All right. Thank you, Operator.

Good afternoon, and welcome to the KushCo Holdings Fiscal First Quarter 2020 Earnings Conference Call. A replay of this call will be archived on the Investor Relations section of the KushCo Holdings' website, ir.kuchsco.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 first fiscal quarter 2019 earnings call. Building off of what was an exceptional year for KushCo in fiscal 2019, Q1 2020 helped us get off to a strong start for the new fiscal year with significant progress made on all fronts, operationally and financially.

From an operational standpoint, we made major inroads in restructuring the business, including completing a sizable reduction in force, tightening our inventory management and credit terms with customers, reducing our SKU count and cutting nonessential costs. We also have been focusing on higher-margin products and services, including gaining traction with our Retail Services division and our recently launched hemp trading desk.

Last but not least, we have strengthened our leadership team with Rhiana Barr as our new Chief People Officer. Financially, we completed a $30.1 million capital raise and generated another strong quarter of year-over-year revenue growth and margin enhancement, despite a challenging market backdrop that has affected the entire industry.

The good news is that many of the headwinds that we talked about on our last call, particularly the widespread impact of the black market vape crisis is slowly starting to appear in the rearview mirror, and our business is showing not only healthy signs of growth in areas that were recently and temporarily struggling but also is presenting new growth offshoots such as our business in medical markets, where we've shown strong growth in recent months, as well as the entire industry across all categories, is beginning to gain more traction and more consumer sales. With that context, let me dive into some of the financial highlights for the quarter before providing more color on our operational progress and then turning it over to Chris for his detailed financial review.

First, I'd like to dive into our supplemental earnings slides. And on Slide 3, we called out our Q1 2020 highlights, starting with revenue, representing $35 million, up 38% year-over-year.

We are pleased with the year-over-year organic growth but obviously disappointed that our run of 20-plus consecutive quarters of positive sequential growth has now ended. And that being said, the result is not much of a shock given that we provided an outlook on our Q4 earnings call where we mentioned that the black market vape crisis would have a material impact on our Q1 vape sales, however, we also guided that we'll see a pickup in Q2 and a return to Q4 levels and beyond, come second half of fiscal '20.

Going forward, we expect to see sequential revenue growth happening, starting in Q2. We also expect to see important trends emerging throughout the year that we saw beginning in fiscal Q1, which is a continued robust growth in medical state sales, which increased 53% quarter-over-quarter, and we'll go into more detail on some of the takes from our geographic sales breakout here pretty soon.

And then we also saw continued momentum gained in cross-selling to our customer base. Obviously, a big focus for us continues to be cross-selling going deeper and wider with our customers, and we're seeing now more large customers in our network who are ramping their businesses both organically and inorganically.

And as a result, they're buying more SKUs from us. Next, I'd like to do a quick look at our gross margins.

In Q1, we achieved 20.8% GAAP gross margins, up from 20.1% in the previous quarter. This is the second quarter in a row where we have achieved gross margins above 20%, and the fourth quarter in a row that we have achieved quarterly gross margin enhancement.

In addition to the initiatives we took in fiscal 2019 to increase our margins, such as passing along the tariff supplement fee, removing air shipping and free shipping, we've also been focused on reducing our SKU count and transitioning toward products that have higher gross margins such as our new CBD packaging portfolio, our hyper custom proprietary packaging solutions, and our new next-gen vape offerings. Not to mention that as we scale our revenue even more, we'll have more gross profit dollars to spread over our fixed costs, which will help increase our overall gross margins.

As a result of all these drivers, we expect GAAP gross margins to continue to increase throughout fiscal 2020, helping us to move closer to our goal of achieving adjusted EBITDA profitability in the second half of the fiscal year. Now speaking of achieving EBITDA profitability in the back half of the fiscal year, I want to take a quick look at some of the cost-cutting and restructuring efforts we've implemented to help build that pathway to profitability.

As we mentioned on the last call, we've completed a reduction in headcount of 53 employees, which will generate approximately $4.3 million in annual net cost savings. We've also eliminated or reduced a lot of recruiting, consulting, and temp labor costs while also optimizing our footprint to reduce and streamline our cost structure across the board.

As we guided on the last call, we did not see the quarter-over-quarter improvement in adjusted EBITDA loss for fiscal Q1 because of the lower revenue base and the fact that our cost reductions occurred late in the quarter and thus didn't have an immediate impact. However, beginning in fiscal Q2, we'll start to see adjusted EBITDA trending in the right direction.

So, while we've captured only a small part of the expected benefits from our operational rightsizing, fiscal Q1 put the plan in motion for EBITDA improvement, which we'll start to see more meaningful throughout the balance of the year. Next, I'd like to turn your attention to Slide 4 of the supplemental earnings slides, where we look at our geographic sales breakout.

As you can see, we had some softness in our adult-use rec markets as guided to on the last call, but the flip side is, we also saw some substantial growth in our medical markets. This demonstrates, once again, that because we have a lot of irons in the fire, we continue to benefit from having a diversified exposure to multiple markets, customers, and product categories.

I think there's five specific callouts that we want to derive from this slide. First and foremost is a big area of disappointment, which is the state of California.

It's down 57% sequentially as we continue to experience softness in our home state, largely due to the challenging regulatory system, which includes a continued lack of new retail stores and the fact that sales in these limited number of stores are term-based given the large surplus of products and brands in each of these stores. Not to mention, we had the black market issue, which may only get exacerbated with some of the new excise taxes that are expected to go into effect this year.

So while we still believe California to have a massive runway ahead of us to execute on, we still need to see more retail stores, more enforcement and more consumer awareness that legal is the only way to go, which we believe should be helped by the illnesses and deaths from the black market vape crisis. The big positive, as I mentioned before, is that we have a lot of irons in the fire.

So while California has slowed down significantly for us, other states have picked up a slack and more to drive our revenues even higher. In fact, California alone made up more than half of our revenue in fiscal Q1 2019.

We generated $25.3 million in total revenue. In fiscal Q1 2020, California made up only 22% of our revenue, but we were still able to grow total revenues by nearly 40% up to $35 million, and this is because of the strong growth experienced in other markets, especially our medical markets.

Secondly, I'd like to call attention to some of our other legacy states, states like Colorado, Washington, Oregon, Nevada. These are states that have always been strong for us and fairly consistent.

We're expecting to see these states down a little bit, and that's mostly due to the black market vape crisis, which, for some of these states, led to some rule changes about what types of products are allowed to be on the shelf. So some of our customers had to take products off of the shelf and retool their formulations.

And now we see positive momentum coming back into these states. So nothing too alarming here.

We think that, ultimately, as the vape crisis is coming to an end, and it seems that the CDC has now narrowed down potential culprits stating that it's likely vitamin E acetate was the main cause of this, but now states will have clear regulatory guidelines around vape, and that clarity is going to lead to more confidence in the marketplace for our consumers, and therefore, increased sales for Kush. And as an example, we can just look at Massachusetts, which was the only state that enacted an all-out ban on vape products and then lifted that ban prior to its official expiration and in the state of Massachusetts, we saw in December, more sales than we did all of fiscal Q1 due to the fact that the regulatory reform was implemented in that state.

So as the regulation guidelines become more clear, these markets start to stabilize and rebound. That's where we see the growth in our sales.

The next call out is Canada. Our revenue in Canada was at $1.3 million, which was up 16% sequentially and 174% year-over-year.

This is the second quarter in a row where we've generated more than $1 million in Canada through benefiting from customers preparing for Rec 2.0. Though it's still very early days, we've received orders from some of the LPs during the quarter, which we only expect to ramp up as producers accelerate their expansion plans and new retail outlets open up.

However, we do see some vape brands popping up now in Canada, Québec, Alberta, New Finland and Labrador have posed near-term challenges for the 2.0 rollout. But we still expect derivatives as a whole to be a huge market opportunity in Canada.

In fact, it's also very possible that these provincial bans could end up the same way that the Massachusetts ban did. It was a very conservative upfront approach.

But then as more data came out, the state decided to end the ban early, and we hope as the provinces see some of the vape sales happening in other areas and no negative consequences that they will to reconsider their stance and hopefully open up vape in these other markets that are currently closed. Regardless, we don't have to wait to tap into this opportunity as we already have.

We're securing orders today. We have vape products going out, and we have customized packaging for vape that we have under contract, that we do expect to provide a big lift for us in our Canadian market.

Next, I want to call out our emerging rec states. This is Michigan and Illinois.

Michigan and Illinois are showing strong signs of improvement from a rather soft fiscal Q1 for both states. Michigan went adult rec legal in December at the start of our fiscal Q2, and we're starting to see some traction there based on that dynamic.

And even more so, we're building up a good head of steam in Illinois where that state went rec legal last week. Like Massachusetts, we generated more in Illinois in sales in the first -- in the month of December than we did for all of our fiscal Q1.

But with the difference, of course, being the larger market size and opportunity with adult rec and retail store availability being opened day 1 versus the slower rollout that we saw in Massachusetts. Long story short, we're very excited about both Michigan and Illinois ramping up in calendar 2020, and we're in a solid position with a secure customer base to further benefit from those markets expanding.

And the last call out is our performance in medical states. The big revenue driver this quarter was obviously our sales to these medical states, which grew more than 50% sequentially, led by significant growth in Florida, Pennsylvania and Maryland.

Many of these states are inching closer toward adult rec legalization, which will obviously be a big boom for our business. However, it's important to note that we stand to continue benefiting from these states, while they are still medical because our customers' expansion plans are robust, and we're seeing strong growth in active patient count in all of these markets.

Overall, we're pleased to see growth in medical markets, offsetting to a large degree, the softness in the rec markets, which we expect to rebound throughout the remainder of the year. Next, I'd like to dive into Slide 5 in our supplemental earnings side, which is our product mix.

As we mentioned on the last call, we are changing the way we're classifying certain products and services to better reflect how we look at our business. Paper & Supplies is now part of our Packaging segment, and we've created a new category called Services to encompass hemp trading, Retail Services and revenues from the Hybrid Creative.

As expected, fiscal Q1 saw sequential declines across all categories. Vape, specifically, had a decline close to 30%, which was greater than the 20% to 25% we guided to on our Q4 call, and this was due to bans in Massachusetts as well as flavor bans in Washington and Oregon.

But it's in line directionally with what we expected as customers slowed down their purchasing activity and took less inventory risk until they received the clarity from the regulators around vape. As a percentage of revenue, vape dropped down from 67% to 61%, and not exactly the way we wanted to reduce our exposure to vape.

But as you can see, this is helping diversify us into other products and services. As I mentioned at the onset, though still early, it appears that the vape market is turning the corner, and we expect vape sales to rebound significantly in the second half primarily due to a number of factors.

Number one, decline in new illnesses and deaths. And number two, concrete findings from the CDC and health officials, narrowing down the potential root causes.

Three, the conversion of users from the black market to the legal market. Consumers are becoming more aware of the differences in quality and safety between legal sources and illegal sources.

And our hope is that more consumers are going to be choosing the former and willing to pay a little bit more to ensure safety. Number four, operators upgrading their supply chain.

We call this like the premium mentality, and we're starting to see that play out a little bit where they're wanting to upgrade their vape hardware to make sure that they have best-in-class materials and products that they can now market as safe to their consumers. And then we have Massachusetts, of course, removing their ban.

That was a positive for us removing that early. And then Rec 2.0 in Canada.

We've got our initial vape orders out. We're disappointed to see some bans come in late.

But the vape market is alive in certain provinces, and we're benefiting from it. And then lastly, of course, the new rec states coming online, Illinois and Michigan.

These are just huge, massive markets that are opening up for us, and we expect to be able to ride the growth wave there. Next, I want to take a look at our Packaging, Paper & Supplies bucket.

A big call out here is that we recently launched our new CBD packaging portfolio where we're working with many proprietary and nonproprietary vendors, where we can ship made-to-order products, either directly to our customers or store them and ship them to them as needed. And we expect these products to gain meaningful traction as CBD is becoming more and more mainstream.

And what's more is that these are high-margin products, which should help us toward our overall goal of increasing margins and inching toward profitability. In addition, as mentioned earlier, we have reduced our SKU count for stock items in order to reduce the amount of inventory we have to keep on hand and free up our cash to use toward growth initiatives as well as allow us to focus more on delivering higher-margin products and custom products for our customers.

We expect Packaging, Papers & Supplies to rebound significantly throughout the year as some of the new adult rec markets like Illinois and Michigan are coming online. As well as the traction in Canada over 2.0 of being a healthy growth driver for packaging around vape and edibles.

Next, I'd like to dive into our Services bucket, which was down 11% compared to the previous quarter. I would like to note that we're learning here.

We had a situation where we booked couple of sizable transactions based on COA data that we received. In this industry, everything is priced around points of CBD potency.

And when the product was delivered, we found out that, in fact, the potency was less than we'd expected. And therefore, we had to revise down in a meaningful way, the size of these transactions.

So although that's a negative, and we did expect a much bigger bump from this bucket in Q1, it's a learning lesson and it's something that we're going to now apply to our process to be better. And we still see significant opportunity within this division.

We have a lot of traction underway already, plus a large pipeline that only continues to grow as we establish a more dominant presence in this burgeoning part of the industry. And we feel very confident that we'll be able to achieve and beat our previously disclosed target of at least $25 million in revenue for fiscal '20 from our hemp trading businesses.

On a positive note, for the Retail Services side, we did announce before MJBizCon last month, the addition of our new compliant hemp-derived CBD brands under our partnership with CA Fortune, which includes Heavenly Rx, Maye and Level Select. This in addition to Sentia Wellness, which we announced back in October.

And we're building momentum here with CA Fortune. We're also looking at activating these brands into different channels other than grocery, including conventional, convenience, pet care and beauty.

So our CBD brands are going to have a lot of opportunity to go mainstream through our retail services division. And based on these contracts that we have alone via the partnership with CA Fortune, we will now be recognizing revenue starting in Q2 where we expect to generate at least $100,000 from the Retail Services.

Keep in mind that with the Retail Services revenue, we virtually have no cost associated. Therefore, it's about 100% gross margin.

And given that this revenue is ultimately tied to a percentage of wholesale sales, as we activate these brands into additional retail outlets, the revenue derived from this division should only increase throughout the fiscal year and beyond. And as you've heard us say many times before, it's not the actual product or service that delivers the greatest value but really the cross-selling opportunities to leverage our network.

And lastly, I want to take a quick look at our energy and natural products bucket. This business posted another good quarter, but down slightly sequentially.

This has given the impact of the black market vape crisis and how a lot of brands temporarily halted their production of oil. However, just as vape sales are starting to rebound at the consumer level, we expect that a lot of these brands and operators are going to start to ramp back up their oil production to meet that demand, which should help our Energy & Natural Products bucket, which we do expect to continue to grow throughout the fiscal year.

Lastly, I want to turn everyone's attention to Slide 6. The last slide in the supplemental earnings deck, where we look at our cross-sell progression.

We talk a lot about cross-selling. And once again, we see some great data here showing that we are continuing to make significant strides in delivering incremental value for our customers.

As seen in the slide, we're gaining traction in cross-selling to our customer base, especially with our larger customers, the $500,000 plus. You can see this by looking at the sequential decrease in the number of smaller customers and the sequential increase in the number of larger customers.

We expect this dynamic to continue with the growing consolidation in the space, especially in light of the recent market challenges, but also because we can now deliver the most value to our largest customers by providing them with the comprehensive suite of products and services that we now offer, which only enhances our defensibility moat. We now have 49 customers purchasing over $500,000 on a trailing 12-month basis compared to 42 a quarter ago.

In the $1 million-plus bucket our customers are now purchasing an average of $4.2 million with us annually versus $3.8 million in Q4. Our SKU count is also rising and has exceeded now 80 SKUs on a TTM basis for these customers in the $1 million-plus bucket compared to less than 70 SKUs a quarter ago.

Now these are all very encouraging trends. But as we've said before, fiscal 2020 is not just about capturing more revenue opportunities, but more importantly, it's about how we deliver incremental value to our customer base and how we focus on our path to profitability.

Now I'd like to spend some time talking about our strategic initiatives that are centered around getting to our goal of adjusted EBITDA profitability this fiscal year. On the last call, I talked about 3 main levers to get us to that goal.

And I'll spend a moment going over our progress on delivering on each of these initiatives. As a reminder, the 3 main levers are: one, continued top line growth in our core business; two, ramping up our newer and higher-margin initiatives; and three, tightening the belt and restructuring the business to cut costs, improve margins and improve cash flow.

First, we'll look at, number one, growing our current business. You've heard us talk about the external and the internal catalysts in great lengths on the past 2 calls.

From an external perspective, we have market catalysts such as Rec 2.0 in Canada and new adult rec states coming online like Michigan and Illinois. Internally, we already have seen a meaningful success and traction in getting some of our newer revenue-generating and margin-accretive initiatives off the ground, including, most notably, our hemp trading business, which is expanding our CBD footprint and helping us improve adjusted EBITDA metrics, given that it's EBITDA accretive and cash flow accretive.

We also have been pleased to launch our initial brands in our Retail Services business and now complementing our overall CBD portfolio with a robust CBD packaging product set that is going to be delivering higher margins. So we look at this focus on higher-margin products and services.

This CBD bucket is going to be able to deliver a lot of value there as well as some of our new vape offerings, which include batteries and also CCELL pod systems, all the while focused on where we can have proprietary edge and hyper custom packaging is something that is going to increase stickiness and drive higher margins as well. And last but not least, we've made further progress on rightsizing the business and aligning our current cost structure with the revenue goals we are targeting to achieve positive adjusted EBITDA.

Already, we have completed the following restructuring and cost-cutting initiatives. We've reduced headcount of 53 employees, which we expect to result in annual net cost savings of $4.3 million, which will begin showing up in Q2.

We've also eliminated nonessential third-party vendors. We've tightened our inventory management belt, where we actually saw our inventory balance come down again this quarter.

We're continuing to renegotiate better pricing and better credit terms with our vendors. And we've also strategically aligned our core focus initiatives and focusing on the right areas of the business that are margin accretive while also saying no to a lot of new business opportunities that may have historically garnered some of our attention.

So we're really trying to stay very focused and very aligned. Altogether, we expect the impact of this to make us a leaner and stronger organization that can take advantage of this market shakeout.

But also, an organization that can self-sustain and control our own destiny by improving our profitability and cash flow metrics. And lastly, I want to drop a quick note around our guidance.

Last quarter, we did come out with fiscal 2020 guidance. That was $230 million to $250 million.

We did expect a lighter Q1. So we are still very confident in achieving this guidance.

We want to reiterate our number of $230 million to $250 million, which includes growth from our core business as well as at least $25 million in revenue from our new hemp trading business. We continue to believe that our current cash resources, which include the proceeds from our September raise and our line of credit with Monroe Capital, along with our improving working capital situation and cash flow from operations will take us through fiscal 2020 while giving us the resources to achieve our stated goal of adjusted EBITDA profitability in the second half of the fiscal year.

So at this point, I'd like to turn the call over to our CFO, Mr. Chris Tedford, to discuss the fiscal Q1 2020 financial results in greater detail.

All right. Thanks, Nick.

I will now turn to our Q1 '20 financial results. Total net revenue increased 38% to $35 million compared to $25.3 million in Q1 of '19.

The increase in net revenue was driven primarily by increased sales of vape hardware and accessories, Packaging, Energy Products and hemp. On a GAAP basis, gross profit for the first quarter increased $7.3 million, up approximately $4 million or 125% from Q1 '19.

Gross profit as a percentage of net revenue for the first quarter was approximately 21%, representing a 70 basis point increase as compared to Q4 '19 driven by improved vape gross margins partially offset by lower Packaging and hemp margins. On a non-GAAP basis, excluding the impact of the China trade tariffs, gross margin was approximately 23%.

At the end of Q1, total inventory was approximately $40 million as compared to approximately $44 million as of Q4 '19. The recent decrease in inventory is consistent with a lower sales trend, continuing efforts to rationalize our stock SKU count and increasing trend towards more custom products, which tend to turn faster than stock products.

Operating expense for Q1 '20 was approximately $21 million, which was in line with the fourth quarter of 2019. Compared to the prior year quarter, operating expense increased approximately $9.4 million from approximately $11.7 million due to the rapid expansion of our business, primarily driven by compensation and benefits, facilities costs and consulting fees.

Cash SG&A as a percent of net revenue for Q1 '20 was approximately 45% as compared to 41% in the same period a year ago. As we indicated on our last call, we expect cash SG&A to remain relatively flat quarter-over-quarter moving forward and to decrease as a percent of net revenue.

On a GAAP basis, net loss for Q1 '20 was $12.5 million or negative $0.12 per diluted share as compared to a net loss of approximately $8.6 million or negative $0.11 per diluted share in Q1 '19. On a non-GAAP basis, excluding the impact of certain nonrecurring charges as well as other noncash gains and losses, our net loss for the quarter was approximately $9.2 million or negative $0.09 per diluted share as compared to negative $0.08 per diluted share in Q1 '19.

Adjusted EBITDA equaled negative $6.8 million compared to negative $5.2 million in Q4 '19. As Nick mentioned, adjusted EBITDA loss was slightly higher than expected due to a lower revenue base, and the fact that our recent cost reduction initiatives weren't fully realized in Q1.

Going forward, we continue to expect adjusted EBITDA to improve significantly for the business to drive positive adjusted EBITDA in the back half of our current fiscal year. We ended the quarter with a cash balance of approximately $15 million as compared to approximately $4 million as of Q4 '19.

During Q1, we completed a registered direct equity offering, which yielded approximately $27 million in net cash proceeds. Together with available borrowing capacity on our revolving credit facility, we believe we are well positioned to successfully execute on our 2020 strategic initiatives.

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

Just wanted to ask one on the revenue. Obviously, the guidance that you gave and that you reiterated would look to -- for a quite a meaningful increase in the next few quarters.

So can you give anything on how we can be confident in that where particularly you're more confident? And how we can have some reassurance on that?

Yes. Thanks, Ryan.

Certainly, obviously, it's a big ramp up, right? But where we're confident is looking at the macro data and just seeing the amount of sales that's continuing to occur in the marketplace.

I mean we saw -- we all saw, I'm sure, the lines around the corner in Michigan, the lines around the corner in Illinois. Cannabis is currently sold out in Illinois.

So when you see just the overall demand for this product, our business is really set up to get a small piece of those sales and so where we've had a hiccup because of the vape crisis and some consumer pullback. The other bigger hiccup has really been in evaluating the clientele, the people that we're doing business with, and determining if these guys are going to be folks that we should be extending credit to and further adding on or if this is a risk that we don't want to take.

And so we're going through that process right now. It's a bit -- it's a shake out, right?

So, we're adjusting along the way with the shakeout and trying to figure out how to best position the business to, obviously, capitalize on growth, but mostly to minimize risk to be able to achieve our goal of getting to profitability. So we expect a little bit of this lumpiness in the interim.

But we know that long term if consumer demand is there, somebody is going to fill that shelf. We're spread out and diversified across the marketplace so well that we're going to get a piece of that.

And so we see a lot of this rebounding in a big way. And then we've got the obvious catalyst with Illinois, Michigan, Canada for Rec 2.0, all coming online, and continued growth in medical markets.

So, we're hoping for a little bit more out of California in order to make this happen. But really, it's just about evaluating the new landscape and picking our spots wisely and taking advantage of the opportunity.

And if the consumer demand is there like it is today and continues to grow, then we should have no problem being able to ramp sales in the back half of this year and hit our guidance.

Okay, brilliant. And just a follow-up on vape.

I mean how would you categorize the demand you're seeing now for vape compared to during the quarter, we're looking at now, would you say largely it's returned to normal? Is there still a little bit of hesitation?

How would you look at that?

Yes. So we're looking at this in a couple of different ways.

Number one, the consumer data, I think, we've all seen reports showing that vape declines have basically bottomed. And now in most states, it's all increasing.

Obviously, Canada will be complete increase because they didn't have vape before mid-December. So the consumer data is good, right?

It's showing that the market's coming back and the vape crisis essentially is over, right? Now the other aspect for us is how are the -- our customers, which are the brands and operators, ordering, right?

And that's dependent on a few things. Number one, they're cash.

So some of these folks don't have as much cash as they used to have. So whereas we used to expect bigger orders and them playing for more growth, they've become more conservative, right?

They're ordering less. It doesn't mean that they're not going to need more product as we go along.

Certainly, they will, but they're going to be more cautious about how they're ordering. So it's sort of hard for us to kind of see between the 2 things.

Number one, we know consumer demand is there, but we are seeing still a little bit of softness in vape. We are expecting that to pick up, and what we're hearing from our customers is, as they're getting more comfortable, as they are sort of rightsizing their businesses, everyone is going through the same process, right?

They're now getting more confident to where they can order more from us. So, we're seeing good underlying trends there, but it's still a little too early to be extremely bullish on vape just because of those dynamics.

But we know that the new markets are going to play big, right? We know Canada -- working orders from Canada right now.

We know Massachusetts because the ban was lifted, we had a big month in the month of December. We know Illinois, we had a big month in December because it just went rec legal.

So, there are some things we know for sure. There's some data that we can look at and then there's really just our feel for how our customers' ordering patterns are going to change and a lot of that is determined by their own internal issues and something that we really can't project wholeheartedly.

I just wanted to follow up on the revenue. Nick, I appreciate your cautious optimism around some sequential improvement in California.

But how do you kind of balance that? Yes, the vapor concerns seem to be abating, hopefully, there is a restocking of inventory.

But at the same time, you've got a pending excise tax increase. So like, how do you get comfortable with those puts and takes that net you out to an improvement?

Yes. I mean California is -- remains to be the most challenging market with all those dynamics.

As you mentioned, the new excise tax coming in. We think, ultimately, there's more sales occurring in the legal market every quarter in California than there were the quarter prior.

So if that trend continues, I think the market should eventually stabilize and grow. We know that the market needs more retail stores if it really wants to get explosive growth.

If it really wants to compete with the black market, you need more distribution points. We're seeing people start to do workarounds where they're putting up kiosks and using delivery as a way to kind of work around these cities that are banning retail.

And so that's a positive thing. We don't know how that's ultimately going to play out.

But people are figuring out how to conduct more sales in the legal channel. The problem that we are having and the problem our customers are having to raise is they're cash strapped.

So, we're looking at our customers in California and some of the guys we've done business with historically, we may not be doing as much business with in the future, they might be going out of business. We've also heard from people that some of these customers or some of these other companies that are going under are flooding the market with cheaper product to liquidate.

So, there is a lot of those dynamics. And ultimately, where we step -- take a step back and why everyone looks at our company as this sort of hedge to the market is because long term we should not be affected by that.

Short term, yes, there's a shakeout, and we have to kind of figure out where we want to take a little bit of risk with certain customers. And right now, we're choosing to take less risk, which means we are not loading people up and giving them extra credit terms.

But as this sort of shakeout occurs and as new market leaders emerge, then we're going to double down on those new market leaders and we're going to ride their growth. So I think we need to wait a little bit and see how this all plays out.

And I think California specifically is going to continue to be challenging, but where we do get that optimism is just looking at the fact that more consumption is happening in the legal market every quarter, every year than the year prior. And we have some positives like there's been some crackdowns.

There's been some brands that have been busted for double dipping vMAPs has removed almost all of the illicit stores as of Jan 1. So that just went into effect.

So there's some positive things that we can look at. But ultimately, the biggest thing for us is going to be kind of watching the customer base and figuring out who's going to be those new winners that emerge and avoiding the people that are unfortunately going to go under and riding the wave of -- growth wave of the people that are going to take their spot.

Okay, super. That's helpful, which certainly is a pretty good lead into my second question.

I really appreciated your commentary around kind of the pathway to EBITDA profitability and your candor around the importance of operating leverage driven by revenues to get there. So in thinking about kind of the range of outcomes from the full year, just trying to get a sense of how conservative you've been in terms of targeting back half profitability relative to your full year revenue guidance.

Is there a scenario where you could miss the low end of the range, say, by a 10 percentage points and you're still profitable? How do we kind of think about the range of outcomes there from a profit standpoint?

Yes. That's a great question.

And I think our overall mentality is -- whereas in years previous, it's sort of -- let's just rely on growth, and the growth has been there. I think given what we just went through and where we didn't grow for now -- it was 20-plus consecutive quarters, and we had a quarter where we were down.

We've reframed our mindset to say, look, we can't rely on growth, right? We have to focus on being profitable, even if we're not overachieving on the growth areas.

So obviously, we're not expecting to miss guidance. We're still reiterating the guidance.

But we're operating like, hey, if things start to look like we're not going to hit the sales then we have to do things on the cost side because that's the only thing we can really control at this point. These market dynamics are out of our control.

Vivien, you and I have talked about it. I mean, we've seen what's happened in Canada, where everybody has expected this, and things have changed drastically time and time again.

So we're in the same mindset. We can't -- you can't -- we can't sit here and say, "hey, for sure, the sales are going to be there in the back half of the year, and therefore, let's just load up the costs blindly."

No, we're going to take the approach that we need the cost to be rightsized for where the business is today. Unfortunately, everyone is looking right now at Q1, where we made those decisions.

So you have the revenue numbers showing up in Q1 but you don't have any of those cost savings showing up in Q1. So it's a little hard to see with the financials we just reported.

But trust that our mindset is that, that we would rather make the cuts to the business because we know we can control that. And only ramp those up as we're getting the sales so that we're not at risk of, say, missing a sales number and then not getting to that goal of profitability.

If that makes sense.

Vivien just to add to that, this is Jason. I think as our top line revenue shifts to multistate operators, the forecasting of the business continues to get easier we're starting to see some separation from the customer base, and the multistate operator from a revenue perspective is continuing their growth as we've seen.

So our focus, on the top line standpoint, is to really focus our sales team on leveraging our relationships with those MSOs and driving business with those customers because it's easier to forecast. And obviously, there's a bit more stability from a cash perspective with those customers.

That makes perfect sense. Last one for me in another segue.

So focusing on that cap -- those cost control and recognizing that the cost-saving benefits will kind of layer as we go through the course of calendar 2020. From an organizational standpoint, can you just give us a sense of the 50-plus reductions in headcount, where those were coming from a function or capability standpoint?

Yes. So the customer across the board, we looked at every single department, we just pretty much figured out what's their essentials that we need to operate this thing, and how can we get people to do more with less people, right?

We've also implemented some technology over the recent quarters that we've talked about. And so that's helped where we got to the point where we could reduce people without losing efficiency because we have technology in place that can automate a lot of this stuff.

One department that was taken a little bit harder than the rest was our creative services. And one of the reasons why is because the customer shift, that Jason talked about, a lot of these MSOs aren't used to using smaller creative agencies.

They are going in-house or they're partnering with large creative agencies. So we decided to cut a little bit deeper there.

So that's one specific call out. But generally, it was across the board.

I mean, most of our headcount is in sales and operations. And so another thing is as sales have consolidated, and we have MSOs that are ordering larger amounts, so average order size is up.

That means a couple of things. Number one, we don't need as much relationship managers because each relationship manager has less accounts doing more volume.

And then on the warehouse side, we don't need as many warehouse people picking, packing and shipping smaller orders because these orders are larger and because we implemented a WMS system, we're able to get the operations component filled with less bodies. So that was -- those are the two main areas where we cut in addition to the creative services.

But we did make cuts across the board because it was just really time to look at the complete business and figure out how can we make this as lean and mean as possible. And I think, we did a great job at that.

And now we're still evaluating constantly, and we're going through and we're cutting budgets for other things like consulting budgets and other nonessential things that right now is the time just to take a look holistically and figure out every which way that we can cut costs to ensure that we hit our goal of profitability.

First, I just want to dive in on Canada and the expected ramp there. So obviously, you mentioned the vaping bans that you're going to have in some of the provinces.

So I just wanted a little bit more color in terms of what you're hearing from the LPs in terms of the orders that they're getting. I know there are other derivative product format that they're going to be ordering from you guys there.

But how to best think about that kind of line item for Canada, kind of, kind of going forward as we think about expected ramp for brick-and-mortar and then vape coming online potentially for other provinces?

Yes. So I mentioned California being the hardest market.

I think Canada has proven to be pretty difficult, too. And I think about what we've said and what we've had to go back on because of changes in the marketplace there.

And so I think, we want to use extreme caution when guiding to Canada because it is a lot tied to regulatory. And you wait -- you think there's going to be this huge vape market and you wake up and Québec is baned and Alberta bans at the last minute.

So look, we're still feeling good about Canada. We're hearing good things from the LPs.

We're trying to figure out exactly what that means for us. Jason has additional color.

Just -- he's been a little bit closer to having those conversations. So Jason, why don't you jump in?

Yes. Aaron, Canada, as Nick mentioned, has been a struggle really because things continue to change, and they're changing day by day.

With that said, we know what's in the pipeline. If things are going to hit in Q2, there already orders, are in the system.

So I do feel very good about taking a big jump here in Q2. And as our customer base in Canada starts to understand what works and what doesn't work, especially on the vape side, we're seeing more and more customers say, you know what?

I need to go to something that's proven and trusted and that's CCELL and being a CCELL distributor, we are reaping the benefits of that. So we expect Q2 to be our biggest jump in growth and feel confident in that.

All right, great. Appreciate the color there.

And then just second one, I know you guys have talked about California and there was a question there. But as we look at the past 2 quarters, obviously, been a big move in terms of the $21 million to $8 million we had this quarter.

So just based on the color you had in terms of brands, and we have seen actual state data showing an increase in the past 2 quarters. Just any more color in terms of what's actually been driving that for you guys?

And do you think you can get back to that run rate of $21 million this year? And is there enough that you can make up in these other states, including kind of the U.S.

other market and medical market seems to have been the best for the quarter to kind of get to that guidance revenue number that you have?

Aaron, the question was California or just vape in general?

California getting build to get back to the run rate from 2 quarters ago of $21 million. Yes.

Okay. Yes, yes.

For sure. So Jason, why don't you jump in on that one?

Aaron, it's Jason. California, we're talking about the two most fun markets right now.

California, yes, we're seeing the consumer data, which makes us feel very good, right? But when you dig down one step further, okay?

And you look at what are the consumers actually taking off of the shelf, that's where thing -- we're seeing things shift drastically, okay? The brands that were the winners, 3, 6, 9, 12 months ago are now shifting.

And we're seeing the businesses that we're winning before struggling, right? Some businesses more than others, depending on their dependency on vape, depending on what their cash position was going into the vape crisis, right?

And a lot of customers were just not prepared to basically halt their sales for three weeks, a month, two months, right? So the actual brands -- and we're looking forward to getting some new BDS data, the actual brands that are moving off of the shelf, I think, has shifted in a pretty big way.

And the brands that are able to consistently fill those shelves are now the winners, right? And I think that is the change in California, and we're going to start to see that stabilize again.

Can we get back to the $21 million run rate that we were at previously? I do think so.

However, it's not going to come in Q2. It likely isn't going to come in Q3, it's going to be kind of a reset in the market, understand who the winners are now under this new market dynamics and go and attack those brands and make sure that they're on our platform if they're not already today.

But luckily for us, we have pretty much all of the brands within the state on the platform to a degree. It's now saying -- and cross-selling, sometimes even more aggressively to get them across the entire platform.

Yes, and I think, the one other thing like I said on the previous question, it's really about cash flow right now in the California marketplace. We were just looking at something today that there was a quote saying that there -- what was that quote about the...

"There is a epidemic of not paying vendors in the California market." And it's a trickle-down effect.

I mean, when you have retailers that can't pay their bills. You have distributors that can't pay their bills.

That trickles down for the brands and really the ancillary vendor.

Yes. So I think the point is, we could get a lot more sales in California, if we said, "hey, here's some credit.

Pay us in 30. Pay us in 60."

And the reality is we're in the process of collecting, and we feel confident that we will on some people that are 90, 120 days out. They're communicating, they're going to pay us.

They're just -- they don't have the cash, right? So the question is how much more of that do we want to take on?

Now is not the time, in our opinion, to take on that type of risk. We would actually rather have less sales but have it be with the right customers, which is why we've been focused on MSOs and LPs and people with strong balance sheets that we can underwrite to.

And yes, we'll do make sales to the people that have cash, but the amount of people that have cash in California is very little. And so that's where you're seeing the reflect in our sales is someone else can take that risk.

And until we figure out who's going to be here and who's not, we want to minimize the amount of risk that we have in the California marketplace, unfortunately.

Guys, just a couple of quick ones. So when we look at Canada, can you just describe maybe some of the differences in the competitive landscape there versus the U.S.

versus some of the states where you guys have a lot of experience?

Yes. So I think, first and foremost, it's a more consolidated market.

There's a few players there that have majority of the market share. We're coming in mostly on the adult-use side whereas a lot of people had established kind of generic packaging relationships on the medical side.

So where it's important for brands to really differentiate and stand out on the shelf and create packaging designs that are attractive to the consumer, you don't really have that element in Canada because Health Canada regulations are so restrictive. So it's hard to appeal to people and saying, hey, the sexy packaging that we do really well in a lot of these markets in the U.S., not as applicable in Canada.

Where we found a lot of success in Canada is on custom projects. And the pros and cons of that are that they take a long time.

They -- it's costly upfront. But once we design something that becomes adopted, it's under contract, and it's going to be used for the foreseeable future.

So it's stickier. And so we have a few of those projects that launched in Q1.

We've got more coming. So that's an area where it's different, and it can be a negative upfront.

But long term, it's also a positive if you can get it right. So we're seeing success in Canada where we also, on the vape side, obviously, have an opportunity to penetrate with our CCELL products.

And we're seeing some products that are non-CCELL, that have had issues in the market and recalls. And so I think, again, it's a learning lesson.

People in the United States have been doing vape a lot longer, and they've found out that, hey, having a quality issue at any point in time is not worth the amount of money that you're saving by going with cheaper options. So I think the Canadian market is figuring that out, and that's going to be a benefit directly to providers of premium products like CCELL.

So those are some of the differences in the dynamics. And I think, we still remain bullish because we're set up to succeed there, but it's not going to be as quick as the process as we've seen in some of these U.S.

states.

Great. And then just shifting to vape hardware.

You guys have had -- CCELL has had some technology leadership there. And with the vape crisis, there's some vendor consolidation, shifting to tier 1 guys for quality assurance, safety reasons.

What are the design -- what's the design roadmap look like in terms of innovation, maybe to increase the leadership of the CCELL product over the -- some of the competitive products that are out there?

Yes. So CCELL has -- for the last couple of years until about 6 months ago, has really just playing catch up with the demand, right?

And the demand was around 510 thread cartridges. And so they did a good job.

They were able to invest in more production capacity. And they're finally now to a point where they can produce on a cartridge basis significantly more than is being sold today.

So they're in a good spot there, which has allowed them to turn their focus toward innovation of new devices and particularly around pod systems and other disposable devices. So a differentiated product versus the cartridge.

They have already launched a DART, which we were part of launching, and we're seeing some early successes. Now there's a slew of new pod systems coming out right behind that.

So we're in the precipice of being able to offer a wide array of new technologies and pod systems to the customer base. And the good thing for us is, where we've made investments in some of the other lower-margin items, these pod systems are priced appropriately to where there's an ample amount of margin for the manufacturer and the distributor.

And so we look forward to an opportunity to shift some of our mix over away from the generic cartridge systems over to some of these new next-gen enhanced pod systems, which will deliver a great consumer experience and the brands are going to be able to garner more loyalty because of the closed end-to-end system that they provide.

And then can you just quickly contrast maybe the black market competitive dynamics in Illinois, in Michigan versus California and some other places? Is it as robust the black market?

Or are we kind of on better footing right out of the gate here?

It's interesting because there's a couple of states that have sort of allowed the black market to establish a presence. And the big difference is -- in those states is they've allowed it in the form of brick-and-mortar retail and also advertised delivery.

And you don't see that in a lot of states like Illinois and even Massachusetts, certainly black market. But if you go to California, Michigan, they actually have retail stores that -- the average consumer probably doesn't even know they're illicit, and they're going in there and they're buying products.

California has probably 2x as many, maybe 3x as many illegal storefronts than they do legal storefronts. The delivery services.

They've all been on vMAPs. People are used to ordering delivery in California of vMAPs.

Nobody was used to ordering delivery off of vMAPs in Illinois, right? So there's just different dynamics from the legacy consumer experience to the amount of -- that the state has allowed people to open up brick-and-mortar stores without penalty or punishment, that's exacerbated this problem in certain states.

We saw in Washington, which is an early state had a similar problem coming their way, where they had given out 502 licenses to a certain group. And there was a group of former medical operators that were operating quasi-legally under the previous regime that now had become essentially illegal under the new 502.

And there was this struggle, as I remember, it was about 6 months of struggle where it was like, hey, we got -- you got to shut down, nobody wanted to shutdown. And what they ended up doing is giving everybody an opportunity to get licensed.

Now if you were in a zone next to a school or something like that, you didn't have the opportunity. But if you were otherwise in a good area and had good infrastructure, you could basically apply and convert your unlicensed store into a licensed store.

That fixed the problem in Washington. Now California can't do that.

And the reason why is because, in Prop 64, the state gave these local municipalities the right to create their own regulatory framework. Still, to date, 70% of the municipalities in California have chosen not to allow retail.

So the illegal stores in California are filling that gap. If you live in Orange County, population of 3.2 million, same as Denver, which has 400, 500 stores.

But Orange County has 25 stores that are open. And they're all in Santa Ana.

So if you live in San Clemente or if you live way out in Yorba Linda, you're going to drive 30 minutes to pay double the price to buy a legal or you're just going to go to the store that's nearby that's selling the same brands that are knocked off, and you probably don't even know the difference, right? So that's the dynamic that's occurred in California.

Michigan has got a similar dynamic. But these other states have never had that dynamic because they don't have the history and they don't have this illegal illicit storefront activity that we have here.

Okay, great. And importantly, Illinois is one of those states that doesn't seem to have that problem?

Correct.

I'll be quick. Just a little more color on the hemp side.

I know you have $25 million kind of projected for that. Does that include the FDA moving forward?

And then just kind of your strategy of expanding partners on the commercial side and the different distribution markets or challenges that you're looking at?

Yes. Scott, I'm glad you mentioned it.

So hemp, we guided $25 million. And we hit about $3 million.

So we're right on pace there. We don't see any issues.

We were hoping for a much bigger quarter, as I'd mentioned in the commentary. We're learning.

So what happened was we had some very large shipments of hemp that we're supposed to be millions of dollars. And when the product was then final tested, it turns out that it wasn't as high of a CBD potency.

So the price of those transactions was reduced 25%, alongside the potency, right? So we ended up losing a lot of revenue that we thought we were going to be booking.

So it's unfortunate. But again, it's a good learning lesson.

So we're diving in. We see the market being pretty vibrant.

We don't see any issues in terms of needing FDA to open up a broader market for us to achieve our numbers. Certainly, our growth would be enhanced if that were to occur, but it's not necessary, so to speak.

And then on the retail services side, this is a -- it's been a little bit of a slower rollout, but very optimistic. We've got a brand solidified with our partnership with CA Fortune.

So those brands are right now taking meetings with all of the major grocery channels throughout the country, and we're getting placements for these brands. Obviously, with CPG, you get a meeting, the store likes it, they tell you, hey, here's the data you can get into the store.

You start with 100 stores and you move to 1,000 stores. So it's a little bit slower, but we're going to have a lot of adoption throughout this fiscal year in those grocery channels, thanks to our partnership with CA Fortune.

And then we're also helping our brands get into other channels and other brands outside of the ones we've announced. Certainly, convenience, bodegas, beauty.

So we have a whole division pet care that is -- has liaison with CA Fortune to do grocery but also has contacts in all of those different arenas to be able to directly plug our brands in. And so I think right now, none of the major players are going to take a risk on food and beverage products, but they're certainly happy taking topicals and lotions and grains.

And so that is a fairly sizable market, enough for us to play in the short term. And then some of these other channels might be more aggressive and take on food and beverage.

And obviously, if the FDA okays it, that would be prevalent nationwide, and that would be a huge boom to our business because it just exponentially expands the category for us.

I'll be quick too. I just want to ask the revenue guidance question a different way.

So just given your Q1 performance and some of your commentary thus far. It does imply a big Q4 sales number for you guys relative to the $35 million that you did this quarter.

So just when I measure that bridge, can you maybe give us some proportion numbers? It sounds like you guys are calling out a few main drivers here.

You have new states that are turning for you like Michigan and Illinois, it sounds like you're also expecting vapes to rebound. And then the feel I get is that maybe you're being a little bit conservative with the $25 million in services that you're putting out there.

So can you just bucket those for us a little bit and talk about how we bridge to that big Q4? And what buckets you're really banking on to make that number?

That would be really helpful.

Yes. I mean I think in broad brush strokes, I mean, we're kind of looking at the core business getting up to -- upwards of $200 million and hemp trading making up the difference.

So that's where we're really -- we were a little more optimistic, obviously, guided to $25 million, but thinking we could probably do double that, right? That's how you got the high side of our range there, $250 million.

So that's kind of very broad. But I mean we don't want to kind of go into too much more detail because we've proven that we've been wrong, but -- in different areas, but we've been right on the macro.

So I think if I could talk macro, we have a lot of new packaging options that we're launching. These are higher-price point, higher-margin custom solutions, proprietary solutions.

And then on the vape side, when we look at pods, they are priced about double the price of our average 510 thread cartridge. So we don't necessarily need more vape sales, even the same amount of sales at double the price, you're doubling your sales.

So that's where we feel confidence. It's just the overall revenue number is going to grow because we have higher-priced products and we have higher-priced vape products coming into the fold here.

We also are expecting big things from Illinois. So when you're thinking about our Q4 is the summer well, Illinois is likely to work through these shortage issues, and they're probably going to have a very big summer of cannabis sales in Illinois.

Same with Michigan. Same with Canada.

Hopefully, right? Now the big challenge with Canada is if they don't allow vape in certain provinces, and we don't get the benefit of those higher ASPs on our vape units.

So that's kind of how we're thinking about getting this growth. We've got customers that are growing at certain clips.

We've talked to them. We've gotten their forecast.

We've got new products that we're launching and we're getting preorders and we're trying to figure out how much volume we're going to do off those new products. Kind of bundling that all together, hoping for significant recovery in our key markets like California.

And that's how we get very confident, at least on the low side of that range with a modest hemp performance to be able to hit the $230 million. And then if hemp overachieved like we expect or we hope, right?

Then that's how we get to the upper end of that range to the $250 million. And the one thing to note, too, is on the hemp side, right, we feel like that's very scalable because it doesn't tie up cash.

So we also would welcome the opportunity to grow that significantly because it's cash positive for us. And even if it's at a lower margin, it's still meaningful gross profit dollars.

So that is an area that we can feel confident that if the business is there, we can take advantage of it without running into tying up too much cash with inventory or something like that.

First, I mean, it was pretty nice to see the robust growth in the medical market this quarter. Going forward, maybe for the remainder of fiscal 2020, what medical markets are you most excited about?

Greg, it's Jason. We are, obviously, bullish on Florida.

Not many customers there, but the customers there that are winning are doing it in a big way. So Florida, Pennsylvania.

And again, the same mix of customers keep showing up in these medical states, right? So when you win one of the MSOs, and back to my comments on who are we targeting, when you win these multi-state operators, you're going to win a lot of these limited license states on the East Coast.

So specifically, Florida, Pennsylvania, Maryland, Ohio, and then Arizona on the West Coast. Those are the drivers in the medical space.

Got it. That's helpful.

And then in the past, you did talk about renegotiating the favorable terms with vendors just to kind of drive margin improvement. So I guess I was wondering what stage you're at with respect to these negotiations and is there still may be notable room for additional margin improvement there?

Well, I think there's always room for improvement. It's usually easier to negotiate as volumes are ramping.

So I think as we look at our plan when we get towards the back half of the year, and we start hitting the revenue numbers that we're expecting, that will be another good time to go back and negotiate better pricing on some of our faster-moving items. So I think this is an ongoing continuous process.

We have made strides in securing better credit terms. We've also been able to get some cost reductions.

And then we have new products launching. And like we mentioned, a lot of those new products are at higher margins.

So it's a combination. It's ongoing.

It's something that I think is -- very positive about our business is the fact that despite all of this, we're not -- we haven't had to lower prices. In fact, we've been raising prices in different ways by launching new products that are higher priced, et cetera.

So people look at this, even the vape crisis and thinking that the vape inventory is not as valuable. And in fact, we've have proven the opposite that with premium products, the market will pay a premium price and even pay more over time because the risk of not having something that works is too great.

Just given some of your comments on the quality of receivables and what's happening in the marketplace with some of the smaller companies having some financial trouble, how do you guys think about the sort of go-to-market strategy? You obviously have strong relationships with MSOs, with the major LPs.

Is this sort of causing you to rethink your philosophy? Or who your targeted customer base is?

And how you sort of structure your sales and marketing efforts to better sort of target those large customers?

Yes. No.

Certainly, great point and something that was already a focus of ours before this, but it's become even a bigger focus as we've simply been saying no to a lot of business that 6 months ago, we likely would have said yes to. The good news for us is we are -- we have been cleaning up our AR.

We did see the same scenario where when this vape crisis hit and there was a cash crunch, we saw people that couldn't pay. We've been working with those people to get payments, and we feel very good about our legacy AR.

So that's first and foremost. But then secondly, do we want to create another problem for ourselves.

And the answer is no. We just -- we can't afford that right now.

So we're being very selective. And we're looking at, hey, this thing is going to consolidate and it's going to consolidate in 2 ways.

Number one, the larger folks are going to acquire. We're hearing about -- I mean, crazy deals about this company is throwing in and merging in with this company and that company.

And it's just like all the stuff that -- you just sense the desperation, unfortunately, in the marketplace. So we know that there's going to be consolidation by way of acquisition and merger.

And certainly, we want to be aligned with the folks that are going to become large via those methods. But secondly, there's going to be consolidation in terms of market share, and that's simply because folks that have capital and have infrastructure to be able to produce and make products and put them on the shelf and maybe float them to a retailer, they're going to get more market share, right?

And the people that can't are going to get desperate. And like I said, they're going to do some crazy things.

And they may end up discounting stuff on their way out the door, which will ultimately throw a wrench in the market, but that's only going to last so long. So over time, that shakeout will play out.

There will be consolidation in those two ways. And we want to be focused on servicing those winners when the dust settles, plain and simple.

And we're going to work with everybody. We're going to work with the smaller brands and new brands, just like we always have.

But we're going to work with them in a different fashion, right? We're not going to take the risk.

We're not going to extend the credit. And we're going to be more aggressive in servicing the larger folks that are going to be the consolidators, and we're going to be comfortable taking risk and extending credit to those guys.

Just a few quick ones, very quick. So first of all, one of the big questions, I think, investors have is just around your capital situation.

And I just want to understand better, I appreciate your statement that you can make it on your plans without a capital raise by tapping your credit line, can you refresh us as to what's going on there in terms of do you think you can fully access that and remind us of the size? And then also, Nick, you've talked about finding other sources of capital, can you update us on that?

Yes. So obviously, across the board, there's a capital crunch.

We were very fortunate to raise a decent size of equity right when the crunch was approaching. And so we looked at that as, hey, this is the last sort of influx of capital that we're going to be able to get.

So we need to control our own destiny, and we're going to do it by executing operationally, cost-cutting and focusing on higher-margin, higher-profit initiatives. And we're also going to leverage our credit partner, which is Monroe.

And so dovetailing right back into what I was just saying, right? When we look at our credit facility, it's tied to AR and inventory.

So we want to focus on storing the inventory that we know is going to be moving. And that's why we've reduced our stock SKUs to 60 SKUs, and we're bringing in custom SKUs a lot of customers, but tied to purchase commitments, right?

To make sure that the velocity is there on the inventory so we can borrow against it. And then on receivables, right?

Anything past 90 days, we're not going to be able to lend again. So we have to make sure that if we're going to give credit and extend credit, it's going to be to somebody who can pay their bill and can pay it within terms or slightly afterward, right?

So that we can leverage it. And I think that's -- it's all the right thing to do for the business.

So I think we're not having any qualms over making these adjustments. It's the right thing to do.

But if we can execute and make these adjustments then we're going to be able to leverage that credit facility, and we're going to be able to make it to our goal of adjusted EBITDA profitability. And hopefully, the market turns around.

I mean we all want that. But at this point, we can't expect that as part of our plan, we have to operate as if it's not going to turn around and there's not going to be capital available.

Okay. Well, you didn't file your 10-Q yet.

Will there be an update on the SEC issue? Or can you say anything about that?

I know you're very limited in your ability.

Yes. Alan, I love to talk, but unfortunately, they don't love me talking about this SEC issue.

So really, it's just same as we said last time, we haven't got much updates. And we've done everything in our power.

And so we're hoping that this comes to a resolution here in the near term, but it's completely out of our control.

Okay. And then the last one on a more positive note, are you seeing -- I assume you're seeing some of your competitors really struggle.

Can you highlight any examples of that?

Yes. I think it's just a challenging marketplace.

I think there's a lot of people out there that have done well, and they've had a good business, but like -- I mean when you think about it, there's no outside capital to come in. And then you have a large part of the marketplace that can't pay their bills, like how are you going to stay in business, right?

It's just extremely challenging for these smaller companies. So we had a good relationship with AiR Vapor Systems, vape distributor that even before we acquired MediPen was a competitor to our business and a friendly competitor, and there was a point that it just didn't make sense for them to continue.

And so we actually hired Peter Hackett, who was their Founder and Chief Operating -- or Chief Executive Officer. We hired him December 1.

Now he's running our vape division. So that's one anecdotal example, but I'm sure that there's many others out there and many to follow.

Right now if you have a profitable business, and you're happy with the cash flow. You're going to be able to keep operating, but you're probably not going to be able to grow, right?

And then if you're not profitable, then you're pretty much looking at downsizing and rightsizing or you're going under, right? And I think we're in a great position being a publicly traded company, being one of the larger companies.

We have to do things right. We have to be smart.

But as this continues to progress and the shakeout, et cetera, it should only benefit us long term.

All right. Thank you.

And thank you, everyone, for listening in. So in summary, despite our revenue coming in lower than what we'd hope for, Q1, we still believe, was a solid quarter for the company.

I mean we laid the groundwork for what we expect to be a robust recovery in the business throughout the remainder of the fiscal year, particularly with vape. And we also set the stage for more significant growth in some of our newer initiatives like hemp trading.

But 2019 was a challenging year overall for cannabis, calendar '19. And our industry still has a lot of hurdles to get through.

But we also have a lot to be excited about, both internally and externally as new markets have opened up. Illinois, Michigan and Rec 2.0 in Canada.

And the industry is getting more disciplined and consolidated with a healthy mindset on getting to or expanding profitability, and this is the message that we've been giving. It's the message I've been hearing from a lot of other operators as well.

So people are kind of rallying around this, hey, the capital is not there, but that just gives us an opportunity to do the right things for our business, and we're making the hard decisions. And we're rightsizing, and we're going to be in a great position to survive long term.

So we're hearing that from a lot of companies, and that's encouraging. And the biggest thing is, as I mentioned, consumer demand is there.

I mean you wake up, you see a highlight of sales in one day in Illinois, you see lines around the corner, I mean, what other industry is experiencing that type of growth. Now all the stocks are down 50%.

But we still know the demand is there. So will it catch up?

My bet is it will. So we're not concerned, and I think a lot of folks in the industry are taking the same view.

We've demonstrated an ability to produce outsized growth consistently. And we've demonstrated ability to grab market share and increase value for our customers.

And now it's time for us to leverage the strong base we've built to drive even more value through cross-selling, eliminating inefficiencies, reducing cost and enhancing margins, which will ultimately get us to the point where we're more disciplined and more profitable and in a sustainable state where we control our own destiny. The good news is that for us, we've put in these initiatives already, although we have not seen the effects in Q1 on the cost side.

Those will show up in Q2 and beyond. And we're in a place where if we get the growth that we expect from the core business and the growth from the emerging businesses that with the reorganization that's taking place, we're going to be in a great place, with a right size of the business and a profitable outlook for the future.

So in summary, since I co-founded KushCo nearly 10 years ago, I've never been more encouraged and more excited by what we've achieved so far and the path that we're heading on. So thank you guys all again for listening.

Look forward to seeing everyone at our upcoming conferences and roadshows, including ICR, Needham and ROTH. And I want to wish everyone a happy and prosperous 2020.

Thank you.