February 12, 2019

Origin House (CNSX:OH) President on Brand Acceleration Partnerships

Midas Letter
Midas Letter
Origin House (CNSX:OH) President on Brand Acceleration Partnerships

Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4) President and General Counsel Afzal Hasan talks about the company’s recent brand acceleration partnerships. Origin House partners with unique and exciting brands and entrepreneurs in California and uses its expertise and vertically-integrated platforms to grow its brand partners. The company’s deals with Humboldt’s Finest and Henry’s Original exemplify this strategy and Hasan notes that both deals support communities that are critical for the long-term success of the cannabis industry. Hasan reveals that because Origin House is involved in every step of the value chain , the company can offer partnering brands a selection of services, which gives Origin House significant flexibility. Hasan shares his thoughts on the Ontario retail lottery process, and indicates that while Origin House was interested in discussing potential working arrangements with the winners, no rational deals were available.


James West:           How have you been?

Afzal Hasan:  Great, thank you. Thanks for having me on again.

[stock_chart symbol=”OH:CNX” align=”left” range=”1M”]

James West:   Yes, you bet. So Origin House, this is interesting, is coming close to the stock price that was at when I last started accumulating it, so I’m thinking, Oh, it’s, you know, it’s time to start maybe accumulating again. What’s new in the world of Origin House?

Afzal Hasan:  We’re keeping active and busy. The last few weeks, we put out a series of our brand acceleration deals, so that’s been the focus for the past handful of weeks, and I think I had alluded to that being the focus for us the last time I was on, too. We’re now starting to show the results of the brand building exercises that we’ve been engaging in over the last handful of months, so, exciting times for sure.

James West:   Right. And exactly, when you say brand acceleration, maybe just give us an update on that for those who might not have caught –

Afzal Hasan:  Yeah, absolutely. It’s a program that is still in active evolution right now. What we’re looking to create is this program or platform that allows really unique, interesting brands with compelling products or authentic experiences, to partner up with us in California and really leverage the benefit of this model that we’re creating as a larger, more diversified company.

So the theory here is, you pair up our infrastructure, our expertise, our capital, and that experience that we have from having been an operator in the space for quite some time with these really unique ideas or entrepreneurs, and you theoretically might be able to leverage the best of both worlds. And this is a recipe and model that you see in the typical real world most of the time without the need for any sort of an accelerator, because it’s common for you to be able to find partners.

In this case, in the cannabis industry, much harder for people to find reputable partners that are there for the long term, and that’s what we’re trying to furnish for entrepreneurs out there in the space.

James West:   Hmm. So on February 4th you announced a $704,000 investment into Humboldt’s Finest – an allegiance of heritage cannabis farms representing Humboldt County. Is that sort of a good case example of your acceleration program?

Afzal Hasan:  Absolutely. I mean, the folks at Humboldt’s Finest have been partners with our distribution company for quite some time, and this deal allowed us to put some capital into this company that represents a really unique, authentic brand that has been around for quite some time and is quite heavily involved with this community. So both this transaction in Humboldt’s Finest, as well as the transaction that we had with Henry’s Originals, the key element that was really compelling to us was being able to not just make a sensible investment that’s going to drive our business and drive our potential brand, but also indirectly support communities that are critical for the long-term success of this industry.

So providing capital to these companies actually filters out into their communities and allows them to pay cash to farmers and do things that farmers in those areas have just never been able to access in a meaningful way. So we were really excited about that, and that’s part of the power of this platform, is being able to achieve a variety of different end goals while also driving good business for ourselves.

James West:   You bet. So just to sort of segue, because I think you’re probably perfectly positioned to talk about this: one of the problems I find with the cannabis available in Canada through the legal system is that the time frame from harvest through testing to irradiation, which is common, to packaging, means that by the time it gets to you, it’s generally too dry and has, it’s all those processes have had such an effect on the flavour that the perishable nature of cannabis has been overlooked completely, and you’re left with what I can only categorize as a really inferior product.

And certainly I think in the case of, especially producers in Humboldt County, where the concept of cannabis as a perishable good has been long held in high regard as a default reality, is there a better process and a shorter timeline for getting fresh cannabis that’s just finished its ultimate curing process? – I’m talking obviously in the case of premium flower – to market, into the hands of consumers in a more compressed way than there is in Canada?

Afzal Hasan:  I would say that generally it’s better because we have a lot more maturity and experience in the industry, so you’re not going to get as many of the learning and growing pains that you see in Canada, which is, we’re just doing this for the first time, we screwed up X or Y or Z, and that caused a hiccup in our timeline that has pushed things out.

So from that angle, California, but a lot of other states are better off, because their infrastructure and systems are just more finely tuned. But the flip side of it is, is that it’s a constant gripe for us as well. When we get products in, we need to send them out for testing; the rules for testing are still in evolution right now. I think they’re moving in a sensible way, where you can have the ability to potentially do things like test flower upfront and then manufacture products like pre-rolls out of them without having to re-test over and over again.

So those are things that, I think, represent improvements in efficiencies that we’re eventually going to see happen in Canada too, but really interesting aspect about this that most people aren’t aware of, that ties back to Humboldt and Mendocino again, is a believe that I’ve seen reiterated by a number of entrepreneurs in the market that have a lot of experience, that outdoor cultivated cannabis will have a much better shelf life and profile over time versus indoor cannabis.

The argument over there is that, because of the fact that it has been exposed to the elements naturally through the course of its life, it has better characteristics to be able to preserve some its smell, taste and effect versus indoor-cultivated cannabis. So this is something that is more anecdotal than factual, and then obviously some of these characteristics that you’re pointing to are very subjective for users, so you might not be able to test them, but there is an interesting kernel that interests us in that outdoor side of it for potentially some of the aspects that you’re touching on, which is longer term shelf life.

And I can say from actual observation – again, anecdotal – we have seen outdoor products that are anywhere from six months to a year in terms of age that feel like they’re just as good, if not better, than when they started off. So that might be part of the answer or the solution, too.

James West:   Sure. Certainly I’ve noticed with outdoor cannabis, it’s like everything is more robust in terms of structure; you know, the stalks just seem that much stronger, the leaves are thicker, they’re able to sort of withstand direct sunlight more, and they’re just less delicate, so I could see that being the case.

Does Origin House – so I mean, it’s hard to keep up with the pace of evolution of your company, and it’s like, I’m always looking at this and going, what does this mean in the context of like, all of the assets now under Origin House? How does one think of the asset mix of Origin House right now? You’ve gone from becoming sort of portfolio investors to becoming owner/operators of brands that you acquire or develop to the point where they’re mature and then incorporate them into your sort of distribution mix. So maybe if you could just give me a total overview of all of the things that Origin House has going for it right now, because I think a lot of investors have the same problem: they can’t see the forest for the trees.

Afzal Hasan:  It’s complex in a lot of ways, but when you understand the model, you realize that it’s actually quite simple. So the front line of our business is the same, regardless of what products we’re selling; it’s distribution. All the products that we either sell or carry from third parties, they go through our distribution subsidiaries, so every dollar of revenue that we generate in the US in California from our cannabis business, goes through distribution.

When you take a step back from distribution, distribution gives us a certain level of return on the products that we’re selling, but we then have involvement with the products that can range from ownership completely, to also partway down that pathway of doing contract manufacturing or other support services.

So one step back from distribution on the value chain is when we do pick, pack and ship for companies. So we’ll get raw inventory, then have to package it up in our facility and put it into boxes and packages for dispensaries. That’s a function that we’ll take on for companies that’s more distribution-related, but then you start to get to activities that are another, further step back from that. So when we talk about our deal with Viola that we did not so long ago, one of the aspects we’re exploring with them is to purchase the raw flower that they were using on the market, but then be the processor and packager for that raw flower.

So, taking it from an unprocessed good to a processed good. And that’s another way that we get more involved with the brand.

As you follow that chain backwards, you’ll see that we’re involved in each step of the value chain with the brands, well, some of the brands that we own all the way through. But we’re essentially offering brands a menu, which is, start off with distribution, and then we’ll happily do as much or as little as you need. But it’s a choose your own adventure experience.

So we have the capabilities not just for distribution, but for this warehousing and manufacturing and processing for just any type of product. We have the in-house capabilities, in house kitchens, as well as the ability to fill vape cartridges and roll pre-rolls, so manufacturing is there.

We don’t presently extract in-house, because there’s a very active and robust market for bulk cannabinoids out there in California, but we are, as part of our longer-term, building out some of those capabilities that require that level of control over their product.

And finally, on the cultivation side, we did a deal a handful of months ago for a facility that we’ve called internally Cub City, where we allow for craft cultivation. A similar type of opportunity; it’s pick your own adventure, if you need it, we’ve got it. And that’s part of the all-in package that we’re trying to create. But if not, we’re happy to also work with companies as just their distributor, because for us, it’s an expand and scale and learn model, as opposed to trying to own everything and do everything ourselves.

James West:   Mm-hmm. It’s interesting: from what you describe, you know, you could never do that in Canada, because the rules are so restrictive in terms of how companies can interact and what is possible in terms of the product mix. And I look at the Canadian advantage in that, you know, we were first with a national strategy in a G7 country, but we’ve got this total restrictive regime.

In the United States you’ve got this whole spirit of enterprise. Anything goes, if it’s a good idea, let’s do it, kind of approach. But, you’ve got the restriction of, you know, segregated markets in the form of state borders and everything, and a Federal prohibition. If only they could, you know, everybody could accept everything, and then it would be true, free and open market.

Do you think that California is, you know, a good model for Canada? I mean, we’re in Canada; you guys operate in California, but do you think Canada could learn from California at this point in terms of, like, you’re not going to really do anything by having such restrictive regulations except limit the opportunities of this emerging sort of market.

Afzal Hasan:  Yeah, I have long been a proponent of the intellectual property and experience that has been developed in California, not just in the cannabis perspective but just generally from the consumer packaged goods perspective, that location and that market is one of the most active, diverse and discerning in the world. So I think there’s a lot of lessons to be learned regardless.

But the way that I see it for Canada, if I was a regulator up in Canada, is not necessarily just to take a look at California and say, This is what we need to be, but you’ve actually got a wealth of diversity of experiences that you can take a look at in the US of, like, different approaches. So you’ve got the California, you’ve got the Oregon, the Washington, Colorado as being early movers out west that have approached the market in different ways and have had their own setbacks and pitfalls.

James West:   Right.

Afzal Hasan:  You’ve also got the east, and the southeast, where you’ve had more restrictive, slower development, and sometimes vertically integrated ecosystems, as well. I think there’s just a ton of lessons to be learned from comparing these different approaches.

I fundamentally believe that, out of all the approaches that are out there, having reviewed them to a certain extent, I believe that California has a superior one from every characteristic that’s important to our business, but I think there’s lessons to be learned from every market, and that’s the opportunity that Canada has that I think it has been trying to grasp towards. But you get also things that reflect regulators that are uncertain and maybe aren’t applying the right business mindset or mentality. I won’t necessarily open up a can of worms unless you want to talk about it, but the Ontario retail situation that just happened recently, great example of that. I’m curious how you perceive that one.

James West:   You’re talking about the lottery situation for the retail stores. Well, we sit, you know, the news interpreted it as 25 new bricks-and-mortar stores and we said, Well no, I think there might be five new bricks-and-mortar stores and 20 new bankruptcies in the space. And so that’s been our attitude, is that, if you are going to open up a process and make it just so randomly selective, how are you going to, like, it should be at least merit-based in some way, shape or form in order to ensure a higher rate of success.

Afzal Hasan:  Exactly.

James West:   Because if the program is a failure, then, you know, the government is in this strange position where it’s like it’s mishandling the administration of the emerging cannabis laws, and there are many who aren’t in government who believe that government has no place in business in a free and fair market society. I happen to be one of them. That’s somewhat Libertarian, perhaps, but so yeah, I’m, you know, I’m watching the story unfold. The first store, apparently, is opening in Yorkville, the news is today, and it sounds like, okay, so the first store sounds like the people who won –

Afzal Hasan:  It’s actually opening today?

James West:   No, it’s not opening today, but there was a story in the paper, there’s an announcement, there’s a lease in place, it’s in a high-end sort of strip of Cumberland Street, 20 Cumberland, I believe. And so it’s obvious to me that, if you’re going to open a store in Cumberland Place, you’ve obviously got some financial firepower behind you, and you’ve probably got some depth of retail experience.

But even if Starbucks was to identify a new location for a store, it wouldn’t be able to open it in three months. It would take six months just for the reconstruction of it interiorly. So yeah, I’m not really, I don’t have a high degree of confidence in the lottery program, and I think the government is going to learn from its mistakes, theoretically, hopefully, if it’s the same government that’s still around by the time it is a mistake.

But so what’s your take on that?

Afzal Hasan:  I share the same views. I mean, you used the word merit, for example; I flippantly threw out a Tweet, I think, around the time that some of this stuff was happening about the fact that we don’t choose astronauts based on lotteries. There are certain types of things that are really hard and difficult and critical and important, that meritocracy is often the best solution, even if you do want fairness and democracy inherent in the process.

So I agree with not having licenses just issued to a handful of select players that have the most capital. I think that that would be the wrong result. But the far extreme has led to almost like a farce in our case of what has happened. And we were part of the active process that happened of reaching out to every one of these 25 people that were on that list and calling them and saying, Do you want to work with us? Because we are an operator, we have tons of locations out there, and that was part of our background.

We tried to, and stuck to, all the rules that are in place that we understood from the government, which, again, very hard to decipher what the intention was, but seemed like they wanted to have a very strong distinction between ownership, control, and what was happening in those stores, and third parties being involved. So the thought was, whoever gets a license is supposed to own it, control it, direct it, at least from my understanding. So we tried to stick within those lines and also strike rational deals, if possible.

We were not successful, because there were no rational deals to be had. Everybody that was out there in the market was going out there with ludicrous proposals. I saw one announced a handful of days ago that seemed to suggest that a minority equity position was being vended in for one of these assets, and from my understanding of the rules, that seemed to act least violate the spirit, if not the actual black letter law. But I can only observe, I can scratch my head, but at some level, when it gets too irrational, we just look back and say, we’ll just keep delivering, and hopefully this market will sort itself out, and that’s coming back full circle to why we’re operating primarily in California right now and taking a careful and calculated approach in Canada.

James West:   Wow. Great analysis, Afzal. Thanks very much for joining us today.

Related Articles


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.