SLANG Worldwide Inc.

Thank you, operator. Good morning, everyone.

Our speakers on today call will be Chris Driessen, President and CEO of SLANG and Mike 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 securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of SLANG Worldwide in a subsidiary and 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 can 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 [Technical Difficulty]

Hello?

Operator, this is Mike Rutherford, Chief Financial Officer of SLANG. I can step in for Phil who has lost service momentarily.

Okay. Before we begin, I would like to remind listeners that certain statements made during the 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 and 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 can 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 3 months, 3 and 6 months ending June 30, 2021 and 2020 and other disclosure documents available on the company’s profile on SEDAR.

The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities legislation. Now, I would like to turn the call over to Chris Driessen, CEO.

Chris, please go ahead.

Thanks Mike. Good morning, everyone and thank you for joining us on our results call for the second quarter ended June 30, 2021.

SLANG continues to improve our performance as our team executes successfully across all areas of the business. We reported our fourth consecutive quarter of growth, with revenues reaching a record $11.3 million.

This represents an impressive 147% increase from the prior year period and a 14% increase from Q1 2021. We are very pleased with these results, which demonstrate our continued strong brand performance in all channels.

Our increase in revenue, combined with continued progress towards profitability, is further evidence that we can continuously grow the company in a responsible way. We narrowed our EBITDA loss to $3.2 million in Q2 2021 compared with a loss of $4.6 million in Q1 2021 and a loss of $4.2 million in Q2 2020.

This represented a 31% improvement quarter-over-quarter and a 24% improvement year-over-year respectively. Our adjusted EBITDA also improved both quarter-over-quarter and year-over-year.

In Q2 2021, we narrowed our adjusted EBITDA losses to $0.95 million, down from $0.96 million in Q1 2021, a 1% improvement and a loss of $1.8 million in Q2 2020, a 48% improvement from a year ago. These improved top line and bottom line results were primarily driven by modifications to our operations in our core markets of Colorado and Oregon, as we benefited from our consolidated supply chain with Colorado being the driving force behind our improved results.

We also strengthened our position in our emerging markets, with the successful launch of brand extensions and new products via our asset-light business model, which centers around forming strategic partnerships that enable us to establish a market presence in other states, without incurring high startup or entry costs. Of course, our most exciting initiative is our entry into Vermont, creating our third kit following the closing of High Fidelity, or HiFi, acquisition earlier this month.

This is a major milestone for us and follows months of careful due diligence of the local players until we secured what we believe to be the most exciting opportunity in Vermont. HiFi is the largest medical cannabis company in the state, servicing approximately 70% of the registered patients and has 2 of the 5 fully vertical medical cannabis licenses.

HiFi, now SLANG Vermont, includes 4 medical dispensaries, 1 of which is in the Burlington area, the state’s largest population center. These licenses will also provide SLANG with 2 adult-use cannabis licenses once the program goes live in the second half of 2022.

There is also a moratorium on issuing new licenses, which will not be vertically integrated of several months, giving us a unique first-mover advantage, which we intend to capitalize on. The acquisition expands SLANG’s footprint in Vermont, which currently includes a fully operational 28,000 square foot cultivation, production, lab, and retail distribution facility, with a planned 50,000 square foot expansion to be completed in 2022.

The business also conducts statewide delivery of THC products, in addition to a robust CBD portfolio, that adds over 1,200 retail points of distribution to the SLANG network, which now totals 3,000 plus stores. We expect the acquisition to contribute to improved financial results starting in late Q3.

HiFi trailing 12-month revenue is $6.9 million, and trailing 12-month adjusted EBITDA is $1.1 million. And on this basis, is expected to be accretive to SLANG’s earnings in 2021 and beyond.

Moreover, this acquisition will provide a return upside to our gross merchandise value metric, which tallies the total retail dollars – total retail dollar value of SLANG branded products. Even better, the Vermont adult-use market is projected to be upwards of $230 million.

And because SLANG Vermont is vertically integrated, our percentage recognition of GMV will be 100% which will allow us to capture even higher revenue and profits as we bring retail sales and direct-to-consumer home delivery into our arsenal. Following this acquisition, Shane Lynn, the former President of HiFi, will now become President of SLANG Vermont and has been appointed to SLANG’s Board of Directors.

We are well positioned to leverage our cumulative operational experience from our core markets of Colorado and Oregon, where we have built solid brand recognition, which we will use as a blueprint for Vermont expansion. As a reminder, Colorado is the company’s largest market, where revenues are primarily driven by our distribution business, which enables us to recognize wholesale revenue by distributing all SLANG branded products as a plant-touching entity that makes sales directly to dispensaries.

Of note, in June, we closed the acquisition of ACG, a manufacturing and distribution business based in Colorado that produces all open branded products which have been the best-selling vape brand in the state by a wide margin for years now. While the company has been consolidating the economics of ACG since December 31, 2020, the integration of ACG into SLANG’s platform will allow us to control our own destiny from seed to wholesale of the entire portfolio of SLANG brands by consolidating and streamlining operations in Colorado.

We also operate a 3,600-plant outdoor and greenhouse cultivation facility, which is expected to contribute to revenue more meaningfully starting after this year’s harvest. In addition to our focus on revenue growth in Colorado, we continue to seek out and implement initiatives to help drive continued efficiency gains in the state.

In Oregon, the LBA acquisition has been especially beneficial as it included Lunchbox Alchemy CBD, which is sold nationwide and has been rated as the number one CBD sleep by multiple media outlets. The products can be found on our e-commerce platform and in hundreds of retail outlets across the country.

This product line has been instrumental in our improved performance due to the margin at which we are able to produce these award-winning products. 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 brands, maintaining their market-leading positions in core markets in the second quarter of 2021. Our expansion strategy in our emerging markets continued to contribute to revenue growth in the second quarter through the introduction of new and unique product SKUs and additional brands.

Major reason accomplishments include our reentry into California, which is the largest cannabis market in the world, with the relaunch of District Edibles through our strategic partnership with Natura Life + Science. District Edibles was previously the best-selling gummy brand in California.

We are excited to move forward with our plans to launch even more SLANG branded products to the California market and increase both our market penetration and brand recognition. In Washington State, we recently launched our best-selling brand, O.pen, through a strategic partnership with Snowcrest, a cultivator and processor in Vancouver.

As part of this partnership, Snowcrest manufacturers SLANG branded products and SLANG sales and marketing teams work to place these products into dispensaries across the state. This is just another example of our emerging market strategy and how it offers us a low-risk approach to expansion.

As we continue to grow our emerging market, we expect these new products to drive stronger revenues by generating an ever-growing stream of royalties without a material increase to cost. Finally, we are making material progress with our third pillar, our THC 3 business line, or T3, which we are growing through distribution partnerships in e-commerce.

The acquisition of HiFi will further bolster our THC 3 strategy and online presence through the addition of a portfolio of CBD products under the brand name Series Natural Remedies, complementing our existing CBD offering that include capsules, topicals, pre-rolls, oils, tinctures and beverages. With that overview of the quarter now complete, I’ll turn the call over to Mike Rutherford, our CFO, to walk through the financial results.

Go ahead, Mike.

Thanks, Chris. As Chris mentioned, we continue to make significant progress in the second quarter, developing a firm operational infrastructure for sustainable revenue growth, which is supported by our official entrants into Vermont through our acquisition of HiFi subsequent to quarter end.

With this acquisition, we have expanded our core markets to now include Vermont along with Colorado and Oregon. Beginning at the end of the third quarter 2021, we will start consolidating the economics of the Vermont operations, which will include recognizing retail revenue from HiFi’s four retail locations.

During the second quarter of 2021, we generated revenue of $11.3 million compared to $4.6 million in the second quarter of 2020 and $9.9 million in Q1 2021. The primary driver of the year-over-year increase in revenue was the consolidation of wholesale revenue in our core markets, with the sequential increase due to particularly strong demand in the company’s Colorado core market, along with growth in our emerging markets.

With the acquisitions and consolidation of supply chain assets during the latter part of 2020, SLANG was able to start wholesale selling and distributing all SLANG branded products in both core markets of Colorado and Oregon beginning in Q4 2020. The company is now recognizing wholesale revenue from sales directly to dispensaries.

In Q2 2020, the company was only recognizing the packaging and hardware revenue as well as licensing fees in relation to the product and licensing revenue stream. During Q2 2021, SLANG’s gross merchandise value, or GMV, representing the total retail dollar value of SLANG branded products sold through all existing SLANG sales channels whether directly by SLANG or by one of SLANG strategic partners, totaled $40.5 million.

SLANG’s Q2 product and licensing revenue of $11.3 million represents 27.8% of GMV. We calculate GMV by multiplying SLANG’s number of branded products sold in the 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 capture. As a newly reported metric, the company will continue to focus on GMV going forward as well as initiatives that will help increase SLANG’s percentage of GMV.

We expect the acquisition of HiFi and a continued focus on e-commerce channels will have a meaningful impact on SLANG’s percentage of GMV in the remainder of 2021. HiFi’s core retail locations in Vermont and direct-to-consumer sales via e-commerce will allow us SLANG to recognize 100% of GMV on products sold via those channels.

Gross profit for the second quarter 2021 was $4.1 million or 6% gross margin compared to $2.8 million or 62% gross margin in Q2 2020 and $3.7 million or 37% gross margin in the first quarter of 2021. On a year-over-year basis, the $1.26 million gross profit increase was primarily due to the full acquisition and consolidation of supply chains in the core markets as previously discussed.

Sequential profit margin was mostly flat. However, as many in the industry have noted, and we are also experiencing, higher cannabis raw material and input costs due to supply chain challenges have added pressure to our profit margin.

We are actively managing this through discussions with vendors and by producing our own raw material inputs for 2022 through our cultivation site in Carbondale, Colorado at Colorado cultivation. Importantly, with the recent acquisition of HiFi, we expect a positive impact on revenue and gross margin going forward by efficiently selling product direct to consumers through retail channels in Vermont.

I will turn now to expenses. Despite the increased scale of the business, we continue to benefit from our overall cost-cutting initiatives.

Total operating expenses for the second quarter 2021 were $9.2 million compared to $8.7 million in Q2 2020, and $10.3 million in Q1 2021. We continue to focus on strategic spending in our core and the emerging markets that have been generating greater sales.

Our cost cutting initiatives remain a priority as we continue to reduce spending on service providers such as finance and marketing and have effectively refocused marketing spend to digital advertising to increase visibility and drive e-commerce sales. We continue on – we continue our ongoing efforts validate core market supply chains for greater operating efficiency, while remaining prudent relative to SG&A expenditure.

EBITDA was a loss of $3.2 million in Q2 2021 compared with a loss of $4.2 million in Q2 2020 and a loss of $4.6 million in Q1 2021. The improvement in EBITDA from the prior year and prior quarter represents a 24% to 31% improvement, respectively.

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 $950,000 in the second quarter of 2021 compared to a loss of $1.8 million in the second quarter of 2020 and a loss of $960,000 in the first quarter of 2021.

The minor improvements in adjusted EBITDA through the first half of 2021 is attributable to an increase in revenue due to consolidating wholesale revenue from our core markets, while holding operating expenses relatively constant for the six months ended June 30, 2021. Moving forward, we anticipate momentum in the top and bottom lines to benefit from the further development and expansion.

We continue to focus on improving revenue, gross margin and EBITDA quarter-over-quarter following our accretive acquisition of HiFi, which produced positive adjusted EBITDA in fiscal year June 2021, expect to be a positive contributor to SLANG’s earnings going forward. Turning to our balance sheet, we had $9.7 million of cash and cash equivalents at June 30, 2021, compared to $12.4 million at March 31, 2021, and $6.5 million at December 31, 2020.

This includes proceeds from an oversubscribed private placement of $11.9 million, which closed in the first quarter of 2021. We continue to monitor cash very closely with minimal debt to align with our cost controls.

In addition, our capital-light business model does not require significant [Technical Difficulty]

I will jump in there for Mike. It seems like we are having difficulties today on the line.

But what he was saying is, in addition, our capital-light business model does not require significant CapEx. And to wrap things up, we are pleased that the successful execution of our strategy, which is centered around consolidating our supply chain and core markets, establishing partnerships in targeted emerging markets and growing sales from our line of THC-free products, continues to be reflected in our ever strengthening results.

This quarter’s performance demonstrates the sustained beneficial impact 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. Looking ahead, in the second half of 2021, we expect to see revenues from the Vermont acquisition contribute to improved results together with the continued execution of strategy – of our strategy to bring new product SKUs to market through the launch of additional brands and the expansion of existing product lines as well as expansion into new states.

With our recent expansion into California and Washington and with Massachusetts and Michigan coming online later this year, we expect to increase our emerging market revenue with minimal expense. As you can see, we continue to grow the company in a responsible way, improving revenue and narrowing our losses.

We expect this trend to continue and look forward to a bright future. With that, I would like to turn the call over to the operator for the Q&A session of the call.