The Top Line
- A superb management team with powerhouse Canopy Growth in their corner
- 90% of their revenue comes from brands performing in the top 5 positions in their markets.
- They operate a very light-capital model and have the ability to scale rapidly across the US via licensing deals, replicating their recent exclusive distribution deal with Florida-based Trulieve
- They distribute 94 products through 2,600 retail outlets across 10 States
- Projected revenues of $83m in 2019 and $417m in 2020
- Strong acquisition candidate and currently the #1 independent US product/distribution company, after Origin House was sold to Cresco Labs
SLANG worldwide (SLANG) is a consumer packaged goods company that is very well positioned for global brand expansion. The company, headquartered in Toronto, was founded in May 2017, under the original name of Fire Cannabis. They would eventually change their name in November of 2018, just prior to the company's IPO in January this year.
"When we created SLANG, the objective was to create a company that had a portfolio of brands that could compete at the highest level both nationally and regionally."
– Bill Levy, SLANG President
SLANG operate in the high-growth areas of the market, namely edibles and specialty vape products. The real value of the company sits across their two acquisitions (Organa Brands and Firefly), and their minority ownership in Agripharm, a Canadian Licensed Producer.
SLANG acquired Organa Brands in late 2018 for just over $200. million, in literally a game-changing move for the company. Organa Brands—which is being acquired through the purchase of National Concessions Group (NCG), and is sub-licensed to 14 different businesses—receives royalties on the hardware, non-cannabis ingredients and marketing materials required to manufacture products, with licensees responsible for procuring cannabis inputs.
Although the company was only founded in 2013, Organa already is the maker of the #2 most sold cannabis product in the US, and the #1 selling product in the Colorado market, the O.penVAPE.
"That product was one of the first 510-thread vape cartridges in the US, and its lifetime sales at the cash register are approximately $200 million USD, so that's a real brand with real penetration," said Peter Miller, the SLANG Worldwide CEO.
After developing the O.penVAPE, Bakked, Pressies, and Organa Labs into world-class brands with nationwide distribution, the company also chose to acquire The Magic Buzz, along with picking up an interest in—and exclusive distribution rights for—District Edibles. Organa Brands sells one of its' products every 4 seconds around the world, and has delivered over one billion puffs through its flagship O.penVAPE line.
At the same time, SLANG also acquired Washington-based Firefly, which is legally known as NWT Holdings, and holds the intellectual property for vaporisers that service flower, liquid oil and solid extract formats.
The brand's Firefly 2 vaporiser—a dry material vape pen that competes with the well-known PAX—is widely considered to be one of the leading premium dry herb vaporisers on the market, and can be found today across 14 different countries. Firefly will also be launching its own oil products later this year.
Miller said he was most impressed with Firefly's co-founder Mark Williams, who was a design manager at Apple, leading the Mac OS X interface.
"His design expertise is truly blue chip," said Miller. "We want to leverage his expertise of industrial design across the whole portfolio, as well."
According to Miller, the next generation of Firefly vape pens are going to occupy a super-premium segment of the market.
Agripharm is a licensed producer of medical cannabis in Creemore, Ontario. Founded in 2013, Agripharm is home to both the first cannabis production facility built from the ground up in Canada, and the first supercritical CO2 extraction lab in the country.
Agripharm uses state-of-the-art grow pods that provide controlled growing environments, allowing for both consistent quality of production and selective R&D projects designed to improve product quality through isolated experimentation.
Agripharm has exclusive Canadian rights to the IP, strains, and brands of Green House Seed Co., the preeminent global provider of cannabis strains, and its sister brand Strain Hunters. Through its partnership with SLANG, Agripharm also has exclusive Canadian rights to the IP and brands of Organa Brands, and have gained access to the proprietary extraction methods of Organa's production arm Organa Labs, the longest operating licensed manufacturer of cannabis-infused products in the USA.
The combined existing distribution capabilities of Organa Brands and Agripharm will provide the foundation for a nimble platform that will allow SLANG to quickly deploy brands, and understand consumer preferences across multiple markets around the world.
SLANG will own 20% of Agripharm, which was owned by National Concessions Group (NCG), with the balance 40% owned by Green House (which is 50% owned by the CEO of SLANG) and 40% by Spectrum Cannabis Canada, a subsidiary of Canopy Growth. Agripharm was developed by the CEO of SLANG and then sold to Mettrum, which was later acquired by Canopy Growth. When Canopy Growth eventually bought Mettrum, as part of the deal they sold Agripharm back to NCG consortium.
Just recently, SLANG announced that they had executed a letter of intent to enter into a strategic partnership that will encompass a licensing and distribution arrangement with Agripharm. Upon completion of the transaction, Agripharm will begin manufacturing products for SLANG's portfolio of brands with the intent of distributing them into the Canadian and international markets, including Europe, South America, Africa, and Australia, where such distribution is legal.
This deal talks to the overarching business model that the company is deploying. A capital-light, nimble, and highly effective strategy, that gives them real scale on very little capex. Oh, and they have deep roots and ties with cannabis royalty in Canopy Growth (more on that a little later).
Last month SLANG introducing its RESERVE line of vaporiser cartridges to the California market, extending its top-selling O.penVAPE brand with a curated selection of top strains at competitive prices. California is the jewel in the American cannabis crown. As one of the largest cannabis markets in the United States, with recreational sales of $1.2B in 2018 per BDS Analytics, California is among SLANG's top-grossing territories.
RESERVE will be sold alongside SLANG's other offerings like Bakked, California's #1 best-selling distillate, and District Edibles, California's third best-selling gummy brand (as reported by BDS Analytics). Pre-sale orders for RESERVE sold out across the state, supporting SLANG's view that a competitively priced vaporiser cartridge will prove to be an essential piece of the California retail cannabis environment.
"As cannabis markets get more sophisticated, so too do cannabis consumer tastes" said Peter Miller, CEO of SLANG. "With the RESERVE line of strain-specific cartridges, these discerning consumer tastes will be served at a great price."
The business strategy
The business strategy could be described as follows
- Acquire market-proven brands that can bolster SLANG's portfolio
- License their Greenhouse IP (high-end premium strains that provide increased margins)
- Enter the Canadian market via Agripharm
- Expand across the US via licensing deals (see the Trulieve deal below)
- And finally, develop in-house brands, and leverage other strategic relationships, to increase margin-generating opportunities.
Each of the above talks to one thing. Light Capex. SLANG have perfected the art of certain parts of the vertically integrated process, and have stuck to their knitting in this regard. They simply do not spend money in areas that require very high capital costs, or that could jeopardise their product distribution opportunities.
They operate with a very light-capital model. Essentially, the company provides third-party producers and manufacturers with packaging, IP and production knowledge, and then these providers manufacture the product and sell wholesale to SLANG's vast network of retail outlets. It's completely win-win.
"…We're really lucky that everything we really do is really capital-light. We don't do any cultivation at scale; we don't do any retail. We find cultivation gets commoditised pretty quickly, and for the return you get, it's incredibly capital-intensive building out indoor greenhouses, anything really other than outdoor," said Peter Miller.
"And then on the retail side, we just don't want to compete with our customers. Retailers are our customers, and if you have a chain of stores, it's unlikely another chain of stores is interested in carrying your brands, and we can see that, you know, in the real world: mainstream grocers, any branded retail environment typically doesn't carry its competitors' products."
They leverage infrastructure, and there is no better example of this than their deal to enter the Florida market. Just this week, SLANG announced an exclusive distribution agreement with Trulieve that will see them servicing the Florida medicinal market, which is one of the biggest in the US.
Given the range of qualifying conditions, and the ageing demographic that dominates the Florida population, this is a booming medicinal market. It is currently sitting at 180,000 patients, having tripled in size since 2017. And in this market, no one has a bigger share—or better reach—than Trulieve. They are simply number one in Florida, and by a long shot.
The latest report by BDS suggests that 60-80% of the production and distribution of cannabis products in Florida comes from Trulieve. Capitalising on this, SLANG was able to enter Florida without the need for licenses, or the crippling infrastructure costs that are typically associated with vertically-integrated cultivation facilities, and…they paid almost nothing for it.
Why? Because when all is said and done, the retail outlets and dispensaries will live and die by the product range they carry. The better—and more in demand—the products that a store stocks are, the more foot traffic it will attract, and as a result, the higher revenue per square metre it can generate.
"Brands, distribution, and management proficiency will determine success; in these areas, we believe that SLANG is unmatched."
– Peter Miller, SLANG CEO
SLANG have some of the best brands in the market. Trulieve recognised this, and hence in one quick swoop, SLANG gets their products onto the shelves of the largest player in the Florida market, and the market leader packs their shelves with the most in-demand products in the market. Getting the picture yet?
The cannabis industry is very nascent – there is a running joke, that cannabis years are like dog years. And sometimes it can feel that way. The industry is moving so fast, with legislation and consumer tastes changing so quickly, that in the end, only the companies with true vision and excellence will last. Excellence is founded in execution, and it's the people that execute.
David Ogilvy, who founded the global Ogilvy advertising agency, famously said, "the people with the best people, win." We have always believed that in early-stage markets, investors should gravitate to the bigger players and to companies run by management that have been there and done that. And in this case, it's check and check.
SLANG is run by Peter Miller (CEO) and Bill Levy (President). Peter Miller founded Agripharm and then sold it to Mettrum. Bill Levy, who co-founded Mettrum, was also the founder of a gaming company that Richard Branson bought and turned into Virgin Gaming. The two partners who came together at Mettrum, then went on and sold Mettrum to Canopy Growth in 2017 for a cool $430 million.
It was this experience and this relationship with Canopy Growth, that led them to form SLANG. Both passionately believed that in the end, the cannabis companies that win out would be those that had strong brands that are highly distributed.
The two have been there and done that. And more often than not, those who have succeeded, succeed again.
SLANG receives over 90% of its' revenue from brands that are ranked in the Top 5 in their respective markets across the US market. Ahead of their January IPO, they raised $66 million which was earmarked for global expansion (particularly Europe and Latin America), and for working capital to drive their footprint and brand portfolio.
Given the capital-light nature of their business model, the company has given guidance that no further cap raises are expected this year, unless of course, they raise for a strategic purchase. The company generated $11.7 million in sales in the first three quarters of 2018, with District Edibles generating $2.7 million in sales in its first year, and O.penVAPE generating $7.7 million in revenue. The disappointing part though is that the O.penVAPE sales were 4% down on the previous corresponding period.
SLANG have an option to purchase Organa Brands outright, however current Colorado legislation prevents listed companies from owning companies in the cannabis space (protecting the smaller players and entrepreneurs). It is a matter of time until this changes, and when it does, this would add around $60 million—consolidated—to their top line.
Clarus Securities is the only brokerage house to cover the stock, and have estimated revenues for Fiscal Year 2019 of $82.3 million, and Fiscal Year 2020 of $417.4 million, with Earnings Per Share of $0.31. Given SLANG's leading market share in California, Colorado, and Massachusetts, they have a speculative buy recommendation, with a target price of $5.00
"SLANG Worldwide is one of the largest "branded" cannabis companies in the U.S. We expect aggressive organic revenue growth over the next few years as SLANG adds further products, increases their market share of dispensaries in current territories, and expands into additional states."
– Clarus Securities analyst Noel Atkinson.
Let's do a very simplistic, back of the envelope, calculation. At $5.00 per share, it would give SLANG a Basic Market Cap of $1.13 billion. Let's call this $1.1 billion. Ring any bells? Origin House was last week acquired by Cresco Labs for…$1.1 billion. Now make no mistake, at the Green Fund we are massive fans of Origin House and Mark Lustig. It is one of the largest positions in the portfolio and has been a superb performer for us in the past 14 months.
However, in reality the company is California-centric, with very small revenues and heavy losses (this is one of the reasons you cannot use fundamental analysis alone to value pot stocks). Only $6.6 million in revenue in the first three quarters of 2018, at an average gross margin of around 10%. But they do have superb Californian distribution (over 500 retail outlets) and carry some of the market-leading brands. And herein lies the beauty.
The purchase of one of the world's largest product/distribution cannabis companies has set the floor for these ancillary-style players. It shows that the Top Tier MSO's would like to control more of the value chain in their vertically-integrated business models. And SLANG has Origin House covered on many levels.
SLANG has a much broader footprint and is on way more shelves than Origin House. It generates more revenue, at higher margins—with Clarus suggesting SLANG's gross margin will eventually settle at 52% (it's currently higher than that). So with larger revenue, larger margins, and a larger footprint, SLANG's value should at worst, command a floor of $1.1 billion.
Using a fully diluted share count, the $5 price tag would give SLANG a fully diluted market cap of $1.8 billion. The fully diluted count includes Canopy's 32 million warrants, which Canopy could only exercise if cannabis was decriminalised or legalised at the Federal Level. If that was the case, then SLANG's distribution opportunities would immediately apply to interstate distribution, amplifying its Total Addressable Market.
With the outlook for legalisation only 2-3 years out, and with logic dictating that, by then, SLANG would have considerably increased both its product range and retail outlet reach, $5.00 doesn't sound so unreasonable.
The Bottom Line
We've always liked SLANG. We brought it to the attention of our readers in early February and stated then that this was a company to watch. Since then they have executed like champions and their deal with Trulieve is simply subliminal.
It's one the of the best (and smartest) deals we've seen to date, and it's one of the primary reasons why we are so bullish on SLANG. It gave them instant access to patients statewide, with more product on more shelves, and in more stores, than anyone else. It has laid the blueprint for US expansion. And imagine when it is Federally legal and SLANG can ship interstate!
The management team has been there and done that. They are two of the smartest and most influential characters in the industry. They have the experience and the know-how, and importantly, they have the right connections. Their sale of Mettrum to Canopy Growth not only gave them a $430 million exit, but it also gave them Canopy Growth.
In 2018, SLANG granted Canopy Growth 32 million warrants which can vest between $0.75 to $1.50, but only when the US legalises cannabis at the Federal Level. The warrants, which if exercised would give Canopy Growth 14.5% of the company, also come with a Collaboration Agreement, meaning Canopy must collaborate with SLANG on research, marketing and distribution. In other words, when the time comes and the US really opens up, SLANG will have the world's market leader and most cashed-up company in the eco-system, in its corner. That's powerhouse.
They operate a low capex model, that doesn't require growing licenses, or capital-intensive, vertically-integrated, MSO-style operations. Using their outsourced model they only need to have one in-state extraction and edible production facility and they can easily supply the entire state. This, in turn, lowers the execution risk of the business, given it has over $60 million on the balance sheet.
SLANG Worldwide sells 94 different products, across 10 US states, in over 2,600 retail outlets. They now distribute to 14 countries and have just announced their entry into the CBD market. These guys understand the power of brands and their impact on the retail market. In an emerging industry, it is always a pretty sound strategy to follow the market leaders.
With Origin House being acquired, in our opinion, SLANG just became the #1 US brand/distribution company. Not only that, but they instantly became one of the prime acquisition targets for any Tier 1 MSO looking to extract more margin from their value chain.
Top management, super business model, cash in the bank to fund growth, and the leading player in the currently nascent, but booming, US cannabis retail market, we believe SLANG is one of the smartest ways to play the consumer packaged-goods market, and have initiated a position in the Paper Portfolio.
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