Origin House (CNSX:OH) Formerly CannaRoyalty Corp

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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.

Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4) CEO Marc Lustig discusses how the company’s recent name change from CannaRoyalty to Origin House better fits its current direction and indicates its aim to be a premier ‘house’ of cannabis brands. Lustig emphasizes that the company is focused on distribution and branded products in the crowded California market because once it dominates that space, Origin House will have the experience and knowledge to branch out across the country. Lustig shares his opinion on the post-Sessions resignation news and indicates that Origin House has planned its production for a landscape that includes de-prohibition and legalization. However, he suggests that federal de-prohibition is still a few steps away and that the STATES Act is the next likely advancement at the federal level. Lustig ends the segment by underscoring the opportunity the US cannabis space represents, noting that the US market is 20 times bigger than the Canadian but has 1/20th the number of cannabis companies.

 

Transcript

James West:   Hey, welcome back to Midas Letter Live. Joining me this segment again is Marc Lustig, CEO of Origin House, formerly CannaRoyalty Corp., now trading on the CSE under the symbol OH. Marc, welcome back.

Marc Lustig:  Thanks for having me, James.

James West:   Marc, let’s start off with a question about what caused you to change the name from CannaRoyalty to Origin House?

Marc Lustig:  Well, it was really just the evolution of the business. We had started CannaRoyalty as an investment platform largely into the US, acquiring assets in all sort of different states, mostly around branded products, manufacturing, distribution. As we started to do that and started to see opportunities in California to actually acquire businesses and be an operator, and now we’re the largest operator in the State of California, the name CannaRoyalty really didn’t make sense anymore. We weren’t a royalty company anymore, and we weren’t a passive investor by a debt or equity; we were an operator.

And so we went through a very significant process of figuring out what the brand should be, and Origin House for us represents a number of the cornerstones of what we’re doing, like manufacturing, distribution, branded products, IP. So those are sort of our blocks that build that house. And literally as we continue to acquire more branded products, those are the members of our family that live in that house, and so that’s part of the rationale.

James West:   Sure. So you’ve got financial statements, third quarter coming out November 28th; how are those looking?

Marc Lustig:  I think people will be pleased.

James West:   Okay. [laughter] Understated as usual. Now, California is very quickly emerging as the leadership state in the whole cannabis complex in the US, and I’m looking at the depth and reach that Origin House has in the state of California. What is the competitive landscape for you like, there? I mean, how do you differentiate yourself from the thousands of LPs and dispensaries and brands? I mean, what is it that is driving your success there?

Marc Lustig:  Well, early on, we identified distribution and branded products as, let’s call that the mid-stream. So there are cultivators here and there are retailers here, but someone’s got to be the gatekeeper of making sure that those products get manufactured properly and they ultimately reach the shelves for consumers to buy. And that leaves the chunkiest part of the margin chain, but it’s also the best way to view which branded products are going to be the winners.

And so our strategy is that we built the distribution, we’re the largest distribution company in the state. We now cover more than 75 percent of all dispensaries in the state of California, which no one else can say. And really, the second leg of that strategy is to pinpoint because we’re watching and in real time which branded products are doing what, pinpoint those products as potential acquisition targets, or certainly brand partners that can leverage off of the Origin House platform.

James West:   I see. So the strategy at this point has become to focus on California-only, brands, logistics, sales locations?

Marc Lustig:  I’m glad you brought that up, because, you know, a lot of your viewers would be hearing a lot about now US cannabis companies that are so-called multi-state operators. These are companies that have licenses in a variety of different states. Our approach has been sort of the opposite, which is, we focused on California. We knew that this is the biggest market, the most competitive; we also think it’s where branded products really need to be originated from, just from a pop culture and sophistication of that market.

James West:   Sure.

Marc Lustig:  And so it was our bet that if we dominated in California, then, and only then, would we have the wherewithal and discipline to drag that out and go into other places; not 15 states and then try and be good at all of those, which is, I can tell you, going to be difficult. Even when I started CannaRoyalty and we had multiple just passive investments in different places, it was difficult, never mind just managing vertically integrated operations.

So our approach was, dominate California, then start expanding into other places. And so our acquisition of 180 Smoke in Canada was actually sort of going the other way to what everybody else has done, where we felt like we had reached a place of understanding in California that we could really leverage the 180 acquisition for the Canadian market.

James West:   Wow. Okay, so looking at the way that the US market is maturing now, the resignation, forced resignation of Jeff Sessions and the sort of incremental spreading of medical marijuana legislation in additional two or three states, is that going to catalyze a sort of M&A environment in the United States where the larger, recently structured companies are going to look to sort of accelerate their progress in the industry through acquisition of companies that might be targets?

Marc Lustig:  Absolutely. I mean, there are two comments that I would make: one is, I’ve been saying since being on with you over the last couple of years that I thought that there would be continual progress in the US as it relates to more states having some form of legalization. There’s currently two acts in Congress right now that are gaining momentum: one’s called the Farm Act, and one’s called the State Act, both of which would be usually positive for the legislative environment, but the two comments are, first, every day we at Origin House see new players from other industries, whether they’re tobacco or beverages, which has been very well covered but nutraceuticals, even on the edges some pharmaceutical companies taking a look; and that’s just going to continue.

The fact that Michigan is now a rec market as of two days ago is just more fuel on that fire. So one part of it is other industries starting to look at acquisitions; but to your point, the M&A environment is very active right now. You saw a company called Pharmacan be acquired by MedMen several weeks back, you saw iAnthus acquire MPX, which happens to be a California platform, and you know, to your point, I think some of these operators who have very large capitalizations are looking at how they can expand into some key states by making some strategic acquisitions.

James West:   I’m wondering, will Federal de-prohibition of cannabis in the United States mean that all of the state operators are now no longer constrained by state borders?

Marc Lustig:  Yes, it would. I mean, it would instantly, depending on what the legislation looks like, it would instantly resolve the banking issue, and it would also resolve the logistics issue, let’s call it, of not being able to manufacture and move product from state to state, which really changes everything. I mean, the way that we’ve approached our business at Origin House is, the acquisitions that we’ve made and the platform that we’ve built, we see as a post-prohibition, you know, de-schedulized market where we’re manufacturing products in California that are going to the entire southwest of the United States. So we’re thinking sort of ahead just like a large multinational company in tobacco would think; this is how they run their business, they have hubs. So we do anticipate those walls, if you will, coming down, and we’ve planned accordingly.

James West:   So how will the state differentiated licensing rules affect the cross-border trade among states after de-prohibition? For example, in some states, one operator can be all things: extractor, grower, product manufacturer. In other states, you’re only allowed a combination of things. How is that going to play out in that environment?

Marc Lustig:  Well, I think that it’s probably a bit premature to be talking about full blown de-scheduling or de-prohibition. The State Act that I referred to earlier is my, and I think our advisors’, best guess of what will happen next, which is that the State Act really just gives the states the prerogative to run the program however they want, which would still, you know, lead to progress on the banking side and some of the logistics side, but it also probably helps the brain damage that would be created by trying to unify 50 different states that have all been in some different type of form.

James West:   Sure. So you don’t think the risk is very great that Donald trump might recognize the opportunity inherent in declaring by executive order the de-prohibition of marijuana Federally?

Marc Lustig:  I think he actually gets it, and I’m sure he has a bunch of smart people who have done the math on votes and what the population says about their support for this, but I just think it’s very complicated to bring something to de-scheduling it that quickly. And frankly, from the CannaRoyalty perspective, I’ve said this often: the best case scenario for us is status quo, because we’re building a platform that would be confused or we’d start to see competition like we’ve never seen before if this de-scheduled tomorrow out of some act of surprise, then all of a sudden things would be highly competitive for things that we’re looking to acquire, and we want a little bit more time just to keep building our value.

James West:   Sure. Okay, so there’s no denying, and I’m not asking you this because I just look at your financials and I can see that you are an acquisition target for a large US national cannabis company that will come out of the woodwork upon de-prohibition, and perhaps sooner. If that was to occur, what would you do next?

Marc Lustig:  I’m not sure. I’d probably rest a little bit. [laughter] But I mean, the beauty of what we’ve built at Origin House has been how many different other companies and other types of relationships we’ve built, and I mean, it would depend on when and how that happened, but there’s no shortage of opportunities for –

James West:                              Can you talk about any of them by way of example?

Marc Lustig:  Um, probably not. [laughter]

James West:   Okay. Darn, I tried. [laughter] Okay, so then, the evolution of the legalization in the United States, to us in Canada, appears, you know, like it’s 2013 in the US and they’re just getting their heads straight. So does that mean – I mean, we’re looking at the companies that are operating in the US, listed in Canada, as well as the one or two companies that are listed exclusively in the US and operating in the US, we’re seeing the volumes of those stocks really start to far outweigh the volumes in the Canadian market issuers. So is it safe to say that the US investor is all in on the market already, or is this just a taste of what’s to come?

Marc Lustig:  You know, I think this is probably the most important trend that’s starting to take shape for the investment side of the cannabis sector, which is that the US market is 20 times bigger than the Canadian market, and there are 1/20th the number of companies to invest in. so that should put in perspective where the money is flowing, or should be flowing, and the reality is that the US investor, aside from some very forward thinking people who got their heads around this to come and invest into Canopy or Aphria or Aurora in the past couple of years, has been nowhere. And so I would say that if you want to use the baseball analogy, we’re not even in the first inning yet of what the investor in the US has exposure to right now.

And then on top of that, those people are going to be looking to buy US-asset based companies, and so when you start looking at how many of those there are, it’s really less than 10 that are investible. And your point about volumes, I mean, that’s starting to play out before, I mean, I think CannaRoyalty and now Origin House was one of the first companies investing in the US. We started in the CSE, our volume may have been 100,000 or 200,000 shares a day, now it’s at 2 million shares a day between both our US listing and our Canadian listing, and there are, I think, four or five deals that are coming to the market in the next couple of weeks that are all US-based companies, that really, the US investor is starting to look at this sector, but they’ve been nowhere. And Tilray would be a good example; I mean, you get a listing that US investors can actually feel confident in buying, i.e. on the NASDAQ, and the thing goes from whatever, 10 to 300 or something, I mean, and that should be a sign.

I don’t have an opinion on Tilray, but I’m just saying, that should be a sign of how much pent-up investment appetite there is for a cannabis stock that gives someone US exposure like our company.

James West:   All right, Marc, well, as ever, very enlightening. we’re going to leave it there for now and cone back to you in due course. Thanks very much for joining me today.

Marc Lustig:  Thanks, James. 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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