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

Good morning. Thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the SLANG Worldwide Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Phil Carlson with KCSA. Sir, please go ahead.

Thank you, operator, and good morning, everyone. Our speakers on today's call will be Mr. Drew McManigle, Interim CEO and Chairman of SLANG; and Mr. Mikel Rutherford Chief Financial Officer. Before we begin, please let me remind you that during this conference call, SLANG's management may make forward-looking statements made in the meaning of applicable security laws. Forward-looking statements may include, but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations or intentions. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially include limited to the risk factors contained in the company's filings with SEDAR. Please also note any forward-looking statements made here are as of today and except to the extent required by law, the company assumes no obligation to update statements as circumstances change. Now I'd like to turn the call over to Mr. Drew McManigle, Interim CEO and Chairman. Drew, please go ahead.

Thank you, Phil. Good morning, everyone, and thank you for joining us on our third quarter 2021 financial results call at the end of September 30, 2021. Before a more detailed discussion of the current status of SLANG's operational and financial performance during the third quarter, I'd like to provide a brief introduction. My background is deeply rooted in restructuring practices and largely comprises all facts of business reorganization. A critical part of my involvement in assisting in the rightsizing of businesses, which spans a diverse set of industries, has included stepping into executive leadership roles on an interim basis and providing structural financial counsel to reposition businesses for longevity and overall staying power. Based upon the options available, the ongoing execution of SLANG's operations, the Board has decided new experienced, proven leadership as the most effective approach. We've recently announced the completion of a successful financing transaction with our respected strategic partner Trulieve and our noteworthy shareholders, Pura Vida and Seventh Avenue. This financing agreement provides over $17 million initially with an option to upsize during the 3-year term by converting a portion of the interest into SLANG's common shares and signifies a firm vote of confidence from each of these esteemed partners in the viability of the company's established brand power and foundational strength. Additionally, this significant in support enables this newly appointed restorative leadership team to commence the strategic transformation of SLANG. The Board opted for a proactive approach towards the company are challenges, the appointment of an expert transformational leadership team in conjunction with the significant financing aspect from solid and supportive partners provides SLANG with a firm platform and the ability to make rapid progress in the repositioning of the company. In the very short time since I've been appointed to lead this transformation process, our team's immediate action step has to assess the elements of the company's current operations that are providing attractive ROI versus the elements that are pressuring the financial performance and therefore, the ability to reach its full potential to profitable revenue. My leadership style consists of making meaningful yet timely decisions and is a proven method to reach the ultimate vision of creating a streamlined vision of SLANG that generates profitability and creates value for our loyal shareholder base. To provide high-level direction on the transformation process of SLANG, we start with assessing the current benefits that the company offers, including a solid foundational base, a leading product mix and established marketing. We will continue to strategically position the company in core and emerging market opportunities that present the greatest demand, sales growth momentum efficiency. As indicated in our recent press release, the financing participants, including our strategic partner Trulieve and significant shareholders permit and Seventh Avenue hold confidence in SLANG's overall business strategy as well as our recent Vermont acquisition. Management views Vermont, not simply as a strategic core market but also as a catalyst for considerable growth opportunities under the direction of the transformed leadership team's fundamental expertise in guiding and creating operations that materialize in profitability. This confidence is further reinforced with the condition in the agreement noting 50% of the financing proceeds are to be allocated to complete the development and integration of the Vermont operations to the Greater Slate platform thus ensuring the revamped operational capabilities result in future growth. In further building out the state's operations, we will be certain to employ our proven pragmatic and nimble approach to capture significant efficiencies across the financial and operational life cycle, including infrastructure and human capital as well as refining the product mix that is best suited to the state's most popular consumer preferences. In addition to Vermont and a key factor in the transformation strategy, Colorado will remain a core market going forward. as we will continue to consolidate and streamline operations that are already underway and work towards refining the market-leading brands available in the state to generate attractive revenue. Next steps in the streamlining process in Colorado include further consolidation across manufacturing and distribution segments and selling several licenses in the state as well as our activation facility. The goal of the new management team in my direction is to operate the company in a nimble and efficient manner. The consolidated Colorado operations will create numerous operating efficiencies and enable increased revenue recognition in the future. To that end, we've evaluated the viable entities under SLANG's current core market strategy and we've decided to reorg operations and reposition the state as an emerging market. In the near term, we will wind down manufacturing operations of our THC products in the state, but will continue to offer our CBD brands as we search for a partner to license our products in this market. Touching on the transformation of our overall emerging market strategy, we are reviewing the current footprint of emerging markets and will only remain in the ones that provide meaningful and profitable lines of revenue while exiting the markets that are unprofitable. In order to generate future significant revenue growth we will assess the performance data on brands and products offered in these regions and only retain the offerings that are most sensible in terms of total value return based on the output cost and clear contributions to SLANG's revenue growth. Importantly, we will also consider opportunities for potential growth in alternative geographies with high consumer demand, reduce costs and likely to generate a positive return. A critical factor in our transformative approach is our notable strategic shifts with Trulieve, which provides SLANG significant growth opportunities on a go-forward basis in several markets. In addition to SLANG's products and brands available in all Trulieve retail locations throughout Florida, and expanded footprint announced during the third quarter now comprises Trulieve retail locations in Massachusetts beginning in July with entrance to additional states of Pennsylvania by the end of Q2 2022, and West Virginia by the end of Q3 2022. In addition to pivoting our core markets and overall footprint, as another pillar of the company's transformation strategy, we will reevaluate SLANG's product mix, retaining the solid products and leading brands in order to capitalize with the greatest unit economics. During this reevaluation process, we will take a thorough analysis of the full revenue life cycle of the current brand and product portfolio, including packaging and product costs, marketing costs and response rates. As part of the evaluation, we will suggest potential efficiencies inclusive of the sales process and distribution method. The resulting data will reveal the necessary steps forward as it relates to product and brand viability and could entail streamlining or rebuilding our product portfolio to achieve profitable revenue dollars and eliminating the less and nonprofitable revenue dollars. Effectively, you will see this management team curtail investment in products, operations and geographies that do not present a compelling return on investment to the company and have up to this point, negatively impacted shareholder value. Our third quarter revenue of $10.1 million represents an increase of 28% from the prior year period but resulted in a sequential decline of 11% from the second quarter of 2021. Our top line year-over-year revenue growth represents continued momentum in consumer demand for a diversified portfolio of leading cannabis brands. The 11% sequential revenue decline is largely a function of the overall decline in the Colorado market due to supply chain challenges resulting in low inventory levels as well as overall cyclical declines in the cannabis sector during the quarter. However, we believe there remains significant value in our Colorado operations, brand portfolio and the overall Colorado cannabis market in general. We will remain, as previously noted, a core market to our strategy. Overall, we want to assure our shareholder base that the financing support provided by Trulieve and Seventh Avenue instills a tremendous vote of confidence in the viability of various segments of SLANG's platform based upon the immediate reorganization under new, deeply experienced and transformative leadership. Our structural transition encompasses a much leaner, more linear version of SLANG and our transformative agenda begins with building a solid infrastructure by refining our strategy in core and emerging markets as well as product mix based on assessments and due diligence to ensure profitability on each line of revenue. Additionally, we will take greater strides in the handling of SLANG's communicated cost-cutting initiatives. As a function of the assessments by new management, further cost-cutting measures and reductions in human capital and providers will be necessary. This type ensures the company is aligned with our updated plan and forecasted financial performance including profitable revenue growth over the long term. Of note, despite taking immediate and rather significant steps to transform the company, there is a lag effect and we do anticipate disappointing financial performance to continue in the near term. Based on management's further strategic evaluations throughout 2022 and with the potential for unseen events to occur, over the course of this turnaround, the company's financial performance going forward will be difficult to predict. But once our repositioning initiatives take hold, the results will indicate improvements across key metrics and profitability over the long term. On a final note, we have tremendous appreciation for Trulieve, Pura Vida and Seventh Avenue and their conviction in the established segments across this land platform built by SLANG's prior leadership, we secured an adaptable framework. Under my direction, experience and proper execution management, SLANG will result in a viable and durable organization focusing on the rapidly growing cannabis CPG market with our knowledge and transformational leadership team now at the helm and decades of experience rightsizing organizations, we see significant future opportunities to execute our growth plan in new states. Overall, our goal is to capitalize on opportunities in fast-growing markets in order to promote consistent revenue growth and profitability, delivering long-term sustainable returns and increasing shareholder value. Thank you for your time. And I'll now turn the call over to Michael Rutherford, or so to talk through our financial results. Mike, please go ahead.

Thanks, Drew. As Drew mentioned, our third quarter 2021 has largely involved preparations for the recently announced strategic repositioning of SLANG enabled by the recent financing transaction with our respective partner Trulieve and our noteworthy shareholders, Pura Vida and Seventh Avenue. During this final quarter of the year, we shifted our focus to repositioning the company as a more nimble, streamlined and profitable business by focusing on the full development of Vermont operations, consolidating the structure of our core markets, and reviewing the entire operational revenue cycle to rebuild our core emerging markets and product mix to profitability by eliminating less profitable revenue sources. During the third quarter of 2021, we generated revenue of $10.1 million compared to $7.9 million in the third quarter of 2020 and $11.3 million in Q2 2021. The primary driver of the year-over-year increase in revenue is attributable to the consolidation of wholesale revenue in our core markets of Colorado and Oregon as the company recognizes wholesale revenue. The completion of the Vermont acquisition of HI-FI, the largest medical cannabis company in the state in August 2021, the company realized approximately $1.1 million in revenue during Q3 2021. The sequential decline of $1.2 million in revenue from the second quarter of 2021 was due to weaker-than-expected sales in the Colorado market, [indiscernible] due to a slowdown across the industry attributable to lower inventory levels as well as declines in the emerging market packaging and hardware sales due to a reduction of orders from our Florida licensee. Importantly, we anticipate the Florida market is packaging and hardware sales to rebound beginning in Q4 2021. As previously noted and as a critical component of our go-forward transformation, our focus turns to fully ramping operations in our core market of Vermont, where we expect the strong consumer demand in the state to drive revenue over the long term. During Q3 2021, SLANG's gross merchandise value, or GMV, representing the total retail dollar value of SLANG branded products sold through testing SLANG sales channels, whether directly by SLANG or by 1 of SLANG strategic partners totaled $39 million. SLANG's Q3 product and licensing revenue of $10.1 million represents 25.8% of GMV. We calculate GMV by multiplying SLANG's number of branded products sold in a period by the MSRP of those products sold. Furthermore, the total percentage of GMV captured by SLANG is an important metric in assessing brand performance as it determines SLANG's proportion of total retail revenue captured. As a newly reported metric, the company will continue to focus on GMV going forward and initiatives that will help increase SLANG's percentage of GMV. We expect the acquisition of HI-FI continued focus on e-commerce channels will have a meaningful impact on SLANG's percentage of GMV in the remainder of 2021 and into 2022. Hi-Fi's 4 retail locations in Vermont and direct-to-consumer sales [indiscernible] will allow line to recognize 100% of GMV on products sold via those channels. Gross profit for the third quarter 2021 was $3.5 million or 35% gross margin compared to $4 million gross margin in Q3 2020 and $4.1 million or 36% gross margin in the second quarter of 2021. On a year-over-year basis, the $0.5 million decrease in gross profit was primarily due to the acquisitions completed in 2020 and 2021 in Colorado, Oregon and Vermont. As previously , we will now be able to distribute all SLANG branded product recognize higher top line wholesale revenue in our core market of Colorado, as we now recognize retail revenue in the fully vertically integrated core market of Vermont. On a quarter-over-quarter basis, the $0.6 million decrease in gross profit can be attributed to the reduction in sequential revenue of $1.2 million, [indiscernible] in the value of biological assets and an increase in cost of goods sold associated with fair amounts on inventory related to the HI-FI acquisition. Sequential gross margin is mostly flat due to continued impacts from higher cannabis raw material and input costs due to supply chain challenges. The recent closing of the financing transaction will have a pivotal role to further our efforts towards accelerating operations and meet the strong demand for cannabis products in Vermont by directly to consumers through our retail channels. I'll turn now to expenses. Total operating expenses in the third quarter of 2021 were $9.6 million compared to $9.7 million in Q3 2020 and $9.2 million in Q2 2021. As we enter the formative period, we plan to implement more disciplined cost-cutting initiatives to streamline our operations without losing operational quality and marketing efficacy. In the quarters to come, we will consolidate our core service expenses and overall G&A, including HR and audit practices, encompassing a leaner structure that will ultimately contribute to our path to profitability. EBITDA was a loss of $0.9 million in Q3 2021 compared with a loss of $4.1 million in Q3 2020 and a loss of $3.2 million in Q2 2021. The $1.75 million decline in EBITDA from the prior year was primarily due to a onetime expected credit taken on receivables from the company's Oregon licensee. Without these credit losses, EBITDA for the 3 months ended September 30, 2021, would have increased by $0.12 million over a quarter-over-quarter basis. The company remains committed to prudently managing its operating expenses on its mission to further improve efficiency. Turning to adjusted EBITDA. We reported a loss of $2 million in the third quarter of 2021 compared to $57,000 in the third quarter of 2020 and a loss of $0.95 million in the second quarter of 2021. The decline in adjusted EBITDA was primarily due to lower gross debt from the consolidation of the Colorado supply chain in 2020. In addition, we experienced higher recurring operating expenses during 2021 as a result of the acquisitions completed in Colorado and Oregon in 2020 and the acquisition of HI-FI in August 2021. Turning to our balance sheet. We had $3.5 million of cash and cash equivalents at September 30, 2021, compared to $9.7 million at June 30, 2021, and $6.5 million at December 31, 2020. Increasing cash and cash equivalents as of September 30 is primarily due to $5 million of transaction expenses related to the HI-FI acquisition. We anticipate a higher cash balance at the end of the quarter due to the approximately $17 million received from the financing agreement with our respective partner Trulieve and our noteworthy shareholders Pura Vida and Seventh Avenue. I'd like to turn the call back to Drew for some concluding remarks.

Thanks, Mike. While this is a long-term refined, focused and purposeful approach by experienced leadership for long-term revenue growth and overall success. This reposition will require patients from our loyal shareholder base. To be certain, we are confident that our hard work will provide rewarding. We are laser-focused on executing the transformation of SLANG accordingly and largely based on cost-cutting initiatives and improving operating performance through efficiency to deliver sustainable, profitable revenue growth. I would like to thank all of our dedicated shareholders for their support at this time.

Ladies and gentlemen, thank you for your participation. This concludes [Technical Difficulty].