Q3 2021 KushCo Holdings Inc Earnings Call
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Greetings and welcome to the Kush Ko Holdings fiscal third quarter 'twenty 'twenty 1 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded I would now turn the conference over to your host Mr. Nadeem most demands.
Code coach codes could director of Investor Relations Mr. Moss from Mad you may begin.
Alright, Thank you operator.
Afternoon, and welcome to the Kiszko Holdings and school third quarter 2021 earnings Conference call.
A replay of this call as well as a copy of the supplemental earnings slides will be archived on the Investor Relations section of the Crisco Holdings website, IR Dow Kiszko dotcom and.
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.
The risks are outlined and the risk factors section of our SEC filings any forward looking statements should be considered in light of these factors. Please also note and the safe Harbor any outlook. We present is as of today and management does not undertake any obligation to revise any forward looking statements and the future.
With me on the call today are our co founder chairman and CEO and they kovacevich and our CFO, Steven Christoffersen with that I would now like to hand, the call over to Nick.
Yeah.
Thank you Jim and thank you all for attending our fiscal third quarter 2021 earnings call.
Hope everyone had a fun and safe fourth of July weekend, I know much and to talk around Chriscoe. These past few months has been around our proposed merger with Green line and I'm excited to report that we were making great progress toward closing within our expected timeline of calendar Q3.2021.
So before jumping into our results for the quarter I wanted to spend some time, providing an update on the merger and the important upcoming special meeting of shareholders to approve the merger.
And we'll shift gears to our Q3 financial results before opening it up for Q&A.
So with that let's turn to slide 4 of the supplemental earnings slides, where we will go over some of the details for the upcoming special meeting.
As you may have seen by now we have set our virtual special meeting day to Thursday August 26 at 12 P. M. Eastern time, all shares held as of the record date of July 1st will be eligible to vote and you do not need to attend the virtual meeting to vote and fat a majority of shareholders, both well in advance which.
And why it's important to be on the lookout for the proxy materials that will be arriving and your mailbox. Either later this week or next week. These proxy materials will have a control number that is needed to submit your vote, which you can do online by phone or via mail and just a few minutes.
I just want to stress how important it is to vote your shares no matter, how many or how little you own without your support and the overall approval needed to consummate. This merger we cannot realize the expected benefits of this merger, which we believe are significant.
Won't name all of them, but just to name a few of the benefits of the merger, especially the Costco shareholders..1 we will create greater scale and a stronger platform for profitable growth with the combined company is expected to generate more than $300 million in calendar 2021 revenue.
2 we expect to reap significant cost savings synergy to the tune of 15 million to $20 million within the first 24 months of closing.
3 we also expect to reap significant revenue synergy, especially cross selling Green line best in class proprietary owned brand products to our premier customer base of leading Msos Lp's and brand.
And not to mentioned point number 4 we will finally be able to list.
On NASDAQ retaining the Green line name and ticker symbol, which we expect will result, and several benefits for our shareholders, including greater liquidity increased institutional and shareholders and additional sell side coverage.
I could go on and on and I'm happy to answer any questions related to the merger or the meeting and the Q&A portion of the call, but for the sake of time I'll just mention a couple of more bullets on this slide. The first is that we launched a dedicated transaction website for the merchant, which consolidates all of the information that both green line and push flow have.
Disclose as it relates to the merger. It also husbands video summarizing the benefits of the merger and a helpful section and addressing frequently asked questions.
The ones that you are out at Www Dot Green line Cuzco, together dot com and I encourage you all to check it out today.
And final thing that I wanted to call out on this slide is that we have engaged morals the dolly to help with the proxy solicitation process, but do you have any questions related to the boat or needing any assistance and voting your shares please contact them at the number and e-mail scheme here on this slide.
I. Thank you all for listening to this important announcement and I will now turn to our fiscal Q3 results beginning with slide 6.
Starting with revenue, we generated $28.3 million and fiscal Q3, which was down sequentially, but up 27% compared to the same period, a year ago and greater than the $27.5 million to $28 million range, we pre announced a few weeks ago.
With 27% year over year increase was primarily driven by an increase in sales to our existing top MSL and LTE customers as well as the fact that we secured new MSR customers over this period as we mentioned and the pre announcement 24 of our top 25 customers and fiscal Q2.2021 purchased similar products.
Again in fiscal Q3, albeit not requiring the same quantities as they had from the previous quarter. This lumpiness will continue to be part of our business given how well we've been able to align with our top operators in North America, who now drives the overwhelming majority of our sales.
But it also means that our results over single quarter are no longer a good proxy for determining the overall progress and success were experiencing with these customers. That's why our focus remains on retaining and growing these elite customers overtime and.
And that note, we're encouraged to see revenue from our top 25 customers increased more than 60% year over year and as I've said before it's not just our sales to these customers that are growing but also the quality of these customers are improving as our book continues to strengthen to include more of the room.
<unk> customers.
Moving now to gross margin on a GAAP basis, we generated 15% gross margins for the quarter, which was down sequentially, but up from the 11% regenerated and fiscal Q3.2021.
The year over year increase was due to the excess and obsolete inventory charges and prepaid inventory write offs. We recognized in Q3 of last year as part of our 2020 clients to rightsize the business and get back to positive adjusted EBITDA, which we successfully did following that quarter and Q4, 2020.1.
Looking at margins from a sequential basis, we did continue to experience.
Uncontrollable shipping delays, we and many other importers of goods have been experiencing for the past couple of quarters.
Even though the situation has improved somewhat since the end of last year, where we saw a record breaking shipments severe COVID-19 restrictions of the court and a global shortage of containers virtually all products coming from overseas continuing to experience some delays.
Fortunately it has not.
Cereal and impacted our ability to effectively serve our customers and give them the products. They need on time, but I've mentioned before we have seen the increase and freight costs and.
Absolutely create a drag on our margin.
In addition, we did experience lower direct material margins on several of our products, especially for base as we're now cycling through some of our higher price inventory.
And as we've come out with a more aggressive pricing program. This is especially true for some of our newer big MSL customers, who reversed onboard with vape, but then take time to do the necessary cross selling into higher margin offerings, such as packaging and energy as we know cross selling doesn't happen.
Overnight, but we are seeing great progress and expect this dynamic to improve in the coming quarters as we work with our customers to make sure that works.
And with cross selling them and we work with our vendors to ensure that we're getting the best price appropriate for our scale.
The good news is that while some of these headwinds are largely uncontrollable. We believe we're doing a very good job of controlling what we can control which is our costs.
So moving onto the next part of the page, you'll see our cash SG&A decreased from $7.7 million, and Q3, 2020 and $8.4 million and the prior quarter to just $7.1 million and fiscal Q3.2021, the year over year decrease was the large.
Actually due to reduced consulting expenses and reduced head count.
Even though we have been experiencing temporary headwinds on the margins front.
We are more than pleased to.
Continue operating with fiscal Prudence, and managing our costs, while setting ourselves up to grow profitably.
And lastly on the adjusted EBITDA side.
We reported a loss of $1.1 million, which represents a significant improvement from a loss of $2.7 million. We recorded in fiscal Q3 of last year. The year over year improvement was driven by higher revenue and lower cash that's cash SG&A as mentioned with that I'd like to turn to slide 7 where we break out our sales by our top 2.
25 customers versus the rest of our customer base.
Sales to these elite top 25 customers were up by more than 60% year over year and as a percentage of overall revenue grew from 57% and fiscal Q3 of last year to 72% and fiscal Q3 of this year.
We are thrilled to have cultivated such and elite customer base over the last several years.
And believe this positions crystal extremely well to recognize sustained year over year growth aligning alongside these customers as they continue to execute on their aggressive growth plans.
Next well look at slide 8 where we break out our sales by geographic market. Once again, we experienced strong growth and both our adult recreational and medical market, California experienced a nice sequential uptick and was up 22% year over year as we see that market beginning to pick up again for Krishna.
And even more impressive is the growth we're seeing out in the Midwest and East coast are sales to Michigan, Massachusetts, and Illinois, all double year over year and these markets are continuing to make up a bigger part of our overall revenue and in fact, we generated the highest level of revenue in company history and fiscal Q3 from <unk>.
Both Michigan and Massachusetts, as we continue to increase our presence and these fast growing markets by aligning with the key operators in those states.
Turning now to medical markets, we experienced strong year over year growth of 66% driven in part by substantial growth and Florida, Maryland, New Jersey, New York, Ohio, and Pennsylvania.
These markets are the next frontier and the expansion of our industry, especially in New Jersey, and New York, which have both recently legalized adult recreational use and will commence their programs later next year.
And last but not least we turned to Canada, where the COVID-19 related lockdowns there impacted our sales during fiscal Q3 and in fact, roughly half of the $4.6 million dollar sequential decline in revenue for fiscal Q3 could be tied to the pullback in Canada.
We've been seeing that a lot of the dispensaries, there havent been cycling through inventory as quickly as they thought because there hasn't been as much foot traffic due to the COVID-19 restrictions as that country fully reopened however, we.
We do expect to see a pickup.
Next I'd like to dive into slide 9 which is our revenue by product mix paper.
It was up 43% year over year to $19.1 million and sales as we continue to secure large vape orders from our new <unk> customers.
As mentioned on the last call once the anticipated Green Lane merger closes our combined company will become an even more formidable player and the beef market as we leverage not only our deep relationship with T cell and experienced and the category combined with Greenland, 15, plus years and institutional knowledge and experience.
And the consumer vape category, they're unique premium and third party brand offering and their diversified expansive customer base.
Packaging papers and supply was up 12% year over year as our customers continue to expand and both existing and new markets and as we continue to secure and complete higher value custom packaging projects.
And last I was I wanted to take a brief look at our energy and natural product bucket, which generated $1.6 million of revenue for the quarter slightly up from last quarter, but down overall from the prior year period. The year over year decline was largely due to the hand sanitizer Crazy saw and Q3 of last year as several customers.
<unk> shifted their focus to produce and sanitizers, which led to a higher level of ethanol sales and the prior year period, even though those same dynamics from last year don't exist. Today, we are still gaining traction selling ethanol to our MSR customers, which we ultimately deem more valuable where we're continuing to see.
Strong adoption as well of our stainless steel tanks for butane locking up more and more customers into supply contracts for this differentiated offering and with that I'd now like to turn the call over to Steven who will walk us through our Q3 financial summary.
Thanks, Nick I'll now turn to slide 11, which displays the snapshot of our income statement for the quarter.
Total net revenue increased 27% year over year to $28.3 million as Nick mentioned, we're continuing to experience strong growth from our <unk> and LTE customers, which is a part of our strategy to align with the industry's leading operators.
On a GAAP basis gross profit for the quarter was $4.4 million or 15% GAAP gross margins as Nick mentioned gross margins were down sequentially, primarily due to lower material margins and an increase and freight charges related to shipping delays.
We expect gross margin to have these headwinds, especially the lower material margins for a couple of quarters as we cycle through the higher priced inventory.
And on the freight side, we're evaluating some options to offset these higher charges, which along with securing more favorable pricing from our vendors should help us return to the mid Twenty's gross margin levels. We know this business can generate.
On a non-GAAP basis, excluding the impact of China trade tariffs gross profit was approximately $5 million or 20% of revenue for a complete reconciliation of GAAP to non-GAAP financial information. Please visit the reconciliation table at the end of this presentation or in our fiscal Q3 earnings release sales.
Sales general and administrative expense for fiscal Q3, 2021 was approximately $9.1 million, which was down 28% from the $12.7 million and fiscal Q3.2020.
The big drivers year over year were reduced head count bad debt expense and consulting spend expenses.
Largely as a result of the COVID-19 pandemic as well as the implementation of our 2020 plan to right size, our business and align it with the leading operators and the industry.
Cash SG&A, which excludes noncash expenses, such as bad debt stock based compensation depreciation and amortization was $7.1 million, which was down sequentially year over year from the $7.7 million and fiscal Q3.2020.
Turning now to the next item on a GAAP basis net loss for fiscal Q3, 2020, 1 was $8 million or negative <unk> <unk> per share.
And which represents an improvement of a net loss of approximately $13.5 million or negative <unk> 11 per share and Q3.2020.
The significant year over year improvement was driven by restructuring initiatives, which led to prepaid inventory write offs of $1 million as well as excess and obsolete inventory charges of $2.1 million and fiscal Q3.2020.
On a non-GAAP basis, excluding the impact of certain nonrecurring charges, our net loss for the quarter was approximately $3.2 million or negative <unk> <unk> per share compared to the net loss of $5.5 million or negative <unk> <unk> per share and fiscal Q$3.2020.
And finally, adjusted EBITDA for the quarter was negative $1.1 million compared to negative $2.7 million from Q3.2020, the year over year improvement was due to higher revenue and decreased cash SG&A as Nick touched on earlier.
As you can see on the next slide Slide 12, we believe the business is becoming a lot healthier with a stronger book of customers elevated revenue and much smaller losses as we achieve positive adjusted EBITDA and 2 of the previous 4 quarters. We're right on the cusp of achieving that feed again as we continue to grow revenue and maintain our lean <unk>.
Cost structure.
Turning now to slide 13, which provides a snapshot of our balance sheet as of the end of the fiscal Q3, our AAR for Q3 decreased sequentially year over year to $7.4 million as we continued to generate strong collections activity, especially from some of our smaller customers and fact bad debt expense was actually negative for the quarter.
As we successfully collected on several doubtful accounts.
Total and inventory increased slightly on a sequential basis to $52.4 million and fiscal Q3.2021 with.
With the increase largely driven by inventory purchases and higher freight and tariff costs and we feel really good about our inventory position, especially the quality of the customers that these products are linked to <unk>.
Cash and perfect during fiscal Q3 was down year over year as we used a significant portion of our $40 million capital raise and February to pay off our both our term debt and the balance on our line of credit.
I can say, it's a tremendous feeling they have virtually no debt on the balance sheet and a healthy amount of working capitals to support our continued growth.
With this strong balance sheet, we're excited to merge with Green Lane, who also has a solid balance sheet with no debt and enabling the combined company to start off on the right foot and being the best financial position possible and with that I'll now turn it back to Nick.
Alright, Thanks, Steven and looking ahead, we are excited to move closer towards consummating, a merger with green line and creating the industry, leading ancillary cannabis company and how is the brand.
And I mentioned and at the onset 1 of the final milestones left the shareholder approval required to approve this merger and.
We strongly encourage all shareholders to make their voices heard and to vote their shares using the proxy materials that have been provided to them.
We are thrilled by the prospect from joining forces with Green line and generating significant value for our shareholders, but as I mentioned before we can't create any of the expected value from the merger until we get the required shareholder approval. So please vote today.
And with that.
I'd like to turn it over to the operator for the Q&A session.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad and <unk>.
Formation tone will indicate your line is and the question queue. You May press star 2 if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
1 moment, please while we poll for questions.
Thank you. Our first question comes from Vivien <unk> with Cowen. Please proceed with your question.
Hi, good afternoon and.
Have you been yesterday and.
How're you doing.
So I didn't go ahead. Thank you.
My first question is on the top line and fully appreciate that there is going to be some lumpiness quarter to quarter, given the higher concentration around key customers that makes a lot of sense, but I'm just curious as you're having conversations with those top msos and L. P and like what sense, you're getting around their optimism around.
And post Covid recovery.
In terms of kind of consumer spend and the potential impact from incremental stimulus from the child tax credit that kicks in next week.
Are you sensing any change in net income from your key partners.
Yeah, Great. Great question, you know I think 1 thing as reported and no rate breaks are.
We have forecast a lot of our forecasts are coming from those customers and and so you know and since our.
And that's been up means that they were off too so.
And certainly sentiment is important but you know and reality none of us can really predict.
And exactly where those sales are going to be especially in this climate I mean look I think in general as you know the msos are expanding aggressively.
Panic, right, Andrew and organically.
So we're seeing them bullish on overall growth in terms of going a little bit more granular market by market and same store sales things like that related to tax credits.
Or are there stimulus we haven't.
And then having too many of those conversations without having to.
To be able to really comment on that but I think the general sentiment is.
The industry continues to grow these msos.
And if they're going to continue to grow long term and their existing markets and expanding into new markets and.
So really if you.
The year over year.
Do you or the limb.
It's going to be very bullish across the board and and that is consistent with what we're hearing and I don't know.
Stephen has anything additional to add to that.
Yeah, I was just kind of and maybe on the on the Canada from so you can see and our revenue breakout by location, obviously, Canada down.
Pretty substantially quarter over quarter.
And that's as a result of the Lockdowns, but the word on the street at least from our sales directors, who are talking with with the different.
Buyers of these that these firms there.
And good and they feel good that they're going to be able to you know sort of sell down the inventory between now and the end of the calendar year. So I guess the message there and there is and ended site north and the border. So that's encouraging.
No that certainly is encouraging and thank you both for that color and.
Albeit a small market just as a follow up on the revenue line on.
And from Nevada, a little bit surprised to see that now and you know again, albeit small just my my impressions from from the press is that that Nevada is 1 of the markets, where you've seen and tourism.
Kind of come back and in a pretty encouraging way and Heath.
And just sort of commentary on that market.
No specific worry I havent dug in and there are good to be able to answer that but I know, there's a couple of large msos that we're doing.
The significant amount of business with that have.
Decent presences and Nevada, I would say, we probably underperformed there in terms of aligning with with some of the other larger players that are more single state or smaller and multi state operators and so there's some opportunity for us to just aligned with what's more.
Significant clients in that market, but nothing specifically that we're concerned about with with our msos that play there.
And I think you know it could be due to some lumpiness that we saw that market.
Kind of come up come and where it did and in Q3 and I haven't looked at our Q4 numbers to date, but I would hope that we're seeing that a little bit of a recovery there for us.
Terrific. Thanks last last 1 from me and you know recognizing that that that shipping delays are completely outside of your control and and are really a global phenomenon and are far from and you need to take candidates or U S. Cannabis he didn't.
But like what kind of indicators are you watching for.
Perhaps more importantly, like what can we be looking for you know externally to get a sense that that some of that pressure might be easing.
So I mean I think.
Companies are adjusted to it and you know I think we're gonna have to figure out.
How we can offset some of the impact that we're experiencing and share that with our customers and that's already in motion.
Rolled out a new program where.
We have very tight cluster.
Customer requested time frames and and for customer needs the product.
Ahead of that schedule is going to require and air shipment, which we continue to do for vapor day, it's actually not terribly more expensive for probate just because it's a higher.
Average selling price on those products and they are smaller.
<unk> footprint in terms of dimension versus like a glass door, that's cheap and takes up a lot of strength and savvy.
It really never makes sense, they're shipped that although we've done that and the crackers and but.
With the air shipping for Vape specifically.
We're offering up but with the customers and then pay the difference right. So that's something we weren't necessarily doing where we were kind of like okay. They need.
And a month earlier, and we would sort of eat that.
And we're moving to a system, where we're not doing that now.
And you will show up in Q4, so little things like that that we can do to control what we can control.
But on the macro front when this is going to ease up.
Nothing specifically comes to mind, there would be an indicator that.
And that the street can look at to see that start to improve I don't know if Stephen has any insight there go ahead and Steven.
Yeah, and they need and we're all sort of following the headlines as it relates to the trade war and and and you know so and so the tariff impact is probably here to stay and as Nick mentioned, we have just gotten a little tighter.
With the customer requests and I'm going to try and pass through some of those costs that they needed earlier.
But I think for US you know really well.
We're paying attention to and and what we'd like to see you here and our fiscal Q4, and ultimately that that inventory ticked up it ticked up incrementally from like 50 to 52, this quarter and we'd like to see that start to come down which is usually the case and so.
And as that happens you know that that that basically means that we're sort of some of the shipping delays have kind of worked themselves out and and that business has become a little bit more predictable I mean, we've got shipments lined up we're sitting here in early July and we have visibility now kind of what's going to hit between now and call. It early September we feel pretty.
Good about that so you know it.
For us its just kind of a quarter by quarter basis, but.
And definitely something that we need to start reevaluating and and potentially passing on to customers.
Oh.
And 1 other thing and I think it's relevant.
Just just to expand on this point because it could be yes, a great question Vivian.
You know 1 of the things that were kind of wrestling with is.
And it was a large larger publicly traded company, we do things by the book.
Where we have the tariffs that have been affecting us for years.
We also have.
And the shipping headwinds.
And that are really kind of universal and then they then you also have this pact act.
Which.
We had to move everybody over to shipping on L. T O and <unk> always talked about and the last call.
Currently a lot of our competition is cutting corners right, they're underpinning on the tariffs.
And they are still using <unk>.
P S and and Fedex and USPS U S. P. S. Let me just be clear you can still ship through U S. P. S. Although that that is expected to close.
But you pay ups and Fedex you can't people are cutting corners, theyre doing it and they're getting away with it. These are smaller companies right they have less to.
And to lose they're taking the risk.
And so we look forward to a more level playing field and so we've been reluctant to.
You know pass more of this onto our customers because we know that the competition.
As you know.
And a better position not having to pay their fair share of these expenses.
And so we're wrestling with that and we're seeing actually coming down the pipe more enforcement, especially with the pack that I'm also with the customers and tariffs and we've heard we've heard whispers that theres some crackdowns coming.
And so we're expecting that that playing field to be leveled a little bit, which will give us more opportunity to get some of that margin back.
Without risk that some of these smaller private companies.
Can can cut corners, and undercut us if and when we do.
Move forward with trying to recoup some of those additional expenses. So I think that's an important dynamic to understand long term, we'd rather do things the right way.
And ultimately we think overtime.
People that are cutting corners aren't going to be able to continue.
And to build their business and this industry.
But we're dealing with it and real time, and we're making decisions.
How much do we look to recoup when we know Theres theres competition, that's getting away with stuff versus let's keep let's keep our customers happy and let's keep the competition at Bay and let's ride through this.
And you know tumultuous time with all of these regulatory changes, hoping that there will be proper enforcement.
Companies will start to comply.
And so there will eventually be a level, playing field, which will favor us.
Certainly that seems like a reasonable approach, thank you Beth and color.
Thank you Ben.
Thank you. Our next question comes from Aaron Grey with Alliance Global Partners. Please proceed with your question.
Hi, good evening and thanks for the questions.
So first 1 for me and I want to go back and pay how's it going.
Just wanted to go back in terms of the competitive environment and specifically you know the pricing I'm. Just wondering could you give some more color in terms of your new more aggressive you know pricing.
Pricing program that you've rolled out and you know whether or not you're.
And you're now kind of utilized and that more so you know and a defensive mechanism as people try to might come after your business. I know you know see subtle specifically those kind of price from our premium or if you're also kind of using it.
And a more aggressive tactic and also kind of gaining more business or just any more color you could kind of provide there because I know you had been talking about potentially rolling this out for basketball yourself. Thank you.
Yeah, Great question, Eric and we are embarking on a 3 pronged strategy too.
Yeah.
And do 2 things right and defend and protect the market that we have but also to expand and and garner additional market share. So our pricing is 1 of the prongs.
The pricing strategy.
That is underway and we see it being very effective and doing bolt broke defending and.
Expanding our business so you will see.
And some additional expansion.
Of our market share and T cells market share.
With that tactic, but it's complemented by 2 other pronged.
The second prong.
B and innovation.
We believe again, we sell the parent companies more for those who aren't familiar.
It's worth almost 40 billion.
They raised 1 billion and cash and a deal last year that are well funded they've got engineers.
Upwards of 567 hundred I don't even know the latest number and they're developing a lot of intellectual property and they are bringing next generation products to market we.
And we see that is obviously a huge barrier to the competition right. We believe that small will continue to innovate and be.
And I'm Gonna leader and vapor technology for the foreseeable future. So we feel great about being aligned with them.
And the third prong is.
It is illegal strategy.
As you know there's IP developed.
We intend and its more intense to defend that intellectual property and so using the 3 pronged strategy. We're very optimistic that we'll be able to retain the business we have.
That we have and and retained that for the foreseeable long term future, but also go out.
And take new business and hopefully knock out some of the competition that has come in and and undercut.
Pricing on products that are you know.
And our opinion.
Maybe infringing on intellectual property right. So.
We'll see how it all plays out but the 3 pronged strategy, we feel very good about and we're already underway as you know with with.
Those are initiatives are currently in the market, including the pricing.
Thanks I appreciate that that's helpful color and second question from me just looking up to Canada, and certainly appreciate you know and know how.
You had some sales kind of come down sequentially with what we have going on up there with the lockdowns are little more prolonged and here and the U S. But.
And I'm more big picture question.
I guess longer term you know couple of quarters, we had talked about the fact that there was some lps that might've been our operators are looking to kind of go for somebody and the lower pricing options in terms of.
And devices for vapor just because of the pricing pressure and the market, but the ocs came out with a report last week for Ontario that.
1 of the complaints that they are receiving about 72% were from Vapes and over 9000, just due to quality issues. So I'm just wondering if you've seen kind of going back you know as you're talking to some of these L. P and if they're now looking to maybe be willing to kind of pay a greater premium for a better product, especially on the battery or CCL side have been.
And have these issues and potentially risk you know game day, listen and whether or not those conversation and start to evolve and you've been able to essentially bring on more customers out there. Thanks.
Yeah worker and it's almost as if.
And you know what I said I forget when I said, a while ago. It is playing out right and we saw you know happened here and the U S and and now you're seeing it happen in Canada right. So.
You don't have this big boom and the market.
They've got all these these companies do.
Doing well, what can do to lower their cost and maximize their profit.
Soon as something goes wrong.
And that's when people decide hey, maybe it's not all about maximizing every dollar profit maybe I should be sure that I have a quality product that can scale with my business, that's where we saw in the U S and migration specifically for the larger msos back to the T cell platform.
And in Canada. We saw we saw the initial part happened where again everybody wants to differentiate and everybody wants to have the lowest cost and so there's a proliferation and 2 other you know and our opinion lower quality products and.
And this is 1 of the effects that now are showing up and the market and I do believe.
It is and will continue to drive more especially with the larger operators back to the T cell platform.
And I know specifically.
And we work with.
1 of the largest not the largest player.
Player and the space.
And you can see so.
Is that why they are leading the way and Canada.
And I don't know I would argue it has something to do with it.
Our people are going to take note of that are they take and noted that I would think so right. So I believe the dynamics you laid out is going to happen as you laid it out.
And it's you know.
1 of the reasons why we feel so bullish about our relationship with yourself and the future.
Warm and some of the T cell products and and all markets.
Because of the fact, they've demonstrated it can produce the highest quality products at the largest scale.
And and in the key cannabis market.
Yeah.
Okay, great. Thanks for the color and I'll jump back in the queue.
Thank you Aaron.
Thank you. Our next question comes from Scott Fortune with Roth Capital Partners. Please proceed with your question.
Good afternoon, and thanks for the question.
As far as you and the so customers, who you secured new in the tail winds from there and can you provide a little more color on winning these new Orient myself from the competition.
And and how long does it take you know well from you. In this are you onboarding debate and a low margin per se, but when does that and new and the sales really enjoy it and become a more valuable customer and initiatives the cross sell opportunity there.
Your account from that.
So longer timeframe.
Yeah.
Yeah, Great question.
Some of the customers we work with are out there publicly and but we don't.
Specifically, we love to clean their names but.
In general right, we're sort of working with a majority, but there's you know.
A few that we are doing a lot of products with and specifically as you can see and our revenue 67% of it is day. If we have that if were the main vape and provider for that and so there's.
And there's gonna be big dollars attached to it so to answer your question.
And it differs right. So 1 scenario where are we on board and I think it was actually in Q2, but.
On boarded.
1 of the top 10 and sort of revenue wise publically traded msos.
Specifically with it and we're seeing immediate significant impact right there 1 of our top.
GAAP.
5 overall customers.
We started with vape, and we're working to diversify and actually win.
The packaging business over time.
The flip side of that is well worth it we just land.
Landed a private.
And so.
And that started with with child resistant.
Boxes, and and we just expanded to providing ethanol.
These are great wins, but they're not going to show up really high on the revenue line item right. So.
And it goes both ways and it depends on how we ultimately.
Total Atlanta customer and then how we how we expand the business with that customer we're looking at you know.
Making sure that we're developing good relationships with all of the leading Msos and we're.
And we're making sure that we're providing high quality service right. So they have a great experience with Costco.
We're winning on both of those from right now when that actually translates to.
Securing a bulk of their spend and.
And and showing up big and our revenue.
That we can't control as much but if we do the first thing as well like I mentioned.
Optimally that revenue will show up we're not worried about it.
In terms of.
Ultimately recognizing the value of this strategy.
But we can't exactly predict when and of course.
All of us want it sooner rather than later and so hopefully that gives you some color.
And on how these things go.
Yeah, and Kansas segue, Thanks, Nicky and let's segue on that business opportunity and have the Msos started engaging with you more on maximizing their floor and wall regional footprint.
Whereas cuzco and the potential of Greenland coming on board here and as products as add on to you know purchases within the stores and then kind of the new initiatives.
Are you looking to potentially put in place for the business and the fall that we.
And we can look forward to.
Yeah, a great question and and and this is really you know 1 of the most exciting things about the merger with Green line and the ability to take their CPG products.
And bring curated sets hopefully right into these NSO dispensary storefronts help them maximize not only the square footage and and and the revenue and margin and those stores, but really what's most important is.
That consumer experience for those consumers and the ultimate experience, where they can come and buy their cannabis products and by the accessories needed to consume those products in 1 location right. So we're super excited about that unfortunately until the merger closes.
Not able to action on that we're planning to answer your question Scott, We're planning and we're building a robust plan. So that we can hit the ground running and effectuate those cross selling opportunities.
Greenlee and as a stand alone is not just sitting idle right, they're winning some of that business. They are slowly starting to build out what they call. Currently they are enterprise division targeting dispensaries, and primarily and micro dispensary storefronts.
A little bit of that is happening with green line as a standalone and I.
And I don't have direct insight into how much you have to ask them on their next call, but we do know that when the companies merged together that is the greatest revenue synergy opportunity and so we are doing the planning work to be able to maximize that and we are optimistic.
Some of it's going to be ultimately.
Driven by the market, we know that is the pricing of cannabis comes down and the margins come down.
Companies are going to look to offset that by offering higher margin higher priced accessories.
Of course, we don't want to wait for that so we'd like to get people ahead of the curve and then we also think that once smart retailers, our merchandising properly, they're going to actually differentiate themselves with the and consumer and if you see customers walking into someone else's dispensaries and so they have a better selection of candidates and non cannabis.
Products, then you're probably going to want to onboard those as well. So there will be some of that ripple effect and so we're excited to get this going and at scale. We believe we're set up to do it.
Really well given given green lines product set and give them push gross relationships, but we can't we can't really launched at cross selling program until the merger closes. So hopefully, we'll get the boats and and and and we can get this thing closed and you can start building that value that we think will be ultimately very accretive for all of our stakeholders.
And I appreciate the color I'll jump back and then Q. Thanks.
Thanks, Scott Great question I appreciate that.
Thank you. Our next question comes from Eric to lower here with Craig Hallum Capital Group. Please proceed with your question.
Great. Thanks for taking my question.
First 1 and just a bit of a piggy back off that last question.
As it relates to that cross selling opportunity.
And to understand and then it is early stages here I do you anticipate that and <unk>.
And that opportunity varying either by customer type.
Smaller mom and pop or larger top 25 type customers or do you see it varying by by geography at all and you've made some comments on you know sort of a correlation to the price of cannabis and Oh I'm. Just wondering if you see it or anticipating and bearing by customer type or geography.
Yeah, Yeah, great question and thanks for.
Tuna and N and asking them.
And I said, we're going to learn a lot more once we once you give them a field but.
Doing the planning work, we're doing right now and and kind of leveraging the knowledge that we have now and we were talking to customers about 3.
Theoretical.
Examples so we I think we have a decent picture and ultimately someone that's going to come down to where do we want to spend our resources.
So the dynamics are different in each market and go to market like Oregon, and yes, the pricing.
Canvas has come down and I think retailers are are are looking to offset are already offsetting that by selling and accessories.
But it is a much more mom and pop market now.
Very little if any of the Msos are set up and Oregon with vertical integration and into retail.
And vertical integration and the other thing right. If Costco is currently doing business.
With a vertically integrated operators selling products upstream well, that's a warm channel to open up the downstream retail channels to the green line products and.
Versus going and engaging with the retailer that Costco is currently doing no business with because they're not vertically integrated theres nothing to sell them upstream and now this is a brand new relationship that we have to cultivate.
To sell a product set into their retail.
Footprint. So we're just gonna be the best use of our time.
What we're thinking right now.
He's gonna be leveraging the existing msos that are vertically integrated the Costco currently have strong relationships with their and their top 25 lets just say right and having that warm.
And that warm relationship to them.
Penetrate the downstream channel and because they are and and so there's not just 1 downstream channel and retail store right. There's 40.50, and some cases upwards of 100 retail stores that we can get access to through 1 relationship. So that's going to give us the most bang for our Buck now granted.
A lot of these MSL footprint, maybe and markets, where the price of candidates.
As you know and.
And at its peak and the margins are great and I'm kind of is there maybe a little bit less incentive so theres going to be a little bit of a trade off there and that's why I think it's a great question, yes, but how we're thinking about it now as you know where are we going to get the most bang for Buck it's gonna be leveraging the best relationships, we have with the largest operators that have the most retail stores. So we're gonna start there and.
And then evaluate it as it goes and obviously, we'll be opportunistic and and some of the legacy markets too and.
And we hope over time that.
Some of that will be consolidated by Msos and that there'll be more regional msos that garner larger footprints and therefore.
Those same dynamics might be at hand for us to.
To move that strategy into legacy markets.
Okay.
And it makes sense, it's great color there. Thank you and then just last 1 from me here might be a bit of a difficult question to answer given some of the comments you had on.
And I you know some of these larger customers.
So starting out with vape, and then getting into a more cost and packaging and the like but to the extent that you can provide any color here could you give us a sense of sort of how much runway you have within.
Within your top 25 customer base.
And.
And those customers supply and packaging budgets.
Obviously, those those top 25 customers have lots of runway.
Runway ahead of them for growth, but can.
Can you give us a sense of sort of your current wallet share and where you think back and go with these customers.
Yeah, I mean look I think it's a hard question.
To answer to quantify even but we'd be moving though that you know the more.
And the opportunities that we have to take on additional lines of product ultimately be more top line, that's going to roll up into so for example, if somebody you know if you look at the top opportunities.
Opportunities from Krish go deep is going to be 1 of them the packaging, but Asia Pac and flower packaging well 8 packaging is probably going to be the biggest 1 so if we can land the eighth package and Atlanta Vape and.
Atlanta Day packaging now we've got 3.
And 3 of sort of the top 5 areas of spend.
And you know we want to complement that with the ethanol business or butane business with their concentrate jars with there are pre roll joint packs, there pre roll joint tubes.
But there are gonna be certain areas and it depends on the operator, because some folks.
Main area for them might be either flower.
Cause or flower centric brand others, it might be there because they do pay bonus.
And others that might be.
Opportunities and concentrates or pre rolled joints, because somebody papers. They can buy joint cases, so it depends on the customer the msos tend to do most of all of it right. So there's going to be kind of those.
Biggest selling skus right the bulk of their business and that's typically going to be.
And especially for Cushing, they've just because its higher average selling price.
But vape and day packaging.
A popular SKU and we know when it comes to flower.
AIDS.
No 1 graduate we're seeing people go up a little bit too there they're wanting to have.
Larger quantities available, especially for value line. So it does depend on the customer and it is hard to quantify but I always kind of say within our book and and I think it's equivalents at the top 25.
It's probably less opportunity with a third.
There's a substantial opportunity with 1.1 third.
And then there's you know and even larger opportunity with the other third probably not relevant for our top 25, but our overall and.
And that's our relationships, it's probably a third third third right, where we're doing a lot with the third.
GAAP opportunity was 1 third and then you know there's.
And so at the bottom third is relatively untapped.
Yep, Okay, Great day, and I Hope I may.
Hey, I can go ahead I'm sorry go ahead, Sue and I was I was just going to take a stab yeah. So quantifying the share of wallet I mean, we have you know 1 and 1 customer in particular that we have you know supply contracts around and you know really sticky relationship with they are not the largest cannabis company out there, but theres. Other cannabis companies that are you know of equivalents.
Size and scale and we're doing it.
It's disclosed around 5 million Bucks a quarter with right. So I mean that kind of gives you and that's that is a relationship that as Nick mentioned, we've been able to cross sell a bunch of cost and packaging and and ethanol. So you know and that's that's that's 1 customer. So the goal here is you know with with the other and myself and our book.
You know I think it is we've proven that we can sell $5 million a quarter to a single customer Theres no reason to think that we can't replicate that with other equivalently.
Equivalently sized necessities.
That's very helpful. Thanks, guys.
Thank you.
Thank you. Our next question comes from Georgia tell Vod from.
And <unk> Holdings. Please proceed with your question.
Oh, Hey, guys How's it going.
And Georgia are going great how are you.
And well thank you and my first question for you is regarding the merger and the potential opportunity with you know increased liquidity and our investor awareness with quite a green line do you think that with the current and past that you're on and how you vote, you know righted the ship as far as.
EBITDA and everything else, but you would've been able to get them and NASDAQ yourself anyways and Green line was just a way to expedite that process.
Thanks for the question, Georgia.
I don't know how much we can comment specifically because Ah and Nash.
Doug.
Our application, we haven't talked much about our application with NASDAQ and other than when we filed and so and in theory, yes.
You know.
Accelerating through the merger of Green line getting that size and scale I think also because of the delay we publicly announce reported for NASDAQ quite some time ago and we were.
Up and being able to get listed so the fact that that didn't happen sooner and we werent able to you know.
Garner the liquidity that some of the companies have that have been able to uplift and do the M&A. That's 1 of the companies have ever been able upwards and grow their revenue again merging with Greenland kind of puts us right back and that same position.
So I think it's twofold right with the speed and also the.
The size and scale that we get to overnight by effectuate and this merger.
I think there's.
You know kind of the things, we should be considering and.
And the motivation around the listing and and doing this with gold zone versus organically.
Absolutely absolutely I appreciate your answering that question My and my next question for you would be regarding the name and Greenway Holdings are you wanting to switch that at all or are you happy with the name.
Yeah look we've announced that we're gonna be keeping the name I personally like the name.
It is obviously something we've we've discussed we can still consider making a change but we like the green line name I mean more important obviously, there's the public side.
Side of things and and you know the name and the picker.
And what's really the most important thing for us and always has been a cuzco and as the brand reputation and the marketplace right. We've got a reputation.
Servicing our customers well, providing high quality products at great prices.
Chris go has and always has had and we're very grateful for that.
We want it and we want to make sure that maintains and Green line and is it similar reputation right. There was 1 of the things that and.
And our diligence we wanted to make sure that you know.
Their reputation was up there with ours and it certainly is.
And so from that standpoint.
No theres nothing theres nothing not to like about the name.
And could could we change your mind, because there could there be a scenario, where we would look at a different name and strategy yes.
But.
For now we're going forward with Green line GNL and.
And we believe that the marketplace is excited about that and we will be represented very well with the.
And the most important stakeholders, which are our customers and we also want to be cognizant of.
You know the.
The marketplace.
In terms of the listening and the shareholders and you know that.
That is somewhat of a factor too, but like I said, we haven't made any decisions to deviate from the plan.
Fair enough fair enough I know, it's a bit of a different question sorry about that my my final question for you would be regarding north Danny Moses if he's still gonna be and advisor to green Windows. So krish core right now.
Yeah.
Good good question you.
You know we are actually disbanded our advisory board.
While we went through after we went through the restructuring I'm, Okay, I'm still friends with Danny.
And still.
Complied and him and he was a mentor a great Guy and we do intend to keep close with Danny and potentially reengage them as an adviser at some point down the road.
So you.
Keeping our options open and maybe even building that back and other and.
Advisory Board.
And at some point.
It could be and the future for for Green line. So haven't haven't got that far yet, but I'm glad I'm glad you brought that up because Danny has been a great advisor and mentor for the company in years past and continues to be.
And to play a role an unofficial at this point.
That's about right.
Working with me and the company up.
The main reason why I brought it up is because of microbreweries, a cryptic tweets and the last couple of weeks regarding your company and so I was just curious on the angle there and have Danny Moses was maybe you know if you were having some conversations and the background I'm off if you're familiar with it or not but your company is blowing up all over read it.
Yeah.
Look I I am familiar with information that's been put out there I can't.
Comment or confirm you know you know how that got out there honestly don't even know right, but yep definitely interesting that the the breweries talking about it that the damage was previously a coherent with the company.
And who knows.
Europe dive and hands are regarding the moon and his other question or what.
But look we're flattered that are you know if if it is true that the brewery has taken a position of the company were flatter. We think you know this is a huge opportunity we think we're undervalued.
We think a lot of smart investors would find value and and the company right now.
Does that affect how we operate day to day no. We havent plan, we're executing toward that plan and want to deliver value to our customers, which will in turn.
Create.
For the company, which will deliver value to the shareholders, we're going to stay focused on that and.
Fun to watch but outside of that there's there's.
And there's not much that that really does for us other than a low creates and news.
Nick I appreciate you answering all the questions. You gave me a favorite man and you keep taking those half court shots and go forward Man you got this.
[laughter] based Georgia, and we got your email about us and Krish Wag and we're gonna and we're gonna get that out to you. We are we know a lot of people are asking for Christy here and as we get closer to closing the merger.
We might have some extra cushion here to go around for our shareholders. So Oh no. Please do remind me.
Right on Nick Thanks, a lot man.
Alright, Thank you take care.
Alright take care.
Yeah.
Thank you. Our next question comes from Rob Alexander Private Investor. Please proceed with your question.
Yeah.
Hey, guys, how you doing.
Hey, doing great how are you doing great.
And well real quick question here I wanted to discuss the increase and the litigation and consulting cost and I see the 2 million charge, there and you guys and the statement. This year I want to see how that value adds come back to the company and how this is kind of going to your target market and the strategic outcome with this investment.
Yeah sure. So we wanted to so Stephen here I think great question. You know this this is really tied to the merger.
So we we loved it and to lip litigation and consulting and obviously when you effectuate a merger bankers' costs legal fees due diligence costs. So you know.
That that's really driving the overall the overall weight them out of that of that bucket. So.
And you know that it is it how it's adding value. Obviously, it's you know it's unnecessary cost too to effectuate a merger.
But that's really what that is.
Perfect that was my question I appreciate it and go back and the Q I didn't really appreciate the question yeah.
Alright, thank you.
<unk>.
And does seem to have any other questions.
No there are no further material at this time.
Okay.
Great just coming up on an hour. So we'll wrap up thank you guys for tuning in a really really appreciate.
You're jumping on and asking the questions.
And and following the company and there's clearly a lot to be excited about as we check off these final boxes, leading up to the conclusion of this transformative merger with Green line.
And today, our industry as a whole is at a critical inflection point customers. All over are looking to partner with companies that can support their growth for years and decades to come we believe the combined company Costco and Green line will be well positioned to be that premier partner of choice providing both.
And enhanced product offering and ancillary services to these customers, while also driving profitable growth for our shareholders and my 10 plus years and this industry I've seen a lot and I have enjoyed my fair share of excitement, but never have I ever been more.
And about where the industry is going and more importantly, where kush quote and its shareholders are going and I am right now with this merger coming down the pipe.
We will not only bring together 2 very complementary portfolios, which sets us up nicely for the significant cross selling and we talked about earlier.
But we'll also be.
Serving now and even more elite and diverse customer base going forward spanning across the top msos and L. P and leading brands and also the majority of top smoke shops, and the U S and millions of consumers directly globally.
We hope that you guys can join us as we pioneer the next chapter and the cannabis industry and as we work to build a profitable growth engine that becomes 1 of the few ways for institutional investors to take advantage of the cannabis boom through our NASDAQ listing.
So again, thank you all for listening we hope you all take care and stay safe and I look forward to providing more updates on the merger and the coming weeks cheers.
Thank you ladies and gentlemen. This concludes today's conference call you may now disconnect.
Have a wonderful evening.