KushCo Holdings, Inc. (OTCQX:KSHB) rolled back its original revenue estimates due to supply chain interruptions from China and continued weakness in the California market. The cannabis package maker said that it now expects its second-quarter revenue to be closer to $30 million versus the original forecast of $35 million.
The company is taking back its net revenue guidance for fiscal 2020 of $230 million to $250 million, which was originally issued on November 7, 2019. KushCo did not give a new number. Results are expected to be formally announced in April, but a specific date was not given. KushCo also said it was taking back its forecast that net revenue from its hemp trading business would exceed $25 million for fiscal 2020.
KushCo said it has approximately $11 million in cash and a revolving line of credit with Monroe Capital that allows for borrowings up to $35 million. As of the fiscal second quarter ended, the company said it did not have any outstanding borrowings under the revolver.
Fiscal Second Quarter 2020 Preliminary Revenue Results
The company said that the 14% sequential decrease in revenue was “driven primarily by a slower-than-expected rebound in demand for the Company’s vape hardware products, continued weakness in the California market, a slower-than-anticipated rollout of its hemp trading business, the extension of the Chinese New Year holiday, and a delay in the rollout of cannabis 2.0 products in Canada, especially due to some provincial bans and taxes on vape products.”
“Our revenue for fiscal Q2 was negatively impacted by several short-term factors, but we are fortunately seeing strong fundamental trends across the business that give us confidence for a stronger second half of the fiscal year and beyond,” said Nick Kovacevich, KushCo’s Co-founder, Chairman and Chief Executive Officer. “For one, despite a challenging near-term market backdrop in California, we have been actively tightening our customer credit terms, ramping up our collection efforts, and continuing to move away from the smaller and less financially stable customers that historically comprised a core part of our business.”
He continued saying, “In fact, over the past few years, this regional customer base, especially in recent months due to their heightened liquidity challenges, is gradually comprising a smaller part of our business, whereas our business with our larger MSOs and LPs, which each spend more than $500,000 on a trailing twelve months basis, has ballooned from less than 20% of sales in fiscal 2017 to more than 60% in fiscal 2019. While it will take some time for this transition to fully scale, we are encouraged with the progress thus far in securing and entrenching ourselves even further with these larger and more financially stable customers.”
In February 2020, KushCo completed another round of layoffs, letting go, 26 employees, which the Company expects will result in approximately $3.7 million in annual savings. In total, KushCo has reduced its headcount by approximately 30% since September 2019, which it expects will result in an aggregate annual savings of approximately $8 million
Vape Stays Flat
“With respect to the broader demand for our vape products, we were disappointed to see a roughly flat quarter-over-quarter contribution from this category, but are encouraged with the underlying trends in our business that show continued robust growth in many of our key markets, such as Illinois, Michigan, Massachusetts, and Canada,” said Kovacevich. “As consumer sentiment and the regulatory environment around vape continues to improve, we expect this category to rebound and drive our revenue growth as well.” The company did say, however, that it has seen an uptick in orders for vape products from Canada.
Supply Chain Disruptions
“With the recent coronavirus outbreak, our business was briefly and minimally affected by temporary factory shutdowns, production delays and product shortages,” said Rodrigo de Oliveira, KushCo’s Chief Operating Officer. “Fortunately, we entered Chinese New Year with healthy inventory levels, whereas some of our peers who don’t have the same scale, resources, supplier relationships, or inventory quickly ran out of product. Overall, we’re pleased to see the situation slowly improving and for new shipments to make their way into our warehouses again, from which we can accelerate our sales again.”