Find Your Fortune As An Angel Investor
It’s rare that everyday investors in America get an opportunity to become an angel investor. This has long been something in which only the wealthiest 2% could take part.
In 2012, a provision in the JOBS Act meant to open up this world to ordinary investors…
But it didn’t open very wide. There are few legitimate opportunities available, and they are hard to find. Every once in a while, a public company will have a batch of private investments.
In most cases, the private investments add up to only a tiny fraction of the public company’s worth. Google’s parent company, Alphabet Inc., for example, has hundreds of private investments, any one of which could make shareholders rich if it paid off for a smaller company. But Google is so huge that, even if every one of its private investments soared, shareholders would barely notice.
Cannabis investing is different.
To understand why, we have to look at two facts.
The first is where the term “angel investing” came from. An angel investor is called that because he or she is an angel to the company – providing capital when it is not available from other sources, even venture capital funds.
The second fact is that in the United States, traditional capital has not been available to cannabis companies at any price.
So, what that means is that if you are invested in a U.S. cannabis that has not yet moved to the Canadian Securities Exchange – through an U.S. cannabis company, you are in a way already an angel investor!
Those who have been able to get in as early investors for better-known cannabis companies that are listed today often have life-changing tales to tell.
Take Aurora Cannabis Inc., for example. Today, it’s as close to a household name as you can get.
But when it started out, the Canadian firm needed angel investors. In cannabis, these weren’t always easy to come by in the earliest days.
One of the earliest angels was an electrician, one who was reluctant to say the least. Well, he was talked into putting some money into the company. The company started to grow.
Aurora began positioning itself for the recreational cannabis opportunity that starts in Canada tomorrow. It eventually brought in more investors, including the big institutions, and now it’s one of the biggest cannabis companies in the world.
That electrician’s investment is now worth tens of millions of dollars.
And that’s without Aurora finding a big corporate investor the way Canopy Growth Corp. did. When that happens – and the rumors about companies like Coca-Cola were widespread by October – he and other investors who have stayed in will build up those already huge profits in a hurry.
One smart, gutsy decision changed the electrician’s life and that of his family for generations to come. Imagine the regret if he had passed on the opportunity and seen someone else get that fortune.
Another example of a gun-shy investor doesn’t have such a happy ending.
One of our top researchers at ETF Probe, a colleague and friend, passed on a chance to be an angel with Tokyo Smoke back in 2016. It was then valued at just $3 million total.
By 2018, the biggest company in cannabis came knocking. Canopy Growth acquired Tokyo Smoke in a $350 million deal… creating a wave of wealth for anyone who was in early.
Even with the opportunities unique to cannabis, the rarest situation of all is the ability to buy a public company with a large percentage of its assets in angel investments, which happen to be in the fastest-growing sector of the economy.
But there are examples out there… one, in particular, that ETF Probe is pleased to share with our members.
Origin House (OTC: ORHOF, CSE: OH)
Origin House is the best of a diminishing number of back-door ways to gain entrée to the world of angel investing in cannabis companies through a public vehicle.
Origin House had more than a third of its assets invested in private cannabis companies through mid-2018.
These investments cover huge portions of the cannabis industry, from cultivation to branded cannabis products to testing to ancillary products. ETF Probe is a fan of each of its investments – it will realize substantial profits as it disposes of them over time.
This firm is also an investor in a company that is itself an angel investor, giving shareholders yet another opportunity to profit from angel investments.
The remaining company is also very strong in its own right. Cannabis distribution is very good business in California, and it will only get better as the state improves its regulatory environment on the fly. That’s going to be a must for California for the state to be able to achieve its goal of stamping out the illicit market.
The combination of the two – access to private investments and a strong, growing operating business – make this firm a unique investment opportunity even within the lucrative cannabis industry.
Origin House’s Patience Worth Its Weight in Gold
In the early days of the cannabis industry, companies like Origin House were fairly common. They would raise capital, which was scarce in the sector, and purchase minority stakes in a variety of cannabis companies.
Cronos Group Inc., one of the early “blue-chip” cannabis companies, started out by financing several operations in that country.
Over time, these firms rolled up some of their investments to become wholly owned subsidiaries and sold other investments, essentially converting themselves to operating companies from investment firms.
CannaRoyalty is doing the same thing as these other firms. But it wisely waited until later in the cannabis story to maximize the value of all those minority investments.
ETF Probe likes Origin House’s wholly-owned subsidiaries and the business plan it has for them, but we’re particularly excited by those minority investments and the near-term profits they can provide in an industry still characterized by operating losses.
Origin House has a history of making successful investments in cannabis companies, having taken profits on several previous investments and sporting a mark-to-market profit on their existing portfolio. That portfolio includes several companies with promising brands. So let’s take a look…
The Brands That Make Origin House an Emerging Cannabis King
AltMed is a cannabis company operating in Florida and Arizona, with cultivation, processing, and retail operations in each state. AltMed also owns a company called MuV, a branded line of cannabis products.
AltMed has wholly owned cultivation facilities in Arizona, along with one dispensary and plans for at least four more. In Florida, AltMed created a joint venture with another licensed operator there. The venture will own a 150,000-square-foot growing operation, and will build five dispensaries in the state to start, with plans for up to 25 in the longer term.
Origin House owns 6.1% of Altmed and receives a royalty on the sales of MuV products. The company has put $2.26 million into AltMed for its equity stake and for the royalty stream. It has marked up its equity investment based on subsequent investments in AltMed; the value of the royalty stream is currently unchanged.
ETF Probe believes that there is substantial further upside in the value of Origin House’s AltMed investment.
Anandia is a cannabis testing company in Canada. Aurora Cannabis acquired the company and Anandia wrote up its value to reflect the shares it would receive. In the weeks after its June 2018 financial report, Aurora shares soared up 37% in a couple of months, giving the company a $10 million gain so far.
ETF Probe saw Aurora’s share price as undervalued through October 2018. So, any shares Origin House chooses to keep will appreciate in value.
Resolve Digital Health is a “digital health platform” for cannabis users. Basically, that means a very advanced cannabis inhaler.
The company’s “Breeze” product gives medical cannabis patients a precise method of dosage control for smoked cannabis flower. The company started in Canada, but is expanding into Florida and Australia. As a device maker that does not “touch the leaf,” Resolve does not have to contend with the regulatory constraints of cannabis growers. The investment has been a home run for Origin House. The company invested $2.5 million in Resolve and the most recent financing valued Origin House’s investment at $21 million.
Origin House is considering the disposition of this position. ETF Probe expects that such a large portion of the company will be attractive to many private investors, and that if Origin House chooses to sell its investment, it will do so for an amount in excess of that $21 million.
Wagner Dimas makes a cannabis rolling machine which makes uniform cannabis cigarettes and packages them, similarly to tobacco cigarettes. Pre-rolled cannabis cigarettes are a large and growing part of the cannabis industry – new consumers and even many traditional consumers do not wish to go through the hassle of rolling their own cigarettes.
Origin House invested $825,000 in the equity of the company, loaned it another $200,000, and paid it $150,000 for the Canadian rights to the intellectual property behind the product. In August 2018, Origin House sold those Canadian rights to Aurora for shares worth $4.5 million (which were worth more than double that less than three months later).
As with the Aurora shares received for Anandia above, the Aurora shares will be an attractive holding for Origin House until it needs the money for its own expansion.
An investor in Origin House today is buying all of the upside on Altmed, Resolve Health, and any Aurora shares remaining.
Giving Investors Another Shot at Angel Status
There’s a second round of angel investing that investors will get with an investment in Origin House.
Origin House owns a percentage of Trichome Financial. Origin House formed Trichome with renowned Canadian resource investing firm Sprott, Inc. and Stoic Advisory, a financial advisory firm. The company recently raised $20 million to invest in private cannabis investment opportunities.
There are also rumors of Trichome seeking a public offerig itself, giving it a potentially massive war chest to make more investments. Through October 2018, Origin House owned a majority interest in Trichome. But that may change with subsequent capital raises. However, if the exact percentages balance out, Origin House will have a substantial interest in yet another company making angel investments in the cannabis industry.
Perhaps more exciting still are the minority investments that Origin House is converting into wholly owned subsidiaries, as it transitions to an operating company. After all, if Origin House had such outstanding success with the investments it sold or intends to sell, it only makes sense that the investments they want to keep would be even more valuable.
These investments will convert the company to a distributor and branding company in California.
Origin House obtained full control of RVR Distribution on Sept. 1, 2018. Combined with the earlier acquisition of Alta Distribution and Kaya Management, Origin House has built a distribution business with pro-forma revenues of $25.3 million in 2017, making it among the largest public U.S. cannabis companies in terms of revenue. In addition to distributing over 130 branded products across the state, Origin House owns the valuable Bhang brand in California, as well as its own brand outright.
Distribution is a particularly attractive business in California because of the state’s cannabis history. In most states where cannabis is or will be legal for recreational purposes, there are relatively few producers. And most of them held medical cannabis licenses.
But California also had decades of illicit growing activity. This was tolerated – or even welcomed – long before recreational use became legal. These growers developed their own strains, brands, and reputations independent of the government’s approval. Many developed large groups of loyal fans. One of California’s priorities in enacting adult-use legislation was to encourage these producers to “come in from the cold” and become legal producers.
California has a mind-numbing patchwork of regulations regarding dispensaries. This also makes it extremely unlikely for any one dispensary company to dominate the market. Even the most successful companies, like MedMen Enterprises Inc. and Harborside, are likely to have small market shares of a huge market.
As for distribution, there will only be a few producers and dispensary companies in a market like Massachusetts. The two parties can talk and ship product directly. In California, there will be hundreds of producers and hundreds of dispensary companies. That market demands distributors who can pick up and hold inventory, and then deliver it to a diverse set of customers.
Origin House’s Leadership Is Nothing Short of Impressive
Origin House’s management is set up for success. The CEO, Marc Lustig, is an experienced investment banker. It was his leadership that brought together such an outstanding portfolio of profitable investments.
And it will be his leadership that maximizes the company’s proceeds as it disposes of the assets.
As for the distributor business, it’d be difficult to do much better than Ted Simpkins. Not only was he the CEO of RVR back when Origin House only owned a piece of it, he has years of experience with California’s largest wine and spirit distributor, Southern Wine and Spirits. A distributor of a highly regulated product with thousands of small participants in California is a perfect place to prepare to be a cannabis distributor there.
It’s also worth noting that former Molson Inc. CEO Dan O’Neilrecently joined the company’s board. That’s yet another senior executive from the beer industry who wants to invest in cannabis.
Because of Origin House’s massive transformation, the company’s historical results are irrelevant. The firm hasn’t shown much in revenue because it had minority positions in most of its investments. But the most recent quarter gives a glimpse of the company’s future. Run-rate revenues were $14 million, and gross margins came in just under 23%, a healthy profit for a distribution company that reflects branded product sales. By comparison, SYSCO Corp., the massive food distribution company, had average gross margins of 18.3% over the past four years.
Run rate revenues and gross margin will increase because of a branded products and cultivation company acquisition that closed on July 2, 2018.
Over the next year or so, the company will have to either grow into its large administrative footprint or shrink that footprint in order to become consistently profitable. With the proceeds of the investments the company intends to wind down, ETF Probe has high confidence that Origin House can make the transition. And while that happens, Origin House will have the growth of Trichome to help along the way.