Our continuing travels into the US ‘legal’ cannabis landscape takes us to a company that’s made a lot of smoke over the past couple of years, but no real fire. Slang Worldwide ($SLNG) had a heady start back in February 2019 – coming online at some $2.40 a share – the stock has been inconsistent in creating returns.

Unlike some of the flatlines out there, this one’s had intermittent interest (at least in the past year):

They claim some distinction in their business model – at least initially. At the time, their approach was stated as being a brand house:

That doesn’t appear to have changed.

Canopy Growth Corporation ($WEED) wasn’t very far away from the company, and is listed in the article as having an option to purchase 32MM shares in $SLNG, and sharing ownership in licensed producer Agripharm (one of the very first in getting a licence for outdoor production). Bruce Linton took a stake in $SLNG in September 2019, which was notable enough to warrant a press release. The stock has dropped from sight since his buy-in, but 5 year warrants attached gave him a sweetheart of a deal (at least up front).

I’m not going too deep into the entrails on this outfit. There’s utility in knowing where a company has come from…as it can often presage where they’re going. We’ve never had a look at them up close – as US focused brand houses have been outside of our focus (which is operations and capital structure). After an initial pass at these financials, there looks to be a high degree of complexity, acquisition leverage, and somewhat overweight in Related Party transactions. Sigh.

This one’s got 34 Notes attached to the financials, and some of them look a little on the thick side.

To the financials!

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• $3.4MM in cash. They burned about the same over the last quarter, and have picked up about $12MM in cash via acquisition and a raise so far this year.
• That implies another raise is incoming. Not exactly high-art in making that prediction….they will need money. $8MM in revenue in the latest quarter generated $4MM in gross margin. It took $5MM (in SG&A/consultants/professional fees) to generate it.
• An additional change in fair value of derivative liabilities of -$900k occurred this quarter. Note 26 is the home of those liabilities…we’ve seen several of them recently in US companies. This one’s more inelegant than others, more below.
• Inventory (yes, they have some in vapes and batteries) is around $1.8MM, with $300k reserved for obsolescence. They moved $14MM in COGS for inventory in 2019, 2020 YTD is at $6.3MM. Looks like they did some sort of bulk sale in the last Q of 2019 that bolstered sales.
• Given what they are moving and inventory levels, feels like the are drop shipping hardware their name on it. Ok. But with YTD sales of $14MM, it implies they are nothing more than a vaporizer supplier. More below.
• There’s $17MM in Deferred Revenue sitting in liabilities, and being amortized. The amount comes from the aforementioned AgriPharm, a greenhouse in Creemore, Ontario. The facility was supposed to be a launch pad for Arjan Roksam’s (Greenhouse Seed Company) genetics to be grown in Canada. He really lit Canopy up at the time. The whole deal appears to have fallen apart (just like Canopy’s claims of being able to cultivate).
• $WEED’s impaired most of the Agripharm asset (they owned 50%), and it stands as a net zero in their financials. $SLNG made a sale of $19.2MM USD of licensing “IP” to it during headier times. For that price, they took a 20% equity stake in exchange. The equity value is now a bag of rocks, at least on paper.
• I heard that an outdoor crop at the facility was hit by hail this past season – but I’ve no visibility into production.
• Many things that Canopy touched around cultivation turned into dust. These guys – simply by being in proximity – have a large pile of dust sitting under a rug on their balance sheet. $17MM CAD of deferred revenue to go (it’s under Depreciation and Amortization’) .
• Much they accumulated during the ‘gold rush’ is long gone. 2019 saw $SLNG impair $220MM in total.
• A whopping total of $704k in PP&E on the balance sheet. Half the total of inventory. One expects a company with an IP business model to be lean:this thing (with a total of <$150k in office equipment and computers) looks like it’s run out of a phone booth. Bulk of remaining PP&E is in packaging equipment. Literally. Some thin outfits I’ve worked in will spend a $150k on a cluster of blade servers. For 5 employees. These guys look like they force employees to work on their own laptops.
• Land and buildings – listed at $5MM – is within ‘Investment Properties’.
• Intangibles written down by $25MM so far this year, beginning balance was at $61MM, now down to $36MM. Getting in front of the auditors no less….look for $SLNG making reference to making ‘improvements in the balance sheet’ during 2020.
• Looks like they’re paying for stock promotion ($80k/Q), frequent mention of them in media (from my perspective) is in all the wrong places.
• 225MM shares out. That’ll increase by 24MM as they bought some ORE assets with paper.

Ok. I don’t see much point in going deeper. Let me explain.

Regarding calling $SLNG a ‘vape reseller’, I’m sure they’d take umbrage with that categorization. If I was a shareholder, I’d take umbrage in seeing expected credit losses being booked at 33% of YTD sales:

Like, who the hell did they sell to? A guy with no fixed address selling out of cardboard boxes on a street-corner? There’s gotta be some sort of explanation. I’m surprised (if) they carried that prior year’s balance forward.

‘Credit losses’ appear yet again in Related Party transactions no less:

References to related parties abound in these statements. The values are in dollars, not ‘000’s’:

These numbers don’t reveal the liabilities that centre around ‘The Purple Company’ though, which is reported within – and one of the drivers of – derivative liabilities. I’m not going too deep into these (they’re based upon 2 notes, Purple #1 and #2, as described in Note 26 of the financials). The first is based upon a loan provided to $SLNG of about $3.3MM. This was changed into a convertible, triggering a derivative liability of $5MM, and accreted at an effective interest rate of 428.94% (there’s a number). The accounting value has eroded, but a $.20/share straight conversion remains. A continuous 5 year option embedded no less. Man.

Note #2 relates to the same related party being contracted in August 2020 as consultant, and paid $807k USD for services (could be finder’s fees). That party took payment in a convertible note, this one having a 4 year tenor with a 30day VWAP strike. Forced conversion can happen at $0.75.

Needless to say, there’s a liability there, and as of these statements, listed at $660k. The liability was $4MM at the end of 2019…. as expected as the equity was around $0.40 at the time (but $0.13 as of these statements’ valuation). $SLNG finished the year at $0.32, so expect a ~= $2-3MM bump in liabilities here.

Little traction has been seen in the core business they tout. I mean, looking at the size of the ‘Select’ deal that $CURA did, the amount $GTII paid for the ‘Integral’ brand, and even at a relatively ‘small’ scale…..$GAGE’s gushing about their (likely very expensive) deal with the ‘Cookies’ Brand. Either $SLNG’s brands aren’t as desirable to license….or perhaps the market they’re gunning for doesn’t have the cash purchase one outright….and installs trailers on their revenue.

Getting licensing deals is the hinge upon which $SLNG’s business model swings.

Canopy Growth figures large in $SLNG, having the option to take a significant ownership position in the company should the switch flip on legal cannabis in the US. The tout is that in combination with Acreage Holdings, BioSteel, and $SLNG….the pitch being that Constellation Brands (via $WEED) will become an instant heavy in the American market. As to $WEED’s interest in $SLNG:

The reference to ‘nominal’ as a share price is way cute. And signals that the option that $WEED wrote for themselves is complex and contingent. I also see little chance that they’ll pay any kind of premium for brand real-estate – they’re a business after all. If that’s the case, existing $SLNG shareholders would be best served by organic growth by $SLNG itself, and not count on a big bus of global conglomerate to bring them bags of money.

I mean, if $SLNG’s brand portfolio isn’t putting out before $STZ lands (assuming they do), what’s the impetus for $STZ to pay any kind of premium?

As to my crack about being a vape reseller, of $7MM in actual ‘sales’ in the quarter, COGS was $4MM, for a reported margin of 42% on operations. They’d also brought in $274k in inventory via acquisition, wrote it down by $30k, then sold that (it’s included in the COGS value). So, what – exactly – did the ‘brands’ generate in revenue? $SLNG claims brand presence via their ‘network’ in 12 states and over 2,600 stores. Really?

How they describe themselves in their own words:

The MD&A refines this further:

I get from this is that they sell packaging and hardware and base to business customers, and get licensing revenue. This meshes with reported inventory (which also says they have $8,400 bucks of weed on a shelf somewhere):

This quarter describes inventory differently than previously though, as before they’d split out that single line of ‘finished goods’ line into its’ components:

These numbers are immaterial. But. They speak to the core of what $SLNG’s business actually is. The $4MM in COGS comes predominantly from vape sales with a label put on. And it begs the most operative question of all: how much does their IP generate in margin?

Yep. That there is a massive red flag. Almost the size of the field.

That would pre-empt a good chunk of any interest I might have in the company to begin with. The related party deals seal it. And I haven’t even wandered into NS Holdings. I don’t need to.

Watch the year end for another bulge in sales. If there’s a game on, it’ll be done now while the market is hot. I say ‘game’ – and use that very infrequently. I don’t like supposition. But I don’t really see a business here that looks anything like they describe it. And I have a hair trigger for marketers making nothing sound like gold.

Perhaps there will be an expansion and uptake of their ‘brand’ portfolio. There hasn’t been, despite a relative explosion in legal cannabis sales. Surely, an outfit with as much claimed depth as these guys have would have seen some traction. That they haven’t – and look to be making money on nothing more than repackaged vaporizers – tells me to move on.

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