KushCo Holdings, Inc. (OTCQX:KSHB) reported that its net revenue dropped 46% in its fiscal third-quarter ending May 31, 2020. The net revenue of $22 million was also lower than what the company has forecast in March when it told investors that it would be roughly $30 million. Analysts according to Yahoo Finance had estimated that revenue on the low end would be $29 million.
The company attributed the drop to the adoption of the 2020 Plan, which meant tighter credit terms being extended to smaller customers. the company is focused on larger, more financially healthier customers.
In addition to that, the drop in revenue was also driven by lower sales from vape and natural products, as well as order lumpiness from KushCo’s larger customers. Compounding the quarter’s decision to tighten credit, COVID-19 caused travel and regulatory restrictions in the markets that the company operates.
Net losses increased to $13.5 million versus last year’s $10.6 million in the same time period for last year. The basic loss per share was $0.11 compared to $0.12 in the prior-year period. This also missed analysts’ estimates, which averaged at a loss of -$0.10.
Nick Kovacevich, KushCo’s CEO said, “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.”
The company said it finished the cost-cutting initiatives as part of the 2020 plan and as such the SG&A dropped more than 50% sequentially from $27.2 million in the second quarter to $12.7 million in the fiscal third 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.
“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,” said Kovacevich. “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.”
Balance Sheet Moves
The company strengthened its 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. 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.
KushCo said it 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 said it 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.
“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,” said Kovacevich. “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.”
KushCo stock moved higher by 10% on the day’s trading ahead of the earnings announcement and was lately selling at $0.82 . The average analyst price target is $2.50.