Origin House (CNSX:OH) President Discusses Recent Hostile Takeover Attempt and Shareholder Confidence
Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4) President and General Counsel Afzal Hasan shares details of a recent hostile takeover attempt and reveals how some Origin House shareholders have responded in defense of the company. 26 percent of Origin House shareholders signed an agreement reiterating their commitment to the direction of the company and belief in its vision. The company hopes the agreement will signal the strength of Origin House to other players in the space. Hasan addresses the difficulties cannabis companies face in California with regards to the lingering illicit market and the repercussions of price rationalization. Origin House’s distribution expertise provides protection from the inevitable lowering of cannabis prices, which have already impacted cannabis companies operating in states like Washington. Origin House is focused on driving incremental and organic growth, as well as expanding its California footprint in 2019.
James West: Afzal is with me, Afzal Hassan is the President of Origin House, formerly known as CannaRoyalty. Azfal, welcome back.
Afzal Hasan: Thank you.
James West: Afzal, you guys put out a really interesting press release that I was really intrigued by, because you’ve done two things: you’ve come out and said that you’ve been the subject of some, you know, M&A activity that has not resulted in a transaction, and you also managed to get 26 percent of your shareholders to sort of pile into an agreement in principle. Tell me about that: that’s interesting.
Afzal Hasan: Yeah, and it’s maybe one of the blessings and the curses of having a former securities lawyer as a leader in an organization. It’s an area that I’m very well acquainted with. Some of my own background had a lot of to do with M&A work, as well as proxy fights in particular hostile transactions. And we’re in a very unique time in this industry where the conditions are quite ripe for this type of activity.
So we had the good graces to have that knowledge and insight, we have great advisors, too, that have supported us through this process, and what we’re trying to do is just instill a little bit of discipline into a very unpredictable market that we’ve got ahead over here.
James West: Sure. So is the purpose of getting 26 percent of your shareholders to sign up to this agreement, is that designed to draw a line in the sand and let anybody who would contemplate, we’ve got 26 percent at least of the shareholders who are going to be voting our way no matter what, so give that some thought?
Afzal Hasan: Well, it’s intended to signify a few things. And effectively for the market, it’s intended to signal that you do have this core group of insiders and management in this company that is very much so subscribed to the long-term value of this organization. So it’s 26 percent, it’s obviously not 100 percent or 60 percent because we are a large, publicly traded company, but it’s intended to signal to the market that we do have that level of alignment and that we have a belief in the long term value of this organization that may not be reflected for external shareholders.
So that’s the key uniting factor with these 26 percent shareholders: they’re all internal folks. They understand and know this company better than anybody in the world, and this is intended to be a signal to the market that they really truly do believe in the value of this company in the long term.
James West: That’s interesting. Do the – have the M&A sort of interests that’s come your way, has that been from companies that are typically larger Canadian LPs or large multi-state-operators in the us? Who’s interested in taking over CannaRoyalty/Origin House?
Afzal Hasan: It’s the usual suspects. I mean, we’ve got a very unique business model that’s quite complimentary to either one of those categories that you mentioned, so be it large Canadian LP or large multi-state operator. We’re neither one of those things, but what we are is a very brand-focused and product focused company, and that tends to be a big value driver and the very reason why we chose this business strategy was because we thought it would be very lucrative. So, either category has been open for discussion.
James West: Okay. So, if I was, you know, well, I am an Origin House shareholder, I’m looking at sort of the next phase, here. You guys have accomplished great things, and that’s why I’m a shareholder and I’m happy to be a shareholder. What are the big events in 2019 that are going to take you to a new level? What is it that we should be looking out for as investors?
Afzal Hasan: Well, California really has had a year of recreational market legalization so far, and this is the year that we expect to see a lot more of the development and maturity that we didn’t see last year. And we always have a period where we need to roll out the kinks in the system; we still haven’t actually implemented in California yet, the final regulations; we’ve been on draft emergency regulations since the outset, so we’re expecting to see some really interesting growth trends over here. And this sits on top of just the reality that the umbers for California were a lot lower than anybody was hoping.
The estimates that I’ve seen estimated around $2.5 billion, which for most people, represented a decline, as opposed to an increase. And that, predominantly in our view and from many other market commentators’ perspectives, is due to the activity in the illegal market.
So we’re expecting to see a big transition over the next few years and hopefully more sooner rather than later, from the illegal market to the legal market, ad that’s going to be a really interest growth trend, similar in Canada as well. So we’re expecting to see some of that.
Canada – a little bit further behind. I mean, I’m frustrated as an operator in California that we only have five hundred retail points of sale give or take, but in Canada, it’s under – I don’t know what the actual number is, but it’s well under 100 for the entire country, and it doesn’t look like that’s going to be changing in the very near future.
So I think that’s going to be an emerging theme across the board for markets, is increasing maturity and activity. And really that’s the great thing about being in this industry, is that growth is coming, no matter which way you want to cut it.
James West: Yeah, you bet. So the California market is very mature, at least in terms of the producers and the product manufacturers. There’s a ton of stuff down there; every time I go, I’m always trying this, that and the other thing. So I’m curious as, is there is a period of consolidation coming in California that’s maybe going to see some of the less dynamic brands sort of become folded into other companies? Is that something that has to happen for the health of the California market?
Afzal Hasan: I think there’s arguments made there made on both ends. Certainly for some types of business, you’re going to see consolidation, because if you’re trying to be the lost-cost provider that’s in every single store, that’s going to be forward to your business model; scale and efficiency, that’s an unavoidable drive that really drives us out of the business.
That being said, there really is going to be room for craft producers and small producers as well, but keeping to understand is that we just don’t know where that balance is going to go because we’re exploring an entirely new market, and have no idea how this could actually shake out.
One thing that we have not yet seen happen, which is going to be really fascinating to see the effects of, is price rationalization. You’ve started to see that happen in Washington and Oregon and Colorado, where you’ve had long-time activated markets which California has had more of a gray and fuzzy and unregulated market. We haven’t yet seen California prices approach anywhere near what they are in Oregon or Washington or Colorado.
So that is going to be a factor that’s going to cause a lot of activity and likely a lot of consolidation too, and squeezing a lot of business models.
James West: You mean, prices coming down?
Afzal Hasan: Absolutely, and as the prices go down, you just have such little margin to play with that it drives business out of profitability, and that’s a big driver for consolidation, too. You have to scale up to have the hope to be profitable.
James West: Okay, and is Origin House in that position where it’s got the scale that can withstand competition on price every time?
Afzal Hasan: We, and that’s the nice thing about being a distributor, too, is that we’re in a sense indifferent to that price movement. We’re in a great position and a negative portion in that our margins from our perspective reflect what the margins are likely going to be for our class of business into the long term. When we take a look at distributors in other types of businesses, our margins make sense versus what they charge when you take a look at other types of product categories in the cannabis industry, so cultivation or retail or manufacturing, in many cases, you have parties that have been able to extract above-market returns for their activity.
So if you’re running a farming business, you’re not there making 50 or 70 percent EBTIDA on your business; that is just an impossibility. But that has been the case for quite some time in cannabis, an that is where you’re going to see a lot of this activity move: you’ve had bloated margins of the business just because of the historical evolution of this industry, it’s going to start to compress, and ultimately going to reflect what we see in any other business. Capital is going to go to the places where it’s most efficiently deployed and you’re going to have returns generated for everybody, but nobody’s going to be sitting there making odes and odes and odes of cash as you might expect to see just because it’s cannabis.
James West: So at this point, is there a sense of how much of the market is supplied by illegitimate sources relative to legitimate ones?
Afzal Hasan: Well, estimates down the south of California, which is where we tend to hear more of the illicit activity and see more of the illicit activity occurring, is that there were, at points last year, three to one retail outlets illegal to legal. So that was the reality that we had to grapple with, and it was frustrating, because the legal dispensaries, when they talked to us, they told us that they weren’t making any money, because most of the people that are coming in the door aren’t making the huge purchases, they have a lot of their consumers price-competing across the illegal market, so the scale and volume that the legal producers have been able to drive just hasn’t been enough to eke it out for them. So it’s been a very challenging environment.
James West: Wow, interesting. So what, in the grand scheme of things for 2019, is going to drive primarily Origin House’s continued success?
Afzal Hasan: Well, expansion. Expansion in California. We’ve been hard at work building an infrastructure and business over the past year that really is just letting onto its legs and starting to move forward. So what you saw last year was us putting together the business, bet not rally operating it, because we were putting the pieces together. Now what you’re going to see is us actually using those pieces to drive incremental and organic growth for our business too.
So this is the exciting time, and the long wait that w e had was to be able to plan and to put this infrastructure in place, so you’re going to see in 2019 for us is execution in California, also execution in Canada with our partners, 180 Smoke, that we’re well underway with closing an acquisition with.
So a lot of fun stuff ahead in California and Canada, and we’ve definitely got our sights stet on a vast number of other markets. Our point, though, is whenever we go into a market we want to make sure that we’re doing it right and actually successful as opposed to just getting there and being a number on the license registry.
James West: Sure, you bet. All right, Al, so that’s a great update and I’m excited to be a shareholder of Origin House still. Thanks very much or joining me today.
Afzal Hasan: Thank you.
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