SLANG Worldwide Inc. (SLNG) Earnings Call Transcript & Summary

Good morning. Thanks, everybody, for being here. Very happy to have SLANG Worldwide, CEO and President, Chris Driessen, here to give us an overview of a leading cannabis CPG company that's managed to successfully deploy an asset-light model. So these guys are doing a lot in branding across a spectrum of products and in multiple states. So with that, Chris, I'll turn it over to you. Thank you.

Yes. Thank you very much, and good morning, everyone. My name is Chris Driessen, President and CEO of SLANG Worldwide. Here's all the legal mumbo jumbo, if you can see my screen, that our attorneys tell us we need to let you know. But I'm here to talk to you today about what makes SLANG unique? What do we do as a company that's may be different from other cannabis companies that are out there? So we'll start with what some of the investment highlights are. As Bobby mentioned, we're a diversified portfolio of brands. In fact, we're a house of brands that compete and win across some of the most competitive markets in North America. We're currently in 12 states, 3 countries. Those being Puerto Rico, Jamaica and, of course, Canada. And what we do is we enter markets through a capital-light, efficient model that allows us to bring our brands to market with strategic partners that are producing our brands. We're teaching them how to make our things. We're delivering SOP. But over and above that, we're developing a strategic partnership with these folks, where we also provide sales and marketing service, product and op service and, obviously, generate revenue from both the licensing aspect and the strategic partner, value-added services that we provide. We recently announced a management transition to myself and my fellow management team members, Mike Rutherford, CFO; John Moynan, COO and General Counsel. And we've got a track record of driving profit across the businesses that we've run in the past, and that we've been executives of and a broad end to provide a supreme operational focus as we continue to build through and grow our business. One of the unique things about SLANG is we're very close to profitability. Our capital-light model and strong margins allow for us to not only go public, not only to expand, but to get to profitability. And obviously, that's our #1 objective in every company's goal, and I'm pleased to report that we're well on that path. Some of the strategic initiatives that we have that are delivering growth for us in the second half of 2020, we're entering into new markets. We recently announced partnerships with -- in Michigan with Gage Cannabis or in Ohio with Standard Wellness, and Oklahoma with Elite Cultivation & Processing. And then a little bit further back than that, our great relationship with our friends, Trulieve, down in Florida. We're also introducing new products. SLANG makes a wide variety of brands that -- in the vape category with our O.pen and Firefly lines, in concentrate category with Bakked concentrates, edibles with District Edibles, and soon, we'll close on our acquisition in Oregon of Lunchbox Alchemy, further segmenting and supporting our edibles vertical. We also make ingestibles with our Pressies pill lines. And more recently, we have announced our partnerships, and they're doing extremely well with Cookies in the distribution of flower. Further to that, we're introducing hydrocarbon products in both concentrate and vape, and consolidating assets in our core markets of Oregon and Colorado. I'm very pleased to report extremely strong growth in both of those markets. As a CPG company, we base ourselves really on a few different KPIs or key performance indicators. Our goal is to drive and dominate market share. It's our belief that brands will have a premium place on them, you'll see this in a slide later in the presentation of what typically happens in more mainstream industries, which you generally see an outsized multiple attached to brands. So we measure ourselves by market share, certainly, but there's a handful of different ways that we look at it, too. Branded unit sales. How many finished branded goods are ourselves or our strategic partners putting into the market with our brands on it? Branded surveys. These are the number of times people are having experiences with one of our branded products. And you can see we did almost 0.25 billion of those in 2019. That's a lot of people having a lot of good experiences with SLANG-branded products and we're very proud of that number. Something very unique for us as well, again, we're distributed across 12 states and 3 countries, we're in over 1,100 dispensaries. Further to that, we're in over 2,400 brick-and-mortar non-cannabis retailers, a head shop, a smoke shop, et cetera, with our non-cannabis products, typically, hardware, our Firefly 2+ dryer, vaporizer, our O.penVAPE 2.0 Variable Voltage battery. But collectively, we're pushing 4,000 brick-and-mortar locations where you can find branded products of ours in the market. Since our inception, we've delivered over 2 billion branded servings. We also measure things like total points of distribution, how many brands do we have and how many places. These are all access points for patients or consumers to experience our brands. And it's our belief that dominating market share one day will provide an outsized multiple that's attached to our brands. How do those things happen? The SLANG distribution network. Our distribution network, as I mentioned, spans 12 states, 3 countries. Very excited with our progress that we've made, not only in our core markets of Colorado and Oregon, but more recently in Canada. We have received information that our wholesale license through our partner company, Agripharm, has been approved and look forward to putting SLANG branded products into that market very, very soon. Our core markets, it's important to understand what that means. The core market for us is Oregon and Colorado. In a core market, what is unique about that from an emerging market is we're doing everything in the process up to and including wholesale of products, ourselves and our partner companies. So we license the products, we're manufacturing the products, we're distributing the products and we're generating wholesale revenue and profits in Colorado and Oregon. In the other states that you see here in red, we enter into a strategic partnership, whereby a different licensed operator, Trulieve, Gage, Standard, some of the folks that I've mentioned already, are technically making those products. And we are basically showing them how to do that. We are generating, obviously, revenue from the sales of the components, the hardware, et cetera. But then we're also generating revenue from the value-added services, generally, sales and marketing, operational and product support. What's key to understand about the core and emerging market strategy is the difference in revenue profile. When you are an emerging market with the licensing revenue, the strategic partnership revenue, the top line is far and lower than, say, a retailer, who's getting the toppest of the top lines. We're getting a smaller number in those markets, albeit generally more profitable per unit. In a core market, our top line revenue is much higher, but has a more moderate profile -- margin profile. Our brands, as you can see here, span many, many categories. So vape, concentrates, edibles, hardware, flower, ingestibles. You can see some of our branded products in the middle column, and they span a very wide range of categories. But not only are we widely distributed across many dispensaries and across many categories, we're also segmented within those categories. And what that means is that we offer products in the value price point, in the premium price point, in the ultra-premium price point. What that allows for is flexibility. As consumer preferences change, as people's buying habits change, as their financial situations change, which has been the case for a lot of people in the COVID era, we're able to pivot and shift with those times because we offer many different products and many different categories at many different price points, we're just covering a very wide range of the market. So our market share is something that we really pride ourselves on, and that's only possible through doing these things through a whole host of partners in the SLANG network and allowing us to get to all those numbers of dispensaries that we're in. So you can see that we make vape pens. We make disposable vape pens. We make pills or ingestibles. We make gummies. We make sour gummies. We make chocolate. We make concentrates. And so generally speaking, you can spend time in a dispensary, particularly in competitive markets, you're going to be made aware of our products. It's very difficult to walk into a place in Oregon or Colorado or many other states and not have us be in your face with our brands. Our market penetration in Oregon is approaching 65%. We're in almost 400 stores in that state. In Colorado, we're in almost 300 stores here, where I call, home in Denver, and in Colorado as a whole. So we just are extremely widely distributed, and we're very deep and wide with the retailers that we work within the states. Last, but not least, is our strategic partners, Canopy Growth, Trulieve, Greenlane, Standard, Cookies. This list isn't exhaustive. There's many more other than this. But that's how we drive value. We form relationships with folks where we don't have infrastructure, where we don't have leadership and ultimately are able to work with them in a very capital-efficient or capital-light way to bring our brands to market. We pride ourselves on the scoreboard. This is a bit of a busy slide, but I think it's important for people to understand, not only do we have a lot of products, but those products compete and win in some of the toughest places in the country that sell cannabis. So we are in some limited license markets, but we're also in very open, free markets like Oklahoma, Oregon, Colorado. And the scoreboard doesn't lie. We're the #1 vape in multiple states. Top 5 in almost every state that we're in, as far as vape is concerned. In Colorado, we've been #1, basically, since they've been keeping score. And in fact, O.pen is the second best-selling cannabis brand of all-time of any brand according to BDS Analytics. So we're very, very proud of that. More recently, we had a lot of success with our District Edibles brand. Again, district Edibles makes gummies, it makes chocolate, it makes sour gummies. Very pleased to report that, that brand is expanding very rapidly into more and more markets, and we've enjoyed a lot of success in the edibles category. Our Lunchbox Alchemy acquisition is soon to be closed in Oregon. That will welcome the #5 edible brand in Oregon into our portfolio. And more importantly for us, allows us to segment our edibles category. So I'll have a value product in District, I'll have a premium product in Lunchbox Alchemy, which again allows us just to get deeper and wider with retailers and basically work with a wider range of consumers. Our Pressie Pill brand, our ingestible brand, is #4 now in Colorado, having a lot of success in moving up the leader board. And albeit that pills and ingestibles in general are a smaller category, it's more and more access point for us, one more total point of distribution that we can get our name out there. Bakked concentrates does very well. Historically has been a distillate-focused brand. Our key products there, the Dabaratus, and the soon to be launched [ Gyro ], and also extremely excited that we've now entered into hydrocarbon extraction methodology, whereby we'll be making things like sauce, live resin. In fact, the O.penVAPE pure live resin cartridge which goes live next week in Colorado, and our sales teams' on the phone right now are talking to dispensaries to get that product slotted in for our launch next week. Very excited about that. Brand ownership drives value. I talked a bit about this earlier. What you see in capital markets today with cannabis, obviously, the MSOs are out there, they're doing crazy top line revenue, which is awesome, and we are just a fundamentally different business than those guys in that we never touch retail. We don't own retail assets anywhere in the world. And in fact, we don't want to. I want to ride shotgun with every MSO and every dispensary in the country. We want to be on those shelves, of course, just like we want to be on any shelf. As wholesalers and as brand producers, we want our products to be widely distributed, we want people to have a wide range of access points to experience our products, and we want to drive market share, which is inherent with the brand. Brands, in general, when you look at a more traditional industry, you generally see a much higher multiple in a CPG company, for instance, on the right side, here you can see L'Oreal, Coca-Cola, Diageo, et cetera, the multiples you get there are far higher than what you see in a traditional retail. 7-Eleven and Coca-Cola are probably the best comparables when you're looking at this. Certainly, we're nowhere near that size, not yet at least. But 7-Eleven and Coca-Cola do very similar revenue, yet one of those gets just below a 1 multiple and the other one is closer to 6. Why is that? Well, it's because the brand is able to produce a lot of awareness, a lot of distribution and be on a lot of different shelves, 7-Eleven or Costco or anywhere else, at a much higher profit margin. So in time, it's our belief that when you look at SLANG today compared to our peers, we're undervalued. What you see in the mainstream industry is that the brand does start to command a higher level or a higher multiple, and it's our belief that in time, that will happen in cannabis as well. Our business model. We really make money in 2 different ways. Well, 3, if you count our e-commerce channel. But I'm going to focus on a core market and emerging market strategy. You can see here with the graphic, in a core market, SLANG is doing -- or our partner companies are doing everything soup to nuts, from sourcing raw material to taking that raw material and producing a finished goods, from selling those finished goods into cannabis dispensaries or retailers, collecting that wholesale revenue and then, of course, those dispensaries are purveying our products to the end consumer. This again reflects what happens post acquisition. We're very late-stage in both Colorado and Oregon, and excited to close upon those acquisitions. Not only is it a meaningful increase to our revenue, but also to our profit. Profitability is our #1 goal, and we look to be on that path very, very soon. In an emerging market, as I mentioned earlier, it's a little bit different. The endgame is the same. Finished goods are still being provided to consumers by retailers, but SLANG really is more on the front end of this process. So it's licensing its brands, it's selling the components, it's selling the consulting services to these different strategic partners across the U.S. and Canada. And those folks are then producing the finished goods, which goes into retailers. So naturally, this is a smaller or a lower top line revenue profile, but the unit economics generally offer a higher-margin profile. What's really unique about us is the versatility to go back and forth between these 2 models. When you enter a new market and you're building new facilities and you're getting licenses, it's very capital intensive. It takes a lot of time, a lot of money and a lot of peoples' efforts and resources. And for us, sometimes that makes sense. When we look at Colorado and the market share that we command here, when we look at Oregon and the growth we're experiencing there, it made sense for SLANG to enter into M&A activity that allowed those markets to become a core market for us. We wanted that higher top line revenue because we knew it was going to be profitable. In other markets where we may not have the leadership or the infrastructure or the opportunity, we always look to partner with folks that are the strongest or best-in-class operators in a given place, again, Trulieve, Gage, Standard Wellness, Canopy Growth with our JV up at Agripharm in Ontario. These are household names in the cannabis world. And we're very proud to partner with those folks because they've built great businesses in their respective markets. So for us, we're able to join forces with them in those markets, produce these brands alongside of their own in many cases and put them out into places in very rapid fashion, which allows for that wide distribution and us to, frankly, increase our total points of distribution and market share. When you look at our business model, it's important to understand when you're an emerging markets model to the far right of the slide, and this is based on a $50 retail branded product. If I'm only doing the licensing portion of the emerging market strategic partnership model, I'm getting a lower top line, as you can see here, but I'm getting a higher margin, which is great. That drives finished goods, that drives branded unit sales, that drives branded servings, but it leaves a little bit to be desired on the revenue profile. So we go into the core markets model, where clearly, are making a lot more money on the top line via that wholesale revenue, but your margin starts to come down a bit. When you're producing all those things, your gross profit just isn't the same as if you're doing a licensing and consulting services. And just for comparison, when you look at maybe a traditional MSO or a retailer in general, they're getting the true top line, that $50. Now generally speaking, those margins are a little lower. Everybody knows that there's a lot of OpEx in retail. But you are rewarded with a higher top line revenue, albeit at generally smaller profit margin. When you look at our business model, it's our belief, again, that brands win in the end. We're a long-term play. We're a business that's built to withstand the test of time. We're building a lasting foundation that's built on branded products, strong partnerships, improving processes. So we always play on the right 2 sides of this slide, either wholesale or licensing. To give a quick financial overview. Last year, we grossed $30 million. Again, this was pre any plant touching acquisition. So this only recognized what we're doing from that emerging market or strategic partnership model. A lot of people took note, in Q1, our revenues dropped from $8.7 million to $4.7 million. That was intentional, and that was due to us shifting what previously for us have been a core market of Massachusetts, Michigan and California into an emerging market. As we looked at those markets and the money we were pouring into them, we made the intentional decision to pivot back to a model that we know drives profit. A lot of people are familiar with the headwinds in the California market. But in Michigan, we had to be honest with ourselves. We looked at Gage Cannabis and said, gosh, these guys have already put in all this infrastructure, this leadership, why not join forces with them to get our products in the Michigan market even sooner. And as for Massachusetts, very excited that we'll have some news that's coming up there soon. So I can't wait to share that with everyone. As you see, when it's just licensing revenue, our gross margins are very strong, 61%. There's a lot of upward pressure on that as we bring in more of this consulting revenue. It's going to drive that number even higher. Also, one of the things unique about SLANG is because we're capital-light, we just don't need a ton of cash on the balance sheet. We're able to enter markets in a capital-light way that doesn't require capital-intensive outlays. And we have very minimal long-term debt. So in addition to a strong balance sheet, we've got a clean balance sheet. We don't have a lot of exotic converts. We don't have onerous debt. And very proud of the balance sheet that we have maintained. And one of the most recent things we can share with you about that is we had our first consolidated cash flow positive month in June and look forward, again, on our radical focus on profitability getting there very, very soon. So what are we excited about moving forward? There's a lot of good stuff, but these are kind of the highlights. Our organic growth in core markets, we are absolutely going gangbusters in Oregon. We have great market penetration, we continue to introduce more products there, and we literally are growing month by month by month. And now in the top 5, in pretty much everything we're doing there. So very proud of our work that we've done in Oregon. Colorado, our home state, our fortress here, our legacy company, Organa Brands, and prior to that, Organa Labs, is the oldest continuously operated licensed CO2 extraction lab in the country. And right now, the good folks of that lab are still producing oil. So we've got a great, great home here in Colorado. We dominate across many different categories and are seeing triple-digit growth year-over-year in our home state in Colorado. We've recently introduced our partnership with Cookies. We've gone into distributing flower. That's obviously the largest category in any cannabis market. But historically, we've been processing guys, we've been distribution and wholesale guys, and really haven't dealt with cultivation in the past. This allows us, through the Cookies partnership, for someone else to cultivate that product in both Oregon and Colorado, and for us to really use our experience and our wide distribution to get their brand out there. Their brand is great. It's been very additive for us. It brings along our products. When we go into retailers and they want Cookies flower, generally speaking, they're picking up SLANG-branded products as well. Many of those folks we had already worked with, which is why Cookies wanted to work with us. But we've also brought on a lot of new accounts as well that maybe weren't familiar with us or haven't worked with us in the past. It's been very additive to have them as part of our family. Our capital-efficient model, I talked about this before. It doesn't take us a lot of money to go in. Generally speaking, people are paying heavy, heavy dollars. If you look at Florida, for example, people pay anywhere from $10 million to $100 million just for the opportunity to play there, whereas we started working with Trulieve, the 800-pound gorilla in Florida, and basically they're generating revenue without that heavy upfront expense. And of course, they do a great job and we're more than pleased to be working with them there. We benefit from strong brand performance in these emerging markets as they mature. So what you see is, over time, is that emerging market generates more profit, gets a little further in their time line, we're able to look at that market, and in some cases, convert that market to a core market, as we did in Oregon. Oregon at one time was an emerging market for us. We made the investment. We were able to deploy the capital to make it a core market, and that's been a great success story for us. And last but not least, upon closing of the previously announced acquisitions in Colorado and Oregon, it's going to provide us, a, with a material shift in our revenue for the positive, same thing with our profit. But it also allows us to start consolidating supply chain assets, whether it's cultivation, different facilities, we're able just to recognize a much rosier bottom line. And of course, we're then able to get rid of redundant assets in those places, making us even more efficient and more profitable. Again, back to showing that brands do command a higher multiple as the time line goes on and we do that by driving profit and more importantly, driving market share. Last but not least, you can see our capital structure here. Look through and see some of the different things. We have several different analysts that are covering them -- covering us and we appreciate all of them, but just gives you a little bit of idea of where we sit. And then again, it's our belief that SLANG Worldwide is a great investment moving forward because of the great things that we have happening for us in the very near future, the growth catalysts that I mentioned, the acquisitions closing that I mentioned. And of course, long term, brands win the day. And we're very proud to be a brands company. Thank you, everyone.

Great. Okay. Thank you, Chris. This has been a great overview. Hope everybody listening got -- and looking at the slides got a lot of value out of this. And once again, thanks for participating. Unfortunately, we don't have time for Q&A. I've got a lot of questions, all good ones. But thanks again, Chris, and looking forward to having you join us again soon.

Thank you very much, Bobby.