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Edited Transcript of KSHB.PK earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q4 2019 KushCo Holdings Inc Earnings Call

SANTA ANA Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of KushCo Holdings Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arun Kurichety

* Christopher Tedford

KushCo Holdings, Inc. - CFO

* Jason Vegotsky

* Najim Mostamand

* Nicholas Kovacevich

KushCo Holdings, Inc. - Co-Founder, Chairman & CEO

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Conference Call Participants

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* Aaron Thomas Grey

Alliance Global Partners, Research Division - MD & Head of Consumer Research

* Alan Brochstein

New Cannabis Ventures - Founding Partner

* Brett Michael Hundley

Seaport Global Securities LLC, Research Division - Research Analyst

* Gregory Thomas Gibas

Northland Capital Markets, Research Division - VP & Senior Research Analyst

* Jon DeCourcey

* Rommel Tolentino Dionisio

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

* Vivien Nicole Azer

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the KushCo Holdings Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during a Q&A session. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host Najim Mostamand, KushCo's Director of Investor Relations. Mr. Mostamand, you may begin.

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Najim Mostamand, [2]

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Good afternoon and welcome to the KushCo Holdings fiscal fourth quarter and full year 2019 earnings conference call. A replay of this call will be archived on the Investor Relations section of the KushCo Holdings website, ir.kushco.com.

Before we begin, please let me remind you that during the course of this conference call 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 our cofounder, Chairman, and CEO, Nick Kovacevich, our CFO, Chris Tedford, and our President and CRO, Jason Vegotsky.

With that, I would now like to hand the call over to Nick. Nick?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [3]

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Thanks, Najim, and than you all for attending our full-year fiscal 2019 earnings call. Some introductory remarks; first and foremost, fiscal 2019 was a significant year of growth, operational improvement, and transformation for KushCo.

Some of the highlights; we rebranded the company as KushCo Holdings. We implemented our Manhattan WMS system. We revamped our C suite team. We opened a sourcing office in China and a distribution center in Michigan. We turned Koleto into our innovation arm. We applied for a listing on NASDAQ, and we secured a $50 million revolving credit facility with Monroe Capital. And we also launched our retail services division.

Next I'd like to look at some of the fiscal Q4 and fiscal year 2019 highlights. For Q4, we had record revenue of $47 million, up 135% year-over-year and up 13% sequentially. The good news is almost all of this revenue was organic and it builds upon momentum we've established during the entire year with consistent double-digit sequential revenue growth across all four quarters.

Next I'll turn your attention to our supplemental earnings slides breakout. Slide 4 shows our geographic sales. What we see here is that we have significant increases in some of our emerging markets, but also some softness in some of our more established markets. First we'll talk about some of the emerging markets. We want to take a good look at Michigan and Illinois.

In Michigan, our business was up to $2.2 million and we nearly doubled from Q3 to Q4. In Illinois, it was up 88% to $639,000. And we see customers in both Michigan and Illinois ramping up in the medical markets as they prepare for an exponential explosion when adult use kicks in in early January. So we're very pleased to see those markets building, as we know come January for Illinois and likely March or April for Michigan, that those markets are going to open up in a big way as they start adult use sales.

We're also seeing significant growth in some of the medical markets, especially markets like Florida, where we're seeing some of the MSOs experience outsized growth. We're also pleased to now be doing over $1 million in quarterly revenue in Canada, and we have an upcoming catalyst as customers are just now preparing to launch derivative products such as vape pens, edibles, and concentrates, which will hit the shelves in mid December.

Next we'll look at some of the established markets. We were disappointed to see California down 15% sequentially, but California has been a big market for us. We believe long-term it will continue to be a growth driver. But it's hitting some rockiness in the interim, mainly because it's still plagued by the black market and there's limited retail stores that are open.

There's still only about 700 stores that are open in the state, which is just not enough to effectively service the market and it's driving people to the black market. But we know that there's going to be more stores opened over time. And typically when new stores open up is when we get bigger orders as people fill the shelves. And right now a lot of the shelves are fully stocked, and so our sales are going to track more towards turns versus new entrants into retail shops.

But we also saw Oregon was down 22%. Massachusetts was down 8%, and we expected that market to more than double in Q4. And so the reason we were so off there is mainly due to slower rollout of retail rec stores. We don't have a lot of stores in the Maine metro areas yet, but we do know that that market is going to continue to grow as more stores open up, although we're faced with some temporary headwinds in light of the recent four-month vape ban. That said, we still have established markets like Washington that was up 9% and Colorado that was up 25%.

So next I'll turn your attention to the product mix slide, which is slide 5. We did see growth in all categories except for papers and supplies. We believe that our packaging business is gaining nice traction. We think that long-term energy in natural products will continue to grow. We were pleased to see vape come down slightly after a few quarters of sequential increase in percentage of sales. It's now starting to pull back, and we're really focused on balancing out the product category so we're not overweighted to vape.

Next we'll look at some of the full-year fiscal results. So for the full fiscal year of 2019, we saw revenue of $149 million, up 186% year-over-year, and again substantially all organic. We were pleased to achieve our revenue guidance of $145 million to $150 million. And we're also pleased to see a long-term trend that, for as long as the company has been publicly traded, the last four fiscal years in a row we've more than doubled our revenue.

Next I want to look at the cross-sell progression slide, slide 6. We continue to penetrate the market and monetize our customer network, which is a reminder of our greatest asset. We have now had 19 customers purchase more than $1 million in 2019 versus only 4 customers that were over the $1 million threshold in 2018. As shown in the chart, the bigger the customers become, the more they spend with us and the stickier we become with them. This also enhances our moat.

Cross–selling is one of the keys to our success, which is why we've been actively expanding our product and service portfolio with recent launches like our retail services division, our De La Rue anticounterfeiting partnership, our stainless steel tanks, as well as some newer initiatives.

We're really happy with the impressive top line growth. But as we've mentioned many times before, it's not just growth at all costs here. We recognize that the capital markets have shifted dramatically in the past few months. And as I'll touch on later, there has been a deep focus internally on improving margins, profitability, and cash flow, and the recent capital market conditions have only reinforced that focus.

Next I want to look at the gross margins. We were pleased to see in Q4 on a GAAP gross margin basis margins ticking over 20%, up from 18% in Q4 a year ago and up from 17.8% in the recent Q3. The gross margins have been increasing each quarter since we started the fiscal year. It was at a low of 13% in Q1 and has steadily climbed back, and now we're pleased to have ticked over the 20% mark.

We can attribute these improvements to things that we've talked about a lot on past earnings calls, such as getting rid of free air shipping and free shipping to our customers, upgrading our suppliers, removing temp labor, implementing our WMS system to streamline warehouse operations and reduce costs, passing through tariffs with the tariff supplement fee, and renegotiating more favorable terms with our vendors. We're pleased with this margin improvement, but we also expect continued margin enhancement during our fiscal year 2020.

Next I'd like to take a look at the current macro environment. First, on top of everyone's mind is the ongoing vaping issue that has hit the news headlines. We are continuing to monitor this situation, although it is dynamic and constantly evolving. But we do see that the headlines and illnesses appear to be leveling off, which is a great sign.

The CDC has been reporting lower hospital admissions in the past couple of weeks. Data from providers like Headset show that the vape market share as a percentage of the total market in mature markets like Colorado, Nevada, and California appears to be leveling off.

As expected, we saw a short-term customer pullback as this remains in the news and as there's still mystery and confusion about the exact cause of these vape illnesses. That's to be expected. But as this cycles out of the news and as they start to shore up the regulations to ensure less incidents, we do expect that consumer demand to come back into the market.

We do know that there are some regulatory headwinds. Massachusetts is the only state to enact a four-month temporary ban on all vaping products, including cannabis, which we don't expect to be a trend that many states follow, as we've now seen states like Washington and Oregon subsequently issue a flavored ban.

Most of the data points to these illnesses not being caused by THC/cannabis oil itself, as there has been obviously billions of cannabis vape devices consumed throughout the years, but more likely due to new additives or chemicals that are being mixed with the THC oil, which is why states are, in absence of knowing exactly what chemicals are causing this, are outright banning all chemical additives, all flavor additives at least on a temporary basis until the exact root causes are determined.

Do we think that there's going to be potential future bans? I think it's unlikely. However, we do know that this is a dynamic situation. There are other options now for state regulators to enact, such as the flavor ban or tighter regulations about what is being tested when it comes to these vape pens. The bottom line is we believe, and the CDC seems to suggest, that these illnesses are leveling off, but we still want to be careful.

How will this impact our fiscal 2020? Well, what we're seeing is obviously this slight consumer pullback in demand, which we expect to be short-term, so we're not too concerned about that. But what is causing some slowness in our sales for vape when we look at Q1 and potentially Q2 is the fact that our customers don't want to take inventory risk around a product set that they don't know if the regulations might change and evolve; neither do the retail stores.

So right now people aren't wanting to load up on this product. They're still moving through volumes, but their ordering habits have changed. So they're ordering less at a time and they're ordering more frequently until they get clarity around how this is going to impact the business long-term.

So what does this mean for us long-term? Short-term, like we said, there's going to be some slowness for vape, especially in Q1, likely in Q2. But we do expect that to rebound in a big way on the back half of the year, barring any significant regulatory changes.

We also think that long-term this vape crisis is actually a positive for legal, compliant operators. The biggest challenge to the customers that we service on the legal side is losing business to the black market. It's hard to convince somebody to spend more for their product just because it's the right thing to do. However, as sad as it is to see people getting sick and dying from this, this is the one thing that will convince consumers to spend more money to buy legally, if they believe the products on the legal market are safer and more effective.

So we do expect the long-term benefit of this crisis to be driving consumers out of the black market and into the legal channels. We also expect operators that operate in the legal channels to take a closer look at their products and their supply chain, and what we call a flight to premium mentality is going to lead a lot of the customers that we service to want to upgrade things like their vape hardware or their solvents to make sure that they have everything that's in their power to deliver a safe and trusted product to their consumer base.

And then as a business, we have been, even before this issue, focused on diversifying out of vape. And we're going to talk about some of the new business units that we're launching that can help do this, and we're also going to put a further emphasis on some of our existing product buckets like packaging, where we know we can get some immediate ROI as customers may shift from buying vape to other form factors.

Next I want to talk about the capital crunch that's going on in the cannabis sector. There is a shift in investor sentiment. The access to capital that was available for cannabis and cannabis related companies even a few months ago has drastically changed. We see the capital markets now being closed for a period of time. So with that, we made the decision to go out and grab some capital while it was still available.

We were able to complete a $30 million capital raise using Jeffries and AGP. We were able to do this despite the headwinds with the vape crisis. We weren't pleased with the terms on this deal. Due to some of the macro climate, the stock was trending downward as we were looking to raise this capital. But at the end of the day, we needed to get this capital on our balance sheet because we don't know exactly what's going to be coming down the pipe here with the vape news and with some of the investor sentiment and capital markets activity.

But we do know that we're in a great position now that we do have this cash on our balance sheet. And our mentality is this capital is the capital that we're going to utilize to get the company to adjusted EBITDA profitability so that we can control our own destiny.

So now that we're in a strong capital position, I want to talk about the company's focus and vision for fiscal year 2020. First and foremost, fiscal 2020 is all about getting to profitability on an adjusted EBITDA basis. We're targeting the back half of fiscal 2020.

We're planning to do this by utilizing three main levers; number one, continued top line growth in the core business. Number two, ramping up some of our newer and higher margin initiatives. And number three, tightening the belt with a hard look at restructuring the business, cutting costs, improving margins, and improving cash flow.

So now let's take a deeper dive into how we're going to focus on these three main levers; number one, growing our current core business. We're going to focus on growth in new markets; as we mentioned, Illinois and Michigan both rolling out adult use recreational sales in early 2020, and Canada launching derivative products like a vape, edibles, and concentrates in December. Number two, we're going to put an emphasis on higher margin products and services, which includes hyper custom packaging, retail services, and hemp trading, which I want to spend a little time to introduce and talk about.

We announced via press release the expanding of our CBP footprint with the launch of the hemp trading business. The benefits of the hemp trading business is, number one, it expands our CBP footprint. Two, it requires little excess capital. It's highly accretive to EBITDA. Number three, it expands our overall ecosystem and strengthens our competitive moat.

Let's look at an overview of the business. Our new hemp trading business connects buyers and sellers of hemp commodities, including biomass, distillate, isolate, and crude oil. In connection with the launch of this business, we partnered with a national leader in agricultural hemp production that sources legally compliant hemp biomass, CBD distillate, CBD isolate, and CBD crude oil. This partner has over 1,200 acres of hemp cultivation with more than 60,000 acres through its network of farmers.

Together we have created a national hemp marketplace, providing transparency in the legal hemp derived CBD market for buyers and sellers, eliminating the middlemen, guaranteeing the quality of the supply chain while mitigating risk and ensuring compliance. Farmers can now be confident that they have a buyer network when their crop is ready, and buyers can now be confident that they have a trusted source for purchasing industrial hemp.

KushCo does not take any possession of the products, nor do we store any of the inventory, rather we charge a fee for facilitating this transaction. The beauty of this business is that it already leverages our ecosystem of more than 6,000 brands, producers, and suppliers. As such, there is very little excess capital required, making this business EBITDA accretive.

Further, it strengthens our value proposition as a company, as we are now able to service the entire CBD supply chain, from the farming and testing with our hemp trading business to the processing and extraction with our energy and natural products business, to the branding with our CBD packaging and labeling business, all the way to retail with our new retail services business.

This ability to service the customer from seed to sale significantly strengthens our CBD footprint and cross-selling opportunities, positioning us favorably for when this market really starts to expand, especially as many historically THC focused customers start to cross over and launch their CBD brands, which we're already starting to see.

In addition to ramping up these higher margin initiatives, we have also been taking a hard look at rightsizing the business and getting to a leaner operational state. And so the third and final lever amongst the focus of getting to adjusted EBITDA profitability is the operational restructuring and cost-cutting.

First, we want to announce that we made a significant reduction in headcount. We reviewed our staff across all functions. And we took a lens to areas of key focus, and we made sure to trim and cut staff that were not pertinent toward achieving our goal of profitability. As a result, we let go of 53 employees, which we expect to result in an annual net cost savings of $4.4 million.

This was obviously a very difficult decision, but it's something that we believe was necessary. And in many instances, we did all that we could to work with these employees to ensure a smooth transition to another job or career.

Second, we're improving our product margins. We're also working to increase these margins by evaluating and implementing more favorable terms with our vendors, higher tariff supplement fees, and the rollout of higher-margin products such as our CBD ecosystem. As a reminder, we have been able to increase margins over the past few quarters not because we're raising prices, but because we're becoming more efficient at scale.

And lastly, we have some other initiatives in the works, such as establishing tighter credit terms with customers to improve cash flow, better pricing and credit terms with our suppliers, and reducing or deferring some of our potential future CapEx.

Lastly, we're working on establishing tighter inventory management and more robust sell-through of existing inventory. We built up a good level of inventory prior to the new Chinese tariffs kicking in, and we're now selling through that inventory and we have a tighter focus on bringing inventory levels down to be more efficient with our cash.

Now lastly, I want to talk a little bit about the guidance we recently put out. Altogether, we see a very clear pathway ahead to get to adjusted EBITDA profitability in the second half of fiscal 2020. We believe that our current cash reserves from the $28 million net that we received in September, along with the Monroe revolving credit line, that we now have the resources to execute on that goal.

We know that it's up to us to execute, but we are more confident than ever in the future prospects of the business and we are excited to work toward this next chapter in our evolution, which calls for more disciplined, profitable, and sustainable growth. With that being said, we are currently targeting between $230 million and $250 million in revenue for fiscal 2020. That includes growth from our core business and added $25 million plus from our new hemp and CBD initiatives.

As a reminder, this guidance incorporates a softer first half as it relates to vape sales, but these sales do ramp up significantly in the second half of the fiscal year. And with these top line factors in mind, along with the efforts to tighten the belt with operational expenses, we believe we can achieve adjusted EBITDA profitability in the back half of fiscal 2020.

And with that, at this point I'd like to turn the call over to our CFO, Mr. Chris Tedford, to discuss the fiscal Q4 and full-year 2019 financial results in greater detail.

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Christopher Tedford, KushCo Holdings, Inc. - CFO [4]

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Thanks, Nick. I will now turn to our fourth quarter and fiscal year-end 2019 financial results.

Total net revenue for the fourth quarter increased 135% to $47 million compared to $20 million for fiscal 2018. Total net revenue for the year increased 186% to $149 million compared to $52.1 million for fiscal 2018. The increase in net revenue for both periods was organically driven by the sale of vape hardware and accessories, packaging, energy solutions, and natural products.

On a GAAP basis, gross profit for the fourth quarter increased to $9.4 million, up $5.8 million or 161% from the fourth quarter of 2018. Gross profit as a percentage of net revenue for the fourth quarter was approximately 20% compared to 18% in the same period a year ago.

On a sequential basis, GAAP gross margin for the fourth quarter improved by 230 basis points compared to the third quarter. This increase was driven primarily by lower landed costs, better leveraging of fixed costs, and other supply-chain efficiencies.

On a GAAP basis, gross profit for the year increased to $24.6 million, up $11.2 million or 84% from the fiscal year 2018. The increase in gross profit in both periods was due primarily to an increase in sales. Gross profit as a percentage of net revenue for the fiscal 2019 was approximately 17% compared to 26% in the same period a year ago.

The decrease in fiscal 2019 was primarily due to a higher sales concentration of vape products, which generally have a lower gross margin profile as compared to other product categories, along with the negative impact from the China trade tariffs.

Towards the end of May 2019 and in connection with the most recent increase in tariffs, we decided to implement a tariff supplement fee which we charge to our customers, which we expect will substantially offset the impact of the most recent increase in tariffs.

On a non-GAAP basis, excluding the impact of the current China trade tariffs and nonrecurring product costs, adjusted gross margin for the fourth quarter and fiscal year was approximately 22% and 21% respectively.

As of the end of Q4, total inventory was approximately $44 million as compared to approximately $53 million as of our prior fiscal quarter end. The recent decrease in inventory is due primarily to higher sales in Q4 and better inventory management.

SG&A expense for the fourth quarter of $21 million was in line with the third quarter. For fiscal 2019, SG&A expense increased to approximately $73 million versus approximately $26 million in the prior year, primarily due to an increase in salaries and benefits, including non-cash stock-based compensation costs, facilities costs, and consulting and professional fees.

However, SG&A expense as a percentage of net revenue for fiscal 2019 and 2018 was unchanged at 49%. We expect SG&A to remain relatively flat in fiscal 2020 compared to fiscal 2019.

On a GAAP basis, net loss for the fourth quarter of 2019 was $11.5 million or negative $0.13 per diluted share as compared to a net loss of approximately $3.2 million or negative $0.04 per diluted share in the prior year quarter. On a non-GAAP basis, excluding the impact of certain nonrecurring charges as well as other non-cash gains and losses, our net loss for the quarter was approximately $7.2 million or negative $0.08 per diluted share.

For fiscal 2019 on a GAAP basis, net loss was $39.6 million or negative $0.57 per diluted share as compared to a net loss of approximately $24.3 million or negative $0.37 per diluted share for 2018. On a non-GAAP basis, excluding the impact of certain nonrecurring charges as well as other non-cash gains and losses, our net loss for the quarter was approximately $29.8 million or negative $0.35 per diluted share.

We ended the quarter with a cash balance of approximately $4 million as compared to approximately $13 million as of the prior year-end. As Nick mentioned, we recently entered into a $50 million credit facility with Monroe capital consisting of a $35 million line of credit and an accordion of up to $15 million that will be available subject to certain covenant compliance and borrowing base availability.

With that, I'll now turn the call back to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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Certainly. (Operator Instructions) Our first question comes from Vivien Azer with Cowen. Please go ahead.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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So thanks very much for your candid and appropriately conservative outlook on vape in the near term. That seems reasonable. Nick, the commentary about softness in the first half makes a lot of sense in terms of ordering patterns and also slowness in terms of new dispensary openings, primarily in California. But can you help put some numbers around that? Should we still expect year-over-year growth but a sequential decline? Like just order of magnitude, how should we think about the first half versus the back half?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [3]

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Yes, we're looking right now like vape will be down somewhere between 20% and 25% for Q1. We think that Q2 we'll see a bounce back. I mean, our goal is to get the Q2 vape sales back to where they were in Q4, so kind of taking, I guess, six months to kind of fully rebound and then start growing on the back half.

But obviously, there's a lot of uncertainty. So we're not going to stand behind anything at this point because we just don't know if the Massachusetts ban is going to stay in effect. We just don't know what other states are going to do that haven't done anything. But we are optimistic.

So that's the best color we can kind of give. We're looking at 20% to 25% decrease in the vape category for Q1 from where we were in Q4.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [4]

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That's really helpful for modeling purposes. Thank you for that. Can we touch base on Oregon, please, the 22% decline? Can you just describe what key factors might have contributed to that?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [5]

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Yes, that's really boring. It was just basically timing and one particular large customer that was going through some cyclical issues. And we've been able to get them back ramping in Q1. So that was kind of an outlier, although we were looking at the Q1 numbers and we're still seeing Oregon sort of underperform a little bit.

But that's probably more due to the changes in regulatory environment with the new governor's flavor ban and kind of removing those products off the shelf just creating a lot of uncertainty. So I think the Q4 being down 22% was more one-time in nature, but we are facing headwinds in Q1 and Q2, likely because of the regulatory environment in Oregon.

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Vivien Nicole Azer, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [6]

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Perfect. That's really helpful. My last question is on this hemp trading platform. We've heard from multiple operators that there has been significant price deflation in the wholesale market for hemp derived CBD. And I'm just curious, number one, if that's consistent with what you're seeing, and then number two, how that impacts your economics around this endeavor.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [7]

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Yes, this is -- it's a very dynamic market, which is why we set up the business this way, to be very flexible and focus on being able to broker transactions between buyers and sellers and not taking the inventory risk, because we just don't know where the prices are going to go.

I think we have seen a downtick in pricing. Obviously, harvest season right now, I think it's come to a point from what we're hearing where it's stabilized. And I think it's going to be a decent market, at least for another year. I can't comment on what it's going to look like a year from now at harvest season, because we know a lot more people are planting.

But one of the things that we have that's part of this equation is a third-party company that's going in and certifying these farms. And so the demand for quality biomass I think is still there. And we're looking at people that are having issues with either the quality that they're growing, the mold, or even people that just aren't able to dry. We've seen dryer issues, and a lot of this equipment that's in demand has been backed up as well.

So that's kind of kept the pricing a little bit more stabilized. But, I mean, one can expect that pricing will go down over time as more farmers look to move to growing hemp. And the one thing that can help in a big way is if the FDA will open up food and beverage so that more CBD can be put to use with consumers, and that would help offset it as well.

And I think one thing to note is when we look at this marketplace, there was a lot of middlemen in the market. And so some of these transactions were passing through two or three or even four hands, everybody making a significant kind of markup. And so some of what you might see in pricing reduction is just from eliminating some of the middlemen that were driving up cost, and we're getting more of a true cost, farmer directly selling to processor or directly selling to brand.

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Operator [8]

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Our next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [9]

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Congrats on a strong 4Q close out the 2019 fiscal year. First question I just have is on in Canada. With cannabis 2.0 coming online next month, can you provide any more color on what you expect in terms of revenue expectations as that approaches? I believe last quarter you said you expect it to be about 15% to 20% of revenues. Just given brick and mortar rollout continues to lag and from what we've seen and heard from Canadian LPs, just any update there in terms of what you're seeing there from orders from your counterparts up there.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [10]

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Yes, we're seeing some vape orders coming in. We're seeing vape packaging orders coming in. We have some numbers that were originally given to us. A lot of those numbers have been peeled back a little bit, which is no different to what we're seeing with the analyst community. And we're all looking at the same numbers, we're all hearing from the same folks, and we're trying to model based on that.

So I think in the last month we've seen a significant reset in the Canadian market, so we're also resetting expectations a little bit. But opening up a whole new market from basically zero, where it is today with no vape, that is going to present a big opportunity.

And we said on the last call we were very bullish on Canada being 15% or even 20% of our revenue. We're probably taking that down to, say, 10% up to 15%. So we're lowering expectation, but we are seeing some positive trends with some of these orders that are coming in.

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Aaron Thomas Grey, Alliance Global Partners, Research Division - MD & Head of Consumer Research [11]

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Thanks. That's really helpful. And then just touching on vaping and the opportunities there, obviously a near-term hit but a long-term opportunity. Can you talk about what you're seeing outside of existing customers in terms of the potential positive impact?

Just trying to gate if there might be some customers out there who had previously been with some other providers who may not have met the same quality standards or be able to support the scale of growth that you guys have, and if you are getting incoming calls in terms of CCELL technology or just overall kind of packaging needs for you guys.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [12]

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Yes, I think the biggest thing that this vape news is doing -- it's hard to even call it a crisis because it's been blown out of proportion and now I think we see it leveling off. I'm thinking more and more that it was really just a few bad operators, a few bad actors that had put a bunch of crap in their oil. And we see that probably cycling out of the market.

So what it has done, to answer your question, the number one thing is it's brought awareness to what's in the oil. And that's a good thing because we know that customers are going to potentially move out of the black market and move into the legal market. They're going to start to scrutinize and go with brands that they trust that have demonstrated confidence.

But those brands need to be able to demonstrate that confidence through what they're doing with their supply chain. So we're seeing brands reevaluate their supply chain in terms of the components, so as you mentioned, the hardware. It's no secret that CCELL is the most premium hardware on the marketplace. And it's no secret that a majority of the large operators at scale that have millions and hundreds of millions of dollars at stake are using CCELL. And we're continuing to see a few outliers that weren't using CCELL now coming to us trying to get on to the CCELL platform.

So that is happening. I can't comment on the degree of magnitude, but that's one of the factors that gives us confidence around vape. There are some negative factors. There's smaller customers that might be going out of business because they can't withstand this. But the positive factors are new customers transitioning over to CCELL hardware or other premium products that will more than offset that.

And ultimately we position ourselves not to pick the winners or losers. So it may impact us in the short term if a certain set of customers fails or goes under. But ultimately in the long-term, there's another set of customers that will take that space on the shelf. And so for KushCo, one of the things that we want to be is just a proxy to the consumer market.

And so we look at, if the consumer market rebounds, then our vape sales will rebound. And we know that we also have the added benefit of new markets coming online that simply weren't there, markets like Illinois, Michigan, and Canada. And we're also seeing tremendous growth in the medical markets too.

So a lot there, but yes, this flight to premium mentality that we call it, that is happening. It's not something that's a 50% game changer, but it's definitely happening and some meaningful accounts are moving over because of it.

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Operator [13]

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Our next question comes from Jon DeCourcey with Canaccord. Please go ahead.

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Jon DeCourcey, [14]

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Just a couple questions here out of me. So first off, you gave some good color on one of the previous questions on the vape seasonality for 2020. Can you just kind of -- with the new trading business being such a factor within the guidance, can you kind of talk about when you think that will be up and running as well? Is that a start of the year kind of a business, or are we looking at more of a second half weighting there as well? So I guess just another way to ask the question, can we look at seasonality for the total guidance here?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [15]

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Yes. No, I think one of the things that, consistent with what we're seeing in the macro climate, is the time of talk is over, and we would be remiss to announce something that wasn't already gaining traction. So when we put this announcement out, it was after we've already completed sales and booked revenue toward it.

We actually disclosed in the supplemental earnings slide that there was a chunk of revenue in Q4 that's in line with this business unit kind of as we were testing this and getting this in motion. So now the fact that we're announcing it, going public, we're going to have a website that's going to be pretty robust coming out here in the coming weeks, so we're all in.

This thing is in motion. We're expecting for it to contribute in a meaningful way to our Q1 numbers, but certainly in a much more meaningful way in the back half of the year, because that's where we're really going to be ramping. So things are in motion. Things are looking good. We're learning the marketplace, but we're very encouraged by the initial traction and positive signs that we're seeing.

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Jon DeCourcey, [16]

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Okay, great. And then the other question I had is regarding the shift in customer vape demand and how it seems to have shifted to more of an on-demand model as they kind of navigate regulatory scrutiny and customer demand trends here. How is that impacting the margins on vape sales and your ability to kind of preplan inventory and mitigate the risk of air freighting and things like that? Should we expect a even greater margin hit on vape sales here in the short-term that you can't get?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [17]

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No, I don't think so. What we're seeing is folks that were looking to get into custom solutions punting on that and buying stock items, which have the similar margin profile because they're already here. We're already kind of planning on that. I don't imagine us going out of stock with sort of a run on demand.

The one factor that is needed to be considered is Chinese New Year. Chinese New Year I believe is an early January this year, maybe the third weekend. So we have to kind of start planning for that now. And so it's kind of a game where customers are saying, hey, we'd really like to wait and see what happens here regulatorily and with the consumer demand at the retail stores. And our salespeople are saying, hey, that's great and I can respect that, but if you don't have product before Chinese New Year and you gap out, you can kind of plan right there for no sales, right?

So there's a healthy balance that we need to strike with our customers. And that's one of the reasons that we've been more focused on shifting the business to the MSOs, because a lot of these MSOs have the balance sheet to be able to take those bets. And they are going to have to order a significant amount ahead of Chinese New Year because they're not going to be in a position where they don't have product to sell. Some of the smaller companies, they might be in that position.

But we're also in a position -- a much different position than we were last year where we could afford to make those exceptions and spend that extra money to make sure that these customers don't gap out. We're telling customers now we're not in a position to do that. We're hyper focused on getting to profitability. And we would like to be able to make that investment but, given the current market climate, we simply cannot.

So it's unfortunate if some people do run out of stock around Chinese New Year. We're going to do the best that we can to have stock products available. So maybe they don't have their custom solution that's printed and branded, but we could move them into a stock solution that'll get the job done. So there's a lot of factors at play, and we're just handling this in real time and having those conversations in the marketplace.

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Operator [18]

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Our next question comes from Scott Fortune with Roth Capital Partners. Please go ahead.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [19]

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Good afternoon and thanks for a lot of the color on the call. You guys are pretty detailed and provide a lot of great color from that standpoint. I want to talk on kind of rightsizing the business side and keeping the SG&A flat and getting to profitability. Can you touch base, kind of give us a trajectory on the gross margin side of getting potentially up to the mid-25%, 30% gross margins over time?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [20]

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Yes, certainly. We're really pleased with what we're seeing with our margins. I think when we went out there in Q1 with a 13% margin and we told everyone on a non-GAAP basis this is actually much higher and we explained all the reasons, I think it was people that said, okay, yeah, that sounds great. Let's see if you can do it.

And now as we've tracked from Q1 to Q2, Q2 to Q3, Q3 to Q4, exactly what we've said has come true and we've been able to close that gap, pun intended, between the GAAP and non-GAAP margin profile. And you'll see that in the table that we disclosed on the earnings release.

So I think we're happy that we been able to execute on what we've said. Now taking that next jump is getting the margins up over the 25% mark. And we still do have a long-term goal of 30%, but there are some factors that are weighing in here, number one, the tariffs. We looked at -- we saw some news this morning that looks promising.

But when the tariffs are in effect, even if we're offsetting the tariffs with the tariff supplement fee, it's still actually impacts our gross margin percentage, not our absolute gross margin dollars if we're recouping 100% of the tariff, but it does impact our percentage negatively so we have to factor that in.

We're also factoring the new business unit as a CBP business, the hemp trading business, because this might be a business that, again, if it's not tying up cash, right, it's highly efficient and it's really good gross margin dollars. But those gross margin dollars might be at a lower gross margin percentage. So we're trying to model that in and see how that might impact our business if the hemp trading business does what we expect it to do and really takes off.

So there are some unknowns that we're trying to model in. But where we're at now, to be confident in giving you color, is to say that we do expect the margins to continue to improve during fiscal 2020. Just like with our sales, we're expecting the bulk of that improvement on the back half of the year. And I think we're more confident with that 25% number for fiscal 2020. And we're not as confident in saying that we can get to the 30% number in fiscal 2020, although, like I said, that still does remain our long-term goal.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [21]

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Okay, great. And then just real quick, you're real close, can you provide any color or you guys' thoughts around the SAFE Act and hearing anything from the FDA side from you guys's point of view and where we're at on that?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [22]

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Yes. So we had an opportunity to talk to the chief stakeholder in this whole equation about what's going to happen here with the SAFE Banking Act and specifically with the FDA around the CBD. And I think there's a lot of momentum in pushing the FDA to regulate and give guidance on how we can roll out CBD into a food market, food and beverage market. So that we do expect to see some traction on here in the short term.

The SAFE Banking Act, we're not quite as bullish just because of everything that's going on at the federal level. We know that there is an impeachment inquiry right now. And if that moves to the Senate, that's going to take up all the floor time and they're just not going to have time to get to the SAFE Banking Act. The guidance that we heard was that there's nothing that's gonna prevent the SAFE Banking Act from getting to the floor, other than time and potentially this impeachment thing.

It doesn't sound like that anything is going to move too quickly on that front. But the good news is there's nothing that's, from what we're hearing, going to just completely obliterate and take out the opportunity to get the SAFE Banking Act. We just have to be a little bit patient.

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Operator [23]

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We'll go next to Brett Hundley with Seaport Global. Please go ahead.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [24]

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Nick, your 2020 sales guide ex hemp trading effects is still slightly above Street expectations, yet you guys are taking down that Canada number a little bit. So does that imply that there are other areas of the business that you're seeing as a little bit stronger right now?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [25]

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Yes. I think the other medical markets, I think putting a focus there, that's been -- those markets seem to be able to maintain pricing power little bit better as well. So it was a good investment to kind of focus our efforts there and just -- as a part of our broader goal of getting to the MSOs. We know that a lot of MSOs are playing in limited license medical markets.

So those are really the markets that are offsetting. We see significant traction in Illinois. And we know that the program's going to roll out early part of 2020. We know that the new cannabis czar there has a very levelheaded approach to this vape issue, saying, hey, why would we ban vape in the legal market? That would just further send people to the black market, which seems to be the problem.

So when you have solid regulators and you have a motivated legislative body like they do in Illinois, we can bake in a lot of confidence about growth in that market. So that's one of the markets that is going to offset some of this other stuff, like Canada or California that we originally had planned on being bigger, and may not end up being the case.

We also have new products that we're launching. And so a lot of our initiative was we wanted to get out and we wanted to canvas the market with everything that everyone needed, right? And we did a good job of that and we made a significant investment. And now what we're doing, in light of just it's the right time to do it but also because of the macro sentiment in the capital markets, is we're getting much more focused and measured about our product set and what products we are offering.

And we're actually pulling back on some of the products that were not profitable for us, and we're doubling down on products that have higher margin and new products that we think have high margin and better staying power. So that's also a focus, I would say new geographies, like I mentioned, and then also new products like these higher margin products.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [26]

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That's helpful. And then, Chris, it was great to hear the SG&A commentary from you on 2020 relative to 2019. Doing the math quickly, it looks like that it implies a low 30% OpEx -- or, excuse me, operating expense margin; two questions related to this. So should we expect SG&A spend on an absolute basis to be fairly even across the year, or would you point out any quarter that might be lumpy? And then secondly, might there be quarters where you get below a 30% operating expense margin?

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Christopher Tedford, KushCo Holdings, Inc. - CFO [27]

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Yes. No, good question; appreciate that. Yes, just to confirm, I think you're spot on on that 30% and then coming from the mid-40%'s down to 30%. As far as any lumpiness, I don't really see that. I think most of the expenses are pretty static. But yes, I do see opportunities to get below that 30% in the back half.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [28]

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The one thing I will add is we -- as soon as we saw the shift in the capital market sentiment and we were able to raise the capital that we did, we wanted to act very quickly on the cost reduction. And so we were able to make the reduction in force, as I mentioned, the 53 headcount reduction.

However, with the severance and making sure that those employees had the opportunity to move on to something positive, that's going to end up being baked into most of Q1. And so we really look at Q2 as being the first quarter where we don't have any of that cost from that reduction in force.

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [29]

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That's helpful. And just one quick one before I yield the floor. The supplemental tariff fees, can you guys just remind me how often terms like this get revisited during the quarter or the year?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [30]

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So the question was the supplemental tariff fees, how often are we looking at those or kind of revising them?

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Brett Michael Hundley, Seaport Global Securities LLC, Research Division - Research Analyst [31]

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Yes, sorry. So are you on some type of periodic basis with your customers where you revisit those fees? Just trying to figure out how often you conduct those conversations.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [32]

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Yes. So I think the evolution of this for us was at one point the tariffs were kind of in the 10% range, the Trump tariffs. And we ultimately worked with our customers to find a way to absorb some of that impact. And really, we were eating a lot of that tariff.

When the tariff then moved to the 25% range, that's when we had the conversation with our customers that now we were moving to a complete pass through. And so our goal is a one-to-one offset. And what we told our customers was we're going to -- there's no way we can absorb these tariff fees, and I think you're seeing that across the board.

But we want to be transparent and say here's the tariff and here's the tariff fee. And if the tariff reduces or goes away, the same will happen with the tariff supplement fee. So we are fully aligned that our tariff fee is only going to be what the tariffs are that we're paying. And if we end up being able to figure out ways around the tariffs, then we're going to make sure to pass through that savings to our customers by eliminating that fee.

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Operator [33]

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Our next question comes from Greg Gibas with Northland Securities. Please go ahead.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [34]

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With respect to the significant growth, both year-over-year and sequential growth that we saw in the medical states, was just wondering if you could maybe break down what drove the overall growth in that category in terms of which states were the drivers. Could you break that down a little bit?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [35]

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Yes. I mean, I think the biggest state is -- and you're seeing a lot of reports coming out of Florida, right? That's been a booming market. And so being able to establish a sales force there and set up meaningful customer relationships with some of the top players, that was important. And we've been able to capitalize on that. And so we're investing more in that region.

We're also -- we disclosed Illinois' numbers. We are seeing good growth there; Michigan. Even though those two states are technically adult use, all the sales in those markets are currently medical. And then in that other medical bucket, I'll defer to Jason. Are there any other states that are noteworthy to call out?

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Jason Vegotsky, [36]

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Nothing noteworthy. I mean, Florida's the key driver, with some of the players there being larger than your other traditional medical states, more in line with what a rec partner would look like to us.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [37]

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Perfect. That's helpful. And then if I could just revisit margins quickly, will a lower percentage of vaping revenues positively affect margins in 2020? And then what are you currently modeling in for the hemp trading business in terms of margins?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [38]

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Yes, tough questions. We believe so. I mean, look, the vaping business, as we've said, has always been one of our lower margin category buckets. One of the products that was gaining a lot of traction but it wasn't a huge part of our revenue was the terpene sales. With some of the flavor bans, we're seeing those go away. That was a higher margin bucket, so maybe some of that offsets a little bit.

But I think overall, yes, our margins should improve. Some of it is with the softness maybe in sales in Q1 and Q2 are not ramping at the rate that we were expecting last year when we were putting out numbers. That doesn't flow through the same type of operational savings. So our product margins are good, but when we factor in all the overhead at a lower scale, margins just can't grow the way that they were expected to.

In terms of the CBP/hemp business, again, it's very dynamic because it's sort of right now an open playing field, but we expect more competition. We want to operate with some transparency with our customers, but we have a few different avenues to where we can extract value. So some of the transactions are going to be as low as like a 10% margin, and some of the transactions are going to be up in the 20% plus.

So right now, we're conservatively modeling somewhere around 15% for that business. But we do know we also have our retail services business, which, on that business because we're partnered with C.A. Fortune, we have very little cost and we just get a profit share from them. And so that revenue will be all margin. It'll basically be 100% margin, so that'll help offset and get the CBD/hemp business holistically in line with where our targets are, kind of that 25% margin profile.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - VP & Senior Research Analyst [39]

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Perfect. That's really helpful. And the last one if I could, sorry if I missed this, but could you provide an update on the NASDAQ listing process?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [40]

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Yes. With that, actually I'll defer to our general counsel, Mr. Arun Kurichety.

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Arun Kurichety, [41]

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Hello everyone. As we previously discussed on an 8-K filed on July 8, 2019, we did submit an application to be listed on the NASDAQ Global Select market, the highest tier on NASDAQ.

And as we also previously disclosed on April 9, 2019 through an 8-K, the company did receive a subpoena from the Securities and Exchange Commission related to the company's voluntarily -- voluntary restatement of certain financials related to the year ended August 31, 2018 and 2017, and interim financial statements related to that same period. We believe that once we resolve the SEC subpoena, we will be back on track to continuing moving forward in the NASDAQ approval process.

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Operator [42]

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Our next question comes from Rommel Dionisio with Compass Point. Please go ahead.

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Rommel Tolentino Dionisio, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [43]

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I just wanted to inquire about a little more color on the headcount reduction. I certainly appreciate the near term issue with vapes, but I think it comes -- it does seem like a near term issue. Could you just maybe walk us through what areas you're taking away resources from? Is it Canada? Just maybe a little more color on that and the rationale behind it, given that, other than the near term issue, it sounds like your core business is actually doing great.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [44]

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Yes, I appreciate that. And I think that's the attitude that I like to have. And I think right now that's not the prudent attitude that anyone should have in the sector, unfortunately, just because of where it's at at a macro level. I think everyone should be overly conservative.

And so, again, we're treating the capital that we got in, which was not easy to do, as the capital that we have to execute on our plan. And we don't want to leave any margin for error. So if the vape continues to be rockier than we expect, if some unforeseen things happen, if we can't get the traction in our hemp trading and CBD business, then we're still going to be okay because we made the reduction.

So it's really planning conservatively to make sure that we can get through, knowing that we always have the opportunity, if things perform better and it's more optimistic, then we can always hire some additional folks in certain key areas. So that's our mentality across the board.

And then when it comes to the specific reductions, I mean, this is pretty much across the board. We basically tried to trim every area that we could and without taking any functions out that would be detrimental to the business. So we looked even it sales, where we have a lot of relationship managers, and now we're putting more on them to do some of the transactional stuff and not having as much support behind them.

So just taking a fresh look at every function and seeing, hey, how can we do more with less, because we know there's a big lift in the type of growth that we're expecting to do. But I think what we found in this exercise is there was some areas where maybe we'd over hired a little bit.

So it was the right thing to do. It was a great exercise. It was tough. And I think given the macro climate, it was really the prudent thing to do and jump on it early and knowing that, if things go better than expected, you can always hire back. But if things don't and you don't make those cuts, you could be in a world of hurt. So we wanted to avoid that at all costs.

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Operator [45]

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Our next question comes from Alan Brochstein with 420 Investor.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [46]

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I just have three quick ones, Nick. The first one is this $3.1 million that you did in the hemp trading in Q4, was that in your guidance or not?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [47]

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In our guidance of $145 million to $150 million?

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Alan Brochstein, New Cannabis Ventures - Founding Partner [48]

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Yes, the Q4 guidance that you gave, the full year guidance. Were you including that contribution there or not?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [49]

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I think when we reaffirmed guidance certainly, because the fiscal year was already closed. When we initially gave the guidance, I know we knew that we were going to get some traction out of that category. We didn't know to what extent. There are some things that, just timing wise, didn't hit in the fiscal year that ended up hitting in the first quarter. So this maybe covered up some of that.

I don't think there's an exact science to it. I think we just -- we had this initiative kicked off and we were testing the waters, and we knew it would have some impact. I don't know if we modeled $3 million, but that's where it came out.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [50]

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Got it. Thanks. And then on the question of the NASDAQ, the obvious follow-up question is are you able to comment -- I know you're not, but is the general counsel able to comment on that where we are in that process with the SEC? Is there any update you can provide at all?

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Arun Kurichety, [51]

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Unfortunately, I cannot. We're obviously subject to an ongoing investigation. But I think we have previously disclosed the company's position with regard to the restatement.

I think on previous calls Chris Tedford and Nick described what the reason behind the restatement was. It was basically looking at some past financials and determining that certain equity should have been probably more properly booked as liabilities. And based on independent advice from other consultants and experts, we voluntarily made that change.

We've also previously disclosed on calls that none of those changes affect revenue numbers. So again, it's just informing SEC as to those facts and hoping to get an answer that they are in agreement with what we have done.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [52]

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Yes. I think the one thing I'll add to that is we're doing everything within our power to expedite this matter. Obviously, it's important to us. And we have laid out that fact pattern that Arun mentioned. We feel confident with our fact pattern of what happened.

We made an honest mistake. But luckily with bringing on Chris Tedford, we were able to identify that ourselves, bring it to the attention of the shareholders and the broader market, and then we were able to correct it and maintain our current status by filing on time.

So we were pleased internally with how we handled it. But again, we have to go through the entire process. And some of this, unfortunately, is outside of our control.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [53]

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You're in a hurry, but they're not necessarily, unfortunately.

So my last question is that you guys announced a more key CBD customer. Congratulations on that. And I was wondering twofold. One, are you able to give any sort of update in terms of progress you're making in terms of on the retail CBD business with your partnership? And then two, I don't even know if you guys think about it this way, but are you able at this time to break your business into CBD versus non-CBD?

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [54]

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I'll take that first part and then I'll defer to -- or the last part and I'll defer to Jason. So in the last part in terms of how we're going to break things out, luckily we're at the end of our fiscal year and now we're going to start a new fiscal year. So this gives us an opportunity to look at the supplemental earnings slides, gather feedback from the folks on this call here, including yourself, Alan, and figure out what is most beneficial to the community that's following the company and also the community that's following the market. And we want to see how we can do better.

So that is something we've heard from other people, so we're looking at that right now to see how we could break that out in a meaningful manner that's clear and concise and actionable data that you guys can use when you're modeling or when you're thinking about the marketplace. So more to come, but expect some changes to what we disclose and what we break out come Q1.

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Jason Vegotsky, [55]

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Hey, Alan, it's Jason. On the CBD business and kind of where we are right now, we did mention that we brought on Sentia Wellness. We are onboarding them as we speak with C.A. Fortune. And to give you some color on C. A. Fortune, this is a multibillion dollar company that handles some of the largest CPG brands in the world.

And taking what is a new and immature space, at least to them, in CBD, we're in the process of getting these guys ready, along with onboarding other brands to face and be prepared for the likes of Whole Foods, Target, Sprouts, and all of the key retailers across the country, because we're going to do this. We're going to do this right, and we're going to be focused on velocity.

I think early on with CBD and getting on the shelves, it's been about just getting on the shelves and showing revenue. As this matures, just like every other CPG business, the focus is going to be on velocity and how do you turn on the shelf. And the brands that we bring on and we put into mainstream retailers, we're going to make sure that they turn and they're prepared to turn.

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Alan Brochstein, New Cannabis Ventures - Founding Partner [56]

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So, Jason, is part of the success of the Fortune alliance dependent on the FDA giving more of a pathway to these companies to be able to put different types of products into the Walgreens and CVS's, etc.?

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Jason Vegotsky, [57]

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Well, it will certainly help. I mean, right now we're obviously just focused on topicals and brands that procure topicals. However, we're building in the background a portfolio so that when the FDA does turn the switch, and we're hopeful that they will do that soon, that we're prepared to go into retailers with that type of offering.

And to give some color, Alan, real quickly, we are looking to bring on no more than five brands, and we look to have the remaining brands in the portfolio announced by the end of the quarter.

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Operator [58]

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Thank you. There are no additional questions at this time. I'll turn it back to Nick for any closing remarks.

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Nicholas Kovacevich, KushCo Holdings, Inc. - Co-Founder, Chairman & CEO [59]

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All right. Thank you everyone for tuning in and listening to our update. All in all, we're very pleased with the report that we just published. We're also very pleased with the outlook in front of us. I know the sector has faced a lot of challenges over the summer and even up until now. We know that there has been a lot of complaints about certain things happening in the market.

We want to reiterate that this market is extremely exciting, and every single day it is continuing to grow in one way or another. Our company is positioned to take advantage of that growth. So even though there is choppiness, even though there is some macro elements that have dragged on the sector, we have never been more excited about the opportunity in front of us. And we're just talking about North America. We're not even talking about the global opportunity at this point.

So a lot of exciting things, a lot of catalysts coming despite some of these challenges. We know the new states are coming online. We know that Canada is opening up new products. So we're excited about some of the catalysts. And we know that, with this vaping news as a great example, some of the rockiness was rolling out a regulated market from scratch.

I personally wasn't around in 1933 when Prohibition ended. If anyone on this call was, please call up. I'd love to get your insights. But I can imagine there was a lot of challenges. I can imagine there was people getting sick and dying because of illicit, illegal product. I imagine they had to figure out testing standards that they did not have in place.

Our industry is going to go through that. We've proven that we can navigate these challenges. We've proven that we can pivot and maneuver the business. I think that's the most valuable thing at this point. None of us can sit here and say how things are today is now they're going to be tomorrow, but all of us that follow this space heavily can see trends. And we can see companies that have consistently been able to navigate challenges and produce results.

We now have a challenge of getting to profitability. That's something that's within our control for the most part. We're very excited to take on that challenge, and we've become extremely focused on the key levers that are going to get us to adjusted EBITDA profitability in the back half of this fiscal year.

We believe very strongly in the prospects of this business, current business, core business, new products, and new business with the announcement of our hemp/CBD trading platform. And once again, we look forward to continuing to update the community on what we're seeing in the marketplace. I think we have a great perch and a great view. And we want to be somebody who's transparent, who sees what's happening at a lot of different levels, and is able to aggregate that information and relay it to the marketplace.

So please join us at the conferences that we have coming up that we've announced we'll be attending. And we look forward to talking to everybody on our next earnings call. Thank you.

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Operator [60]

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Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.