Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ No ¨

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange ~~Act).~~ Act.)

The number of ~~shares~~ outstanding ~~of each~~shares of the ~~issuer’s classes of~~Registrant’s common stock as of ~~the latest practicable date: 88,840,127 shares outstanding as of~~ July ~~5, 2019.~~

7, 2020 was 125,576,568 shares.

~~FORWARD-LOOKING STATEMENTS~~

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

~~Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:~~

	·	~~Trends affecting our financial condition, results of operations or future prospects;~~

·

~~Our business and growth strategies;~~

·

~~Our financing plans and forecasts;~~

·

~~The factors that we expect to contribute to our success and our ability to be successful in the future;~~

·

~~Our business model and strategy for realizing positive results as sales increase;~~

·

~~Competition, including our ability to respond to such competition and its expectations regarding continued competition in the market in which we compete;~~

·

~~Our ability to meet our projected operating expenditures and the costs associated with development of new projects;~~

·

~~Our ability to pay dividends or to pay any specific rate of dividends, if declared;~~

·

~~The impact of new accounting pronouncements on our financial statements;~~

·

~~That our cash flows from operating activities will be sufficient to meet our operating expenditures;~~

·

~~Our market risk exposure and efforts to minimize risk;~~

·

~~Development opportunities and our ability to successfully take advantage of such opportunities;~~

·

~~Regulations, including tax law and practice, federal and state laws governing the cannabis industry, and tariff legislation~~;

·

The outcome of various tax audits and assessments, including appeals thereof, timing of resolution of such audits, our estimates as to the amount of taxes that will ultimately be owed and the impact of these audits on our financial statements;

·

~~Our overall outlook including all statements under~~~~Management’s Discussion and Analysis of Financial Condition and Results of Operations;~~

·

~~That estimates and assumptions made in the preparation of financial statements in conformity with US GAAP may differ from actual results; and~~

·

~~Our expectations as to future financial performance, cash and expense levels and liquidity sources.~~

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, Part I, Item 1A. “Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2018 filed with the SEC on April 11, 2019, and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

KUSHCO HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MAY 31, ~~2019~~
2020

TABLE OF CONTENTS

~~Page~~

Page

~~Part~~PART I -– FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

34

Condensed Consolidated Balance Sheets as of May 31 ~~2019~~, 2020 (Unaudited) and August 31, ~~2018~~2019

34

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended May 31 , 2020 and May 3 1 , 2019 ~~and 2018~~ (Unaudited)

45

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended May 31 , 2020 and May 31 , 2019 ~~and 2018~~ (Unaudited)

56

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended May 31 , 2020 and M ay 31 , 2019 ~~and 2018~~ (Unaudited)

67

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

2628

Item 4.

Controls and Procedures

2628

Part II -– OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

2930

Item 3.

Defaults Upon Senior Securities

2930

Item 4.

Mine Safety Disclosures

Table of Contents

PART I -– FINANCIAL INFORMATION

Item 1. Financial Statements ~~(Unaudited)~~

KUSHCO HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(Amounts in thousands)

(Unaudited)


	May 31, 2020		August 31, 2019
ASSETS
Current assets:
Cash	$	11,088	$	3,944
Accounts receivable, net	11,162		25,972
Inventory, net	24,048		43,768
Prepaid expenses and other current assets	15,655		12,209
Total current assets	61,953		85,893

Goodwill	52,267		52,267
Intangible assets, net	2,393		3,103
Property and equipment, net	9,296		11,054
Other assets	9,759		6,917
Total Assets	$	135,668	$	159,234
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, net	$	5,497	$	10,907
Customer deposits	4,217		2,992
Accrued expenses and other current liabilities	10,424		6,468
Line of credit	—		12,261
Total current liabilities	20,138		32,628

Long-term liabilities:
Notes payable	24,084		18,975
Warrant liability	2,009		5,444
Other non-current liabilities	4,562		833
Total long-term liabilities	30,655		25,252
Total liabilities	50,793		57,880

Commitments and contingencies (Note 12)

Stockholders' equity
Preferred stock, $0.001 par value, 10,000 shares authorized, 0 shares issued and outstanding	—		—
Common stock, $0.001 par value, 265,000 shares authorized, 119,933 and 90,041 shares issued and outstanding, respectively	120		90
Additional paid-in capital	218,117		164,258
Accumulated deficit	(133,362)		(62,994)
Total stockholders' equity	84,875		101,354
Total liabilities and stockholders' equity	$	135,668	$	159,234

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share amounts)

May 31, August 31,
2019 2018
(Unaudited) (As Restated)
ASSETS
Current assets:
Cash $ 12,230 $ 13,467
Accounts receivable, net of allowance 14,504 8,601
Prepaid expenses and other current assets 13,019 13,623
Inventory, net 53,013 11,814
Total current assets 92,766 47,505

Goodwill 52,267 52,267
Intangible assets, net 3,340 4,488
Property and equipment, net 8,813 4,135
Other assets 3,473 250
Total Assets $ 160,659 $ 108,645

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,075 $ 2,822
Accrued expenses and other current liabilities 9,489 3,009
Contingent consideration payable 2,961 5,488
Notes payable - current portion 117 62
Line of credit 1,150 918
Total current liabilities 29,792 12,299

Long-term liabilities:
Notes payable 18,495 172
Warrant liability 8,221 14,430
Deferred rent 614 106
Total liabilities 57,122 27,007

Commitments and contingencies (Note 16)

Stockholders’ equity
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding - -
Common stock, $0.001 par value, 265,000 shares authorized, 88,840 and 78,273 shares issued and outstanding as of May 31, 2019 and August 31, 2018, respectively 89 78
Additional paid-in capital 154,898 104,918
Accumulated deficit (51,450 ) (23,358 )
Total stockholders’ equity 103,537 81,638
Total liabilities and stockholders’ equity $ 160,659 $ 108,645

~~See~~

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	May 31, 2020		May 31, 2019		May 31, 2020		May 31, 2019
Net revenue	$	22,264	$	41,486	$	87,369	$	101,982
Cost of goods sold	19,892		34,090		86,634		86,834
Gross profit	2,372		7,396		735		15,148

Operating expenses:
Selling, general and administrative	12,719		20,719		60,977		52,032
Gain on disposition of assets	—		—		—		(1,254)
Change in fair value of contingent consideration	—		2,961		—		(2,247)
Restructuring costs	952		—		8,253		—
Total operating expenses	13,671		23,680		69,230		48,531
Loss from operations	(11,299)		(16,284)		(68,495)		(33,383)

Other income (expense):
Change in fair value of warrant liability	(1,160)		6,254		3,435		7,309
Change in fair value of equity investment	(9)		(71)		(1,100)		(663)
Interest expense	(1,487)		(474)		(4,594)		(1,452)
Other income (expense), net	468		(10)		386		110
Total other income (expense)	(2,188)		5,699		(1,873)		5,304
Loss before income taxes	(13,487)		(10,585)		(70,368)		(28,079)
Income tax expense	—		(13)		—		(13)
Net loss	$	(13,487)	$	(10,598)	$	(70,368)	$	(28,092)

Net loss per share:
Basic net loss per common share	$	(0.11)	$	(0.12)	$	(0.64)	$	(0.34)
Diluted net loss per common share	$	(0.11)	$	(0.19)	$	(0.64)	$	(0.42)

Basic weighted average number of common shares outstanding	119,574		88,286		110,440		83,338
Diluted weighted average number of common shares outstanding	119,574		88,377		110,440		83,535

The accompanying notes toare an integral part of the condensed consolidated financial statements.

3

Table of Contents

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of ~~Operations~~

Stockholders’ Equity

(Amounts in thousands)

(Unaudited)


	Common Stock							Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity
		Shares Issued			Amount
Balances at August 31, 2019	90,041		$	90		$	164,258	$	(62,994)	$	101,354
Stock-based compensation	99		—			3,189		—		3,189
Stock sold to investors, net of offering costs	17,198		17			27,362		—		27,379
Stock issued for acquisitions	23		—			—		—		—
Net loss	—		—			—		(12,506)		(12,506)
Balances at November 30, 2019	107,361		$	107		$	194,809	$	(75,500)	$	119,416
Stock-based compensation	89		—			3,141		—		3,141
Issuance of restricted stocks	15		—			—		—		—
Stock sold to investors	10,000		10			14,706		—		14,716
Stock issued for equity investment	1,653		2			2,526		—		2,528
Net loss	—		—			—		(44,375)		(44,375)
Balances at February 29, 2020	119,118		$	119		$	215,182	$	(119,875)	$	95,426
Stock-based compensation	353		—			2,936		—		2,936
Issuance of restricted stocks	462		1			(1)		—		—
Net loss	—		—			—		(13,487)		(13,487)
Balances at May 31, 2020	119,933		$	120		$	218,117	$	(133,362)	$	84,875


	Common Stock							Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity
		Shares Issued			Amount
Balances at August 31, 2018	78,273		$	78		$	104,918	$	(23,358)	$	81,638
Stock option exercises	281		1			41		—		42
Stock-based compensation	5		—			2,297		—		2,297
Net loss	—		—			—		(8,579)		(8,579)
Balances at November 30, 2018	78,559		$	79		$	107,256	$	(31,937)	$	75,398
Stock option exercises	89		—			—		—		—
Stock-based compensation	125		—			3,178		—		3,178
Stock sold to investors, net of offering costs	9,077		9			41,584		—		41,593
Stock issued for acquisition of Hybrid	162		—			140		—		140
Net loss	—		—			—		(8,915)		(8,915)
Balances at February 28, 2019	88,012		$	88		$	152,158	$	(40,852)	$	111,394
Stock option exercises	—		—			—		—		—
Stock-based compensation	328		1			2,740		—		2,741
Stock issued for acquisition of Hybrid	500		—			—		—		—
Net loss	—		—			—		(10,598)		(10,598)
Balances at May 31, 2019	88,840		$	89		$	154,898	$	(51,450)	$	103,537

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)


	For the Nine Months Ended
			May 31, 2020			May 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(70,368)		$	(28,092)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,259			1,711
Amortization of debt discount	3,902			—
Provision for bad debt	10,421			2,313
Provision for sales returns	30			540
Inventory obsolescence	2,218			—
Provision for inventory reserve	14,619			2,133
Loss (gain) on disposal of assets	26			(1,254)
Gain on termination of leases	(798)			—
Impairment of assets	6,895			—
Change in fair value of equity investment	1,100			663
Stock compensation expense	11,074			8,839
Change in fair value of warrant liability	(3,435)			(7,309)
Change in fair value of contingent consideration	—			(2,247)
Changes in operating assets and liabilities:
Accounts receivable	6,854			(8,756)
Inventory	5,101			(43,446)
Prepaid expenses and other current assets	(7,854)			(1,632)
Other non-current assets	498			(706)
Accounts payable	(5,813)			13,278
Customer deposits	1,225			2,253
Accrued expenses and other current liabilities	1,600			4,232
Other non-current liabilities	(752)			—
Net cash used in operating activities	(20,198)			(57,480)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and intangibles	(4,317)			(5,420)
Net cash used in investing activities	(4,317)			(5,420)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases	(86)			(105)
Proceeds from notes payable	1,900			19,935
Proceeds from stock option exercises	—			42
Proceeds from issuance of common stock	42,095			41,593
Proceeds from line of credit	76,325			94,808
Repayments on line of credit	(88,575)			(94,610)
Net cash provided by financing activities	31,659			61,663
NET INCREASE (DECREASE) IN CASH	7,144			(1,237)
CASH AT BEGINNING OF YEAR	3,944			13,467
CASH AT END OF YEAR	$	11,088		$	12,230

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest	$	624		$	959
NON-CASH INVESTING AND FINANCING ACTIVITIES
Services prepaid for in common stock	$	646		$	1,277
Accrued and unpaid amounts for purchase of property & equipment	$	403		$	356
Stock issuance for acquisition of Hybrid	$	—		$	141
Shares issued in exchange for equity investment in Xtraction Services	$	2,528		$	—
Fair value of shares received from sale of assets	$	—		$	1,791

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of Contents

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share amounts)

~~(Unaudited)~~

For the Three Months Ended
May 31, For the Nine months Ended
May 31,
2019
2018
(As Restated)
2019
2018
(As Restated)

Net revenue $ 41,486 $ 12,905 $ 101,982 $ 32,113
Cost of goods sold 34,090 9,247 86,834 22,860
Gross profit 7,396 3,658 15,148 9,253

Operating expenses:
Selling, general and administrative 20,719 5,742 52,032 12,067
Gain on disposition of assets - - (1,254 ) -
Change in fair value of contingent consideration 2,961 7,041 (2,247 ) 18,182
Total operating expenses 23,680 12,783 48,531 30,249
Loss from operations (16,284 ) (9,125 ) (33,383 ) (20,996 )

Other income (expense):
Change in fair value of warrant liability 6,254 - 7,309 -
Change in fair value of equity investment (71 ) - (663 ) -
Interest expense (474 ) (81 ) (1,452 ) (112 )
Other income, net (10 ) - 110 -
Total other income (expense), net 5,699 (81 ) 5,304 (112 )
Loss before income taxes (10,585 ) (9,206 ) (28,079 ) (21,108 )
Income tax expense 13 - 13 66
Net loss $ (10,598 ) $ (9,206 ) $ (28,092 ) $ (21,174 )

Net loss per share:
Basic and diluted net loss per common share $ (0.12 ) $ (0.14 ) $ (0.34 ) $ (0.34 )
��
Basic and diluted weighted-average common shares outstanding 88,286 64,680 83,338 61,995

~~See accompanying notes to the condensed consolidated financial statements.~~

~~KUSHCO HOLDINGS, INC.~~

~~Condensed Consolidated Statements of Stockholders’ Equity~~

~~(Amounts in thousands)~~

~~(Unaudited)~~

Common Shares Additional
Paid-in Accumulated Total
Stockholders'
Shares Issued Amount Capital Deficit Equity
Balances at August 31, 2018 (Restated) 78,273 $ 78 $ 104,918 $ (23,358 ) $ 81,638
Stock-based compensation 828 1 8,256 - 8,257
Stock sold to investors 9,077 9 41,584 - 41,593
Stock issued for acquisitions 662 1 140 - 141
Net loss - - - (28,092 ) (28,092 )
Balances at May 31, 2019 88,840 $ 89 $ 154,898 $ (51,450 ) $ 103,537

Common Shares Additional
Paid-in Retained
Earnings
(Accumulated Total
Stockholders'
Shares Issued Amount Capital Deficit) Equity
Balances at August 31, 2017 (Restated) 58,607 $ 59 $ 29,677 $ 979 $ 30,715
Stock-based compensation 1,265 1 3,570 - 3,571
Stock sold to investors 5,877 6 16,429 - 16,435
Stock issued for acquisitions 640 1 33,372 - 33,373
Net loss - - - (21,174 ) (21,174 )
Balances at May 31, 2018 (Restated) 66,389 $ 67 $ 83,048 $ (20,195 ) $ 62,920

~~See accompanying notes to the condensed consolidated financial statements.~~

5

(Unaudited)

~~KUSHCO HOLDINGS, INC.~~
~~Condensed Consolidated Statements of Cash Flows~~
~~(Amounts in thousands)~~

~~(Unaudited)~~

For the Nine Months Ended May 31,
2019
2018
(As Restated)

Cash flows from operating activities
Net loss $ (28,092 ) $ (21,174 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,711 792
Gain on disposition of assets (1,254 ) -
Change in fair value of equity investment 663 -
Stock-based compensation 8,839 1,905
Change in fair value of warrant liability (7,309 ) -
Provision for deferred taxes - (273 )
Change in fair value of contingent consideration (2,247 ) 18,182
Changes in operating assets and liabilities:
Accounts receivable (5,903 ) (4,119 )
Prepaids (1,632 ) (3,715 )
Inventory (41,313 ) (6,068 )
Other assets (706 ) (571 )
Accounts payable 13,278 1,371
Accrued expenses and other current liabilities 6,485 869
Net cash used in operating activities (57,480 ) (12,801 )

Cash flows from investing activities
Purchase of property, equipment and intangibles (5,420 ) (997 )
Acquisition of Summit, net of cash received - (945 )
Net cash used in investing activities (5,420 ) (1,942 )

Cash flows from financing activities
Repayment of capital leases (105 ) (248 )
Proceeds from (repayment of) notes payable 19,935 (583 )
Proceeds from stock option exercises 42 246
Proceeds from sale of stock, net of costs 41,593 16,435
Proceeds from line of credit 94,808 2,434
Repayments on line of credit (94,610 ) -
Repayment of Summit loans - (712 )
Payments for contingent consideration - (170 )
Net cash provided by financing activities 61,663 17,402

Net (decrease) increase in cash (1,237 ) 2,659
Cash at beginning of period 13,467 917
Cash at end of period $ 12,230 $ 3,576

~~See accompanying notes to the condensed consolidated financial statements.~~

~~KUSHCO HOLDINGS, INC.~~

~~Condensed Consolidated Statements of Cash Flows~~

~~(Amounts in thousands)~~

~~(Unaudited)~~

Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 959 $ 74
Income taxes $ - $ 330
Non-cash investing and financing activities
Services prepaid for in common stock $ 1,277 $ 1,421
Purchase of equity investment $ 1,791 $ -
Stock issued for acquisition of Hybrid $ 141 $ -
Purchase of property and equipment $ 356 $ 204
Reclass Summit tax payable from loan payable short term $ - $ 274

~~See accompanying notes to the condensed consolidated financial statements.~~

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

NOTE 1 - ~~NATURE OF BUSINESS AND~~ SIGNIFICANT ACCOUNTING POLICIES

~~Nature of Business~~

KushCo Holdings, Inc. (“the Company”) was incorporated in the state of Nevada on February 26, 2014. The Company specializes in marketing and selling packaging products, vaporizers, hydrocarbon gases, solvents, accessories and branding solutions to customers operating in the regulated medical and recreational cannabis industries. The Company provides custom branding on packaging products, and its testing standards meet the requirements set by the Consumer Product Safety Commission. The Company’s packaging products primarily consists of bottles, bags, tubes and containers. The Company maintains relationships with a broad range of manufacturers and also has sophisticated in-house labeling and customization capabilities. The Company sells a wide selection of vaporizer cartridges with a variety of core materials and heating technologies, as well as a wide selection of batteries to match the cartridges. The Company provides ultra-pure hydrocarbon gases, including isobutene, n-butane, propane, ethanol, pre-mixes, custom blends and other solvents, which are essential in the extraction process. The Company’s wholly-owned subsidiary, The Hybrid Creative, LLC, is a full-service creative agency that serves both cannabis and non-cannabis clients across the U.S., Canada and Europe.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the activity of ~~the Company~~KushCo Holdings, Inc. (the “Company”) and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles ~~generally accepted in the United States ("U.S. GAAP"~~(“GAAP”) for interim financial information pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all of the information and notes required by ~~generally accepted accounting principles~~GAAP for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the condensed consolidated financial statements for the interim periods presented herein, but are not necessarily indicative of operating results to be achieved for full fiscal years or other interim periods. The condensed consolidated balance sheet as of August 31, ~~2018~~2019 was derived from the audited financial statements as of that date ~~as restated,~~ but does not include all disclosures as required by GAAP. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended August 31, ~~2018, as restated,~~2019 and notes thereto included in the Company’s Annual Report on Form ~~10-K/A~~10-K for the fiscal year then ended and filed with the SEC on ~~April 11,~~November 12, 2019.

References to amounts in these notes to condensed consolidated financial statements are in thousands, except per share ~~data,~~amounts, unless otherwise specified.

Use of Estimates

The preparation of financial statements in conformity with ~~U.S.~~ GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period.

Significant estimates relied upon in preparing these condensed consolidated financial statements include revenue recognition, accounts receivable reserves, inventory and related reserves, ~~valuations and purchase price allocations related to business combinations,~~ expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, stock-based compensation expenses, and recoverability of the Company’s net deferred tax assets and any related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

The Company is subject to a number of risks similar to those of other companies of similar size and having a focus of serving the cannabis industry, including, the development stage of certain products, competition, limited number of suppliers, integration of acquisitions, substantial indebtedness, government regulations, protection of proprietary rights, and dependence on key individuals.

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

~~Reclassifications~~

Certain classifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation. The reclassifications had no impact on previously reported net loss or retained earnings (accumulated deficit).

Accounts Receivable

Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term ~~basis,~~basis; thus, trade receivables do not bear interest. Trade accounts receivables are periodically evaluated for collectability based on the customer's past credit history and ~~their~~ current financial condition. The Company’s net accounts receivable balance was $11,162 and $25,972 as of May 31, 2020 and August 31, 2019, respectively. The Company’s allowance for doubtful accounts was ~~$578~~$3,660 and ~~$1,000~~$1,058 as of May 31, ~~2019~~2020 and August 31, ~~2018,~~2019, respectively.

The increase in allowance for doubtful accounts was driven primarily by the deteriorating credit conditions in California exhibited by the Company’s customers in this market, which have significantly impacted the Company’s ability to collect, in part or in full, amounts owed by these customers. The Company’s sales return reserve was $506 and $477 as of May 31, 2020 and August 31, 2019, respectively, and is included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheet.

Inventory

Inventories are stated at the lower of cost or net realizable value using the ~~first-in first out (FIFO)~~average cost method. The Company’s inventory consists of finished goods of ~~$53,013~~$24,048 and ~~$11,814~~$43,768 as of May 31, ~~2019~~2020 and August 31, ~~2018,~~2019, respectively. The Company also makes prepayments against the future delivery of inventory classified as prepaid inventory. The Company’s prepaid inventory

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was ~~$10,266~~$8,429 and ~~$11,019~~$7,134 as of May 31, ~~2019~~2020 and August 31, ~~2018,~~2019, respectively.

The Company regularly reviews inventory and, when appropriate, records a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life. As of May 31, 2020, the Company had $11,285 of inventory reserve. As of August 31, 2019, the Company had $2,640 of inventory reserve.

Equity Investment

On January 30, 2020, the Company partnered with Xtraction Services Holding Corp (“Xtraction Services”), a provider of equipment leasing solutions to owners and operators of cannabis and hemp companies in the United States in order to provide such solutions to the Company’s network of regulated cannabis and cannabidiol (“CBD”) operators. The Company’s Chief Financial Officer, Stephen Christoffersen, has served on the board of directors for Xtraction Services since May 2019. Under the terms of its agreement with Xtraction Services, upon the closing of the transaction, the Company issued 1,653 of its common shares in exchange for 10,600 proportionate voting shares (the “XS Shares”) of Xtraction Services, the equivalent of 19.9% of Xtraction Services' market capitalization on the closing date. On January 30, 2020, the value of the Company's shares issued in exchange for the equity investment in Xtraction Services was $2,528. The Company’s investment in Xtraction Services is included in “Other assets” on the Company’s condensed consolidated balance sheet.

Net Loss Per Share

The Company computes earnings per share under Accounting Standards Codification ~~subtopic 260-10, "Earnings~~(“ASC”) Topic 260, Earnings per ~~Share"~~Share (“ASC ~~260-10”~~260”). Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net ~~income (loss)~~loss per share is computed ~~using~~by dividing net loss by the ~~weighted-average~~sum of (a) the weighted average number of shares of common ~~shares and common shares equivalents~~stock outstanding during the period and (b) the potentially dilutive securities outstanding during the period. Stock options are potentially dilutive securities; and the number of dilutive options is computed using the treasury stock method.

For the three and nine months ended May 31, 2020, basic and diluted weighted average shares are the same, as the Company generated a net loss for the period. The computation for the three and nine months ended May 31, 2020 does not include 11,368 options and 21,737 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.

For the three and nine months ended May 31, 2019, net loss is adjusted for changes in fair value of warrants recorded as a liability (see Note 9 below) and weighted average diluted shares includes dilutive warrants. The computation of diluted net loss per share for the three and nine months ended May 31, 2019 does not include 12,662 options and 6,988 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.

Revenue Recognition

The Company markets and sells ~~packaging~~a wide variety of ancillary products ~~vaporizers, hydrocarbon gases, solvents, accessories~~ and ~~branding solutions~~services to customers operating in the regulated medical and recreational cannabis and CBD industries.

~~The Company expenses fulfillment costs as incurred because the amortization period would be less than one year in accordance with the ASC 606 practical expedient.~~

These complementary products and services include compliant and custom packaging products; vape hardware; hydrocarbons and solvents; natural products; stainless steel tanks; custom branded anti-counterfeit and authentication labels; hemp trading services; and retail services focused on CBD mass distribution, industry education and compliance.

In accordance with ASC 606,Revenue from Contracts with Customers, the Company applies the following steps to recognize revenue for the sale of products that reflects the consideration to which the Company expects to be entitled to receive in exchange for the promised goods:

1.

•Identify the ~~contract with a customer~~

A contract with a ~~customer exists~~customer.

•Identify the performance obligations in the contract.

•Determine the transaction price.

•Allocate the transaction price to the performance obligations in the contract.

•Recognize revenue when the Company ~~enters into an enforceable contract with~~satisfies a customer. The contract is based on either the acceptance of standard terms, or the execution of terms and conditions contracts. These contracts define each party's rights, payment terms and other contractual terms and conditions of the sale. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

2.

~~Identify the performance obligations in the contract~~

Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. The Company has concluded the sale of finished goods and related shipping and handling are accounted for as a single performance obligation.

Advertising

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~
~~(Unaudited)~~

3.

~~Determine the transaction price~~

The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. The Company estimates the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors.

Discounts provided to customers are accounted for as an element of the transaction price and as a reduction to revenue. Discounts were $5 and $140 for the three months ended May 31, 2019 and 2018, respectively, and $625 and $257 for the nine months ended May 31, 2019 and 2018, respectively.

~~Revenue is presented net of taxes collected from customers and remitted to governmental authorities.~~

4.

~~Allocate the transaction price to the performance obligations in the contract~~

~~The Company’s products are sold at their standalone selling price.~~

5.

~~Recognize revenue when the Company satisfies a performance obligation~~

Revenue is recognized when control of the finished goods is transferred to the customer. Control of the finished goods is transferred at a point in time, upon delivery to the customer. The period of time between the satisfaction of the performance obligation and when payment is due from the customer is not significant.

~~In the following table, product sales are disaggregated as follows for the three and nine months ended May 31, 2018 and 2019:~~

Three Months Ended May 31, Nine months Ended May 31,
2019 2018 2019 2018
Manufacturing $ 40,956 $ 12,894 $ 100,992 $ 32,086
Services 530 11 990 27
Total Net Revenue $ 41,486 $ 12,905 $ 101,982 $ 32,113

~~Advertising~~

The Company conducts advertising for the promotion of its products and services. In accordance with ASC subtopic 720-35-25 (“ASC 720”), advertising costs are charged to expense when incurred. Advertising costs were ~~$207~~$21 and ~~$225~~$207 for the three

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months ended May 31, ~~2019~~2020 and ~~2018,~~May 31, 2019, respectively. Advertising costs were ~~$877~~$199 and ~~$385~~$877 for the nine months ended May 31, 2020 and May 31, 2019, ~~and 2018,~~ respectively.

Recently Issued Accounting Pronouncements

~~Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.~~

In August 2018, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~No.~~ 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which ~~makes a number~~will improve the effectiveness of ~~changes meant to add, modify or remove~~disclosure requirements for recurring and nonrecurring fair value measurements. The ASU removes, modifies, and adds certain disclosure requirements ~~associated with~~and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the ~~movement amongst or hierarchy associated with Level 1, Level 2~~potential impact of adoption of this standard on its consolidated financial statements.

In December 2019, the FASB Issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and ~~Level 3 fair value measurements.~~also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, ~~2019. Early~~2020, with early adoption ~~is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.~~

~~Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.~~ In January 2017, the FASB issued ASU 2017-04, which provides guidance regarding the goodwill impairment testing process. The new standard eliminates Step 2 of the goodwill impairment test. If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is greater than the fair value, an impairment for that difference must be recorded in the income statement, rather than proceeding to Step 2. The new standard is effective for financial statements for annual periods beginning after December 15, 2019. Early adoption is permitted. ~~Based on the Company’s most recent annual goodwill impairment test completed in fiscal 2018, the Company expects no initial impact on adoption.~~

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.~~ In June 2016, the FASB issued ASU 2016-13, which provides guidance on accounting for credit losses, including trade receivables. The guidance requires the application of a current expected credit loss model, which measure credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual periods beginning after December 15, 2019. The guidance requires companies to apply the requirements using a modified retrospective approach. The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.

In January 2020, the FASB issued ASU 2020-1, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-1made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is evaluating the potential impact of ~~the~~ adoption of this standard on ~~our~~its consolidated financial ~~statements and required disclosures.~~

~~Leases (“ASC 842”)~~. In February 2016, the FASB issued ASU No. 2016-02, which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASC 842, which will increase the total assets and the total liabilities that the Company will report relative to such amounts prior to adoption. The Company does not expect the adoption of this ASU to have a material impact on the Company’s statement of operations.

statements.

Other ~~Accounting~~accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

~~NOTE 2 - RESTATEMENT~~

~~In connection with~~

Update on COVID-19

On March 11, 2020, the ~~preparation of~~World Health Organization ("WHO") recognized COVID-19 as a global pandemic, prompting many national, regional, and local governments, including in the ~~Company’s condensed consolidated interim financial statements as of and for the fiscal quarter ended February 28, 2019,~~markets that the Company ~~identified inadvertent errors~~operates in, ~~the accounting for certain shared-settled contingent consideration obligations relating~~ to ~~the Company’s acquisition of CMP Wellness in May 2017, Summit Innovations in May 2018,~~implement preventative or protective measures, such as travel and Hybrid Creative in July 2018. In connection with those acquisitions, contingent equity consideration relating to certain earn-out arrangements were accounted for as equity. Upon further evaluation, the Company determined that the share-settled contingent consideration should have been accounted for as liabilities with fair value changes recorded in the Company’s consolidated statements of operations.

Accordingly, on April 11, 2019, the Company filed Amendment No. 1 to its Annual Report on Form 10-K/A (the “Amended 10-K”), which restated the Company’s previously issued audited consolidated financial statements as ofbusiness restrictions, temporary store closures, and ~~for the fiscal years ended August 31, 2018~~wide-sweeping quarantines and ~~2017 and unaudited condensed consolidated interim financial statements as of and for the fiscal periods ended May 31, 2017, November 30, 2017, February 28, 2018, May 31, 2018 and November 30, 2018.~~

Tables summarizing the effects of the restatement adjustments to the Company’s condensed consolidated balance sheet as of August 31, 2018 and condensed consolidated statements of operations as of and for the three and nine months ended May 31, 2018 were presented in Note 2, “Restatement” and Note 18, “Quarterly Information (Unaudited)” to the consolidated financial statements in the Amended 10-K.

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

~~NOTE 3 - ACQUISITION OF SUMMIT INNOVATIONS, LLC~~

On May 2, 2018, the Company completed its acquisition of Summit Innovations, LLC (“Summit”), a leading distributor of hydrocarbon gases to the legal cannabis industry. Pursuant to the terms of the merger agreement with Summit, Summit merged with and into KCH Energy, LLC, a wholly-owned subsidiary of the Company.

~~The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805,~~ ~~Business Combinations~~. Total fixed purchase consideration at closing consisted of 1,280 shares of common stock and cash consideration of $905, net of cash received. Cash consideration of $188 and approximately 640 shares of common stock were held back by the Company for a period of 15 months for potential post-closing working capital and/or indemnification claims relating to, among other things, breaches of representations, warranties and covenants contained in the merger agreement. The former members of Summit were entitled to receive earn-out consideration of up to an additional 1,280 shares of the Company’s common stock, in the aggregate, based on the net revenue performance of the Summit business during a one-year period following the closing. As of May 31, 2019, the Company determined that the fair value of the contingent consideration was equal to $2,961.stay-at-home orders. As a result, COVID-19 has significantly curtailed global economic activity, including in the regulated cannabis and CBD industries in which the Company ~~will issue 707 common shares to the former members of Summit related to the earn-out consideration.~~

~~NOTE 4 - ACQUISITION OF THE HYBRID CREATIVE, LLC~~

~~On July 11, 2018,~~ operates.

Whilethe Company ~~completed its acquisition of Zack Darling Creative Associates (“ZDCA”),~~is actively working to successfully navigate the financial, operational, and ~~its wholly-owned subsidiary The Hybrid Creative, LLC (“Hybrid”), which together operated as a specialist design agency. Pursuant to~~personnel challenges presented by the ~~terms~~COVID-19 pandemic, the full extent of the ~~purchase agreement with~~impact of COVID-19 on our operational and financial performance will depend on future developments, including the ~~members of ZDCA, the Company purchased the entire issued member interest of ZDCA. Following the acquisition, ZDCA operates as a wholly-owned subsidiary~~duration and spread of the ~~Company, with Hybrid continuing~~pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to ~~operate as wholly-owned subsidiary~~prevent disease spread, all of ~~ZDCA.~~

~~The acquisition was accounted for using the acquisition method~~which are uncertain, out of ~~accounting in accordance with ASC 805,~~~~Business Combinations~~~~. Total fixed consideration paid to the members of Hybrid~~our control and cannot be predicted at the closing included cash consideration consisting of an aggregate of $847 in cash, net of cash received, $82 in cash held back and share consideration consisting of an aggregate of 360 shares of the Company’s common stock. The former members of ZDCA may become entitled to receive cash contingent consideration of up to $485 and up to 213 common shares of equity consideration, based on the net revenue performance of Hybrid during the period September 1, 2018 through August 31, 2019. As of May 31, 2019, the Company determined that it did not appear likely that ZDCA would meet the minimum earnout target threshold. Accordingly, the Company estimated the fair value of the related contingent consideration to be zero.

this time.

NOTE 52 - CONCENTRATIONS OF RISK

Supplier Concentrations

The Company purchases inventory from various suppliers and manufacturers. For the nine months ended May 31, 2020 and May 31, 2019, ~~one~~the Company had 1 vendor which accounted for approximately 33% and 42%, respectively, of total inventory purchases. As of May 31, 2020, there were 2 vendors in the aggregate that represented approximately 23% of accounts payable. As of May 31, 2019, there were 2 vendors that represented approximately 42% of accounts payable.

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Customer Concentrations

During the nine months ended May 31, 2020, 0 customer represented over 10% of the Company’s revenue. For the nine months ended May 31, ~~2018, two vendors, accounted for~~2019, the Company had 1 customer that represented approximately ~~14% of total inventory purchases.~~

~~Customer Concentrations~~

~~During the nine months ended May 31, 2019, there was one customer which represented over 10% of the Company’s revenues. During the nine months ended May 31, 2018, no customer represented over~~ 10% of the Company’s revenues. As of May 31, ~~2019,~~2020, there ~~was one customer who~~were 2 customers in aggregate, that represented ~~24%~~approximately 47% of accounts receivable. As of May 31, ~~2018,~~2019, there ~~were no customers who~~was 1 customer that represented ~~more than 10%~~24% of accounts receivable.

NOTE ~~6 - SALE OF RUB~~

On September 21, 2018, Smoke Cartel, Inc. (“Smoke Cartel”) and the Company entered into an agreement to sell a web domain and inventory related to the Company’s Roll-uh-Bowl (“RUB”) product line. 3 – RELATED-PARTY TRANSACTIONS

The Company ~~received 1,410 shares of Smoke Cartel common stock~~sells certain products and supplies to 2 related parties. Sales recognized during the three months ended May 31, 2020 and May 31, 2019 from the related parties totaled $113 and $40, respectively. Sales recognized during the nine months ended May 31, 2020 and May 31, 2019 from the related parties totaled $1,299 and $99, respectively. Total accounts receivable from related parties was $755 and $465 as ~~part of the consideration for this transaction. The fair value of its equity investment as of September 21, 2018 was based upon the closing stock price of Smoke Cartel.~~

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

~~The following sets forth the calculation of the gain on disposition of assets upon completion of the sale:~~

Fair value of Smoke Cartel as of September 21, 2018 $ 1,790
RUB web domain and inventory sold (536 )
Gain on disposition of assets $ 1,254

~~The sale of the RUB assets did not qualify as a discontinued operation as the sale is not a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.~~

As of May 31, 2020 and August 31, 2019, respectively. Further, the ~~1,410 shares~~Company rents certain warehouse equipment from a related party. NaN rental payments were made from the related party during the three months ended May 31, 2020. During the three months ended May 31, 2019, total rental payments of ~~Smoke Cartel~~$112 were ~~valued at $1,128~~made from the related party. During the nine months ended May 31, 2020 and ~~is recorded in Other assets on~~May 31, 2019, total rental payments of $231 and $210, respectively, were made to the ~~Company’s unaudited condensed consolidated balance sheet.~~

related party.

NOTE 74 - PROPERTY AND EQUIPMENT

The major classes of fixed assets consist of the ~~following as of May 31, 2019 and August 31, 2018:~~

May 31, August 31,
2019 2018
Machinery and equipment $ 3,897 $ 2,938
Vehicles 677 381
Office Equipment 2,811 385
Leasehold improvements 1,889 1,319
Construction in Progress 1,392 -
10,666 5,023
Accumulated Depreciation (1,853 ) (888 )
$ 8,813 $ 4,135

~~Of the $677 of vehicles as of May 31, 2019, $240 consisted of capital leased assets.~~

following:


	May 31, 2020		August 31, 2019
Machinery and equipment	$	6,116	$	4,430
Vehicles	540		603
Office Equipment	3,395		3,232
Leasehold improvements	1,963		3,296
Construction in progress	661		1,930
	12,675		13,491
Accumulated Depreciation	(3,379)		(2,437)
	$	9,296	$	11,054

Depreciation ~~and amortization~~ expense was ~~$397~~$990 and ~~$113,~~$397 for the three months ended May 31, ~~2019~~2020 and ~~2018, respectively. Of the $397 of depreciation and amortization expense related to property and equipment for the three months ended~~ May 31, 2019, $266 is included in selling, general and administrative expense and $131 is included in cost of goods sold in the condensed consolidated statements of operations. Of the $113 of depreciation and amortization expense for the three months ended May 31, 2018, $71 is included in selling, general and administrative expense and $42 is included in cost of goods sold in the condensed consolidated statements of operations.

respectively. Depreciation ~~and amortization~~ expense was ~~$965~~$2,549 and ~~$228,~~$965 for the nine months ended May 31, ~~2019~~2020 and ~~2018, respectively. Of the $965 of depreciation and amortization expense related to property and equipment for the nine months ended~~ May 31, 2019, $623 is included in selling, general and administrative expense and $342 is included in cost of goods sold in the condensed consolidated statements of operations. Of the $228 of depreciation and amortization expense for the nine months ended May 31, 2018, $103 is included in selling, general and administrative expense and $125 is included in cost of goods sold in the condensed consolidated statements of operations.

respectively.

NOTE ~~8 -~~5 – INTANGIBLE ASSETS

Intangible assets consist of the ~~following as of May 31, 2019 and August 31, 2018:~~

Weighted
Average As of May 31, 2019 As of August 31, 2018
Estimated Gross Gross
Useful Carrying Accumulated Net Carrying Accumulated Net
Description Life Value Amortization Amount Value Amortization Amount
Domain name 5 years $ - $ - $ - $ 599 $ (166 ) $ 433
Trade name 6 years 2,600 (903 ) 1,697 2,600 (578 ) 2,022
Non-compete agreement 4 years 2,370 (727 ) 1,643 2,370 (337 ) 2,033
$ 4,970 $ (1,630 ) $ 3,340 $ 5,569 $ (1,081 ) $ 4,488
following:


		As of May 31, 2020										As of August 31, 2019
Description	Weighted Average Estimated Useful Life	Gross Carrying Value		Accumulated Amortization		Net Amount		Gross Carrying Value		Accumulated Amortization		Net Amount
Trade name	6 years	2,600		(1,336)		1,264		2,600		(1,011)		1,589
Non-compete agreement	4 years	2,370		(1,241)		1,129		2,370		(856)		1,514
		$	4,970	$	(2,577)	$	2,393	$	4,970	$	(1,867)	$	3,103

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

Amortization expense was $237 ~~and $188~~ for the three months ended May 31, 2020 and 2019. Amortization expense was $710 and $746 ~~and $564,~~ for the nine months ended May 31, 2020 and May 31, 2019, ~~and 2018,~~ respectively.

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The following table ~~shows~~summarizes the remaining estimated amortization ~~expense associated with finite lived~~of definite-lived intangible assets as of May 31, ~~2019:~~

Intangible Assets
2019 $ 237
2020 947
2021 881
2022 747
2023 528
$ 3,340
2020:


For the year ended August 31,
2020 (remaining three months)	$	237
2021	881
2022	747
2023	528
	$	2,393

NOTE ~~9 -~~6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the ~~following~~following:


	May 31, 2020		August 31, 2019
Accrued compensation	2,532		3,485
Sales tax payable	745		1,047
Lease liability	1,605		—
Other accrued expenses	5,542		1,936
	$	10,424	$	6,468

NOTE 7 – LEASES

The Company adopted ASC 842 “Leases” (“ASC 842”) effective September 1, 2019 utilizing the modified retrospective approach for adoption for all leases that existed at or are commenced after the date of initial application with an option to use certain practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together, and (iv) the short-term lease for leases with a term of 12 months or less.

The adoption of ASC 842 had a material impact on the condensed consolidated balance sheet due to the recognition of Right of Use (“ROU”) assets and lease liabilities. The adoption of this ASC did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a material cumulative effect adjustment to the opening balance sheet retained earnings on September 1, 2019. Because the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company recognized operating lease ROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 10.7%, which reflects the interest rate the Company would pay to borrow funds over a similar term and in a similar economic environment, was used to determine the present value of lease payments. Based on the impact of ASC 842 on the lease population, the Company recorded $7.6 million in lease liabilities and $6.8 million for ROU assets based upon the lease liabilities adjusted for deferred rent. ROU assets are included in “Other assets” and lease liabilities are included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” on the Company’s condensed consolidated balance sheet.

The Company determines if an arrangement is a lease at inception. The Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2026. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. The ROU asset also includes any fixed lease payments, including in-substance fixed lease payments and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease term is determined at lease commencement and includes any non-cancellable period for which the Company has the right to use the underlying asset, together with any options to extend that the Company is reasonably certain to exercise.

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Lease Liabilities

Lease liabilities as of May 31, 2020 consist of the following:


Current portion of lease liabilities	$	1,605
Long term lease liabilities, net of current portion	4,562
Total lease liabilities	$	6,167

Aggregate lease maturities as of May 31, 2020 are as follows:


Year ended August 31,
2020 (remaining three months)	$	647
2021	2,054
2022	1,968
2023	1,362
2024	764
Thereafter	579
Total minimum lease payments	7,374
Less imputed interest	(1,207)
Total lease liabilities	$	6,167

Rent expense was $590 and $2,279, respectively, for the three and nine months ended May 31, 2020. At May 31, 2020, the leases had a weighted average remaining lease term of 3.7 years and a weighted average discount rate of 8.5%. Rent expense for the three and nine months ended May 31, 2019 was $720 and ~~August 31, 2018:~~

May 31, August 31,
2019 2018
Customer deposits $ 3,022 $ 769
Accrued compensation 3,328 993
Sales tax payable 833 432
Other accrued expenses 2,306 815
$ 9,489 $ 3,009

$2,226, respectively, under ASC 840, the predecessor to ASC 842.

NOTE 108 – DEBT

~~Line of~~

Monroe Revolving Credit

Facility

On ~~November 16, 2017,~~August 21, 2019, the Company and its ~~wholly-owned subsidiary KIM International Corporation (“KIM”) as borrowers, and all of~~subsidiaries (collectively, the ~~Company’s other subsidiaries, as credit parties,~~“Borrowers”) entered into a ~~Loan and Security Agreement (the “Loan Agreement”) with Gerber Finance Inc., as lender (“Gerber”), effective as of November 6, 2017. The Loan Agreement originally provided a~~ secured asset based revolving credit facility (the ~~“Revolving Line”~~“Monroe Revolving Credit Facility”) in, with an aggregate ~~principal~~ amount ~~of up~~not to ~~$2.0~~exceed $35.0 million outstanding at any time, ~~outstanding. Under~~with Monroe Capital Management Advisors, LLC (“Monroe”), as collateral agent and administrative agent, and the ~~original terms~~various lenders party thereto. The Monroe Revolving Credit Facility also includes an accordion feature that permits the Company to increase the available revolving commitments under the Monroe Revolving Credit Facility by up to an additional $15.0 million, subject to satisfaction of certain conditions. The Monroe Revolving Credit Facility has a 5-year term which matures on August 21, 2024 and is secured by a first priority lien on substantially all of the ~~Loan Agreement,~~assets of the ~~principal~~Borrowers.

The Monroe Revolving Credit Facility contains customary representations and warranties, affirmative and negative covenants, including a financial covenant requiring certain minimum availability, and events of default. As of May 31, 2020, there was 0 balance outstanding under the facility. As of August 31, 2019, the outstanding balance under the facility was $12.3 million.

The Company incurred closing costs associated with the Monroe Revolving Credit Facility in the amount of ~~loans, plus~~$2,602, which were deferred and amortized over the ~~face amount of any outstanding letters of credit, at any time outstanding could not exceed up to 85%~~5-year term of the ~~Company’s eligible receivables minus reserves. Under~~Monroe Revolving Credit Facility on a straight-line basis. As of May 31, 2020, unamortized debt issuance costs of $2,194 are included in “Other assets.” Interest expense and amortization of debt discount, associated with the ~~terms~~Monroe Revolving Credit Facility during the three months ended May 31, 2020 amounted to $73 and $154, respectively. Interest expense and amortization of debt discount, associated with the ~~Loan Agreement,~~Monroe Revolving Credit Facility during the nine months ended May 31, 2020 amounted to $528 and $461, respectively.

Monroe Warrants

On August 21, 2019, the Company may also request letters of credit from Gerber. The proceeds of the loans under the Loan Agreement will be used for working capital and general corporate purposes. The Revolving Line has a maturity date of November 6, 2019. Borrowings under the Revolving Line accrues interest at a rate based on the prime rate as customarily defined, plus a margin of 3.0%. On March 8, 2018, the Company and KIM entered into a ~~first amendment~~subscription agreement with Monroe, pursuant to the Loan Agreement with Gerber. Pursuant to the first amendment, the aggregate principal amount of the Revolving Line at any time outstanding was increased to $4.0 million and the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time outstanding could not exceed the lesser of (i) 40% of the value of certain inventory and (ii) 50% of certain accounts receivable.

~~On November 9, 2018,~~which the Company issued to Monroe a warrant to purchase up to 500 shares of its common stock (the “Monroe Warrant”) at an exercise price of $4.25 per share. The Monroe Warrant has a 5-year term and ~~KIM entered into a second amendment to~~as such will expire on August 21, 2024. Amortization expense for the ~~Loan Agreement with Gerber. Pursuant to the second amendment, the aggregate principal amount~~three and nine months ended May 31, 2020 was $50 and $148, respectively.

Table of the Revolving Line at any time outstanding was increased to $8.0 million. Additionally, subject to certain exceptions, the face amount of any outstanding letters of credit, at any time outstanding cannot exceed the lesser of (i) 25% of the value of certain inventory (increasing to 40% upon receipt of certain landlord waivers) and (ii) 50% of certain accounts receivable. In April 2019, the Company obtained a waiver of non-compliance with certain covenant violations associated with the restatements described in Note 2.

Contents

Long-term Debt

On April 29, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which the Company ~~agreed~~issued and sold a senior note (the “Original Note”) to ~~issue and sell, and~~ the Investor ~~agreed to purchase, a Senior Note (the “Note”)~~ in a private placement offering ~~(the “Private Placement”)~~ in the aggregate principal amount of $21.3 million ~~(Aggregate Principal)~~ with an original issue discount of $1.3 million, and received ~~gross~~net proceeds of $20.0 million. The Original Note iswas a senior unsecured obligation, ~~of the Company,~~ and unless earlier redeemed, ~~will~~was scheduled to mature on ~~the 18-month anniversary of the closing of the Private Placement (the “Maturity Date”).~~October 30, 2020. The Original Note ~~does~~did not bear interest, except upon the occurrence of ~~any~~an event of default.

~~KUSHCO HOLDINGS, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Amounts in thousands, except per share amounts)~~

~~(Unaudited)~~

On ~~the Maturity Date,~~August 21, 2019, the Company ~~must repay~~entered into an exchange agreement (the “Exchange Agreement”) with the Investor in order to amend and waive certain provisions of the Purchase Agreement and the Original Note and to exchange the Original Note for (i) a new senior note (the “Amended Senior Note”) for the same aggregate principal amount as the Original Note and (ii) a warrant to purchase up to 650 shares of its common stock at an exercise price of $4.25 per share. The warrant has an expiration date of August 21, 2024 and has not been exercised as of May 31, 2020. As of August 21, 2019, the warrant was reclassified from a derivative liability to equity with a corresponding adjustment to additional paid-in capital.

Similar to the terms of the Original Note, the Amended Senior Note was set to mature on October 30, 2020, at which time the Company was to pay the Investor an amount ~~equal to~~in cash representing 120% of all outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the ~~Aggregate Principal. The Company has an option to redeem the Note (i) between the issuance date and three months following issuance at an amount equal to 106.5%~~terms of the ~~Aggregate Principal with respect to outstanding principal and any accrued~~Original Note, the Amended Senior Note did not bear interest or late charges, (ii) between three and six months following issuance at an amount equal to 112% of the Aggregate Principal with respect to outstanding principal and any accrued interest or late charges, (iii) between six and ten months at an amount equal to 115% of the Aggregate Principal with respect to outstanding principal and any accrued interest or late charges, and (iv) thereafter through the Maturity Date at an amount equal to 120% of the Aggregate Principal with respect to outstanding principal and any accrued interest or late charges.

The Note includes customary affirmative and negative covenants, including a limitation on the Company’s ability to incur additional indebtedness, subject to certain permitted exceptions. The Note includes customary events of default including, among others, payment defaults, breach of covenant defaults, bankruptcy and insolvency defaults, cross defaults with certain indebtedness, a change of control default, judgment defaults, and inaccuracies of representations and warranties defaults. The Investor may require the Company to redeem,except upon the occurrence of an event of ~~default, all or~~default.

On November 8, 2019, the Company entered into a ~~portion~~Second Exchange Agreement (“Second Exchange Agreement”) with the Investor, pursuant to which the Company amended the Amended Senior Note (as amended, the “Second Amended Senior Note”). Pursuant to the terms of the Second Amended Senior Note, the maturity date of the Second Amended Senior Note was extended to April 29, 2021 and the aggregate principal amount of the Second Amended Senior Note was increased to approximately $24.0 million and the original issue discount was increased to $1.5 million. Upon maturity, the Company was to pay the Investor an amount in cash representing 120% of all outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the terms of the Original Note, the Second Amended Senior Note did not bear interest, except upon the occurrence of an event of default.

See Note 14 below for a description of the Third Exchange Agreement entered into by the Company and the Investor subsequent to May 31, 2020.

In addition to the Purchase Agreement, the Company granted to the Investor participation rights for the longer of (i) the second anniversary of the closing of the Private Placement or (ii) the date when the Note is no longer outstanding, pursuant to which the Investor will receive pro rata rights to participatewarrants described above, in ~~future financing transactions up to an aggregate of 15% of such transactions (or, except for certain permitted indebtedness, up to an aggregate of 100% of debt issuances). See Note 12.~~

~~NOTE 11 - WARRANT LIABILITY~~

In June of 2018, the Company issued warrants to purchase 3,750 shares of its common stock exercisable at a price per share of $5.28 (the “2018 Warrants”) to investors in a registered direct offering. The ~~warrants~~2018 Warrants have a term of five years from the date of issuance. ~~The exercise price of the warrants is protected in the event the Company issues securities with a variable conversion or exercise price during the three-year period following the warrants’ issuance.~~ Pursuant to ASC Topic 815, the initial fair value of the ~~warrants~~2018 Warrants of $15,350 was recorded as a ~~derivative~~warrant liability on the issuance date. The estimated fair values of the ~~warrants~~2018 Warrants were computed at issuance using ana Black-Scholes option pricing model.

The estimated fair value of the outstanding ~~warrant liability~~liabilities associated with the 2018 Warrants was ~~$7,410~~$2,009 and ~~$14,430~~$5,444 as of May 31, ~~2019~~2020 and August 31, ~~2018,~~2019, respectively.

Increases or decreases in ~~the~~ fair value of the ~~derivative~~Company's liability associated with the 2018 Warrants are included as a component of ~~other income (expense)~~“Other expense” in the accompanying condensed consolidated statements of operations for the respective period. ~~Accordingly, the~~The changes to the ~~derivative~~ liability associated with the 2018 Warrants resulted in an increase of $1,160 and decrease of $3,435 in liability and a corresponding loss and gain for ~~warrants~~the three and nine months ended May 31, 2020, respectively. The changes to the liability associated with the 2018 Warrants resulted in a decrease of ~~$5,965~~$6,254 and ~~$7,020~~$7,309 in ~~warrant~~ liability and a corresponding gain for the three and nine months ended May 31, ~~2019.~~

2019, respectively.

The estimated fair value of the ~~warrants~~2018 Warrants was computed as of May 31, ~~2019 and August 31, 2018~~2020 using the Black Scholes model with the following assumptions:

May 31, August 31,
2019 2018
Stock price volatility 69% 81%
Risk-free interest rates 1.93% 2.74%
Annual dividend yield -% -%
Term (years) 4.0 4.0

~~In addition, as applicable management assessed the probabilities~~ stock price of ~~future financing assumptions in the valuation models.~~

$1.19, volatility of 119.5%, risk-free rate of 0.22%, annual dividend yield of 0% and expected life of 3.0 years.

Level 1 -– Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 -– Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 -– Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, equity investments, accounts receivable, accounts payable and accrued liabilities ~~capital lease~~and obligations ~~and deferred revenue~~ approximate their fair values based on their short-term nature. The carrying amount of the Company’s long-term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.

The Company accounts for its investment in Smoke Cartel, Inc. (“Smoke Cartel”) at fair value. On September 21, 2018, Smoke Cartel and the Company entered into an agreement to sell Rowl-Uh-Bowl (the “RUB”) web domain and inventory related to this product line and in exchange, received 1,410 shares of Smoke Cartel common stock. The fair value of the Company’s investment as of August 31, 2019 and May 31, 2020 was based upon the closing price of Smoke Cartel's common stock on each respective date. The investment was classified as a Level 2 financial instrument.

The Company accounts for its investment in Xtraction Services at fair value. The fair value of the Company’s investment at May 31, 2020 was based upon the closing price of Xtraction Services' common stock on each respective date. The investment was classified as a Level 2 financial instrument.

In connection with the Company’s registered direct offering in June 2018, the Company issued the 2018 Warrants, which are accounted for as a warrant liability (see Note 9 above.) The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

The estimated fair value of the contingent consideration related to the ~~Company's~~Company’s business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

The Company accounts for its investment in Smoke Cartel at fair value. On September 21, 2018, Smoke Cartel and the Company entered into an agreement to sell the RUB web domain and inventory related to this product line and in exchange, received 1,410 shares

The following ~~tables~~table details the fair value ~~measurements~~measurement within the fair value hierarchy of the Company’s financial instruments, which includes the Level 2 assets and the Level 3 liabilities:

Fair Value at May 31, 2019
Total Level 1 Level 2 Level 3
Assets:
Equity investment $ 1,728 $ - $ 1,728 $ -
Liabilities:
Participation rights derivative liability 811 - - 811
Contingent consideration payable 2,961 2,961
Warrant liability 7,410 - - 7,410
Total liabilities $ 11,182 $ - $ - $ 11,182

Fair Value at August 31, 2018
Total Level 1 Level 2 Level 3
Liabilities:
Contingent consideration payable $ 5,488 $ - $ - $ 5,488
Warrant liability 14,430 - - 14,430
Total liabilities $ 19,918 $ - $ - $ 19,918

The following table reflects adjustments to the estimated fair value of the Company’s warrant liability with respect to the 2018 Warrants measured using Level 3 inputs:

The following table reflects the ~~activity for~~changes in fair value of the Company’s ~~investment in Smoke Cartel~~contingent consideration payable measured ~~at fair value using Level 2 inputs:~~

Investment in Smoke Cartel
Balance at August 31, 2018 $ -
Acquisition of equity investment 1,791
Adjustments to estimated fair value (663 )
Balance at May 31, 2019 $ 1,128

~~The following table reflects the activity for the Company’s warrant derivative liability for the June 2018 registered offering measured at fair value~~ using Level 3 inputs:

Warrant Liability
Balance at August 31, 2018 $ 14,430
Adjustments to estimated fair value (7,020 )
Balance at May 31, 2019 $ 7,410

~~The following table reflects the activity for the Company’s participation rights derivative liability for the April 2019 private debt offering measured at fair value using Level 3 inputs:~~

Warrant Liability
Balance at April 30, 2019 $ 1,100
Adjustments to estimated fair value (289 )
Balance at May 31, 2019 $ 811

~~The following table reflects the activity for the Company’s contingent consideration measured at fair value using Level 3 inputs:~~

Total
As of August 31, 2018 $ 5,488
Change in Fair Value 394
As of November 30, 2018 5,882
Change in Fair Value (5,602 )
Cash Payment (140 )
Settled in shares- Hybrid (140 )
As of February 28, 2019 -
Change in Fair Value 2,961
As of May 31, 2019 $ 2,961

The fair value of contingent consideration is evaluated each reporting period using projected financial information, discount rates, and key inputs. Projected contingent payment amounts are discounted back to the current period using a discount rate. Financial information is based on the Company’s most recent internal operational budgets and forecasts. Changes in projected financial information may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement.

The Company’s authorized preferred stock is 10,000 shares with a par value of $0.001. As of May 31, ~~2019,~~2020, and August 31, ~~2018, the Company has no~~2019, there were 0 shares of preferred stock issued or outstanding.

The Company’s authorized common stock is 265,000 shares with a par value of $0.001. As of May 31, ~~2019,~~2020, and August 31, ~~2018, 88,840~~2019, there were 119,933 and ~~78,273~~90,041 shares ~~were~~ issued and outstanding, respectively.

On ~~January 15,~~September 26, 2019, the Company entered into ~~a securities~~ purchase ~~agreement~~agreements with certain accredited investors pursuant to which the Company issued and sold an aggregate of ~~6,476 shares~~17,198 units, with each unit consisting of one share of its common stock and ~~warrants~~a warrant to purchase ~~3,238 shares~~half a share of its common stock in a registered direct ~~offering.~~offering (the “September 2019 Offering”). The ~~securities were offered by~~purchase price for a unit was $1.75. The closing of the September 2019 Offering occurred on September 30, 2019 and resulted in aggregate gross proceeds to the Company ~~pursuant~~of approximately $30.1 million. The aggregate net proceeds to ~~its shelf registration statement on Form S-3 (File No. 333-221910) initially filed with~~ the ~~Securities~~Company from the September 2019 Offering, after deducting the placement agent fees and Exchange Commission on December 5, 2017, as amended on January 25, 2018 and February 14, 2018, and declared effective on February 28, 2018, and an additional registration statement on Form S-3 filed pursuant to Rule 462(b) under the Securities Act, which became effective upon filing on January 16, 2019.other offering expenses, was approximately $27.4 million. Subject to certain ownership limitations, the warrants ~~became~~were immediately exercisable at an exercise price equal to ~~$5.75~~$2.25 per share of common stock. The warrants are exercisable for five years from the date of issuance.

On February 6, 2020, the Company entered into purchase agreements with certain accredited investors pursuant to which the Company issued and sold an aggregate of 10,000 units, with each unit consisting of one share of its common stock and a warrant to purchase half a share of its common stock in a registered direct offering (the “February 2020 Offering”). The ~~combined per share~~ purchase price for a ~~share~~unit was $1.60. The closing of ~~common stock~~the February 2020 Offering occurred on February 10, 2020 and ~~a half of a warrant was $5.25. The offering closed on January 18, 2019 with~~resulted in aggregate gross proceeds to the Company of approximately ~~$34.0~~$16.0 million. The aggregate net proceeds from the ~~offering,~~February 2020 Offering, after deducting the placement agent fees and other ~~estimated~~ offering expenses, was approximately $14.6 million. Subject to certain ownership limitations, the warrants were ~~approximately $31.2 million.~~

~~During~~immediately exercisable at an exercise price equal to $2.00 per share of common stock. The warrants are exercisable for five years from the ~~nine~~date of issuance.

The Company recorded total stock-based compensation expense of $2,985 and $2,667 for the three months ended May 31, ~~2019, the Company sold 9,077 shares of its common stock to investors in exchange for aggregate net proceeds of approximately $41.6 million.~~

~~During the nine months ended~~2020 and May 31, ~~2018, the Company sold 5,877 shares of its common stock to investors in exchange for cash of $16.4 million.~~

~~Stock-based Compensation~~

~~The Company recorded stock-based compensation-related charges of $8,771~~2019, respectively, and ~~$1,905 to additional paid in capital~~$11,074 and $8,839 for the nine months ended May 31, ~~2019~~2020 and ~~2018,~~May 31, 2019, respectively, in connection with the issuance of shares of common stock and ~~amortization~~options to purchase common stock. Stock-based compensation expense is included in selling, general and administrative expense in the condensed consolidated statements of ~~stock option expense for stock awards issued to employees and directors as compensation and to service providers as consideration for services received.~~

~~During the nine months ended May 31, 2018,~~operations.

employee ~~which~~options will be valued once at ~~$667~~the date of grant. At adoption, all awards without established measurement dates were revalued one final time and ~~was recorded as stock-based compensation as of May 31, 2018.~~

did not have a material impact on the condensed consolidated financial statements.

The Company’s 2016 Stock Incentive Plan (the “Plan”) was adopted on February 9, 2016. The Plan ~~as amended, permits~~authorizes the ~~grant~~issuance of ~~share options and shares to its employees and directors for~~ up to 18,000 shares of common ~~stock.~~stock in the form of stock-based awards to the Company’s employees and directors. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the closing market price of the ~~Company's~~Company’s common stock at the date of ~~grant; those~~grant and have 10 years contractual terms. The option awards generally vest ~~based on~~over three years ofsubject to the recipient’s continuous ~~service and have 10-year contractual terms.~~

service.

The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of ~~our~~its stock price over the expected option term, expected risk-free interest rate over the expected option term, and expected dividend yield rate over the expected option ~~term, and an estimate of expected forfeiture rates.~~term. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC ~~718 requirements.~~718. These amounts are estimates only and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.

The expected ~~life~~term of stock options granted during the nine months ended May 31, 2020 and May 31, 2019 is ~~computed using the simplified method, which is the average of the vesting term~~based on management's judgement and ~~the contractual term.~~reflects expected exercise patterns. The expected volatility of these stock options is based on ~~management's~~management’s analysis of historical volatility. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the time of the grant. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life of these options was increased, a higher expected volatility was used, or if the expected ~~dividend-yield~~dividend yield increased.

~~During~~

The following table summarizes the ~~nine months ended May 31, 2019 and 2018, the Company granted 6,936 and 4,096 stock options, respectively, pursuant to the Company’s 2016 Stock Incentive Plan. A summary of the Company’s~~Company's stock option activity during the nine months ended May 31, 2020:

Stock compensation expense related to stock options was $7,348 and $5,740 for the nine months ended May 31, 2020 and May 31, 2019, ~~is presented below:~~

Weighted
Weighted Average
Average Remaining Aggregate
Stock Exercise Contractual Intrinsic
Options Price Term (in years) Value

Balance Outstanding, August 31, 2018 9,368 $ 3.85 9.1 $ 14,463
Granted 6,936 $ 5.63 - -
Exercised (534 ) $ 3.69 - -
Forfeited (3,108 ) $ 4.08 - -
Balance Outstanding, May 31, 2019 12,662 $ 4.78 9.2 $ 4,131
Exercisable, May 31, 2019 2,945 $ 3.22 8.5 $ 3,427

respectively. The weighted-average grant-date fair value of options granted during the nine months ended May 31, ~~2019~~2020 and ~~2018, was $2.59 and $2.22, respectively.~~

~~During the nine months ended~~ May 31, 2019, was $1.39 and ~~2018, the aggregate intrinsic value~~$2.59, respectively.

As of May 31, ~~2019,~~2020, there was ~~$23,741~~$12,482 of total unrecognized compensation cost related to non-vested ~~stock-based compensation arrangements~~stock options granted under the Plan. ~~That cost~~The expense is expected to be recognized over a weighted-average period of 1.7 years.

During the nine months ended May 31, 2020, the Company awarded 533 shares of restricted stock to consultants in exchange for $662 of services rendered.

During the nine months ended May 31, 2019, the Company issued 295 shares of restricted stock to consultants in exchange for $377 of services rendered and $1,277 of prepaid services, for a total of $1,654. The prepaid services are included in prepaid expenses on the condensed consolidated balance sheet as of May 31, 2019.

Stock-based compensation expense related to restricted stock awards was $3,726 and $3,099, respectively, for the nine months ended May 31, 2020 and May 31, 2019.

During the nine months ended May 31, 2020, the Company awarded 174 shares of restricted stock units to directors for serving on the board of directors.

As of May 31, 2020, $2,329 of total unrecognized compensation cost related to restricted stock units is expected to be recognized over a weighted average period of 1.3 years.

The Company has completed, or is in the process of completing, the following restructuring activities in connection with the 2020 Plan:

The Company expects to incur a total of $9.5 million in restructuring charges upon the completion of the 2020 Plan, which represents the Company’s best estimate as of May 31, 2020. The 2020 Plan is expected to be completed by the end of fiscal 2020. The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce and facility, ROU and asset impairment costs. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained, and the utilization of the provisions are for their intended purpose in accordance with developed plans. The following table reflects the movement of activity of the restructuring reserve for the six months ended May 31, 2020:

Expenses incurred under the 2020 Plan during the three and nine months ended May 31, 2020 are included within “Restructuring costs” in the condensed consolidated statements of operations.

Unless otherwise indicated, all amounts herein are expressed in thousands, except per share ~~data.~~

amounts.

This Quarterly Report on Form 10-Q ~~and the audited consolidated financial statements in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2018 filed with the SEC on April 11, 2019. This report~~ contains “forward-looking ~~statements.” The~~statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.

Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. The forward-looking events discussed in this report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties, and assumptions about us. For these statements, we claim the protection of the “bespeaks caution” doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause ~~the~~our actual results, performance or achievements to ~~differ~~be materially different from any future results, performance or achievements expressed or implied by ~~such~~these forward-looking statements.

~~Overview~~

~~We provide customizable packaging products, vaporizers, hydrocarbon gases, solvents, accessories~~ In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

The identification in this report of factors that may affect our future performance and ~~branding solutions primarily~~the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance. A more detailed description of risk factors that may affect our operating results can be found in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the ~~cannabis industry. Representative examples~~fiscal year ended August 31, 2019 filed with the SEC on November 12, 2019, and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as

required by law, we assume no obligation to businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors, and packaging re-distributors.

~~We believe that we have created one of the largest product libraries~~update or revise these forward-looking statements for any reason, even if new information becomes available in the ~~cannabis industry, allowing us to be~~future.

KushCo Holdings, Inc. (formerly known as Kush Bottles, Inc.) markets and sells a ~~comprehensive solutions provider to our customers. Our extensive knowledge~~wide variety of the regulatory environment applicable to the cannabis industry allows us to quickly adapt to our customers' packaging requirements. We maintain the flexibility to enter the markets of decriminalized regions by establishing re-distributor partnerships or opening new facilities. We also have the flexibility to introduce newancillary products and services to customers operating in the regulated medical and adult recreational cannabis and CBD industries. Our complementary products and services include compliant and custom packaging products; vape hardware; solvents and natural products; stainless steel tanks; custom branded anti-counterfeit and authentication labels; hemp trading services, which connect buyers and sellers of hemp commodities; and retail services, which focus on CBD mass distribution services through our ~~vast customer network.~~internal resources and partnerships with leading consumer packaged goods (“CPG”) sales agencies.

As a leader in custom and child-resistant packaging, exclusive vape products, and unique service offerings, such as our hemp trading and retail services, we serve as a “one-stop-shop” for our customers, combining creativity with compliance to provide the right solutions in various stages of the cannabis and CBD supply chain.

Our products primarily consist of bottles, jars, bags, tubes, containers, vape cartridges, vape batteries and accessories, labels and processing supplies, solvents, natural products, stainless steel tanks, and custom branded anti-counterfeit and authentication labels. We ~~have no supplier “take or pay” arrangements.~~maintain relationships with a broad range of domestic and international manufacturers, which enables us to source a wide variety of products in a cost-effective manner and to pass such cost savings to our customers. This allows us to offer quick solutions to our customers and help ensure that their products will be of superior grade and made with environmentally safe materials. In addition to ~~these factors,~~a complete product line, we ~~believe that we offer competitive pricing, prompt deliveries,~~have sophisticated labeling and ~~excellent customer service. We expect continued growth as we take measures~~customization capabilities, which allow us to ~~expand into new markets, invest in~~add significant value to our ~~systems~~customers’ packaging and ~~personnel, forge strategic alliances~~vape hardware design processes, enabling them to turn their packaging and ~~invest in our own molds and intellectual property.~~

~~Acquisitions~~

~~On May 1, 2017 (“Merger Date”), we and our wholly-owned subsidiary, KBCMP, Inc. (“Merger Sub”), entered~~branding into an ~~Agreement~~effective marketing tool. As more multi-state operators (“MSOs”), licensed producers (“LPs”), and leading brands seek ways to further differentiate their brands and product lines, our customization capabilities and premium customer service help us win new product opportunities with both existing and new customers. Our products are relied upon by brand owners, processors, farmers, growers, and licensed medical and adult recreational cannabis dispensaries.

Due to the ~~merger, CMP was owned 100%~~complementary nature of our product and service ecosystem, we are able to successfully cross-sell into our existing customer base, while attracting new customers who are looking to consolidate their vendors and partner with a trusted and established source for nearly all ancillary cannabis and CBD solutions.

During the second quarter of fiscal 2020, the Company adopted the 2020 Plan to more effectively execute the Company’s strategy of focusing its resources on more established, financially stable, and creditworthy customers (namely multi-state operators, licensed producers, and leading brands). In connection with the 2020 Plan, the Company began implementing a restructuring process that seeks to rationalize all aspects of its operations by, ~~Lancer West Enterprises, Inc.~~among other things, significantly reducing its overhead, implementing tighter expense controls, consolidating its warehouses, reducing its inventory, and ~~Walnut Ventures. Membership interest~~drastically altering its sales strategy to focus more on these customers. The Company believes that this strategic shift and associated restructuring should result in ~~CMP was~~a better forecast of demand, reduction of inventory and warehouse space, improved collections and cash flow, and potential revenue upside from these customers’ continued expansion and consolidation in the ~~sole asset~~marketplace. For additional information see Note 13 above of ~~Lancer West Enterprises, Inc.~~our consolidated financial statements.

For the three months ended May 31, ~~2019,~~2020, our revenue ~~increased~~decreased to ~~$41,486~~$22.3 million compared to ~~$12,905~~$41.5 million for the three months ended May 31, ~~2018,~~2019, which represents ~~an increase~~a decrease of ~~$28,581~~$19.2 million, or ~~221%~~46%. The ~~increase~~decrease was primarily ~~attributable~~attributed to ~~significant organic growth across all markets, including California, following~~ the Company's adoption of ~~adult use cannabis~~its 2020 Plan to align deeper with larger and more creditworthy multi-state-operators, licensed producers, and leading brands, which has resulted in significant cost-cutting initiatives and tighter credit terms extended to its

smaller customers; lower sales ~~on January 1, 2018. From product portfolio standpoint, vaping product related sales remained strong~~from vape and natural products; and travel and regulatory restrictions in the markets that the Company operates in due to the COVID-19 pandemic, as ~~this sector of~~well as supply chain disruptions linked to the ~~cannabis industry continues~~COVID-19 pandemic, which has resulted in shipping capacity constraints from China. The COVID-19 pandemic has resulted in customers ordering less frequently and at irregular intervals due to ~~perform well. In addition, we achieved strong growth for custom branded products as customers seek differentiated brand building solutions~~less visibility in ~~line with regulatory requirements. Non-organic revenue related to acquisitions represented 8% of total revenue during the three months ended May 31, 2019.~~

their businesses, overall demand, and general economic conditions.

Gross profit for the three months ended May 31, ~~2019~~2020 was ~~$7,396,~~$2.4 million, or ~~18%~~11% of revenue, compared to ~~$3,658,~~gross profit of $7.4 million, or ~~28%~~18% of revenue, for the three months ended May 31, ~~2018.~~2019. The decrease in gross profit percentage is due primarily ~~attributable~~ to an increase of $1.5 million related to excess and obsolete inventory write downs as a ~~shift in sales mix, along~~result of right sizing inventory levels to align with ~~the recent China trade tariffs that have been absorbed into costs of goods sold. Effective as of the end of May 2019, we have implemented a tariff supplement fee billed to~~ our ~~customers.~~

2020 Plan, $1.0 million purchase order cancellation charges and lower product sales.

Our operating expenses for the three months ended May 31, ~~2019 increased~~2020 decreased to ~~$23,680,~~$13.7 million, or ~~57%~~61% of total revenue, from ~~$12,783~~$23.7 million, or ~~99%~~57% of total revenue, for the three months ended May 31, ~~2018. The increase in~~2019. Lower selling, general and administrative ~~expenses~~expense is primarily due to a $4.2 million decrease in compensation associated with lower headcount. Compensation expense includes a $0.8 million cash bonus reversal to reclassify the ~~expansion of~~expense to stock compensation, which is offset by a $1.0 million restructuring charge associated with severance. To align with the ~~business, primarily attributed to increased compensation cost, insurance, professional service fees, freight-out expenses,~~Company's 2020 Plan, freight, consulting, and facilities ~~costs.~~costs decreased $1.0 million, $0.9 million, and $0.8 million, respectively. Other expenses contracted by $1.0 million primarily due to less travel related to the COVID-19 pandemic. For the three months ended May 31, 2019, ~~and 2018,~~ operating expenses included a loss of ~~$2,961 and $7,041, respectively,~~$3.0 million related to the change in the fair value of contingent consideration. ~~We will continue to make significant investments in infrastructure and supply chain to scale effectively.~~

Loss from operations for the three months ended May 31, ~~2019~~2020 was ~~$16,284~~$11.3 million compared to ~~$9,125~~$16.3 million for the three months ended May 31, ~~2018.~~2019. The ~~increase~~decrease is primarily attributable to compensation associated with our ~~continued investment in infrastructure~~headcount reduction, lower freight costs, warehouse facilities closures, and ~~personnel~~reduced travel expenses related to ~~scale our expanding business and~~the COVID-19 pandemic, which were partially offset by the ~~loss on contingent consideration.~~

restructuring charges the Company recognized in accordance with the adoption of its 2020 Plan, including severance and asset impairment charges.

Other ~~expense, during the three months ended May 31, 2019 was a~~Income (Expense), net ~~gain of $5,699, as compared to net expense of $81~~ for the three months ended May 31, 2018. The increase in other income is attributed to income from the change in fair value of our warranty liability, partially offset by higher interest expense related to the increased credit line capacity and the long-term notes payable which was issued in April 2019.

~~Income Tax Expense~~

~~The provision for income taxes~~2020 was an expense of ~~$13 and $0, for the three-month periods ended May 31, 2019 and 2018, respectively.~~

~~Net Loss~~

~~Our net result~~$2.2 million compared to income of $5.7 million for the three months ended May 31, ~~2019 was a net loss~~2019. The increase in other expense is primarily due to an unfavorable change in fair value of ~~$10,598, or $0.12 per share,~~warrant liability, resulting in an expense of $1.2 million, as compared to ~~net loss~~other income of ~~$9,206, or $0.14 per share,~~$6.3 million in the previous year. Interest expense increased $1.0 million, when compared to the three months ended May 31, 2019.

Loss from operations for the three months ended May 31, ~~2018.~~

2020 was $13.5 million compared to $10.6 million for the three months ended May 31, 2019. To align with the Company's 2020 Plan, the increase in net loss is primarily attributable to inventory write downs related to right sizing inventory, purchase order cancellation charges, and restructuring charges related to severance. The increase is also derived from an unfavorable change in fair value of warrant liability, higher amortization of debt discount, higher stock-based compensation and lower product sales.

At May 31, 2020 and May 31, 2019, we had cash of ~~$12,230~~$11.1 million and $12.2 million, respectively, and a working capital surplus of ~~$62,974 compared~~$41.8 million and $63.0 million, respectively.

We believe that our level of liquidity sources, which includes available borrowing under our revolving credit facility, cash on hand, funds provided by operations, adoption of the 2020 plan and participation in available funding programs instituted by various state and federal governments in response to ~~cash of $13,467~~COVID-19 will be adequate to fund our expenditures and a working capital surplus of $35,206 as of August 31, 2018. The increase in working capital is primarily due to increases in inventory to meet increasing customer demand and increases in accounts receivables attributable torequirements for the ~~substantial increase in revenues compared with the prior year.~~

next 12 months.

Net cash used in operating activities for the nine ~~month period~~months ended May 31, ~~2018.~~2020 was $20.2 million compared to $57.5 million for the nine months ended May 31, 2019. The change is primarily ~~attributed~~attributable to ~~an increase in~~the reduced level of inventory ~~including related prepayments, and accounts receivable during the nine month period ended May 31, 2019.~~

consistent with our efforts to improve our inventory management process, as part of our 2020 Plan.

Net cash used in investing activities ~~increased from $1,942~~ for the nine ~~month period~~months ended May 31, ~~2018~~2020 was $4.3 million compared to ~~$5,420~~$5.4 million for the nine ~~month period~~months ended May 31, ~~2019, which can be primarily attributed~~2019. The decrease is due to ~~higher~~lower levels of equipment purchases, ~~and~~ technology investments and leasehold improvements during the current ~~period.~~

fiscal year.

Net cash provided by financing activities ~~increased from $17,402~~ for the nine ~~month period~~months ended May 31, ~~2018~~2020 was $31.7 million compared to ~~$61,663~~$61.7 million for the nine ~~month period~~months ended May 31, 2019. The ~~increase~~decrease is ~~primarily attributed~~attributable to the ~~sale~~$12.3 million in net repayments on our line of ~~common stock~~credit, compared to ~~investors and~~$0.2 million in net borrowings in the prior year. The change is also attributable to $1.9 million in proceeds from ~~the issuance of long-term debt.~~

~~We manage our liquidity and financial position~~notes payable, compared to $19.9 million in proceeds from notes payable in the ~~context~~prior year.

On August 21, 2019, the Company and its subsidiaries (collectively, the “Borrowers”) entered into a secured asset based revolving credit facility (the “Monroe Revolving Credit Facility”), with an aggregate amount not to exceed $35.0 million outstanding at any time, with Monroe Capital Management Advisors, LLC (“Monroe”), as collateral agent and administrative agent, and the various lenders party thereto. The Monroe Revolving Credit Facility also includes an accordion feature that permits the Company to increase the available revolving commitments under the Monroe Revolving Credit Facility by up to an additional $15.0 million, subject to satisfaction of ~~our overall business strategy. We continually forecast~~certain conditions. The Monroe Revolving Credit Facility has a 5-year term which matures on August 21, 2024 and ~~manage our~~is secured by a first priority lien on substantially all of the assets of the Borrowers. For additional information, see Note 8 above.

We do not currently have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules.

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of ~~the condensed~~these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going

basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable reserves, inventory and related reserves, ~~valuations and purchase price allocations related to business combinations,~~ expected cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, stock-based compensation ~~contingent liabilities,~~ and recoverability of our net deferred tax assets and any related valuation allowance. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of ~~ninety (90)~~90 days or less to be cash equivalents. We do not believe that a notional or hypothetical 10% change in interest rate percentages would have a material impact on the fair value of our investment ~~portfolio or our interest income.~~

portfolio.

There has been no change in our internal controls have been primarily due to the lack of proper segregation of duties, the lack of sufficient levels of proper supervision and review and a material weakness in the accounting, presentation, and disclosure of share-settled contingent consideration.

~~We have taken steps to enhance our internal controls~~control over financial reporting ~~and plan~~that occurred during the fiscal quarter ended May 31, 2020 that has materially affected, or is reasonably likely to ~~take additional steps to remediate the material weaknesses. Specifically:~~

·

~~We appointed additional independent members with public company board experience to our board of directors, such that our board of directors is now composed of a majority of independent directors;~~

·

On March 9, 2018, our board of directors formed an Audit Committee composed entirely of independent directors that, among other things, assists the board of directors in its oversight of the integrity of our financial statements and our financing reporting processes and systems of internal control;

·

The Company announced the hiring of our new Chief Financial Officer, Christopher Tedford, with significant sales and distribution experience who will focus on the development of the finance and accounting function;

·

~~We added staff to our finance team, and outsourced to third party the assessment of certain complex transactions under US GAAP;~~

·

~~In January 2018, we hired a controller with public company experience;~~

·

~~We have adopted a Code of Business Conduct and Ethics and a whistleblower policy;~~

·

~~In February 2019, we engaged a national accounting advisory firm to assist with the design and implementation of our internal control over financial reporting based on the criteria established in~~ ~~Internal Control - Integrated Framework (2013)~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”); and.~~

·

~~In June 2019, we hired a director of internal audit with extensive training and experience associated with COSO and Sarbanes-Oxley Section 404 compliance.~~

~~Our management will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and~~materially affect, our internal ~~controls~~control over financial ~~reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements.~~ reporting.

During the period covered by this Quarterly Report on Form 10-Q, we have not been able to remediate the material weaknesses described ~~above. To remediate such weaknesses, we plan to appoint additional qualified personnel to address inadequate segregation of duties and implement modifications to~~in our ~~financial controls to address such inadequacies. The~~Annual Report on Form 10-K for the fiscal year ended August 31, 2019. Our remediation efforts ~~set out herein~~ will continue to be implemented inthroughout our ~~2019~~2020 fiscal year. ~~Because of~~We believe that the ~~inherent limitations in all control systems, no evaluation of~~ controls ~~can provide absolute assurance~~ that ~~all control issues, if any, within our company have been detected.~~

~~Changes in Internal Control over Financial Reporting~~

~~There has been no change in our internal control over financial reporting identified in connection with our evaluation~~ we ~~conducted of~~intend to implement will improve the effectiveness of our internal control over financial ~~reporting as of May 31, 2019, that occurred during our first fiscal quarter that has materially affected, or is reasonably likely~~reporting. As we continue to ~~materially affect,~~evaluate and work to improve our internal control over financial ~~reporting.~~

reporting, we may determine to take additional steps to address the material weaknesses or to supplement or modify certain of our planned remediation measures.

None.

Not applicable.

The following exhibits are filed as part of this ~~Current~~Quarterly Report on Form 10-Q. Where such filing is made by incorporation by reference to a previously filed document, such document is identified.

~~Nevada~~	~~46-5268202~~
Nevada				46-5268202
(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)			(I.R.S. Employer Identification No.)


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.001 per share	KSHB	OTCQX

	May 31,		May 31,
	2019		2018
Expected term in years		1-3		1-4
Expected volatility		69% - 87%		60%
Risk-free interest rate		2.29% -3.01%		0.67% - 0.81%
Expected dividend yield		-%		-%


	Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Balance Outstanding, August 31, 2019	14,761	$	4.89	9.0	$	3,192
Granted	3,667	2.24
Exercised	(9)	2.06			$	14
Forfeited	(7,051)	4.74
Balance Outstanding, May 31, 2020	11,368	$	4.10	8.4	$	358
Vested and expected to vest at May 31, 2020	10,187	4.13		8.3	$	285
Exercisable, May 31, 2020	5,998	$	4.40	7.9	$	26


	Severance related costs		Facility, ROU and asset impairment		Facility Exit Cost		Total
Balance at December 1, 2019	$	—	$	—	$	—	$	—
Provisions/Additions	1,182		6,895		176		8,253
Utilized/Paid	(1,002)		(6,895)		(176)		(8,073)
Balance at May 31, 2020	$	180	$	—	$	—	$	180

	May 31,			August 31,
	2019			2018
	(Unaudited)			(As Restated)
ASSETS
Current assets:
Cash	$	12,230		$	13,467
Accounts receivable, net of allowance		14,504			8,601
Prepaid expenses and other current assets		13,019			13,623
Inventory, net		53,013			11,814
Total current assets		92,766			47,505

Goodwill		52,267			52,267
Intangible assets, net		3,340			4,488
Property and equipment, net		8,813			4,135
Other assets		3,473			250
Total Assets	$	160,659		$	108,645

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	16,075		$	2,822
Accrued expenses and other current liabilities		9,489			3,009
Contingent consideration payable		2,961			5,488
Notes payable - current portion		117			62
Line of credit		1,150			918
Total current liabilities		29,792			12,299

Long-term liabilities:
Notes payable		18,495			172
Warrant liability		8,221			14,430
Deferred rent		614			106
Total liabilities		57,122			27,007

Commitments and contingencies (Note 16)

Stockholders’ equity
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.001 par value, 265,000 shares authorized, 88,840 and 78,273 shares issued and outstanding as of May 31, 2019 and August 31, 2018, respectively		89			78
Additional paid-in capital		154,898			104,918
Accumulated deficit		(51,450	)		(23,358	)
Total stockholders’ equity		103,537			81,638
Total liabilities and stockholders’ equity	$	160,659		$	108,645

	For the Three Months Ended May 31,							For the Nine months Ended May 31,
	2019			2018 (As Restated)				2019			2018 (As Restated)
Net revenue	$	41,486		$	12,905			$	101,982		$	32,113
Cost of goods sold		34,090			9,247				86,834			22,860
Gross profit		7,396			3,658				15,148			9,253

Operating expenses:
Selling, general and administrative		20,719			5,742				52,032			12,067
Gain on disposition of assets		-			-				(1,254	)		-
Change in fair value of contingent consideration		2,961			7,041				(2,247	)		18,182
Total operating expenses		23,680			12,783				48,531			30,249
Loss from operations		(16,284	)		(9,125	)			(33,383	)		(20,996	)

Other income (expense):
Change in fair value of warrant liability		6,254			-				7,309			-
Change in fair value of equity investment		(71	)		-				(663	)		-
Interest expense		(474	)		(81	)			(1,452	)		(112	)
Other income, net		(10	)		-				110			-
Total other income (expense), net		5,699			(81	)			5,304			(112	)
Loss before income taxes		(10,585	)		(9,206	)			(28,079	)		(21,108	)
Income tax expense		13			-				13			66
Net loss	$	(10,598	)	$	(9,206	)		$	(28,092	)	$	(21,174	)

Net loss per share:
Basic and diluted net loss per common share	$	(0.12	)	$	(0.14	)		$	(0.34	)	$	(0.34	)
							��
Basic and diluted weighted-average common shares outstanding		88,286			64,680				83,338			61,995

	Common Shares				Additional Paid-in		Accumulated			Total Stockholders'
	Shares Issued		Amount		Capital		Deficit			Equity
Balances at August 31, 2018 (Restated)		78,273	$	78	$	104,918	$	(23,358	)	$	81,638
Stock-based compensation		828		1		8,256		-			8,257
Stock sold to investors		9,077		9		41,584		-			41,593
Stock issued for acquisitions		662		1		140		-			141
Net loss		-		-		-		(28,092	)		(28,092	)
Balances at May 31, 2019		88,840	$	89	$	154,898	$	(51,450	)	$	103,537

	Common Shares				Additional Paid-in		Retained Earnings (Accumulated			Total Stockholders'
	Shares Issued		Amount		Capital		Deficit)			Equity
Balances at August 31, 2017 (Restated)		58,607	$	59	$	29,677	$	979		$	30,715
Stock-based compensation		1,265		1		3,570		-			3,571
Stock sold to investors		5,877		6		16,429		-			16,435
Stock issued for acquisitions		640		1		33,372		-			33,373
Net loss		-		-		-		(21,174	)		(21,174	)
Balances at May 31, 2018 (Restated)		66,389	$	67	$	83,048	$	(20,195	)	$	62,920

	For the Nine Months Ended May 31,
	2019			2018 (As Restated)
Cash flows from operating activities
Net loss	$	(28,092	)	$	(21,174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,711			792
Gain on disposition of assets		(1,254	)		-
Change in fair value of equity investment		663			-
Stock-based compensation		8,839			1,905
Change in fair value of warrant liability		(7,309	)		-
Provision for deferred taxes		-			(273	)
Change in fair value of contingent consideration		(2,247	)		18,182
Changes in operating assets and liabilities:
Accounts receivable		(5,903	)		(4,119	)
Prepaids		(1,632	)		(3,715	)
Inventory		(41,313	)		(6,068	)
Other assets		(706	)		(571	)
Accounts payable		13,278			1,371
Accrued expenses and other current liabilities		6,485			869
Net cash used in operating activities		(57,480	)		(12,801	)

Cash flows from investing activities
Purchase of property, equipment and intangibles		(5,420	)		(997	)
Acquisition of Summit, net of cash received		-			(945	)
Net cash used in investing activities		(5,420	)		(1,942	)

Cash flows from financing activities
Repayment of capital leases		(105	)		(248	)
Proceeds from (repayment of) notes payable		19,935			(583	)
Proceeds from stock option exercises		42			246
Proceeds from sale of stock, net of costs		41,593			16,435
Proceeds from line of credit		94,808			2,434
Repayments on line of credit		(94,610	)		-
Repayment of Summit loans		-			(712	)
Payments for contingent consideration		-			(170	)
Net cash provided by financing activities		61,663			17,402

Net (decrease) increase in cash		(1,237	)		2,659
Cash at beginning of period		13,467			917
Cash at end of period	$	12,230		$	3,576

	Three Months Ended May 31,				Nine months Ended May 31,
	2019		2018		2019		2018
Manufacturing	$	40,956	$	12,894	$	100,992	$	32,086
Services		530		11		990		27
Total Net Revenue	$	41,486	$	12,905	$	101,982	$	32,113

Fair value of Smoke Cartel as of September 21, 2018	$	1,790
RUB web domain and inventory sold		(536	)
Gain on disposition of assets	$	1,254

	Weighted Average	As of May 31, 2019							As of August 31, 2018
	Estimated	Gross							Gross
	Useful	Carrying		Accumulated			Net		Carrying		Accumulated			Net
Description	Life	Value		Amortization			Amount		Value		Amortization			Amount
Domain name	5 years	$	-	$	-		$	-	$	599	$	(166	)	$	433
Trade name	6 years		2,600		(903	)		1,697		2,600		(578	)		2,022
Non-compete agreement	4 years		2,370		(727	)		1,643		2,370		(337	)		2,033
		$	4,970	$	(1,630	)	$	3,340	$	5,569	$	(1,081	)	$	4,488

	Fair Value at May 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Equity investment	$	1,728	$	-	$	1,728	$	-
Liabilities:
Participation rights derivative liability		811		-		-		811
Contingent consideration payable		2,961						2,961
Warrant liability		7,410		-		-		7,410
Total liabilities	$	11,182	$	-	$	-	$	11,182

	Fair Value at August 31, 2018
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent consideration payable	$	5,488	$	-	$	-	$	5,488
Warrant liability		14,430		-		-		14,430
Total liabilities	$	19,918	$	-	$	-	$	19,918


	Fair Value at May 31, 2020
	Total		Level 1		Level 2		Level 3
Assets:
Equity investment	$	2,060	$	—	$	2,060	$	—

Liabilities:
Warrant liability	$	2,009	$	—	$	—	$	2,009


	Fair Value at August 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Equity investment	$	592	$	—	$	592	$	—

Liabilities:
Warrant liability	$	5,444	$	—	$	—	$	5,444


	Warrant Liability
As of August 31, 2019	$	5,444
Adjustments to estimated fair value	(3,204)
As of November 30, 2019	2,240
Adjustments to estimated fair value	(1,391)
As of As of February 29, 2020	849
Adjustments to estimated fair value	1,160
As of May 31, 2020	$	2,009

	Investment in Smoke Cartel
Balance at August 31, 2018	$	-
Acquisition of equity investment		1,791
Adjustments to estimated fair value		(663	)
Balance at May 31, 2019	$	1,128

	Warrant Liability
Balance at April 30, 2019	$	1,100
Adjustments to estimated fair value		(289	)
Balance at May 31, 2019	$	811


	Contingent Consideration Payable
As of August 31, 2018	$	5,488
Change in fair value	394
As of November 30, 2018	5,882
Change in fair value	(5,602)
Cash payments	(140)
Settled in shares- Hybrid	(140)
As of As of February 28, 2019	—
Change in fair value	2,961
As of May 31, 2019	$	2,961

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Stock			Exercise		Contractual		Intrinsic
	Options			Price		Term (in years)		Value

Balance Outstanding, August 31, 2018		9,368		$	3.85		9.1	$	14,463
Granted		6,936		$	5.63		-		-
Exercised		(534	)	$	3.69		-		-
Forfeited		(3,108	)	$	4.08		-		-
Balance Outstanding, May 31, 2019		12,662		$	4.78		9.2	$	4,131
Exercisable, May 31, 2019		2,945		$	3.22		8.5	$	3,427

~~Exhibit~~ ~~Number~~	~~Description~~ ~~of Exhibit~~
~~4.1~~⁽¹⁾Exhibit Number		~~Form~~Description of ~~Senior Note dated April 30, 2019.~~Exhibit
~~10.1#~~⁽²⁾
~~Offer Letter, dated February 27, 2019, by~~3.1.1		Amended and ~~between~~Restated Bylaws of KushCo Holdings, Inc., amended and restated as of July 6 , 2020

3.1.2		Amended and Restated Bylaws of KushCo Holdings, Inc., with changes marked against original bylaws of KushCo Holdings, Inc. ~~and Rodrigo de Oliveira.~~dated as of March 7, 2014
~~10.2#~~⁽²⁾		~~Offer Letter, dated February 27, 2019, by and between KushCo Holdings, Inc. and Jason Vegotsky.~~
~~10.3~~⁽¹⁾4.1		Form of Third Exchange Note (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (File No. 000-55418) filed on June 10, 2020)

10.1		Form of Securities Purchase Agreement dated ~~April 29, 2019,~~February 6, 2020 (incorporated by ~~and between KushCo Holdings, Inc. and HB Sub Fund II LLC.~~reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-55418) filed February 10, 2020)
~~10.4#~~⁽³⁾		~~Amendment to Offer Letter, dated June 7, 2019, by and between KushCo Holdings, Inc. and Rodrigo de Oliveira.~~
31.1*		Certification of principal executive officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

31.2*		Certification of principal financial and accounting officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.1**		Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

32.2**		Certification of principal financial and accounting officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
101.INS*
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

~~(1)~~	~~Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed April 30, 2019) and incorporated by reference thereto.~~
~~(2)~~	~~Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed March 5, 2019) and incorporated by reference thereto.~~
~~(3)~~	~~Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed June 11, 2019) and incorporated by reference thereto.~~

	~~KUSHCO HOLDINGS, INC.~~

Date: July 9, ~~2019~~2020	By:			/s/ Nicholas Kovacevich
					Nicholas Kovacevich
					Chairman and Chief Executive Officer (principal executive officer)

Date: July 9, 2020			By:		/s/ Stephen Christoffersen
					~~(Principal executive officer)~~Stephen Christoffersen

~~Date: July 9, 2019~~	~~By:~~	~~/s/ Christopher Tedford~~
		~~Christopher Tedford~~
		Chief Financial Officer
		(Principal ~~financial and accounting officer)~~Financial Officer)