Earnings Transcript for SLGWF - Q4 Fiscal Year 2023

Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SLANG Fourth Quarter and 2023 Full Year Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I would now like to turn the conference over to Phil Carlson at KCSA. Please go ahead.

Phil Carlson: Good morning, everyone. 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, but are not necessarily limited to financial projections or other statements of the company’s plans, objectives, expectations, or intentions. These forward-looking statement 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 result to different 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 fourth quarter and full year 2023 conference call to discuss our financial and operational results for the fourth quarter and fiscal year ending in December 31, 2023. I am pleased to report that our focused growth strategy has continued to yield strong results throughout 2023. By prioritizing and developing high margin revenue streams from our core market operations and advancing into emerging markets through strategic partnerships. We’ve continued to solidify SLANG’s position as a leading operator in the cannabis industry in both the near- and the long-term. In 2023, SLANG continued to differentiate itself by advancing the buildout of our national brand, while continuously improving our financial standing. Our success underscores our ability to navigate financial challenges and maintain market leadership, distinguishing us in a competitive peer group whose growth remains constrained by financial challenges and pressures as they expand across the U.S. Throughout 2023, we demonstrated the underlying value of our streamlined operational infrastructure and an ability to effectively manage overhead costs. The success of our disciplined approach to growth is clearly evident in the following financial metrics. First, we continue to increase our gross profit and gross margin year-over-year, with gross profit before fair value adjustment of biological assets, growing 6.0% to $18.68 million, and gross margin before a fair value adjustment of biological assets, reaching 52% for the full year of 2023, compared to $17.62 million and 46%, respectively, in 2022. We consistently maintained higher gross margins than the industry average in 2023, achieving gross margins in the range of 51% to 54% throughout the year. Our strong gross margins will support our path towards consistent profitability going forward. Another testament to our business model was displayed in a significant reduction of our operating expenses, which were down by $6.72 million year-over-year, or 21% to $24.61 million in 2023, from $31.33 million in 2022. While we were successful in scaling our operations in an efficient and flexible manner to achieve these financial metrics, our overall revenue for the full year and fourth quarter of 2023 was negatively impacted by a continued downturn in our Core Market sales due to challenging market conditions in both Colorado and Vermont. It is worth noting that our fourth quarter is also typically our slowest quarter due to seasonality. Regardless, we are confident that our continued streamlining of operation has set the stage for greater top- and bottom-line growth in 2024. Despite slower sales in Colorado throughout 2023, we were successful in uncovering pockets of growth within the state by leveraging our unique expertise and market awareness to innovate and lead in those areas. In July of 2023, we launched our 2-gram disposable vape line and large-format vaporizers, quickly positioning SLANG as leaders in the category. We followed our success in the large-format subcategory with a revitalization of the full open product offering, and now offer distillate, live resin and live rosin products across the full spectrum of formats. The Vermont retail landscape has also evolved due to an increase in the number of retail licenses operating in this state. We have strategically adapted to the rapid increase in retail licensees and stores by focusing on developing our wholesale sales channel to serve the growing cannabis retail market. In 2023, we were successful in establishing a leadership position within the wholesale market and created another powerful channel for continued high margin revenue growth. Vermont wholesale sales reached $1.04 million since launch. Our wholesale operations will continue to be a leading catalyst for growth in Vermont going forward, enhancing our overall leadership position in the state as we expand our retail operations. We have also continued to build a leading presence in emerging markets across the country through our strategic partners. As we drive sales from our vertically integrated Core Market operations in Vermont and Colorado, our established partnership model provides us with a broad reach across the country in a capital light manner. Partnerships with leading operators such as Trulieve support our entry into today’s most competitive cannabis market without carrying the heavy costs to enter and operate. In 2023, we continued to demonstrate our ability to strategically enter these key markets with entry into Maryland and West Virginia. We are now in the process of planning our entry into yet another emerging market with the launch of our vape brand, O.pen, in Arizona in partnership with Trulieve. Our THC-Free product line represents an opportunity that I am particularly excited about as we enter 2024. This product offering now includes a wide array of vape hardware products under the O.pen brand, including our O.pen Sesh, as well as our Firefly 2+ dry herb vaporizer, and our highly sought-after Alchemy Naturals CBD gummy. We are increasingly leveraging our e-commerce sales channel to provide increased flexibility and profitability of our THC-Free product line to generate stronger margins, while reaching a wider customer base. Our Alchemy Naturals CBD gummies are proving to be a key growth driver in this category, contributing $1.2 million in e-commerce sales during 2023, representing a 54% growth year-over-year. Before turning over the call to Mike, I would like to provide an update on our efforts to explore strategic initiatives to maximize shareholder value. In November 2023, we’ve retained PGP Capital Advisors to assist in this review of strategic alternatives available to the company, which may include, but are not limited to one or more of the following

Mikel Rutherford: Thank you, John. For the fourth quarter of 2023, revenue from continuing operations was $7.42 million, compared to revenue of $11.78 million in the fourth quarter of 2022, representing a 37% decrease. The reduction was primarily driven by a decrease of $4.13 million in Core Market sales and a decrease of $0.92 million in Distribution sales, partially offset by an increase of $0.3 million in Emerging Market sales and an increase of $0.3 million in our e-commerce sales. Within the Core Market segment, the company experienced sales reductions in Vermont of $2.47 million and in Colorado of $1.66 million. It’s important to note that in our fourth quarter of 2022 financial results for the comparative purposes, it reflected the immediate success of the opening of our series collaborative dispensary in October of 2022, Vermont’s first recreational cannabis store in Burlington, Vermont. For the full fiscal year of 2023, revenue from continuing operations decreased to $35.68 million from $38.19 million in fiscal 2022, representing a 7% decrease year-over-year. The reduction was primarily driven by a decrease of $2.65 million in our Distribution sales and a decrease of $1.27 million in our Emerging Market sales, partially offset by an increase of $0.7 million in Core Market sales and an increase of $0.66 million in our e-commerce sales. Within the Core Market segment, the company experienced growth in Vermont with sales increasing by $3.06 million, which was offset by a reduction of $2.36 million in sales in Colorado. Gross profit for the fourth quarter of 2023 was $3.8 million with a gross margin of 51%, compared to $4.7 million with a gross margin of 40% in the fourth quarter of 2022, representing a 19% decrease in gross profit and an 11% increase in gross margin year-over-year. Gross profit for fiscal year 2023 was $18.62 million, with a 52% gross margin compared to $16.45 million and a 43% gross margin in fiscal year 2022, representing a 13% increase in gross profit and 9% increase in gross margin year-over-year. Adjusted gross profit, which we define as gross profit before fair value adjustments of biological assets was $3.8 million in the fourth quarter of 2023 with 51% adjusted gross margin, compared to $5.7 million with 48% adjusted gross margin in the fourth quarter of 2022, representing a 33% decrease in gross profit and a 3% increase in gross margin year-over-year. Adjusted gross profit in fiscal 2023 was $18.68 million, with 52% adjusted gross margin compared with $17.62 million and a 46% adjusted gross margin in fiscal 2022, representing a 6% increase in adjusted gross profit and a 6% increase in adjusted gross margin year-over-year. Despite our revenue being down year-over-year and quarter-over-quarter, our ability to increase our gross margin continues to demonstrate our success in driving more profitable revenue to support our long-term financial growth. The company experienced increases in gross margin and adjusted gross margin due to the following two factors

John Moynan: Thanks, Mike. Our ability to strategically expand our operations with a streamlined operational foundation for ongoing financial growth continues to position playing ahead of our peer group. Our proven business model and lean operational structure allow us to advance key near-term growth opportunities and reach our goal of achieving profitability. As we move forward in 2024, we remain confident in our ability to maintain our leadership position in our core markets with a refined product offering. Meanwhile, our emerging and THC-Free channels will continue to provide us with the path to high margin brand performance on a national scale. We look forward to updating you with our continued progress. Thanks.

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Operator: Everyone, this will conclude our call today. Thank you all for joining, and you may now disconnect.