SLANG Worldwide Inc. (OTCQB:SLGWF) Q3 2022 Earnings Conference Call November 29, 2022 10:00 AM ET
Company Participants
Phil Carlson – KCSA Strategic Communications, Investor Relations
John Moynan – Chief Executive Officer
Mikel Rutherford – Chief Financial Officer
Conference Call Participants
Operator
Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the SLANG Worldwide Third Quarter 2022 Earnings Conference Call. Today’s call is being recorded.
Thank you, Phil Carlson from KCSA. You may begin your conference.
Phil Carlson
Thank you, operator and good morning everyone. Welcome to SLANG Worldwide’s Q3 2022 earnings conference call. Our speakers on today’s call will be Mr. John Moynan, CEO of SLANG; and Mr. Mike 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 within the meaning of applicable security laws. Forward-looking statements may include that 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, but are not 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. John Moynan, CEO of SLANG. John, please go ahead.
John Moynan
Thank you, Phil. Good morning, everyone, and thank you for joining us on our third quarter 2022 conference call to discuss our financial and operational results for the period ending September 30, 2022.
I was appointed CEO of SLANG in early October to lead the next stage of the company’s growth following the successful completion of its operational restructuring. Having previously served as COO, General Counsel and Corporate Secretary of SLANG, I have long recognized the value of the SLANG assets and have witnessed first-hand the success SLANG has achieved in building a leadership position in cannabis markets across North America. Now we have an incredible opportunity to drive even stronger financial returns as we continue to expand our branded distribution footprint under a refined strategic direction.
Since the implementation of our transformational growth strategy last year, we have successfully leveraged a consolidated supply chain and streamlined infrastructure to achieve greater opportunities for sustained margin improvement and profitable revenue growth. This is a very exciting time in SLANG’s evolution and I am excited to build upon the tremendous momentum that the team has worked hard to generate in scaling our core operations at a time when we are seeing increasing demand for our best-in-class cannabis brands.
First, I would like to provide some color on the status of our financial position and the reason for our strong optimism for SLANG financial growth in the months ahead. As we have outlined in the past, as part of the company’s operational restructuring, we took a methodical approach to achieve greater operational efficiencies in our core markets. Through the elimination of non-performing assets, products and brands and the strategic integration of newly acquired assets, we have set SLANG on a new path for financial growth. The successes of these efforts continues to be recognized in each quarter.
In the third quarter, we have reduced our total operating expenses by $2.37 million, while integrating our newly acquired Vermont operations. In October, we were cash flow positive with record unit sales across each of our core markets of Vermont and Colorado, and we have a strong balance sheet with $12.2 million in cash and cash equivalents as of September 30, 2022. In addition, we have sustained healthy gross margins of 44%, which further demonstrate the success of our refined growth strategy. This hard earned success has played SLANG in a position of strength as we advance the products several fronts where we see significant opportunities to reach our goal of achieving profitable revenue growth.
We believe that the progress made in Colorado during the quarter and stronger sales over the past few months will positively shape our top line revenue in spite of the industry-wide slowdown in the country’s most mature cannabis markets. We have continued to demonstrate our ability to expand our operational footprint and lead the market with our industry leading O.pen brand. We are already seeing monthly record sales volume in our core markets, while continuing to reduce OpEx and maintained stronger gross margins, which speaks to the strength of our business model.
As you may remember, we entered Vermont in August 2021 through our acquisition of High Fidelity Inc. Vermont’s largest medical cannabis company quickly incorporating Vermont as one of our core markets. Our immediate priority was to evaluate cost synergies and streamline operations to build a vertically integrated platform for delivering profitable revenue streams.
On October 1, 2022, we opened our first recreational cannabis store in Vermont just as the state legalized adult use sales, which significantly enhanced our ability to serve the state’s rapidly growing cannabis consumer base. We have been incredibly successful in Vermont with October sales alone reaching $1.58 million. Operating under the company’s series collaborative cannabis group, our 1,500 square foot door front is located in the heart of downtown Burlington.
Vermont’s recreational cannabis market is estimated to reach $265 million in annual sales by 2025, and we are positioned right in the center of this. We are already seeing the strength of our newly configured footprint in Vermont with October sales being higher than anticipated, due to high demand for our industry leading products such as O.pen.
Colorado remains one of our strongest revenue channels and our success is in optimizing our sales structure and strategy has supported our recent growth in this market. While we, along with other cannabis operators in Colorado, felt the effects of the safe first downturn since growing recreational in 2014, we still experienced strong growth from our leading products, which have become a mainstay of Colorado cannabis users.
Our O.pen brand continued to outperform all other vaporizer brands in Colorado, holding the number one spot for its 20th month since 2019 for best selling vape cartridge brand in Colorado. It commanded 12.7% of all day sales and 15.3% of all day cartridge sales for the month of September according to BDSA Analytics. But perhaps the most notable milestone for our industry leading O.pen brand was hitting its 10th year of successfully leading the Colorado Cannabis market.
To commemorate this milestone achievement along with celebrating 10-years of adult use cannabis legalization, we have launched a number of special incentives, which began in October and included special edition 10-year anniversary of 2.0 batteries and limited edition commemorative THC cartridge packaging.
Finally, as we have previously shared, on October 1st, we launched Alchemy Naturals, our new high quality edible brand in Colorado. These new edibles combine cannabinoids and adaptogens in a unique manner to create an all natural THC and CBD products. We have seen strong demand from consumers for a healthier and better tasting gummy and this new product line has successfully met the needs of our evolving cannabis market.
By launching in Colorado’s $371 million edibles market in online, we have experienced a steady increase in Alchemy sales with 8% sales growth from July to September and 16% growth in October. Given our increased marketing activity, and continued product demand sales were especially stronger in the months of September and October in Colorado. One of our key accounts delivered a 229% increase in sales from August to September. All in all, we achieved total Colorado sales growth for the month of September of 44.5% year-over-year and 75% from August, significantly beating our overall quarterly sales forecast in Colorado by 12%.
As the Colorado market begins to resume stronger overall sales growth following its slowdown, we leverage our new vertically integrated operational footprint in Vermont to produce stronger high margin sales. We believe the growing opportunities to serve these core markets within the trademark of a more streamlined infrastructure will drive our new growth trajectory.
Just to reiterate, our core markets Vermont and Colorado are our primary avenues for reaching the marketplace with our portfolio of SLANG brands. Since entering each of these states, we have captured significant market share and received wide recognition in accolades for our products. Our success continues to be driven by our ability to understand our customers and produce today’s most reliable products in each category to meet demand. We will continue to refine our product strategy in order to consistently support our brands and drive profitable growth.
Finally, turning over to our emerging markets. We continue to utilize our strategic partnership model to enter each market and secure a leadership position, driving brand metrics in the most capital light efficient manner. Working with our strategic partners such as Trulieve, we continue to establish strong positions in each new market that we enter. As a result of all of these efforts and successes SLANG is in its strongest operational position to-date. We have an amazing team in place, a strong balance sheet and a clearly defined path to profitability. Our focus remains on leveraging a proven growth strategy to further scale our brands and products, to build our position as a top performing cannabis CPG company across multiple states.
I would like to now turn the call over to Mike Rutherford, CFO of SLANG to discuss our third quarter 2022 financial results. Mike, please go ahead.
Mikel Rutherford
Thanks, John. We continue to see the positive effect of transformational growth strategy that has resulted in consistently stronger margins to support our bottom line growth. For the third quarter of 2022, revenue from continuing operations was $8.17 million, compared to $9.36 million in the third quarter of 2021, due to a reduction of $0.87 million in emerging market sales, a reduction of $0.78 million in Firefly 2+ sales and a reduction of $0.29 million in Colorado core market sales, offset by $0.75 million additional revenue associated with the acquisition of HiFi, completed on [Technical Difficulty] 11, 2021.
Gross profit for the third quarter of 2022 was $3.6 million or 44% gross margin, compared to $3.46 million or 37% gross margin in the comparable period of 2021, representing a 4% increase year-over-year. Despite the decrease in revenue year-over-year, gross profit increased due to lower cost of raw cannabis inputs in Colorado, higher margins associated with HiFi’s retail operations, and two previously completed strategic initiatives being the elimination of low margin Oregon sales and the elimination of low margin products via an internal SKU rationalization process.
Total operating expenses from continuing operations for the third quarter of 2022 were $8.59 million, compared to $10.96 million in the third quarter of 2021, representing a decrease of 21.6%. The decrease in total operating expenses year-over-year is due to a decrease in every expense line item with the exception of a $0.07 million increase in consulting and subcontractors and a $0.22 million increase in general and admin. Our cost cutting initiatives continue to have a positive impact for the company.
Third quarter 2022 adjusted EBITDA loss was $1.24 million, compared to an adjusted EBITDA loss of $1.56 million in the third quarter of 2021. The improvement in adjusted EBITDA loss is primarily attributable to a $0.45 million increase in gross profit before fair value adjustments on biological assets, offset by an increase in operating expenditures related to HiFi, which is not presented in the comparative period before August 11, 2021.
Our balance sheet remains strong with $12.23 million in combined restricted and unrestricted cash as of September 30, 2022, compared to $20.83 million on December 31, 2021 and $15.72 million at June 30, 2022. Our focus remains on advancing strategic M&A opportunities, partnership activities in our emerging markets and a refinement of our product strategy in order to drive brand performance in our core markets.
I’d like to turn the call back to John for some concluding remarks.
John Moynan
Thank you, Mike. To conclude today’s call, I would like to reiterate that this is an incredibly exciting time for us at SLANG. We are strategically advancing upon a number of growth opportunities that will serve to further escalate SLANG’s leadership position within the overall cannabis CPG market. We continue to leverage a strengthened operational infrastructure and have demonstrated that we can effectively expand our core and emerging market operational footprint and advance new product lines, while focusing on continued improvement to both our top and bottom line financial results.
There is still a lot of work to be done, but we are now operating from a position of strength and confidence. We look forward to updating you on our year-end call.
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
Question-and-Answer Session
End of Q&A
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