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

Good morning. My name is Blake. I will be your conference operator today. At this time, I would like to welcome everyone to the SLANG Worldwide First Quarter 2021 Conference Call. [Operator Instructions] Thank you. Mr. Phil Carlson. You may begin your conference.

Thank you, operator, and good morning, everyone. Our speakers on today's call will be Chris Driessen, President and CEO of SLANG; and Mikel Rutherford, Chief Financial Officer. Joining them for the Q&A session will be John Moynan, General Counsel and Chief Operating Officer. Before we begin, I would like to remind listeners that certain statements made during this conference call presentation may constitute forward-looking information and forward-looking statements within the meaning of applicable security laws. These statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of SLANG Worldwide and its subsidiary entities or the industry in which it operates, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this conference call presentation, such statements use words such as may, will, expect, believe, plan and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this presentation. These risk factors are discussed in detail under the headings Risks and Uncertainties in the management discussion and analysis for the full year and 3 months ended December 31, 2020 and other disclosure documents available on the company's profile on SEDAR at www.sedar.com. The company undertakes no obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required under securities legislation. Now I'd like to turn the call over to Chris Driessen, CEO. Chris, Please go ahead.

Thank you, Phil. Good morning, everyone, and thank you for joining us on our results call for the first quarter ended March 31, 2021. While it has only been a few weeks since our year-end earnings call, I'm pleased to have this opportunity to discuss our latest achievements. We entered 2021 in an incredibly strong position, following a very eventful 2020, during which we closed on several acquisitions, further consolidating our supply chain in core markets and secured a foothold in several of our emerging markets. As a result of these initiatives, we continued to experience growth in the first quarter of 2021 with revenue of $9.9 million, an impressive 112% increase over $4.7 million in Q1 2020, and a marginal increase over Q4 2020. The improved topline results were partially due to the acquisition of Peoria Partners, our Colorado-based distribution business, which has been renamed SLANG Colorado Distribution or SCD; Pleasant Valley Ranch or PVR, a Colorado Outdoor and Greenhouse Cultivation Facility, which has been renamed SLANG Colorado Cultivation or SCC; and Lunchbox Alchemy or LBA, an Edibles manufacturer in Oregon. These acquisitions represented a shift in our corporate positioning as we are now recognizing wholesale revenue by distributing all SLANG branded products in both markets as a plant-touching entity, recognizing revenue from sales directly to dispensaries. In Q1 2020, the company was only recognizing revenue from packaging and hardware sales as well as licensing fees. Throughout the remainder of 2021 and beyond, we will execute against our strategy to bring new product skews to market through the launch of additional brands and new product verticals and the expansion of existing product lines, as well as through expansion into new states. With the cash balance of $12.4 million as of March 31 and strengthening fundamentals of the business, we have the financial flexibility and operational infrastructure to drive this strategy forward. As expected, gross profit also improved on a sequential basis to 37% in Q1 from 33% in Q4, as we fully consolidated the economics of Allied Concessions Group or ACG, starting as of December 31, 2020. As a reminder, ACG has been our Colorado manufacturing partner. This acquisition has been in the works for a long time, and we're excited to be nearing the finish line with closing expected in the coming weeks. Colorado is an important core market for us, and we are growing our presence in the State through our vertically integrated plant-touching operations. Following our recent acquisitions, we are now benefiting from better unit economics in comparison to Q4 2020 and more flexibility within products. We also have the ability to produce our entire portfolio of products in Colorado, and soon we'll be able to do the same in Oregon. Using these expanded capabilities, we signed a strategic partnership agreement with Aver Skin to manufacture, co-package, and distribute cannabis-based skincare products with the potential to expand into additional markets over time. We also entered into a strategic partnership to manufacture and distribute cannabis products for Flower by Edie Parker, which launched in Colorado in early 2021 with the potential to expand into additional markets over time. In Oregon, our other core market, we are continuing to integrate and invest in the assets that we acquired in 2020, including launching a new e-commerce store through which we are selling our CBD products in the first quarter. We are also [ onlining ] hydrocarbon extraction capabilities at the LBA production facility and Bend. These types of investments will enable us to maximize the growth opportunity in our core markets. We continue to be pleased with our performance with SLANG's brands maintaining their market leading positions in core markets in the first quarter of 2021. Highlights include O.pen, ranked as the #1 vape cartridge in Colorado and #12 in Oregon. Firefly Mini was the #5 and O.pen Micro was the #4 disposable vaporizer in Colorado. Bakked was the #5 dab-able distillate in Oregon and also #5 in Colorado. District Edibles was the #12 gummy in Colorado and Lunchbox was the #8 gummy in Oregon. Pressies was the #4 pill in Colorado. We will continue to drive brand performance and consolidate our supply chain assets in these core states and work towards developing new products. With more and more product innovation being tested in these markets, this serves as a blueprint for us as we plan to introduce our products to our emerging markets using an asset-light, low risk business model centered around securing partnerships with local players. We are pleased to be making significant progress with our emerging market strategy, a testament to our IP and strong reputation in the industry. Our strategy in these states is cost-effective and enable us to rapidly scale our footprint and brand name across 13 states, Canada and Puerto Rico. With California, Massachusetts, Michigan and Washington coming online this year, we expect to increase our emerging market revenue with minimum additional expense, thereby increasing profit from this channel. In California, we are working towards launching District Edibles, the previous best-selling gummy in California in Q2 in partnership with Natura Life and Science. Likewise, in Massachusetts, we are planning to launch new products and partnership with Trulieve, as early as this summer. This follows our very successful partnership with Trulieve in Florida, where we continue to sell SLANG products at all 21 -- all 81 Trulieve locations. In the first quarter, we also added O.pen Cured Resin to our Florida portfolio and District Edibles gummies to launch in Q2 as well. In Michigan, our strategic partnership with Gage Cannabis is expected to bring branded products to market in Q3 of 2021; and in Oklahoma, O.pen Cured Resin is currently being launched. Lastly, in the first quarter, the company's O.pen and Firefly Mini line of products became available in Ontario, Canada. The Firefly Mini has been ranked as high as the #1 selling disposable for several weeks in Q1. Our emerging market channel continues to grow and we expect these new products to drive stronger revenues in these states by generating an ever-growing stream of royalties without a material increase to cost. Now before turning the call over to Mikel to talk through our financial results for the quarter, I would like to touch on our third focus area, aside from core markets and emerging markets; and that is our THC free line of products, which can be broadly distributed nationwide and beyond, including our dryer vaporizer, the Firefly 2+, O.pen 2.0 Battery, and other hardware, as well as Lunchbox Alchemy CBD gummies. Our TH-free product line gives us the ability to build a brand nationwide by establishing a foothold in many states to pave the way for future growth. These higher margin products also allow for both domestic and international partnerships with our new European distribution partners. As you can see, we have entered 2021 with a strong operation to accelerate our growth. Our large distribution footprint allows us to reach the vast majority of retailers in our core markets and we are making continuous headway in our emerging markets. This progress is driving steady revenue performance while we also operate significantly more streamlined operations in a leaner, more efficient business model. It is expected that SLANG's financial performance will continue to improve from both the sale of cannabis in core markets, as well as from sales in emerging markets as we expand our product distribution and drive branded units and branded servings. With that, I'll turn the call over to Mikel Rutherford, CFO, to talk through our financial results. Ruth?

Thanks, Chris. As Chris mentioned, we continued to demonstrate growth in the first quarter, following strong second half of 2020. Revenue for Q1 2021 was $9.9 million compared to $4.7 million in Q1 2020 and $9.7 million in the fourth quarter of 2020. The primary drivers of this growth were strong demand in the company's core markets of Colorado and Oregon, as well as the consolidation in wholesale revenue. Similar strength in the company's emerging markets also attributed to sequential growth, as did the successful launch of new products, including Lunchbox Alchemy CBD. Gross profit for Q1 2021 was $3.7 million or 37% in gross margin compared with $2.9 million or 61% gross margin in Q1 2020 and $0.2 million or 33% gross margin in the fourth quarter of 2020. The increase in margin from last quarter is a result of fully consolidating the economics of our Colorado manufacturing partner, ACG, as of December 31, 2020. As our business continues to consolidate with the roll-up of our supply chain assets, we expect to see ongoing variation in our margins with the level of fluctuation in there as the assets are integrated. Once fully being integrated, we expect to see a higher gross profit margin than we reported in this quarter. The decrease in margin from the first quarter of 2020 is also a result of the acquisitions of our core manufacturing partners in both Colorado and Oregon. As Chris discussed, these acquisitions represented the shift in our corporate positioning as we are now recognizing wholesale revenue by distributing all SLANG branded products in both core markets as a plant-touching entity, therefore recognizing revenue from sales directly to dispensaries. In Q1 2020, the company was only recognizing the packaging and licensing fees from sales to licensees. This shift in economics means that we will now be recognizing higher topline revenue with lower gross margin percentages, but higher gross profit dollars. In Q1 2020, we were recognizing lower topline revenue with higher growth in percentages, but lower gross profit dollars. I'll turn now to expenses. We continue to realize the benefit of operational streamlining processes we began last year as those changes are fully implemented. Operating expenses were $10.3 million in [ Q1 2020 ] compared to $10.8 million in Q1 2020, representing a 4% decrease year-over-year. Included in this quarter's operating expenses were $1.7 million related to the companies acquired in the second half of 2020. For comparability, excluding the acquired companies, the operating expenses in Q1 2021 would have been $8.6 million, a $2.1 million reduction representing a 20% decrease when compared to Q1 2020. The reduction of operating expenses is a result of strategic initiatives taken by management, including a focus on targeting corporate expenditures to only core markets; the elimination of cost pertaining to ongoing integration; reduction of SG&A, including an optimization of our workforce; and the ongoing efforts to consolidate the core markets supply. Adjusted EBITDA was a loss of $960,000 in the first quarter of 2021 compared with a loss of $2.7 million in the first quarter of 2020 and a loss of $1.1 million in the fourth quarter of 2020. This improvement in adjusted EBITDA is primarily a result of the 2 main drivers already discussed: An increase in revenue and gross profit, together with the decrease in operating expenses. Adjusted EBITDA excludes non-cash items such as the impact of unrealized fair values, share-based compensation, impairments, onetime gains and losses and onetime revenues and expenses. Turning to our balance sheet. We had $12.4 million of cash and cash equivalents as of March 31, 2021 compared to $6.5 million at December 31, 2020. This includes the proceeds from an oversubscribed private placement of $11.9 million led by cannabis-focused private equity Merida Capital Holdings. We continue to monitor this very closely, and we operate with minimal debt, in line with our ethos of strong cost control. Our capital-light business model does not require significant CapEx or working capital investments, even in times of significant growth. At this point, I'd like to pass it back to Chris for closing comments. Chris?

Thanks, Mikel. To conclude, we started 2021 on a strong footing and are pleased with the significantly improved top line revenues and adjusted EBITDA reported in our first quarter results. This performance was a result of the integration of the recently acquired assets in Colorado and Oregon, and last year's corporate repositioning initiatives to establish a capital-efficient and scalable strategy. We expect a continued normalization of margins and increased revenues throughout 2021. We are now well positioned to continue this growth path in the remainder of 2021. Our focus remains, as always, on brand performance. The SLANG network spans across 2,200 plus points of retail distribution, spanning 13 states, Canada and Puerto Rico. With our CBD products available nationwide in over 600 stores and, more recently, through our e-commerce channel, we have proven brand recognition and the ability to execute, providing us with the confidence in our expansion strategy. In fact, we continued our progress into Q2, with April being the highest revenue-generating month in SLANG's history. We have a major opportunity ahead of us to build a sizable and sustainable business. And I would like to thank our loyal shareholders for their support during this exciting time in our evolution. With that, I'd like to turn the call over to the operator for the Q&A session of the call.

[Operator Instructions] Your first question is from Bobby Burleson from Canaccord.