Slang Worldwide ($SLNG) is like many operating in the US cannabis sector. Highly leveraged and unprofitable, EBITDA (and ADJ EBITDA) seem to be the thing many rely upon in the sector to stake claims of impending greatness.
I’d like to remind the reader of GoBlue’s comment about (ADJ) EBITDA – that’s it’s a signpost – and not a destination. His metrics that account for taxes and interest are useful in this regard. EBITDA is simply one of many financial measurements, but I see a risk to the investor as its’ been largely squished into being a sell-side marketing tool in-sector.
Speaking of sell-side marketing tools, $SLNG has struck me as analogous to an ad agency. Relatively asset light (66% of total assets are Goodwill & Intangibles) and no significant/’hard’ IP outside of logos….they’re good in presenting themselves as not being that at all. Naturally the ‘industry leading’ tag litters their website (it’s pretty hip).
I’ve had a pretty fulsome look at these guys recently in their year-end, and the quarter prior (where I promised not to go too deep but ended up spending an entire day on the company). The financials were a hard slog due to the complexity within their capital structure.
All dollars in CAD unless otherwise noted.
To the financials!
- Sales listed at $9.665MM (previous quarter $9.558MM). Yep. Same as the quarter prior to that.My suspicion about $SLNG stuffing the sales channel at year end was off, as it appears they held sales levels.
- Indeed, $SLNG attributes revenue ‘growth’ to a ‘rebound’ in both CO and ORE – their core markets. They also claim to have consolidated the economics of their CO manufacturing partner. Umm…yeah. More on that below.
- Gross margin of $3.7MM. SG&A of $6.5MM. $9MM loss booked in the quarter all in. Operations consumed $1.4MM of cash.
- The derivative liability is up 33%, equity price up 25% over the period, reflecting the non-linearity of the ‘Purple’ Notes. Good thing its’ largely immaterial. Still, this outfit can claim low debt (interest charges were ~=$100k this quarter). But the derivatives came in at a $1MM. It’s not a big number though.
- SBC of $3.6MM in the Q. Man, most outfits have backed off the gas pedal where profitability isn’t present, $SLNG didn’t get the memo obviously. Granted themselves 4MM stock options during the quarter, and struck 2.4MM of them @ $0.14. Their share price decay has led them to modifying/granting options quarterly to keep the taps open. The exec must spend a week every quarter keeping on top if it.
- They still have about 9MM of options laying around at a dime.
- I could crap on Note 29 all day (Shareholder Capital). And I can do that because the disclosure there is excellent. The story it tells isn’t. I get the feel that this outfit is just an amalgam of consultants/lone wolves. It brings that ad-agency analogy I made earlier back to my thoughts.
- A look at ‘GNT’s’ sales – a related party operating as processor in Oregon – is also a consulting group that sells services to the cannabis sector. Looks like $SLNG’s management has a side thing. It gives us a glimpse into ORE markets, where GNT had been running about $370k/q in sales (consistently) tanked this quarter, dropping to $280k (from 7% of sales to 3%).
- Immaterial, but something to watch for. It’s rare that we get to see into legacy state operations. I wouldn’t have even noticed it if it hadn’t been for the $5MM of credit losses booked to related parties (GNT was $1.6MM of that total in 2020). It says to me: it’s losing money operating.
- The Agripharm ‘deferred revenue’ liability slowly getting whittled down, now at $16.2MM.
Again, I’ve ended up spending more time than I’d planned to on this mutt. And it’s because every where I look, I see more.
I came across an interesting item in their Notes Payable, where a $2.2MM liability is coming due in early July. It’s owed to a company that’s partially owned by a director of $SLNG – Green House Holdings North America Inc. You might recall the name, as this is part of Arjan Roksam’s empire. We noted that Agripharm deferred revenue liability back in $SLNG’s Q3 F2020, but I hadn’t noticed that one of $SLGN’s directors is part of that empire. Looks like they did a solid for $SLNG back then. I doubt it’ll be done again:
Management compensation is down by half YoY for the first quarter. Go team? Well, not quite….as mentioned, total SBC was $3.6MM in the quarter:
Regarding that GNT, I’ll put up the picture of Note 14 (Related Party Transactions) and leave it to the reader to consider the mechanics here. Transactions between the companies (that are disclosed) saw net sales of $348k CAD by GNT to $SLNG during the quarter. Expected credit losses had gone up by $1.7MM at year end, which roughly corresponds to total inter-company receivables created during 2020:
Ok. The more I look, the less I like this thing. $SLNG popped two more bodies onto the board a a couple of weeks back, but if indeed there’s 6 independent directors, that means 3 people run this shop in its’ entirety.
What they seem to be selling now is that they’re ‘taking control of their own destiny‘ – which I infer to be taking out an ORE distribution outfit for some $2.5MM in paper. Might be the same thing they did in CO (and perhaps explains why GNT is getting smoked in ORE). So, promises of synergies and efficiencies and all that good stuff. They’ve been peddling President/CEO/Chair Chris Driessen around like a bauble on the pay-to-play marketing circuit of late.
They had closed an $11MM raise back in early February, so there’s some cash available. $12.3MM in the checking account.
I hate this company. But I love the look it gives me into legacy dope markets: small, splintered, and low profitability.
There’s a bazillion actors out there (there’s a 133 processing licenses in operation in ORE alone), and tiny kingdoms are held and guarded fiercely. My bias in this is that all dope is local – and that given a robust level of competition in legal cannabis without artificial supply/retail moats in place – it’ll reduce the titans to being nothing more than business mortals fighting for every consumer dollar that walks in the door.
Just some musing. One thing I am certain of – $SLNG is definitely a company to avoid. It looks like nothing more than a salesperson’s plaything to myself. Only thing that might be interesting here is if sales start motoring, but I seriously doubt any outfit is going to be able to move the dials materially in any legacy market……in either the short or even mid term.
With 473MM shares outstanding and a penchant for printing more to leave in the tip jar at Starbucks every morning, it looks like the common shareholder isn’t exactly at the front of their mind.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $SLNG