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 Co-Founder, 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?

Thanks, Najim, and thank you all for attending our full year fiscal 2019 earnings call. 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, 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 secure 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 will 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 and in on 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 $2.2 million and we nearly doubled from Q3 to Q4. Illinois 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 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.

Those markets are going to open up in a big way as they start adult-use sales. Also seeing significant growth in some of the medical markets, especially markets like Florida where we’re seeing some of the MSOs experience outsides 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.

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 plug by the black market and there’s limited retail stores that are opened.

There’s still only about 700 stores that are opened 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 toward turns versus new entrance into retail shops. 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 sell-off there is mainly due to slower rollout of retail rec stores. We don’t have a lot of stores in the main 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%.

Next, I will turn attention to the product and mix slide, which is Slide 5. But we did see growth in all categories except for papers and supplies.

Believe that our packaging business is gaining nice traction. We think that long-term energy and 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 product category, so we’re not over-weighted to vape.

Next, we’ll look at some of the full year fiscal results. So for the full fiscal year 2019, we saw a revenue of $149 million, up 186% year-over-year and again, substantially all organic.

We are 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 purchased more than $1 million in 2019 versus only four customers they were over the $1 million threshold in 2018. As shown in the chart, the bigger the customers become, more they spend with us and the stickier we become with them.

It’s 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 anti-counterfeiting partnership, our stainless steel tanks, as well as some newer initiatives.

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

Next, I want to look at the gross margins. We are pleased to see in Q4 on a GAAP gross margin basis.

Margins picking over 20% up from 18% in Q4 a year ago and up from 17.8% in 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 a steadily climbed back. And now we’re pleased to have picked over the 20% mark.

We can attribute these improvements, the things that we’ve talked about a lot on past earnings calls. It’s just 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.

I think through tariffs with the tariff supplement fee and renegotiating more favorable terms with our vendors. We are pleased with this margin improvement.

But we also expect continue 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 is dynamic and constantly evolving.

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 and mature market like Colorado and Nevada and California appears to be leveling off. As expected, we saw a short-term customer pull back as this remains in the news and as there’s still mystery and confusion about the exact cause of these vape illnesses and that’s to be expected.

But as this cycle is out of the news and as they start to shore up the regulations to ensure less incidents, we do expect our 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 flavor ban. Most of the data points to these illnesses not being caused by THC cannabis oil itself.

And there’s been obviously millions 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 ban?

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 and when it comes to these vape pens. On 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? What we’re seeing is obviously the slight consumer pull back in demand which we expect to be short term.

So we’re not too concerned about that on both 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, it’s 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 of 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. It’s 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 on 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 adjust the 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 the 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 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 CBD footprint with the launch of the hemp trading business. The benefits of the hemp trading business is: number one, it expands our CBD footprint, still 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 risks and ensuring compliance. Farmers can now be confident that they have a buyer network when their crop is ready and buyers and 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 crossover and launched 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 right sizing 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 53 employees, which we expect to result in an annual net cost savings, a $4.4 million.

It was obviously a very difficult decision but it's something that we believe is 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 care of 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 athlete.

Lastly, we're working on establishing tighter inventory management and more robust sell through of existing inventory. We've 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, we are more confident than ever in the future prospects of the business and we are excited to work towards 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.

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 cost, better leveraging of fixed costs and other supply chain efficiencies. On GAAP basis, gross profits 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 or the end of May 19, 2019 and in connection with the most recent increase in tariffs we decided to implement a tariff supplement fee which we charge to 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 non-recurring product costs, adjusted gross margin for the fourth quarter and fiscal year was approximately 22% and 21% prospectively. 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 a 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 noncash 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 as 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 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 non-recurring charges, as well as other non-cash gains and losses, our net loss for the quarter was approximately $7.2 million or a negative $0.08 per diluted share. 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 GAAP basis, excluding the impact of certain non-recurring charges, as well as other non-cash gains and losses, our net loss for the quarter was approximately $29.8 2 million or a 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 $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

Hi, good afternoon

Hi Vivian.

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 with some numbers around that? Should we still expect year-over-year growth, but a sequential decline, like just order of magnitude, like how should we think about the first half versus the back half?

Thanks.

Yes, we're looking right now like vape will be down somewhere between 20% and 25% for Q1. We think that Q2 will 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 Q 1 from where we were in Q4.

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? Thanks.

Yes, that's really boring. It was just basically the 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 that the Q4 being down 22% was more onetime in nature, but we are facing headwinds in Q1 and Q2 likely because of the regulatory environment in Oregon.

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 like, number one, if that's consistent with what you're seeing? And then number two, how that impacts your economics around this endeavor?

Thanks.

Yes, 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 risks because we just don't know where the prices are going to go. I think we have seen a down tick in pricing, obviously harvest season right now.

I think it's come to a point from what we're hearing where it 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 planning. 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 quality that they're growing, the mold or even people that just aren't able to dry, we've seen dry issues in a lot of these 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 one can expect the 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 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 costs.

And we're getting more of a true cost farmer directly selling to processor or directly selling to brand.

Very helpful. Thanks.

You’re welcome.

Thanks guys. And congrats on the strong 4Q to close out the 2019 fiscal year.

Thanks you.

I appreciate it.

Absolutely first question I just have is on Canada. With cannabis 2.0 coming online on next month, can you provide any more color on what you expect in terms of revenue expectations, is that approaches?

I believe last quarter you guys said you expected about 15% to 20% of revenues just given brick-and-mortar roll out continues to lag. And from what we've seen and heard from [indiscernible]?

Or just any update there in terms of what you are seeing there from orders from your counterparts up there?

Yes we're seeing some vape orders coming in, we're seeing vape packaging orders coming in. We had some numbers that were originally given to us.

A lot of those numbers have been fueled back a little bit, which is no different than 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 our expectations, but we are seeing some positive trends with some of these orders that are coming in.

Thanks. That's really helpful.

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

Just trying to gait if there might be some customers out there who had previously been with some other providers who may not have been at the same quality standards, or be able to support the scale of growth that you guys have next year given incoming calls in terms of CCIL technology or just overall kind of packaging needs for you guys.

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, few bad actors that had put a bunch of crap in their oil.

And we see that probably cycling out of the bark. And so what it has done, to answer your question, is the number one thing is it has 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 CCIL is the most premium hardware on the marketplace.

And it's no secret that a majority of the large operators at scale that have hundreds of millions of dollars at stake are using CCIL and we're continuing to see a few outliers that weren't using CCIL now coming to us, trying to get onto the CCIL 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's 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 CCIL hardware, 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 if the consumer market rebound, then our vape sales will rebound.

And we know that we also have the added benefit of new markets coming online that's 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 that's like the premium mentality that we call it that is happening.

It's not something that's 50% game changer, but it's definitely happening and some meaningful accounts are moving over because of it.

Thanks. That's really helpful.

And I’ll jump back on the queue.

Hey guys, congratulations on the quarter. Just a couple of 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 about when do you think that will be up and running as well?

Is that – you started the year kind of business or are we looking at more of a second half waiting there as well? So I guess just another way to ask the question, can we look at seasonality for the total guidance here?

Yes, I think one of the things that consistent with what we're seeing in the macro climate is the time of talk a 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 announce – 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 emotion, 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.

Okay, great. And then the other question I had is regarding the shift in a 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 even greater margin hit on vape sales here in the short term that you can get?

No, I don't think so. What we're seeing is if 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 in early January this year, maybe it's third weekend. So we have to kind of start planning for that now.

So it's kind of a game where customers are saying, hey, we really like to wait and see what happens here regulatorily and with the consumer demand at the retail stores. And our sales people are saying, hey, that's great and I can respect that.

But if you don't have products 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, 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, 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.

Okay. Thank you very much.

Thank you.

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 right sizing the business side and keeping the SG&A flat and getting the profitability. Can you touch base kind of give us a trajectory on the growth margin side of getting potentially up to the mid-25%, mid-30% gross margins over time.

Yes, certainly we're seeing – 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 there was people that said okay, 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 GAAP – unintended between the GAAP and non-GAAP margin profile. And you'll see that in the table that we disclosed in the earnings release So I think we're happy that we've been able to execute on what we've said.

I’m now taking that next job 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 supplements 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 with the CBD 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's some unknowns that we're trying to model in, but 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.

Okay, great for that. And then just real quick, you're real close.

Can you put any color or your guys’ thoughts around the SAFE Act? And are you hearing anything from the FDA side, from your guys' point of view and where we’re at on that?

Yes, so we had an opportunity to talk to the key stakeholder in this whole equation about what's going to happen here with the SAFE Banking Act and specifically with the FDA around 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 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's 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 going to 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.

Got it. Thanks for the color.

And I'll jump back in the queue.

Thanks Scott.

Hey, good afternoon guys. Nick your 2020 sales guide ex-hem trading effects is still slightly above Street expectations.

Yet you guys are taking down that cannabis 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?

Yes, I think the other medical markets, I think, putting a focus there that that's been – those markets seem to be able to maintain pricing power a little bit better as well. So it was a good investment to kind of focus our efforts there.

And just a part of our broader goal of getting to the MSO we know that a lot of MSOs are playing in limited licensed medical market. So those are really the markets that are offsetting.

We see significant traction in Illinois and we know that the program is going to roll out early part of 2020. We know that the new cannabis are there has a very level headed 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 it's 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, 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’re 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.

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 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 a year or would you point out any quarters that might be lumpy? And then secondly, might there be quarters where you get below a 30% operating expense margin?

Yes, good question. Appreciate that.

Yes, just to confirm, I think you’re spot on the – on that 30% and that coming from the mid-40s down to 30. As far as any lumpiness, I don’t really see that.

I think it was expensed to pretty static, but yes, we do see opportunities to get below that 30% in the back half.

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 the 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.

That’s helpful. And just one quick one before I leave 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?

Thank you.

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

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?

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 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 tariffs supplement fee.

So we’re fully aligned that. Our tariff fees 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 that savings to our customers by eliminating that fee.

Perfect. Thank you.

No problem.

Good afternoon, guys. Thanks for taking my questions and congrats on the quarter.

Thanks, Greg.

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

Yes. I mean, I think the biggest state is, and you’re seeing, a lot of reports coming out of Florida, right as 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’re seeing good growth there at 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?

Nothing noteworthy. I mean, Florida is a 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.

Perfect. That’s helpful.

And then if I could just revisit margins quickly, will it 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?

Yes, tough questions. We believe though I mean, look the vaping business, as we 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 turpin sales with some of the flavor ban and 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 and not ramping at the rates that we were expecting.

Last year when we are putting our 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’re expected to. In terms of the CBD 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 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 a partner with CA Fortune. We have very little costs and we just get a profit share from them and so that that revenue will be all margin.

Basically it will be a 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.

Perfect. That’s really helpful.

And last one, if I could just, sorry if I missed this, but could you provide an update on the NASDAQ listing process?

Yes, with that actually, I’ll defer to our General Counsel, Mr. Arun Kurichety.

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.

As we also previously disclosed on April 9, 2019, through an 8-K, company did receive a subpoena from the Securities and Exchange Commission related to the companies voluntarily – voluntary restatement of certain financials related to the year ended August 31, 2018 and 2017 and interim financial statements relate 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.

Great. Thank you.

Hi, good afternoon. Thanks.

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 Nick, in the near term it does seem like a near term issue.

Can you just maybe walk us through, you mean what areas you’ve taken away resources from as Canada, just give me a little more color on that and the rationale behind that given that other than the near term issue, it sounds like your core business is actually doing great. Thanks.

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 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 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 that 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 reduction, 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 look, even at 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, it could be in a world that hurts. So we wanted to avoid that at all costs.

Okay. Fair enough.

I appreciate the color

Thank you.

Hey, thanks for taking my questions. I just have three quick ones, Nick.

Hi, Alan.

This 3.1 million that you did in the hemp trading in Q4, was that in your guidance or not?

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

Yes. The Q4 guidance that you gave, full year guidance, were you including your contribution there or not?

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’s some things that just timing wise didn’t hit in the fiscal year that ended up hitting in the first quarter.

So this may be 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.

Got it. Thanks.

And then on the question about the NASDAQ, the obvious follow-up question is, are you able to comment, I know you’re not, but in a general counsel able to comment on where we are in that process with SEC, is there any update you can provide at all?

Unfortunately, I cannot, obviously it is subject to an ongoing investigation, but I think we have previously disclosed the company’s position with regards 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’s 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.

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 flag pattern that Arun mentioned. We feel confident with our flag 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 in 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.

Right? You’re in a hurry, but they’re not necessarily, unfortunately.

So my last question is that you guys announced a marquee CBD customer and congratulations on that. And I was wondering two-fold.

One, are you able to giving any sort of update in terms of progress we’re making in terms of the – 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?

I’ll take that first part and then I’ll defer to – or the last part, I’ll defer to Jason. So on 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 it gives us an opportunity to look at the supplemental earnings slide, 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 one of the – that is something we’ve heard from other people.

So we’re looking at right now to be – to see how we can 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.

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 CA Fortune and to give you some color on CA 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 or in the process of getting these guys ready along with onboarding other brands to face and be prepared for the likes of Whole Foods’ targets, 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 that, make sure that they turn and they’re prepared to turn.

So Jason, is part of the success of a Fortune alliance depending 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, et cetera.

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 backgrounds in a portfolio so that when the FDA does turn the switch. I mean we’re hopeful that they will do that soon that we’re prepared to go into retailers with that type of offering.

Okay. Sounds great.

Thanks, guys.

And to give some color Alan to give some color 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.

Great. Thank you.

All right. Thank you everyone for tuning in and listening to our update.

All in all, we were 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 until now, we know that there’s been a lot of complaints about certain things happening in the market. We want to reiterate that this mark 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’s choppiness, even though there’s some macro elements that have dragged down the sector we’ve never been more excited about the opportunity in front of us.

And we’re just talking about the 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 is a great example of some of the rockiness with rolling out a regulated market from scratch.

I personally wasn’t around in 1933 when prohibition ended. If anyone on this call was please follow 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 elicit 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.

And none of us can sit here and say how things are today. It’s how they’re going to be tomorrow.

But all of us that all of 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 and 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.