SLANG Worldwide Inc.

Thank you, Operator, and good morning, everyone. Our speakers on today's call will be Peter Miller, Co-Founder and CEO of SLANG Worldwide; Billy Levy, Co-Founder and President; and Kelly Ehler, Chief Financial Officer.

Joining them for the Q&A session will be Mike Rutherford, VP of Finance. 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 securities 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 factors are discussed in detail under the heading Risks and Uncertainties in SLANG's Management Discussion and Analysis dated November 25, 2019, and filed on SEDAR.

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. And now, I'd like to turn the call over to Peter Miller.

Peter?

Thanks, John, and thanks everybody for listening to this quarter's earnings call, and we know that time is precious and we will do our best to be efficient here, as the message we have is both simple and timely. SLANG continues to demonstrate strong organic growth and looks toward a profitable acceleration of these trends into 2020 and beyond.

With the announcement of today's financing, we now do this with significant amounts of cash in our balance at a dynamic time in the market when more than ever cash is king. SLANG's business model was built at the time before the capital markets were focused on the U.S.

opportunity. As such, the business model wasn't built to rely on those sources of capital, but was optimized to rapidly scale when those sources became available.

The idea was simple; produce great products that deliver on their brand promises, and sell those products into scaled consumer markets. With today's equity financing we're even better positioned to scale.

This financing comes largely from existing long-term institutional shareholders. We expect that more traditional debt will become available to profitable businesses in the space, and that we will be well positioned to use it.

In the meantime however, we're excited to focus on our expanded growth strategy rather than a refinancing or servicing the cumbersome debt instruments that are more broadly available. In the quarter, we delivered strong organic revenue growth, increasing gross margin as we continue to optimize efficiency across the network.

Through the continuation of these activities we have a clear line of sight on positive cash flow and overall profitability. Part of the optimization of efficiencies included in the completion of the work required to exercise the option to acquire certain supply chain assets, including ACG, in Colorado, which we exercised subsequent to the quarter.

We will look forward to the increase in profitability and cash generation that this asset will support in the Colorado market. In Q2, we commented on our outlook for the more emerging markets.

We shared why we thought certain markets were not on track to receive the investments needed to fully operationalize profitable businesses. These markets included newly legal states, like Massachusetts and Michigan.

In Q3, we saw the growing pains in those markets persist, with Massachusetts taking the most drastic position in face of concerns around liquid vaping, while the more mature markets took a more measured approach. As the situation around vaping concerns unfolded our core markets showed the most resilience.

Additionally, our diverse portfolio was able to offer alternative products to those looking. The concerns around this issue were largely resolved by the CDC determining that vitamin E acetate was the primary culprit, a product largely limited to the illicit market.

However, the episode demonstrated the durability of our model and the value of having a diversified portfolio. We certain saw a shift to the more premium end of our liquid vape products and an increase in demand for our dryer-vaporizer.

With clarity on this issue we look forward to a clear path for the growth of our entire portfolio into 2020. Another reason for optimism, as counterintuitive as this may sound with recent commentary in mind, is the Canadian market.

This is a market that everybody believes has potential, but some fear always will. While distribution leaves a lot of room for improvement, it appears that the Ontario and Alberta provincial buyers are particularly engaged in moving toward Cannabis 2.0 products.

As a matter of fact, the Ontario government buyers are at our Canadian network facility right now as this call is taking place, expecting finished goods, including the Firefly Mini, O.pen cartridges, and the Bakked Dabaratus. Following [ph] products received great feedback at the Canadian legalization anniversary event held by the OCS, and we're getting strong indications of interest across the board for these products.

We look forward to sharing developments as they unfold. Canada is a great example, but not the only example of an emerging market which is showing signs of growing through worldly [ph] challenges and becoming more conducive to SLANG's core market business model.

The incredible growth in patient participation in Oklahoma is a great indication of future success, and the development of the Florida market has been a bright spot for the entire sector, with our partner's truly really demonstrating operational excellence and focus to incredible ends. With Trulieve, we launched RESERVE in Florida in the quarter, and plan to expand our offerings in that market with them over time.

Across both core and emerging markets we also saw huge growth potential for SLANG and product categories which we don't really currently serve, such as flower. Subsequent to the quarter, we announced a strategic partnership with the Cookies brand for the State of Colorado.

Leveraging existing relationships on both the supply side and retail distribution front, we expect this to be a very successful launch, providing us with valuable experience in flower, and opening doors for us to launch other flower products from our portfolio. Flower is bigger than the entire vape and concentrates categories combined, and this represents a great opportunity for us to leverage the unique distribution pipeline we have built over many years.

We will continue to layer additional products into the portfolio and distribute them through this pipeline where we see gaps in our portfolio and openings in the market. In addition to Flower, we see certain concentrate subcategories offering great opportunity for SLANG.

To that end, we moved live resin and solventless products into the development phase. We are getting great feedback on these new formulations inside the Firefly Mini and O.pen cartridges, and look forward to the commercial launch.

Inhalable products certainly are the only area for growth, and we are keen to build upon the success of District Edibles and Pressies through the release of new flavors and delivery formats including sours, chocolates, and mint in the near-term. In general, our category managers and product teams see significant untapped potential in our core markets, and we are intent to capital on all of it.

Our emerging markets continue show signs of favorable supply and demand dynamics, and we remain committed to expansion into those markets at the right time. As the market dynamics become similar, the playbook that makes us successful in core markets is more transferable than any regulatory edge we may enjoy in emerging markets.

The regional excellence with responsible and a broad geographic expansion is a formula we believe will be successful for ourselves, our partners, and our shareholders. With that overview, I would like to hand the call over to my colleague Kelly Ehler to discuss the finance performance in the quarter and the overall state of SLANG's finances.

Thank you, Peter. I will now walk you through the highlights of our third quarter.

I will highlight key financial metrics in my discussions. Well, turning to revenues, our third quarter revenue increased 29% to $9.3 million, up from $7.2 million in the second quarter and pro forma revenue of $5 million in the first quarter of 2019.

These solid results are testaments to having a diversified portfolio of product and a value of a strong distribution network. Turning to our gross margin analysis, third quarter gross profit increased 39% to $4.6 million, up from $3.3 million, reflective of the fact both sales went up at emergence, product mix and pricing improvements were the drivers in the success.

Our third quarter gross margins of 49% were closers to our target of 50 plus percent, which we consider are sustainable targeted level. We are seeing a positive impact in the integration of certain operation, a process that has been ongoing for several months.

More upside is targeted as we continue integration processes and seek out synergy. The end results for the quarter is our bottom line net income was $400,000.

I will now breakdown some key areas in our financial performance. A significant line item in our income statement is impairment charges and derivative valuation, both of which are non-cash item.

In the third quarter, we booked derivative and exchange gains totaling a $106 million and a corresponding $95 million non-cash impairment expense charge to goodwill. This reduces our goodwill to zero.

The real calculations at the time of acquisition back in January 2019 were driven by market valuations at the time. Since then, market valuation [technical difficulty] sector have reduced, and we have adjusted our goodwill balance to be more in line with current market conditions.

Also as discussed we have exercised option on ACG. To this aspect of the quarterly derivative liability revaluations should no longer occur with respect to that option.

Depreciation and share compensation expenses, there were in line with the last quarter and will remain a material non-cash expense going forward. With respect to our EBITDA, our EBITDA loss was $2.8 million in the third quarter.

After adjusting for certain nonrecurring expenses, adjusted EBITDA loss was $1.6 million, approximately the same as second quarter to reiterate our goals to become EBITDA positive as Peter outlined. Factors to achieve this will be increasing sales volumes, consolidating and streamlining portions of the SLANG network, prudent expense management, and there were a number of expense rates we identified in our ongoing integration process that will reduce without affecting operations or capacity.

This will result in a reduction of cash outflows of $3 million per year. On a go-forward basis, half of this will be effective by the end of the year and the remainder over the 2020 year.

How has our cash position evolved? With $80 million at June 30, December 3 we had $11 million.

Of the $7 million utilized, $2 million was at the SLANG corporate level and the balance in operations. As noted, our adjusted negative EBITDA was $1.6 million for this quarter.

Our announced $50 million private placement significantly adds to our cash balance. We are well capitalized to take advantage of growth opportunities in a profitable way.

With respect to our KPIs, just to remind, revenues increased when taking to consideration our KPIs for the quarter. Our branded units and servings declined from the second quarter levels.

Branded units were $913,000 in the quarter versus $1.1 million in the second quarter. Branded servings were $64 million in the quarter versus $74 million in the second quarter.

Again, a reminder that branded units and branded servings will not necessarily match quarterly revenue trends for the following reasons. We recognized revenue of shipment product, unit, and servings are based primarily on timing of retail sales, and a serving is based on a five milligram of cannabinoid content, and we expect to see fluctuations quarterly.

Back to cost management and to reiterate, we said last quarter that we had been working on integration of the acquisitions we completed at the time of our IPO. And as noted above, regarding cash, total reduction between the network and direct entities is over $3 million in annual savings.

We are well positioned to execute our growth strategy and take advantage of market opportunities. Our priority goal is positive cash flow and profitability for 2020.

At this time, I will turn the call back to Peter for some concluding remarks.

Thanks, Kelly, and thanks everybody for listening. We're proud of the third quarter results, our current capital position, and are more enthusiastic then ever about the prospects for SLANG.

The investments we made in our operating and corporate infrastructure from Q1 to Q3 position us very well for the balance of 2019 and 2020. Aggregate consumer demand continues to grow.

While many political, regulatory, and technological tailwinds all point to an incredible overall opportunity for our industry. Things will not be perfectly smooth, but the overall opportunity we see in the market is thrilling, and we are incredible motivated to capitalize on it.

Thanks, everybody, for listening, and at this point we would be happy to take any questions.

Hi, good morning, and congratulations on a really solid quarter overall. I just have a few quick questions here.

In terms of the ACG exercise of that purchase option, and congrats on moving forward on that, are you still structuring this as a payment of 33 million SLANG shares for that acquisition?

Yes. He, Noel, thanks a lot.

And yes, that's exactly right.

Okay, and is there any cash component to that?

There is not.

Okay.

No, it's straight shares.

Can you provide a targeted closing date for the transaction?

That will just be regulatory-driven, but we've exercised. We have our ducks in a row, and we think it can happen very efficiently.

And I'll just say from an accounting perspective that we will be consolidating their financial results, notwithstanding that the license is not transferred at this point.

Yes, the auditors will require financial consolidation as the control shift has taken place through the exercise of the option. Let's disclose that -- we'll be moving towards as quickly as possible.

So what would be the date in which the consolidation of the revenues would begin?

November.

Yes, roughly around now.

Okay, great. Are you able to provide any pro forma details of the financial for ACG in Q3 or H1 '19?

No, we're not guiding to that specifically, but I will say as part of the consolidation of the Colorado assets and what we're modeling in other core markets, when we bring these things together you start really seeing the profitability, and in the case of Colorado, generation of cash that's really encouraging, because ultimately, I've said this in a few different places and at different times, but we see Colorado as one of those markets that gives you insights into future markets. It's been around longer than any other market from a legal recreational standpoint.

There's been a lot of competition come and go. We've seen wholesale prices decline and then rise again.

You're starting to see, I think, as close to a market in equilibrium as you're going to see. So when we can generate cash in that kind of environment it allows us to, I think, make longer-term models and grow with a lot more precision.

So Colorado excites me a lot on the profit side and in terms of I think being a bit of a bellwether for markets that have similar regulatory structures over time, and maturing rec markets all share common traits as they grow. So, we think it's going to be a great model for what we can do elsewhere.

Right. And it also appears to have been, by far, your strongest state or area in Q3 as well.

Correct, yes.

Okay, cool. On the cost savings side of the $3 million that you're targeting over the next 12 months, can you provide any sort of insight in terms of how that rolls out and what you think you can accomplish in Q4 versus Q1, Q2, Q3 of next year?

Yes, I'll start at a high level and maybe Kelly can go into more detail, but ultimately we did bring together a few entities with their own corporate infrastructure, and there were just very basic efficiencies to find from just back office consolidation, et cetera. But if you have any other -

Sure. I mean half of the $3 million I mentioned will be effective by the end of the year, so that will be on a go-forward basis in terms of reduction of cash outflows, and the balance will occur through the course of 2020, and we still have some other areas that we think we can still drive some synergies and efficiencies that could actually make that number even bigger.

Yes, so high level, you've got HR implications, you got purchasing, collective, sales, et cetera.

Okay. You folks had a pretty solid rental revenue reported in Q4 for 2018.

Do you folks expect something similar to that in Q4 2019?

Yes, since the rents are coming from a seasonally sort of revenue generating business, i.e., a firm. And since this year was successful for that firm I think we're going to see similar performance.

Okay, great. And then just my final, before I get back in the queue, and thanks for taking the call.

It appears from the industry data that vape sales have stabilized overall industry wide in the past couple of months. And can you talk at all from your guys' point of view as you're seeing it firsthand, what's going on in the vape market and the THC vape market right now?

Yes, sure. So I think that the initial signs of trouble the most, I don't want to use the word "Reactive" because it's not what it is, but ultimately the newer states had a much smaller opportunity cost, and so they were more inclined to be very conservative and impose bans.

So a state like Massachusetts didn't have much at risk in saying we're going to delay the sale of vapes. Whereas you have a market like Colorado where vapes have been in market for many, many years without these product liability issues, and in terms of dollar and cents vape sales are hundreds of millions of dollars at the cash register, which represents pretty significant tax revenue for the state.

So it's not so much an opportunity cost, as a really hard cost. And without the right data it's dangerous to make these decisions.

So they took more of a collect information position, and ultimately the information came out they didn't wind up having to do too much. And the local consumers that were used to purchasing these products over many years, we didn't see change their behavior too much.

And the most sort of behavioral changes we saw were in the more touristy retail locations. And so then in more mature markets there's still imposed limited bans, like you saw in Washington and Oregon on the flavored side.

We ultimately saw certain rollbacks and a return to the status quo. But in that period of time there was a shift towards more premium vape devices, certainly in our portfolio, so that was Craft Reserve.

And in some cases we offered stores the opportunity to swap certain products for Craft Reserve. So, again, we saw the biggest differences industry-wise in these more touristy destinations where people didn't have the same experience.

But during the media attention on this we did collect a lot of information and participate in a lot of industry discussions. And speaking on some panels with peers of our in the vape space, the general theme was that there wasn't a response to sales sort of equal to the amount of attention the situation was getting.

So it's no doubt a very serious situation. The CDC point to vitamin E acetate as the likely cause of the issue I think cleared some concerns for certain consumers, and ultimately it's a situation we continue to monitor closely.

Okay, great. Thanks very much.

Thanks, Noel.

Hey, guys. Good morning.

Good morning, Bobby.

So, yes, just a couple of quick ones here, we talked about this $70 million to $100 million revenue guidance for 2019 and others completion of announced deals that could happen in that timeframe. And that could be a big swing factor between the $70 million to $100 million.

If we kind of take out that aspects of the guidance, what is the kind of variability around the remainder of the year is that in your vape line, whether or not there's some lingering fallout in terms of inventory reduction from the vape pens and kind of overall vape prices, is that the most volatile part of your portfolio at this point, and once again to stripping out whether or not those transactions close as swing factor between that $70 million and $100 million.

Yep. Thanks, Bobby.

So I think there's going to be some stabilization that takes place for sure, as I mentioned in, in Oregon, where certain stores that weren't capitalized to take or hold big inventory through the period of time, certainly industry wide scale back purchasing of certain goods and now are getting comfortable again. So I think there'll be some element of variabilities there.

In terms of the acquisitions closing, I don't see that, we're not seeing that as a factor right now. And, we're not going to guide specifically to where we land.

So obviously, a year-to-date being proforma in the $65.5 million range. We're on the doorstep of that $70 million to $100 million.

But we haven't guided any more clearly than that.

Okay. Thanks.

And then, Lunchbox Alchemy LBA, I know the FDA recently sent out a bunch more letters to folks with products in the market where they are marketing, health benefits and other things that are considered a violation. Do you think it's a competitive environment that can get a little bit more benign going forward, given the way you are positioning your product slide decently some of the guys that are maybe bad actors?

What's the takeaway from FDA's latest move ahead of releasing more specific rules?

I think -- so first of all, they were not on that list of names that came out yesterday. And I think that generally speaking, we would prefer some strong regulation and understanding of exactly where the rules lie and then be able to compete on a level playing field.

CBD is still a huge opportunity for growth for the whole industry. There's no doubt it's becoming more competitive every day and ultimately, the lower barriers to entry and combined with the opportunity brings a ton of people into the mix.

I think, we as well as most of the other folks trying to do things the right way would appreciate strong regulation and guidance from the FDA. So we'll see.

I think that goes across the board for all the categories we operate in but certainly as you've identified CBD is going to get more scrutiny and guidance across the board.

Okay. Great.

And you guys are doing pretty well in terms of market share in certain states and Gummy is number three in Nevada. Number two, distillate in California with vapes, O.pen cartridges obviously dominating in Colorado, what's the opportunity for sort of cross pollinating across states for those brands?

And what do you see the most upside, in terms of maybe picking up share, where you don't have significant share in a given state for a given product line?

Sure. So, sending, taking these brands to other states is absolutely something we're focused on doing and that we've done.

But we see taking the brand to other states that are more emerging markets for us, like Florida is best done with a strong partner, we're seeing kind of quarter-over-quarter in the peer group that some of the more regionally focused names are executing incredibly well. And partnering with groups like that allows us to, at worst on a cash neutral basis, get brands into market and start testing the feedback and response.

I think, though the opportunity within our core markets in the short-term is even bigger because of what I was mentioning before you have clear regulation, you know where you stand and the largest category of them all flower. We haven't made a strong push in Q yet.

So, with the deal we announced with cookies for Colorado, we see that as sort of just the tip of the spear of what we're going to do in flower. And you know, it's the same stores that carry all of our other products that are selling all the flowers, and now we have a brand that is in high demand and that they're very keen to get access to.

So we take the same supply chain relationships that we use to purchase inputs for our other products. Expand our relationship with those suppliers to also include collaboration on premium flower SKUs.

And then we are bolstering relationships from the supply side. Then we're bolstering relationships on the retail side because the stores want that brand and that gives us a conversation about our other flower brands.

Strain Hunters and Greenhouse Seed Co, for example, which also set at the premium end, but we haven't even touched value flower, and we've seen other groups do extremely well in value flower when they've had the right distribution relationships. So I think organic growth in core markets just through categories that we're not currently participating in represents huge growth and then separate flower.

You have certain concentrates, subcategories that we don't compete and they're not as massive as flower. When you're talking about live rods and live resin, solventless,.

You're talking about very much smaller subcategories in a relative basis, but you're talking with subcategories experiencing triple digit year-over-year growth and a lot of cases and when you're talking about these ultra-premium concentrates, the process to make them is a lot more artisanal, which it doesn't allow for the same level of scale, but it also defends, games price fighting, because you are talking about a process, for example, with fresh frozen solvent list that has to go through a handful of steps that do require as much artist science. So, we're doing some really interesting things with that product line and putting them in different pieces of hardware that we sell, and we're really excited about what that looks like.

So that'll be high margin. Smaller growth in absolute terms, but flower represents solid margin, but very significant growth in absolute terms.

Okay. Great, thanks.

You did touch on Florida and truly into their obviously they are very well with state. You guys are rolling out your partnership there.

How should we think about the linearity of sad rollout? Are you guys able to go statewide right away, or is there other simple step functions involved?

You know, ultimately, it's a strategy that we have to set with truly but what strategic which stores we launched with, at what point in time. So I don't think that it's as simple as one-to-one they open a store that carries x units of product and we proportionally represent the same number in each place, because we will have different brands that might resonate with different socioeconomic sort of demographics.

Similarly to any sort of retail environment truly this is opening, I believe, their 40th store right now. And those stores exist in different neighborhoods, different locations, and I think there's different consumer behaviors in each of those places.

You can use alcohol analogies or other industries where certain premium labels or certain value labels just do very differently in different places. So, not one-to-one but their growth is ultimately our growth as well on that state and we're really proud to be growing with them in that market.

Great, thanks.

Thank you.

Hey, guys, good morning.

Good morning.

Just a quick question on NSH, can you give an update on how that's going?

Sure. Yes.

So, NSH, their primary assets are a manufacturing facility in California; one in Oregon, and then a handful of minority shareholdings, and ultimately, that is a more complicated set of financials that have to come up to public company reporting standards, because you have assets that were live during a transition from one regulatory program to another in the case of California particularly. So we're still working through making sure that we have every single nut and bolt understood, accounted for, and are in a position to exercise with everything in mind that comes from that process.

So, can you give a timeline?

We are not guiding specifically on that right now because unlike ACG where we have a very short term line of sight on exactly the steps, there's still work to be done in terms of making sure the financials are where they need to be.

Okay. And then any updates on what you intend to rollout with in Canada in December?

Yes. We initially showed the Firefly Mini and the open line of 510 cartridges and the Bakked Dabaratus as well as some Green House Seed Co and Strain Hunters flowers SKUs.

So it was pretty thrilling to see a live and compliant version of each of those products in the facility get developed and start building inventory over the past couple of months. And I wish I could be there right now as the OCS takes a look with their QA folks, but those are the products we are initially targeting, and I think they are setup for success due to the simplicity and what we know market demand is for them elsewhere.

Okay, all right. Yes, that's from me.

Thanks.

Thank you.

Okay, if there is no more questions, thank you very much everybody. We are happy to make ourselves available to anybody to who thinks of a question later or just wants to generally reach out with any questions, comments et cetera.

Thanks everybody.