Successful execution of cost-cutting initiatives resulted in a 50%+ sequential reduction in selling, general, and administrative expenses.
KushCo Holdings, Inc. (OTCQX:KSHB), the premier provider of ancillary products and services to the legal cannabis and CBD industries, today reported financial results for its fiscal third quarter ended May 31, 2020.
Q3 2020 was a successful transition quarter for KushCo, demonstrating the execution of our strategy to accelerate our path to positive adjusted EBITDA.Nick Kovacevich, KushCo's Co-founder, Chairman and Chief Executive Officer
Recent Operational Highlights
- Completed cost-cutting initiatives as part of the Company's 2020 Plan to align deeper with larger and more creditworthy multi-state-operators (MSOs), licensed producers (LPs), and leading brands, which has resulted in the Company's SG&A expenses decreasing more than 50% from $27.2 million in fiscal Q2 2020 to $12.7 million in fiscal Q3 2020.
- Strengthened balance sheet and liquidity by proactively converting 18.5%, or $5 million, of the total principal amount of the Company's senior note due April 2021 into equity with limited dilution and zero warrants.
- Appointed industry veteran and former Green Thumb Industries (CSE: GTII) CEO Pete Kadens to Board of Directors.
- Appointed former Executive Vice President of Corporate Development, Stephen Christoffersen, as the Company's new Chief Financial Officer, effective April 10, 2020.
Fiscal Third Quarter 2020 Financial Summary
- Net revenue decreased 46% from the prior-year period to $22.3 million, primarily as a result of the Company's adoption of the 2020 Plan, which has resulted in tighter credit terms being extended to smaller customers. The decrease was also driven by lower sales from vape and natural products, as well as order lumpiness from the Company's larger customers, in addition to travel and regulatory restrictions in the markets that the Company operates in due to the COVID-19 pandemic.
- On a GAAP basis, gross profit was 10.7%, compared to 17.8% in the prior-year period.1
- On a Non-GAAP basis, excluding the impact of certain non-recurring items, gross profit was approximately 28.2% (see note below regarding "About Non-GAAP Financial Measures" for further discussion of this and other non-GAAP measures included in this earnings release), compared to 22.8% in the prior-year period. The increase in non-GAAP gross profit margin was driven by a favorable product mix, higher product margins, and lower freight expenses.
- Sales, general and administrative (SG&A) expenses were approximately $12.7 million, compared to $20.7 million in the prior-year period and $27.2 million in the prior quarter. The decrease was driven by reductions in headcount, executive salaries, consulting spend, and travel and entertainment expenses, as a result of the COVID-19 pandemic.
- On a Non-GAAP basis, Cash SG&A expenses (which exclude non-cash expenses, such as bad debt expense, stock-based compensation, depreciation, and amortization) were approximately $7.7 million, compared to $16.4 million in the prior-year period and $13.8 million in the prior quarter.
- On a GAAP basis, net loss was approximately $13.5 million, compared to approximately $10.6 million in the prior-year period. Basic loss per share was $0.11 compared to $0.12 in the prior-year period.2
- 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 $5.5 million, or $0.05 per share, compared to a net loss of $8.6 million, or $0.10 per basic share, in the prior-year period.
- Adjusted EBITDA totaled ($2.7) million compared to approximately ($7.5) million in the prior-year period and approximately ($14.8) million in the prior quarter. The improvement in adjusted EBITDA was driven by the aforementioned cost reductions.
- Cash was approximately $11.1 million as of May 31, 2020, compared to approximately $11.4 million as of February 29, 2020, and $3.9 million as of August 31, 2019.
Nick Kovacevich, KushCo's Co-founder, Chairman and Chief Executive Officer, commented: " We substantially reduced our cost structure, consolidated our vendors and warehouses, vastly improved our inventory to align with our actual sales, ramped up our collections activity, stemmed the cash burn, and drove meaningful operating leverage.
"Revenue for the quarter came in lower than we anticipated due to regulatory and travel restrictions in various markets in which we operate due to the COVID-19 pandemic, as well as order lumpiness from some of our larger customers who pushed out their orders due to a general lack of visibility in their businesses. We expect the latter phenomenon to continue for the foreseeable future due to the fact that we now cater to a more concentrated group of larger and financially healthier customers that have longer sales cycles and more measured purchasing patterns. Despite the sequential decline in revenue, however, we have started Q4 on the front foot with a healthy level of purchase orders secured thus far, leading us to believe that Q3 will be the bottom in terms of revenue for fiscal 2020. More importantly, we continue to focus on the things we can better control, such as gaining more efficiencies in our business, significantly right-sizing the organization, and reducing our overall cash burn.
"Along with achieving our highest level of non-GAAP gross margins in recent years during the quarter, we also reduced our cash SG&A by more than 40% sequentially to $7.7 million, due to the headcount reductions, executive salary reductions and reduced consulting spend we completed during the quarter. The $7.7 million is ahead of the cash SG&A target we previously set out for ourselves, and represents a strong foundation for us to achieve positive adjusted EBITDA in the near term. In fact, even though our revenue for Q3 was lower than in the previous quarter, because of the substantial cost reductions we have implemented, we were actually able to drive a significant improvement in adjusted EBITDA from ($14.8) million in fiscal Q2 2020 to ($2.7) million in fiscal Q3 2020, demonstrating the increasing operating leverage in our business. These cost-cutting initiatives, coupled with our heightened fiscal prudence and disciplined capital management, also contributed to a much lower cash burn than we have historically experienced, with cash flow from operations improving notably from ($10.7) million in fiscal Q2 to ($1.4) million in fiscal Q3. In addition to the strong financial performance we generated, we are also pleased to have made considerable strides on the operational front.
"During the quarter, we ramped up our efforts to become more entrenched with our top customers' decision-making processes, investing the time and resources to serve as a trusted partner, and working to formalize these strong relationships into long-term supply agreements. We have already been able to secure several supply agreements with leading MSOs and LPs, and we have been focused on establishing more of these longer-term relationships, while also working to cross-sell these customers across our entire product and service ecosystem. We also launched our customer support line and have been processing smaller orders more efficiently and without the need for multiple sales reps, which has minimized our working capital needs and operating expenses. Lastly, we successfully renegotiated our lease obligations and closed our Las Vegas, Denver, and Santa Rosa facilities, and sublet our Garden Grove warehouse, which has resulted in additional annual cost savings. We believe all of these actions have made us into a stronger organization better-equipped to power our customers' businesses and, more broadly, the global cannabis ecosystem.
"Looking ahead, we expect to realize revenue growth in Q4 not just by recognizing the customer orders that were pushed out, but also by signing additional supply agreements with our customers and focusing more on the areas that we believe we are good at, such as our core businesses of vape, packaging, and energy. We are also going to be focusing even more on controlling our costs and deploying a prudent capital allocation policy, so that we can continue to support the business with the cash and liquidity resources currently at our disposal. The end result of these efforts should lead to what could be a pivotal Q4 for KushCo, and one in which we can achieve our goal of positive adjusted EBITDA."
Fiscal Q4 2020 Financial Outlook
KushCo expects net revenue for the fourth quarter of its fiscal 2020 to be between $24.0 million and $26.0 million. In addition, the Company expects cash SG&A to be between $6.5 million and $7.5 million, and adjusted EBITDA to be between ($1.0) million and $1.0 million.
To learn more about KushCo, visit the company HQ here.
Disclaimer: Past performance is not an indicator of future performance.
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