Origin House's Revenue Soars Thanks to Strategic Acquisitions

Origin House (ORHOF) reported its first quarterly results before the market opened on Wednesday. Sort of. In October, the company changed its name from CannaRoyalty to better reflect its corporate identity and goal of becoming the "preeminent global house of cannabis brands."

The big news for the cannabis products and brands company when it reported its second-quarter results three months ago was the divestitures of noncore assets. Origin House had more divestitures to talk about in its third-quarter results, but the more important story was about what it's doing with the funds generated by those sales. Here are the highlights from the company's third-quarter update. 

Image source: Getty Images.

Origin House results: The raw numbers

Data source: Origin House. *CA$ = Canadian dollars.

What happened with Origin House this quarter?

Origin House posted a huge year-over-year jump in revenue in the third quarter as well as a strong 89% quarter-over-quarter increase. And it was a direct result of the company's shopping spree earlier in 2018, which was largely funded by the sale of noncore assets.

One year ago, Origin house made more money from royalties than it did from product sales. That has changed dramatically thanks to acquisitions of companies including Kaya, Alta, and FloraCal. Over 94% of Origin House's total revenue in the third quarter stemmed from product sales. Royalty revenue will continue to decrease in the next quarter due to the closing of Origin House's acquisition of RVR Distribution. 

The company didn't report a profit in the third quarter as it did during the second quarter of 2018. However, the profit in the sequential quarter came from asset sales. Origin House's bottom line worsened from the prior-year period despite the big increase in revenue primarily due to significantly higher operational expenses resulting from its growth.

Origin House now claims a distribution platform that reaches 486 licensed dispensaries in California, which reflects upwards of 70% of the total licensed dispensaries in the state. The company announced near the end of the third quarter that it was acquiring leading Canadian vape retailer 180 Smoke, a move that should give access to the Canadian recreational marijuana market for its brand partners in California.

Divestitures of noncore assets helped give Origin House a nice cash stockpile at the end of the third quarter. The company reported cash of 75.3 million Canadian dollars, up from CA$4.5 million at the end of 2017.

What management had to say

Origin House CEO Marc Lustig stated:

Last quarter, we stated that after a substantial period of building a foundation, Origin House was at the beginning of a multi-period, sustainable acceleration in revenue growth. Year-to-date, we generated record revenue, completed four transformational acquisitions and are well-capitalized to continue growing. We expect to continue delivering strong revenue growth throughout Q4 2019 and beyond, as RVR and 180 Smoke are integrated and as we further leverage our brand development and support platform.

He added:

Our view is that the next 12 months are going to be critical in determining the winners in the cannabis space. Origin House is positioned as a premier operator in the largest and most dynamic cannabis market in the world, and we believe we are just at the beginning of our growth curve. We expect this platform to become increasingly difficult to replicate and therefore increasingly valuable for our shareholders as our financial results accelerate, as well as for other operators in the cannabis space that need to be in California.

Looking forward

Several recent developments for Origin House should improve its future financial results. The company's subsidiary, Trichome, took steps to go public on the TSX Venture Exchange. Origin House owns a 31% stake in Trichome. The closing of the RVR Distribution acquisition further establishes Origin House's leadership position in the California cannabis distribution market.

Origin House should benefit from several other factors. The company expects the number of licensed dispensaries in California to increase into the thousands. Its acquisition of 180 Smoke provides a solid launching pad into the Canadian recreational marijuana market. Continued addition of new cannabis brands to its portfolio should drive solid sales growth.

There's also the potential for Origin House to expand into additional states. Massachusetts and Nevada are at the top of the list. 

Some investors might be disconcerted by Origin House's widening net loss in the third quarter. However, the long-term growth prospects for the company appear to be very good -- and the company's recent moves should solidify its ability to capitalize on those prospects.