Origin House’s fourth quarter was disappointing, PI says

US Cannabis company Origin House (Origin House Stock Quote, Chart CSE:OH) reported lower than expected quarterly results, according to PI Financial analyst Jason Zandberg, who in an update to clients Monday lowered his overall forecasts for the next two years while maintaining his “Tender” recommendation for the stock.

Origin House, which on April 1 2019 entered into a definitive agreement to be acquired by Cresco Labs for $1.1 billion, reported on Monday its fourth quarter and year ended December 31, 2018. The financials featured a top line of $7.9 million, a 19-per-cent improvement over the previous quarter and a 638-per-cent jump year-over-year. (All figures in US dollars unless noted otherwise.)

CEO Marc Lustig wrote in the quarterly press release that the company’s execution over 2018 culminated in the Cresco deal.

“This partnership is just the beginning of our journey together. The combined entity will be a US distribution powerhouse, with a growing portfolio of over 50 brands on the shelves of over 725 dispensaries across 11 states,” said Lusting. “In the coming months we will work side-by-side with the Cresco team to accelerate recognition and sales for our combined brand portfolios across the U.S., and in the process, continue to build substantial shareholder value.”

Zandberg says the $7.9 million in revenue was below his projection of $14 million, chalking up the difference to underperformance of the California market as a whole as well as regulatory changes in California which forced OH to discount product pricing and write down inventory in order to be in compliance with the new regulations. EBITDA was a loss of $1.9 million and EPS was $0.09 per share.

“We had expected gross margin to improve during the quarter as the company merged the operations of Alta and RVR in the previous quarter. However due to inventory impairment charges and discounts due to regulatory changes and minimum royalty payments, gross margins were negatively impacted,” Zandberg said.

The analyst’s forecasts for 2019 revenue and EBITDA are now $80.4 million and negative $9.4 million (previously $100.9 million and $5.3 million) and his forecasts for 2020 revenue and EBITDA are now $134.1 million and $8.9 million (previously $145.4 million and $32.9 million).

Zandberg is maintaining his “Tender” recommendation with a Speculative risk rating.