KushCo reported financial results for its fiscal second quarter.
KushCo Holdings, Inc. (OTCQX:KSHB) the premier producer of ancillary products and services to the legal cannabis and CBD industries, today reported financial results for its fiscal second quarter ended February 29, 2020.
Recent Operational Highlights
- Implemented a new strategic plan to align deeper with more established, financially stable, and creditworthy customers (namely multi-state operators, licensed producers, and leading brands); to significantly reduce and right-size the Company's cost structure; and to accelerate the path to positive adjusted EBITDA.
- Completed several milestones with respect to the Company's recently announced strategic plan, including substantially reducing overhead and inventory, while also making progress in consolidating its warehouses and enhancing its sales approach toward smaller customers to be more profitable, efficient, and automated.
- Appointed Executive Vice President of Corporate Development, Stephen Christoffersen, as the Company's new Chief Financial Officer, effective April 10, 2020.
Fiscal Second Quarter 2020 Financial Summary
- Net revenue decreased 14% from the prior year period to $30.1 million.
- Revenue from the Company's "Core" customers (defined as the Company's top 100 MSO, LP, and leading brand customers) increased 227% from the prior year period to $24.6 million, or 82% of total revenue.
- On a GAAP basis, gross profit was (29.6%), compared to 12.9% in the prior year period.
- On a Non-GAAP basis, excluding the impact of certain non-recurring items, gross profit was approximately 21.7% (see note below regarding "About Non-GAAP Financial Measures" for further discussion of this and other non-GAAP measures included in this earnings release).
- Sales, general and administrative (SG&A) expenses were approximately $27.2 million, compared to $18.8 million in the prior year period. The increase was driven primarily by a substantial increase in bad debt expense, which totaled $9.1 million during the quarter, largely due to the worsening credit conditions in California that have impacted the Company's ability to collect, in part or in full, amounts owed by customers in this market.
- On a Non-GAAP basis, Cash SG&A expenses (which exclude non-cash expenses, including bad debt, stock-based compensation, depreciation, and amortization) were approximately $13.6 million, compared to $13.4 million in the prior year period and $15.1 million in the prior quarter.
- On a GAAP basis, net loss was approximately $44.4 million, compared to approximately $8.9 million in the prior year period. Basic loss per share was $0.40 compared to $0.10 in the prior year period.
- On a Non-GAAP basis, excluding the impact of certain non-recurring charges and gains such as the Company's restructuring costs, net loss for the quarter was $17.5 million and net loss per share was $0.16.
- Adjusted EBITDA totaled ($14.8) million compared to approximately ($6.7) million in the prior year period and approximately ($6.8) million in the prior quarter. The increase in adjusted EBITDA loss was driven primarily by the aforementioned $9.1 million bad debt expense, which the Company considers primarily one-time in nature.
- Cash was approximately $11.4 million as of February 29, 2020, compared to approximately $3.9 million as of August 31, 2019.
Nick Kovacevich, KushCo's Co-founder, Chairman and Chief Executive Officer, commented: "Despite a challenging market backdrop, we are pleased with how we executed according to our plan. Net revenue of $30.1 million was down 14% year-over-year and quarter-over-quarter due to a myriad of factors, namely a slower-than-anticipated rebound in demand for our vape hardware products, following the illicit market vape crisis; a slower-than-anticipated start to our hemp trading business; and continued weakness in the California market, which has been exacerbated by the recent COVID-19 pandemic."
Notwithstanding the decrease in total revenue, there were several positive takeaways this quarter, including continued robust sequential growth in many of our key markets, such as Illinois, Michigan, Massachusetts, and Canada, where sales in those regions nearly doubled or tripled quarter-over-quarter. Nick Kovacevich, KushCo's Co-founder and CEO
"In addition, we continued to gain traction with our larger MSO, LP, and leading brand customers, collectively referred to as our Core customers. We were able to not only expand this customer base during fiscal Q2, but also cross-sell them additional products and services, with these customers on average purchasing 84 SKUs from us during the trailing twelve months ended fiscal Q2, compared to just 69 SKUs a couple of quarters ago."
"Perhaps most importantly, however, fiscal Q2 was best defined by the significant progress we made in right-sizing our business as part of our newly unveiled strategic plan to accelerate our path to positive adjusted EBITDA. The execution of this plan began in fiscal Q2, during which time we have begun rationalizing all aspects of our operations, including significantly reducing our overhead, implementing tighter expense controls, consolidating our warehouses, reducing our inventory, and drastically altering our sales strategy to focus more on growing, predictable, creditworthy, and financially stronger customers."
"During the quarter, we completed a 26-person reduction in headcount, which generated approximately $3.7 million in annual cash compensation savings; and in March 2020 we completed a 49-person reduction in headcount, which generated approximately $4 million in annual cash compensation savings."
"Since we started this workforce optimization process back in September 2019, we have right-sized our workforce by approximately 50%, which altogether is expected to generate approximately $12 million in annual cash compensation savings-an important lever that we have been able to pull to help us move closer toward achieving positive adjusted EBITDA."
"As a result of these restructuring activities, which we are planning to complete in the second half of fiscal 2020, we expect revenues to be more stable and predictable going forward, as we continue to focus our resources on our core customers. While we don't foresee our overall growth rate in the near future to be as substantial as it has been in the past, we believe that our current growth is more stable and something that we can continue to build a sustainable business around."
"In fact, while our overall revenue in fiscal Q2 declined by 14% year-over-year, our sales to Core customers actually increased 227%, making up 82% of total revenue this quarter and demonstrating the overall transition in our business toward focusing more on a stable and higher-quality revenue base."
"Beyond ensuring a more reliable stream of revenue, we also believe that this strategic shift should help us significantly reduce our inventory and warehouse space as less stock SKUs are required, improve collections and cash flow, and perhaps most importantly, provide us with meaningful upside potential once the broader industry begins to rebound and these Core customers ramp up their expansion and consolidation activity."
In summary, we have made major strides these past several quarters in securing a more established and promising customer base. We have now turned our focus to aligning the rest of our business, namely our cost structure, around this premier group of customers. Nick Kovacevich, KushCo's Co-founder and CEO
"To that end, we have substantially reduced our headcount and third-party consulting costs, enabling us to target a more than 40% reduction in cash SG&A from $15.1 million in fiscal Q1 2020 to between approximately $7.5 million and $8.5 million in fiscal Q4 2020-which is even lower than the $9.5 million we previously forecasted."
"The expected end result is that we will have considerably lowered the quarterly revenue levels needed to achieve positive adjusted EBITDA, namely from the $75 million revenue level needed under our previous cost structure to now approximately between $35 million and $45 million under our new cost structure, once all restructuring activities have been completed. We are ultimately encouraged by the progress we have made in executing against our new strategic plan with the benefit of also being aligned with the industry's premier operators that are just beginning to scale."
 Gross profit during the fiscal second quarter 2020 was impacted by several restructuring activities the Company implemented to execute its strategic plan of aligning more closely with its Core customers and achieving positive adjusted EBITDA. These activities led to an $11.9 million excess and obsolete inventory write-down and a $3.3 million purchase order cancellation charge, both driven by the Company's decision to discontinue nearly all of its stock SKUs in order to focus more on custom and best-selling stock inventory demanded by its Core customers.
 Net loss and net loss per share for the fiscal second quarter 2020 were impacted by several restructuring charges and one-time expenses the Company recognized in order to right-size its business and better execute on its new strategic plan. These expenses include a $7.3 million restructuring charge related to severance and asset impairment charges associated with the Company's recent reductions in force and the planned closures and consolidation of its warehouse facilities, which the Company expects to complete in the near future.
To learn more about KushCo Holdings Inc, visit the company HQ here.
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