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SLANG Worldwide (CNSX:SLNG) CEO on Co-Packing Facility Jointly Owned with Canopy Growth (TSE:WEED)

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

SLANG Worldwide (CNSX:SLNG) (OTCMKTS:SLGWF) (FRA:84S) CEO Peter Miller is thrilled with the recent performance of the company’s stock. SLANG’s stock rose almost 50 percent in the first week in April. Miller credits recent M&A activity in the space as validating brand and distribution players like SLANG. Miller shares details of the company’s recent partnership with Trulieve Cannabis Corp (CNSX:TRUL) (OTCMKTS:TCNNF), a major player in the Florida market. The Trulieve partnership leverages SLANG’s operational experience and manufacturing success to gain access to an important market in an affordable way. Miller discusses the robust margins investment bank Clarus Securities forecasts for SLANG. Miller highlights SLANG’s joint ownership of a Canadian licensed producer, Agripharm, with industry leader Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1). The facility will be used for co-packing and manufacturing of SLANG’s brands for the Canadian market. The segment wraps with a discussion of SLANG’s online sales strategy and plans.

Transcript:

Benjamin A. Smith: Welcome to Midas Letter Live. Back in studio to join us again: Peter Miller, CEO of SLANG Worldwide. Peter, welcome back to the program.

Peter Miller: Thanks for having me.

Benjamin A. Smith: Now, your stock has been moving quite prodigiously lately; it was up about 36 percent over the last four sessions last week, the week of April 1st to 5th, and today it’s up another 12 percent. The consensus feeling is that the Origin House news, the acquisition, sort of set a floor based on what brands and distributor-centric companies like yourself are worth, and you’re sort of the co-leader in the space. Can you comment more about those dynamics, and how it’s helped raise your profile?

Peter Miller: Yeah, I mean, we’re brands first; distribution is an important part of getting those brands on as many shelves as possible. So of course it was a, you know, big macro kind of event for us to see Origin House get, you know, bought by Cresco for that price. So, very validating to the business model on the distribution side.

We’re in a lot of, you know, like, Origin House, in a lot of stores in California. We’re also in, you know, ten other states, Puerto Rico, Canada, and we’re more brand-oriented. I think, but no doubt it was helpful; people were looking at that trade and saying what else kind of looks and feels and smells like that. But I’d say we’re certainly more brand focused.

Benjamin A. Smith: Now your partnership with Trulieve Cannabis. You were able to get on store shelves, you know, the biggest MSO in the state by far, selling about two-thirds of the dried flower content in the state, you were able to get on store shelves without any capital outlays. Now, of course, you know, most vertically integrated MSOs are spending tens, if not hundreds, of millions of dollars to get organized in state. So is that model replicable to other MSOs in other states, or how were you able to do that? Is that in operation or not?

Peter Miller: No, so I look at that deal in the context of kind of earning your way in versus buying your way in. So what I mean by that is, you know, to buy your way into a market like Florida, which is extremely exciting, you could acquire a license, acquire an operator that has a license; in either case, to your point, you’re looking 8 to 9 figures to do that.

But what we were able to do was look at the landscape, talk to the biggest operator that you identified, Trulieve, and demonstrate that our brands would pull people off the street into their stores, and our operational know-how would streamline their manufacturing process and help them avoid probably some of the expensive mistakes we’ve made over the years. So it was really an earn-in to that market, and as such, it didn’t cost us any money to get in, and we’ll have product on shelves very imminently, and we’ll be generating revenue in that market.

And so that is obviously much more scalable to do those kinds of deals, less dilutive, and it speaks to, you know, the spirit of partnership, which we believe in. And in terms of other states, other markets, of course we love Trulieve; and I think if they were in different markets, we’d look to do things with them. But it was seen as really good for Trulieve as well, in the market. You know, if you look at the stock as an indicator of how people feel, it was very positive for them. So you can imagine there’s other conversations, there’s inbound all the time with different groups, but we absolutely would work with any multi-state operator, chain of retailers, anybody who helps us achieve our ultimate goal of getting our brands on as many shelves as possible.

Benjamin A. Smith: Okay. Now, another big takeaway I had during with reading the report and doing some extensive research is going through the Clarus Securities research that they put out. I believe they’re the first and only investment bank that put out research on your company; I could be wrong. But one of the things that struck me was their estimation of 52 percent gross margins and 27 to 29 percent adjust EBITDA margin through 2021. Now, is that sustainable to have those type of robust margins when you have to deal with a retail gatekeeper that is also looking after their own margin profile?

Peter Miller: We’ll see. I think we talk about this in context of like, long term, what does this look like, and what it looks like is what the rest of the world looks like. So in consumer packaged goods, we look to mature players; we look at what their margins are, and we predict that over time, you know, cannabis will have a similar profile because cannabis is a consumer packaged goods category, albeit a really exciting, you know, quickly growing one.

So if you look at the Nestles of the world, you know, they’re in the mid-20 percent EBITDA margin, and I think that there’s some, you know, important gatekeepers, but it’s also important to remember that no single chain of dispensaries is more than two, two and a half dozen doors. So while we’re in 2,600 doors, we achieve that by working with the mom and pops, the chains, by not owning retail. We’re not competitive with retail, and as such, we’re in the largest chains in Colorado, you know, from Live Well to Native Roots, Euphora. We’re also in, you know, the big operators on the West Coast: Harborside is a great account, MedMen carries some of our products across their network.

So ultimately, we want everybody to succeed; the more retailers, the better. Obviously, fewer accounts creates simplicity, and I don’t think anyone is in a position to have their elbows out and try to be like, you know, major…

Benjamin A. Smith: Squeeze you on margin?

Peter Miller: Not yet. We’ll see. One day there’ll be, perhaps, a Walmart-level player that sells a lot of cannabis, or an LCBO-type buyer. We’re just not seeing that today. It’s too early.

Benjamin A. Smith: Okay. Now, it’s my understanding that SLANG products will be coming to Canada sometime in 2019; that was mentioned in the Clarus Securities report, as well. Do you still expect that to happen, and how would that look like? Are you following the same model as you follow in the United States, and have you partnered up with any particular retailer in Canada once that rollout happens?

Peter Miller: Yeah, great question. So we actually jointly own a licensed producer with Canopy, and that will be the facility through which we do all the co-packing and manufacturing for our brands. And the same way we have the largest retail distribution footprint in the US, they have the largest footprint in Canada right now, so we see them as a great partner to get products to market in Canada. But of course there’s, you know, provincial sort of government distributors that, you know, other retailers will be able to order off the menu, so to speak; so I think we’ll be in a variety of shelves, Canopy’s and others, but we’ll be manufacturing all of our products through that facility that we own together unless we don’t have the capability, in which case of course we’d use third parties and partners like we do everywhere else.

The supply chain will be organized in whatever way it needs to be to achieve our goal of products on shelves. In terms of what the products will be, that’ll be largely driven by what the final regulation looks like; the draft regulation, you know, kind of indicates that vapes will look very similar to our vapes in the US, edibles will be probably quite different initially, so there’ll be re-formulations that will have to take place. But I still am hopeful that if the draft regulations go final, we’ll be immediately, you know, there in the market.

Benjamin A. Smith: Do you view selling products online an extension of competing with your retail partners, thus you have no plans to, you know, to create an online shop?

Peter Miller: I think online will be really important in the future. Today, we do sell certain pieces of hardware online, especially with the Firefly devices; but again, we also have a great distributor, Green Lane, who does a ton for us, and we have a great relationship and want to extend that relationship.

When it comes to THC products like finished goods online, there are going to be some great third parties that do online fulfillment and delivery, and I think we’d aim to be on those platforms, because you can sell stuff on your own online store, but if you’re on one of the aggregators like Eaze in California, for example, you’ll be in a really strong position to have real-time fulfillment. You know, delivery platforms that are emerging like the one I mentioned, are game-changing.

Benjamin A. Smith: Does that include Amazon at all, like some of the big chains?

Peter Miller: Could be. I mean, Amazon is selling a lot of CBD right now, and I think sometimes they don’t realize it. Maybe they take vendors off, but then they’ll pop back up again. So yeah, when people say We’re going to be the Amazon of cannabis, no, you know what? Amazon will be the Amazon of cannabis. And so again, the same way that certain brands sell products online, I bet they oftentimes sell a lot more of them through Amazon, even if they’re sharing some of the margin. We just want to be where as many eyeballs are and where as many people can vote with their dollars for our brands.

I wouldn’t rule out online, but I do think we’ll leverage partnership every step of the way to achieve that goal.

Benjamin A. Smith: Okay. And lastly, I wanted to give you the platform to talk about what investors can expect upcoming throughout the next three quarters, finishing off 2019. Obviously you’re limited in what you can talk about specifically, but perhaps you can give generalities of what investors should expect.

Peter Miller: Yeah, so we’re not going to guide specifically on revenue or what deals we will or won’t do, but in terms of the kind of deals we’ll do, I think we’ll be on a parallel path. We’re both kind of pioneering and colonizing, if you will. We’ve pioneered form factors from the 510 thread vape under the O.pen brand, to the convection vape on the Firefly side for dry herb, and with the Pressies, which is a pressed pill format, single serve, at the cash register. And it’s important to note that brands don’t become brands just because they have a cool logo; they have to stand for something, they have to have some history, something that differentiates them.

And so when we’re looking at acquisitions, we’re looking for companies that have done that, that have history, that have differentiated themselves. Even if the market’s competitive now, you know, Nike is in a competitive footwear market, but they basically invented the modern sneaker, you know, 40-odd years ago.

Benjamin A. Smith: And they keep reinventing it.

Peter Miller: And they keep reinventing it. That’s why Nike is Nike; they did something that was unique, that was different, that was compelling. The swoosh is a great way to identify that it’s Nike, but there’s some meat there. You know, Hermes is coming off centuries of, you know, fine craftsmanship. It’s not just the orange bag.

So when we’re looking for brands, we’re looking for something like that. We’re looking for maybe regional coverage that we don’t have, and we’re looking for subcategories or segments where we’re not very well represented. We’re not in, you know, topicals. We’re not doing a ton on those kind of lower volume categories right now; we started, you know, a vape, which is right near the top, with edibles, with gummies. That’s the highest sort of product category within edibles.

So acquisitions, you know, we’re going to target will be to fill gaps regionally and in the product portfolio. Those products will have brands that have a history or something that differentiates them.

Benjamin A. Smith: And of course, you’ll be keeping an eye on the Banking Act or the States Act, to see what develops, so you get THC on shelves, perhaps, in the future?

Peter Miller: Absolutely. Safe and States are super interesting. I think Safe maybe could even happen a little earlier, politically speaking, because the co-sponsors aren’t controversial. Everyone, I think, would appreciate the clarity that the banks aren’t exposed to any sort of, you know, racketeering, money laundering, whatever Cole Memo violations there could be. So if that opens the banks, I think the banks then open the exchanges, and the exchanges open a ton of liquidity, which will be very interesting for everybody in the sector.

Benjamin A. Smith: And then, de-prohibition comes after that, presumably?

Peter Miller: Yeah, you know, I think there’s like a wave, and I think I’ve said it before on this show that, you know, once the tax revenue starts flowing, then I think people want to just keep that momentum going. And if you look at the history of Prohibition, some of the big companies that emerged as consolidators like, you know, AB InBev, Constellation, etcetera, you know, we’re talking multi-hundred-billion-dollar market caps in aggregate.

You know, cannabis is getting pretty wild in terms of valuation; you know, the good companies will fulfill, you know, those promises that the valuations sort of suggest, and the bad companies won’t, and things will diverge. And we believe that looking forward into the future, we’ll be one of the good companies, you know, selling great product with, you know, a diversified portfolio of brands, and our strategy will not have changed. We’ll be a brand company with a great portfolio of products, leveraging partnership to get those products to the shelf, and not exposed to the volatility of commodity prices or the challenges of retail.

Benjamin A. Smith: Terrific. Well, a great update as always, Peter. Thanks again for joining us in studio. We look forward to following your story as the year rolls along.

Peter Miller: Thanks for having me.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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