Origin House (CSE:OH), formerly known as CannaRoyalty Corp., is a cannabis company with operations in Canada and the U.S. and is focused on building its California brands that it wants to take to global markets. The Ottawa-based pot firm posted second-quarter revenues of $21.4 million on Wednesday, which showed growth of 91 per cent over the previous quarter.
Origin House saw revenues grow six-fold from the period a year ago when it recorded $3.5 million in sales. The bulk of that growth came from its California operations where products sales came in at $16.9 million, up from $3.1 million in the year-ago period.
In the Canadian market, the company posted $3.9 million in product sales, compared to no revenue in the same three months of 2018, before recreational cannabis was legal in the country.
— Origin House (@OriginHouse_OH) August 28, 2019
Origin House posts significant loss in Q2
Despite surging revenues, high costs continued to plague Origin House’s financials as it posted a Q2 loss of $34.9 million, compared to the $9.3 million net income it reported in the same quarter last year. The company’s operating expenses of $23.5 million were nearly quadruple the $6.3 million in expenses that it incurred a year ago.
Origin House’s bottom line also took a hit from the $2.1 million transaction costs it incurred related to its pending $1.1 billion acquistion by Chicago-based multi-state operator Cresco Labs (CSE:CL). The company also recorded two non-cash adjustments amounting $13.4 million related to the agreement with Cresco.
With rising costs, Origin House’s shrinking gross margin of 21 per cent, down from 23 per cent in the year-ago quarter, was another key factor why it piled up second-quarter losses. The company generated just $4.4 million in gross profit, leaving not much to cover its overhead and expenses. In the California market, margins are small at just 13 per cent, compared to the Canadian market, which reached 31 per cent.
Other notable second-quarter expenses:
- $4.4 million sales and marketing costs in California
- $4.5 million general and administrative costs in California
- $6.1 million overall sales and marketing costs
- $14.6 million overall general and administrative costs
With the rising expenses and lower margins, it appears the company will have its work cut out to generate enough growth to turn a profit.
Acquisition by Cresco still faces hurdles, but companies confident it will close
But for investors, much of Origin House’s future goals hinges on the closing of its acquisition by Cresco Labs. The deal is expected to go through by the fourth quarter of 2019 pending requests from the Department of Justice Antitrust Division for additional information related to the acquisition.
If and when the deal happens, the companies believe it will help set the stage for significant growth, with plans to eventually go global:
I am as confident as ever that the combination of Cresco Labs’ scale, expertise and brand portfolio with Origin House’s proven track record of leveraging our California-wide distribution footprint, is the best way for shareholders to participate in this growth. Together, we will be well-positioned to build a national, and one day, global house of brands.
– Marc Lustig, CEO of Origin House
The deal is expected to boost Cresco’s status as one of the big cannabis players in the U.S. by selling the combined company’s brands in 750 locations across 11 states.
The California cannabis market is currently the largest single one in the world, and Cresco is excited to access Origin House’s 50 brands its sells in the state to 500 dispensary partners.
Lustig said “with additional regulatory pressure on the illegal market in California, we expect 2020 to be a big year in the state.” State and local officials are currently cracking down on the marijuana black market, and California’s legal market is on track to reach $3.1 billion in 2019 and forecast to reach $7.2 billion by 2024, according to BDS Analytics.