but also for the entire cannabis industry as it was one of the first large capital raises done in the United States by a publicly traded company in the sector and from a traditional investor base that had not ever previously participated in cannabis deal.

We were very pleased to have secured this capital which provides us with the resources we need to further build out our business infrastructure and enter into a new market. Over the past few years, we have successfully established and grown Kush Bottles into a leading player in the cannabis industry through a combination of, organic and M&A growth.

However, in order to take the company to the next level and generate the major sales growth that we believe is within reach, it was important to secure growth capital to give us additional resources to expand quickly into new sectors, innovate rapidly, make strategic acquisitions, and broaden our diversified suite of ancillary products and services for the global cannabis industry. As CEO and a shareholder myself, I am confident that this capital raise was essential to building sustainable long-term value for our shareholders, especially considering the unique opportunity we have here before us.

The emergence of the legal cannabis industry truly is a once-in-a-lifetime event and one that is constantly gaining momentum with larger markets legalizing such as Nevada, California, Canada, and Massachusetts. We are very excited to be in a position to take a leading role in transforming the cannabis industry and plan to strategically deploy this capital to leverage this major opportunity.

Before I turn the call over to Jim, a couple of comments on the new hires that we've mentioned at the company. As we continue to build a world-class operation, it is important that we have the best personnel to support our growth.

In addition to the hires mentioned already, we also have appointed Rodrigo de Oliveira as our new Vice President of Operations. Rodrigo has over 18 years of experience working in global supply chain and operations management, both in the U.S.

as well as Asia, Europe, and Latin America with such brands as Nike Accessories, General Electric, and Oakley. We are very proud to have him on Kush Bottles' management team.

As previously mentioned, we have also added Anthony Pham as our Vice President of our Hydrocarbon Gas division. Anthony joins us from Airgas where he supported their western U.S.

operation. Finally, we have also expanded our salesforce now to a headcount of 45 which we believe is now the largest salesforce servicing the cannabis industry.

With that, I'll now turn the call over to Jim McCormick, CFO, who will talk through our financial results from the quarter.

Thank you, Nick. I'll now go into detail about the core financial results.

These are also found on our Form 10-Q, which we filed with the Securities Exchange Commission this afternoon. Total revenues increased 173% to $12.9 million in fiscal third quarter of 2018 from $4.7 million in fiscal Q3 2017.

This includes sales from the acquisition of CMP Wellness, which closed May 1st, 2017. The remaining increase is due to continued organic growth in current markets, the addition of new customers, as well as revenues from our ever-increasing custom product and services.

Gross profits increased to $3.7 million in fiscal third quarter of 2018 up from $1.7 million in the fiscal third quarter of 2017. As a result of overall growth in sales, gross margins for the period were 28% compared with 36% in the prior year, primarily due to higher sales of vaporizers, product mix, and lower margin products.

Operating expenses in fiscal Q3 2018 were $5.7 million compared with $1.7 million in the fiscal third quarter of 2017. The increase in operating expenses was primarily due to higher SG&A which totaled $5 million compared to $1.4 million in the same period of the prior year.

This increase reflects expansion of our operations and our sales and distribution platform. Stock compensation expense increased by approximately $236,000 due to the amortization of stock options and stock payments.

Depreciation and amortization expense increased by approximately $230,000 as a result of the amortization of intangible assets associated with Roll-uh-Bowl acquisition and the acquisition of CMP Wellness in 2017. The operating expenses also included $650,000 in one-time -- $650,000 in one-time cost.

Net loss for the fiscal third quarter 2018 was approximately $2.2 million or negative $0.03 per share compared with essentially a breakeven scenario in Q3 2017. At May 31st, 2018, we had cash on hand of $3.6 million and working capital of $15.8 million compared to cash of $917,000 and working capital of $3.4 million as of August 31st, 2017.

The increase in cash is primarily due to the sale of our common stock to private placement. Subsequent to the quarter end, we raised $36 million growth, $33 million net, and registered direct offering before -- $36 million growth, $33 million net.

With that, I'd now like to turn the call back to Phil Carlson for the Q&A session.

Thanks Jim. First question, Nick, can you tell us about the partnership with MainStem, how did this come about?

And what does it mean for the company? And have you seen any early success generating sales through this partnership?

Yes, the partnership with MainStem, the idea there is really -- MainStem is building a platform that's bolting-on to a lot of the existing operating systems that cannabis businesses use on a daily basis. And we wanted to plug into that platform.

We want the Kush Bottles' products to be available to all cannabis businesses, however, they choose to purchase them and going through the MainStem platform is a very convenient way for them to access our product. We have started to see some early success.

We're still in Phase 1 of that partnership. Phase 2 will include a full integration -- systems integration with MainStem.

So, we're working toward that now and MainStem is also working on bolting-on to additional operating systems. So, we're still very early days, but we have seen some success with that partnership and we're very excited about the future with MainStem.

Great. Nick, next question, can you tell us about the clients that Hybrid Creative serves?

You mentioned that not all of them are in the cannabis space. Which sectors are they in?

And do you plan to expand more in non-traditional sectors? What is behind this decision?

Well, The Hybrid Creative has served clients in many industries. There's been a particular focus on solar industry technology, also security, sports as well.

So, really I think the idea here is that we're going to continue to take opportunities as they come. We're positioned to take opportunities across multiple industries.

We feel that cannabis is now becoming more and more mainstream. We see cannabis eventually being similar to any other consumer product good.

Our business model is set up to service other industries that set up to service cannabis. More so, we're focused on cannabis, but we believe that we can learn from the other industries as well and then translate that over to our cannabis client.

So, we're going to continue to take opportunities as they arise. We're going to continue to stay very focused on cannabis, but we know that the learnings that we glean from these interactions in other markets ultimately have a synergistic positive effect on the business that we're doing in this sector.

Great. Next question Nick, why do you feel this large of a capital raise is necessary for the company is that today?

This is a significant capital raise for our company. It's also a significant capital raise for the cannabis industry here in the United States being one of the first really large capital raises for a publicly-traded company and doing it with a lot of traditional investors that have not invested yet in cannabis before.

So, we believe that this capital raise is actually sort of like a turning point for the industry and it's particularly important for our business because we see this industry really heating up. These large markets are now opening up California, Nevada, Massachusetts is coming, Canada just legalized and that market will be opening later this year.

So, now is really the time to go out and aggressively grab market share. We're very well-positioned as a leader in the industry, we're a first mover and we want to continue that position.

And we know that's going to require a significant amount of capital. There's so much opportunity right now.

There's so many accretive places to put our dollars and we felt the opportunity to take this money now and allow us to really focus on our growth, was going to be more beneficial long-term to shareholders.

Great. This question is for Jim.

Jim why did gross margins decline this quarter?

Yes, gross margins decline, I think you have to look at the wider spectrum of what's going on. And dovetail on what Nick just spoke about, we're in a situation where we're in a market share grab and getting as much as we can, while we have this contestable space out there.

So, price is one of the strategy. But I think you have to look at it broader than that and it's [probably the] whole HoldCo holding company strategy and being able to sell across the different business vertical.

So, we want to, first and foremost, bring these cannabis companies into our platform and when we have them on the platform, we have the ability to cross-sell higher margin businesses whether it's in the gas or in the creative service side. So, it's part of our strategy now to build out market share and what that ultimately provides us is with greater scale which gives us better influence on cost with our vendors as we get higher volume.

So, in the short run, it is a market share tool, but over the long run, we see ability to leverage that into higher value as we get these clients onto our platform and we continue to service them across multiple vertical.

Great. This question is for Nick.

Nick what are the company's plans for Canada with adult-use legalization on the horizon?

Well, the company is preparing to launch in Canada. We're actually in the process of establishing our Canadian entity.

We are also in the process of hiring a team in Canada. We know that the market is set to roll out here pretty soon.

It's going to be a fairly low roll out. There's still some pretty restrictive language with how cannabis can be packaged and marketed in the country.

But we believe all of this is going to start to open up and we want to be there day one ground zero and plan a stake in the ground. So, we're putting those pieces together as we speak to be prepared to do so.

Great. Next question Nick, what type of opportunities do you foresee in packaging for the pharmaceutical and veterinary industries?

Well, these are industries that are very traditional legacy industries and there has not been nowhere near the type of dynamic market that we're seeing here in Canada where there's really a brand war going on, there's a competition for differentiation. And as a result that's leading to a lot of innovation and Kush Bottles is committed to remaining at the forefront of that innovation.

I mean as we start to innovate and we start to innovate around bringing products that are aesthetically pleasing, that are highly customizable, highly brandable, that are unique, they are sleek, they look great on the shelf, but they are also married to what the regulatory environment is creating. So, we have to build these products to be fully compliant in all the states in which we operate.

And as we're building out these products, we know that there's going to be a direct application to other industries and we believe there's going to be a huge opportunity to eventually disrupt some of these old antiquated legacy industries such as pharmaceutical and veterinary and packaging where folks just haven't had that desire to innovate and create really highly customizable brandable sleek aesthetic looking packaging options. So, we're going to develop these things and then we're going to be able to use a targeted approach to leveraging them into other industries.

We don't quite know how big that opportunity is today, but we're starting today to lay the framework for what we believe will be an innovation arm that can take advantage of multiple industries.

Great. The next question is from Jim.

Jim can you give us a timeframe as to when the company plans to uplist to a major exchange?

Sure. First, I'd just want to say it is the company's intention to move into one of the two major exchanges in the U.S.

When that is feasible? Some of that is out of our control.

However, the things that are in our control in terms of getting our internal infrastructure prepared to make that transition, those things are underway and well underway. So, again, some of that is out of our control, but we are pursuing that path and assuming that it is feasible to do so, we intend to uplist.

Great. Nick, next question, will the company need to raise additional capital in 2018 to fund its growth?

The reason we decided to take such a large amount of capital in this recent capital raise was so that we can take a step back and really focus on growing the business and taking advantage of the opportunities in front of us. So, the amount of capital that we did raise when looking at our budget and our operating plan is enough capital to get us well through fiscal 2018 and almost all the way through fiscal 2019 as well.

So, we should not need to raise any additional capital in calendar year 2018, unless of course, a huge opportunity presents itself which is highly accretive to the company, then of course, we would take advantage of that. But as of now, we believe we have enough capital to execute on our growth plan and we're going to turn our focus to doing just that.

Great. Last question.

Are there any promising acquisition targets for Kush Bottles Nick?

We're constantly looking at acquisition targets. Of course we have a pipeline of companies that we're vetting today.

The nice thing here is that the way that we are structuring the company with the holding company structure is we actually have two opportunities to make acquisitions. We can continue to make acquisitions like we've done with CMP Wellness and like we've done with Summit Innovations that really bring another product category, another division to our core Kush Bottles sales and distribution business.

So, we're going to continue to evaluate opportunities there. And on top of that now we have a holding company where we can actually buy companies that are adjacent to Kush Bottles that are wholly-owned -- under the holding company, but provide a different product or service to the same demographic.

And that's an example of what we've done here with The Hybrid Creative. So, we really have two avenues to look down when we're looking for additional acquisitions that can drive strategic value and accretive revenue growth and we have a pipeline of companies that we're evaluating now, but nothing that's material at this point that we can discuss.

Great. I'll now turn the call back over to Nick for his closing remarks.

All right. Thank you, Phil and thanks to everyone who submitted question.

Before closing the call, I'd like to reiterate how excited we are to be at this pivotal juncture in the company's development. There's a very clear opportunity here on how to grow sales and become a significantly larger company and as a result of our recent achievements, we feel we're incredibly well-positioned to achieve this.

Our new corporate structure will allow Kush Bottles to easily scale and leverage shared services such as technology, human resources, finance, and marketing, as well as operational processes and vendor relationships we've built over time. Furthermore, we are very well-capitalized as a result of the equity raise we completed last month.

The global cannabis industry continues to move forward with Canada stating the legalize cannabis starting October 17th this year. In the U.S., even Oklahoma, a traditionally conservative state, voted to approve medical cannabis in June.

California and Nevada, two major markets where we already have a strong presence, continue to evolve and gain momentum as the industry professionalizes. And of course, we're waiting every day now for Massachusetts to begin legal sale.

We were very excited to be in a position to take a leading role in transforming the cannabis industry and plan to strategically deploy our capital into these major markets among others to build Kush Bottles sales and maximize shareholder value. I would like to extend my thanks to all of you for taking the time to join us for our earnings call and we look forward to updating you again next quarter.