KushCo Posted Disappointing Q2 Results, Stock Rose 8%

Cannabis stocks got a boost this month due to the sudden surge in marijuana sales. Currently, marijuana is the only industry that’s benefiting from the coronavirus pandemic. However, the sector still has challenges. Amid the COVID-19 pandemic, marijuana companies are reporting their earnings results. KushCo Holdings reported its results for the second quarter of fiscal 2020 after the markets closed on April 8. Did KushCo met analysts’ expectations in the second quarter? Why is the stock up 8%?

KushCo’s disappointing Q2 results

KushCo’s second-quarter revenue was almost in line with analysts’ estimates. Analysts expected the company to report revenue of $30.17 million—a decline of 14.3% year-over-year. The company reported revenue of $30.14 million. Sequentially, the revenue declined by 13.7% from $34.9 million in the first quarter. KushCo attributed a slow rebound in its vape hardware products as one of the reasons for lower revenues. The vape crisis in the illicit market has taken a toll on many cannabis companies. Other factors that impacted KushCo’s revenue were a slow start to the hemp trading business and weakness in California’s market. The company mentioned these factors during its first-quarter earnings call. Notably, the company faced a supply issue in California.

The company’s EBITDA loss was higher in the second quarter. KushCo reported an EBITDA loss of $14.8 million compared to $6.7 million in the second quarter of 2019. Sequentially, the EBITDA loss also increased from $6.8 million in the first quarter. The company mentioned that the $9.1 million bad debt expense resulted in a higher EBITDA loss, which is a one-time expense.

Bad credit conditions in California led to an increase in the bad debt expense. The conditions also caused higher SG&A expenses of $27.2 million in the second quarter.

Positives in the Q2 results?

There were positives in KushCo’s second-quarter results. The company reported continued sequential growth in its key markets of Illinois, Michigan, Massachusetts, and Canada. KushCo also saw a 227% YoY increase from its “core” customers. The “core” customers include its top 100 MSO, LP, and leading brand customers.

KushCo ended the quarter with cash of $11.4 million as of February 29, which is a good sign. Cannabis companies, especially in the US, have faced financial difficulties for a while. In the US, cannabis is still illegal at the federal level.

KushCo is a California-based company. Marijuana is legal in the state. However, that doesn’t make it any easier for cannabis companies to obtain financial support. Having cash on hand to survive the COVID-19 storm would make it easier for these companies. Financial institutions still avoid providing any kind of help due to fears about facing federal issues. The COVID-19 pandemic has made it more challenging for US cannabis companies to get any emergency business relief.

Most states have declared that cannabis is an essential item. As a result, companies run their businesses as usual. They will also have to provide their employees with benefits without receiving any benefits from the government. Many senators and cannabis trade groups want the SBA to provide relief for cannabis companies amid these challenging times.

KushCo plans to achieve a positive EBITDA

KushCo has taken up some cost-cutting and restructuring strategies to achieve a positive adjusted EBITDA. In the second quarter, the company completed a 26% reduction in its headcount. The reduction generated around $3.7 million in annual savings. After the quarter ended, the company generated another $4 million in annual savings from a reduction in the workforce. The company expects some impact from COVID-19. Production and shipment delays are possible. However, KushCo is confident about the progress from key markets like Arizona, Florida, Maryland, Pennsylvania, Ohio, and Oklahoma.

April has been good for cannabis stocks

Rising marijuana sales help cannabis stocks’ performance. Cannabis companies in the US and Canada want to stay operational amid the pandemic. They’re working to meet the demand. Recently, Ontario removed cannabis from the essential business list, which will impact recreational cannabis sales in the region. Hexo (TSE:HEXO) stock took a hit after it decided to raise more capital. On April 8, Hexo fell by 2.01%. Meanwhile, Aurora Cannabis (NYSE:ACB), Cronos Group (NASDAQ:CRON), OrganiGram (NASDAQ:OGI), and Tilray (NASDAQ:TLRY) rose by 2.8%, 4.6%, 0.55%, and 2.8%, respectively.

Despite the dismal results, KushCo stock rose 8.2% on Thursday. Most analysts are also bullish on the stock. The average target price on the stock is $2.86, which represents a 333% upside from its last closing price of $0.66 on Thursday. Most of the analysts have a “buy” rating on the stock.

Stay with us to learn more about the cannabis sector.