Source: HEXO Corp.

Hydropothecary reports fiscal 2018 second quarter results; achieves revenue visibility and business certainty for the first year following cannabis legalization

GATINEAU, Quebec, March 28, 2018 (GLOBE NEWSWIRE) -- The Hydropothecary Corporation (TSX VENTURE:THCX) (the "Company") reported its financial results for the three and six months ended January 31, 2018, the second quarter of the 2018 fiscal year. The management discussion and analysis for the period and the accompanying financial statements and notes are available under the Company's profile on SEDAR at www.sedar.com and on its website at www.THCX.com. All amounts are expressed in Canadian dollars.

Highlights

  • Sales of medical cannabis of 131,501 gram equivalent, up 9% sequentially from the first quarter of fiscal 2018 and up 45% year-over-year compared to the second quarter of fiscal 2017.
  • Weighted average cash cost of dried inventory sold per gram of $0.97, down 9% sequentially from the first quarter of fiscal 2018 and down 44% year-over-year compared to the second quarter of fiscal 2017.
  • Letter of intent signed with Société des alcools du Québec (SAQ) for the supply of 20,000 kg of cannabis in Year 1 following legalization.
  • Negotiations continuing with SAQ to reach definitive agreement for supply in Year 1 and subsequent years.
  • Cash and short-term investments of $264.5 million as at January 31, 2018, debt-free balance sheet.

‘‘We have achieved excellent revenue visibility as we approach the legalization of recreational cannabis, with the 20,000 kg supply commitment under our letter of intent (LOI) with SAQ and our medical cannabis sales. Predictable revenue streams from the recreational and medical markets, a debt-free balance sheet, two fully-funded expansion projects, and additional liquidity for corporate purposes, provide strong business certainty through Year 1 post-legalization and beyond. Without a doubt, this achievement is the most important milestone to date in our company’s history,’’ stated Sébastien St-Louis, CEO and co-founder.

‘‘We are in active negotiations with SAQ to finalize a definitive agreement for the supply of cannabis to the Québec market for the next several years, including the volume currently under LOI. Based on the LOIs signed between the SAQ and five licensed producers in February 2018, we obtained the highest Year 1 volume, representing approximately 35% market share, and we are aiming to remain the largest supplier to SAQ in subsequent years,’’ added Mr. St-Louis.

Two expansion projects are currently underway, including a new 250,000 sq. ft. greenhouse that is planned for completion by July 2018, increasing the Company’s annual production capacity to 25,000 kg of dried cannabis, and providing the ability to supply SAQ and medical patients in priority in Year 1 post legalization. A second expansion scheduled for completion at the end of 2018 will increase annual capacity to 108,000 kg of dried cannabis, allowing for sales into other Canadian markets heading into the second half of Year 1 post legalization.

Second Quarter 2018 Results

Summary of results for the three- and six-month periods ended January 31, 2018 and January 31, 2017 (In thousands of Canadian dollars, except share and per share amounts, and where otherwise noted)

Income Statement SnapshotFor the three months
ended
For the six months
ended
31-Jan-1831-Jan-1731-Jan-1831-Jan-17
Revenue$ 1,182  $ 914  $ 2,283  $ 2,053 
Adjusted Gross Margin$ 731  $ 652  $ 1,370  $ 1,442 
Gross margin$752  $ 939  $ 3,215  $ 2,009 
Operating expenses$ 5,491  $ 1,713  $ 8,335  $ 3,202 
Loss from operations$ (4,739) $ (774) $ (5,120) $ (1,193)
Net of other income/expenses$ (4,213) $ (340) $ (5,751) $ (350)
Net income (loss)$ (8,952) $ (1,114) $ (10,870) $ (1,544)
Weighted average shares outstanding 93,202,241   51,526,560   84,841,163   45,545,664 
Net income (loss) per share$(0.10) $ (0.02) $ (0.13) $ (0.03)

* As a result of a business combination completed on March 15, 2017, pre-consolidation THCX shares were exchanged at a rate of six to one.  Shares after this date have been stated using post-consolidation figures. (See Note 4 to the condensed interim consolidated financial statements for the three and six months ended January 31, 2018.)

Revenue

 For the three months
ended
For the six months
ended
31-Jan-1831-Jan-1731-Jan-1831-Jan-17
Revenue$ 1,182 $ 914 $ 2,283 $ 2,053
Total gram equivalents sold 131,501  90,518  252,345  171,300

Revenue for the second quarter ended January 31, 2018 increased 29% to $1,182 compared to $914 in the same period in Fiscal 2017. Higher revenue was driven mainly by increased sales volume, offset partially by lower average selling prices. Compared to the prior quarter, the sequential revenue increase was 7%, also reflecting higher sales volume and lower average selling prices.

Sales volume increased 45% to 131,501 gram equivalents, compared to 90,518 in the same prior year period, reflecting growth in the number of patients served and strong market acceptance of our new products.  Revenue per gram equivalent was $8.99 compared to $10.10 in the same prior year period, mainly as a result of higher sales of our H2 and Decarb product lines, which retail for $3.00 to $15 per gram. Lower average realized prices in the latest quarter also reflect the decision by Veterans Affairs Canada (VAC) to cap the reimbursable amount at $8.50 per gram, effective in the second quarter of Fiscal 2017.

On a sequential basis, sales volume increased 9% compared to the first quarter of Fiscal 2018, essentially for the same reasons as noted above.

For the six months ended January 2018, revenue increased 11% to $2,283 compared to $2,053 in the same period in Fiscal 2017. Sales volume increased 47% to 252,345 gram equivalents, compared to 171,300 in the same prior year period.

Cost of Sales

Cost of goods sold includes the direct costs of materials and labour related to inventory sold, and includes harvesting, processing, packaging and shipping costs.

Fair value adjustment on sale of inventory includes the fair value of biological assets included in the value of inventory transferred to cost of sales.

Fair value of biological assets represents the increase or decrease in fair value of plants during the growing process less expected cost to complete and selling costs and includes certain management estimates.

 For the three months
ended
For the six months
ended
31-Jan-1831-Jan-1731-Jan-1831-Jan-17
Cost of Sales$ 451  $ 262  $ 914  $ 610 
     
Fair value adjustment on sale of inventory$ 1,032  $ 146  $ 1,846  $ 198 
Fair value adjustment on biological assets$ (1,053) $ (434) $ (3,692) $ (765)
Total Fair value adjustment$ (21) $ (288) $ (1,846) $ (567)

Cost of sales for the second quarter ended January 31, 2018 was $451, compared to $262 for the same quarter ended January 31, 2017. This is due to an increase in the number of gram and gram equivalents sold during the period as well as an increase in the number of grams sold from more recent harvests, with a lower production cost. 

Fair value adjustment on the sale of inventory for the second quarter ended January 31, 2018 was $1,032 compared to $146 for the same quarter ended January 31, 2017. This is due to changes in the valuation of biological assets, as well as an increase in the number of gram and gram equivalents sold during the period. 

Fair value adjustment on biological assets for the second quarter ended January 31, 2018 was ($1,053) compared to ($434) for the same quarter ended January 31, 2017. This is due to B5 coming on line in January 2017 resulting in an increase in the number of plants as well as changes in the determination of fair value of biological assets from the prior period.

Non – IFRS Measure

Weighted average cash cost of dried inventory sold per gram
Weighted average cash cost of dried inventory sold per gram includes direct costs associated with the growing, harvesting and processing of inventory sold such as labour, utilities, fertilizer costs, biological control costs, general supplies and materials, curing, milling, quality assurance and testing, of inventory sold in the period.

As there are no standardized methods of calculating this non-IFRS measure, our methods may differ from those used by others, and accordingly, the use of this measure may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Weighted average cash cost of dried inventory sold per gram is calculated as follows:

 Q2’18Q1’18Q2’17
Cost of goods sold$  451  $ 463  $ 262 
Less   
Order fulfillment costs$ (286) $ (307) $ (106)
Cannabis oil conversion costs$ (41) $ (32)  - 
 $ 124  $ 124  $ 156 
Number of dried gram sold 127,769   115,768   90,518 
Weighted average cash cost of dried inventory sold (g)$0.97  $1.07  $1.73  

In an effort to become more comparable with the metrics reported by our competitors, we have chosen to report the weighted average cash cost of inventory sold in the period, we have previously reported the cash cost of finished goods inventory.  The weighted average cash cost of inventory sold in the period is higher than the cash cost of finished goods inventory because it also includes the sale of inventory produced in previous periods when the cash cost of finished goods inventory was higher.

Weighted average cash cost of dried inventory sold per gram declined 44% year over year to $0.97 for the second quarter ended January 31, 2018, compared to $1.73 for the same prior year quarter.  Cost per gram sold has been trending downward as a result of improvements in cultivation processes and economies of scale resulting from the full utilization of higher production capacity. We expect the scale up of growing and harvesting methodology to drive further improvements in production efficiencies.

Operating Expenses

Operating ExpensesFor the three months
ended
For the six months
ended
31-Jan-1831-Jan-1731-Jan-1831-Jan-17
Marketing and promotion$1,358 $673 $ 2,426 $1,450
General and administration$1,770 $727 $ 3,046 $1,244
Stock-based compensation$1,968 $179 $2,281 $281
Amortization of property, plant and equipment$188 $78 $ 312 $110
Amortization of intangible assets$207 $56 $ 270 $116
Total$5,491 $1,713 $8,335 $3,202

Operating expenses include marketing and promotion, general and administrative, research and development, stock-based compensation, and amortization expenses. Marketing and promotion expenses include customer acquisition costs, customer experience costs, salaries for marketing and promotion staff, general corporate communications expenses and research and development costs.  General and administrative expenses include salaries for administrative staff and executive salaries as well as general corporate expenditures including legal, insurance and professional fees. 

Marketing and promotion

Marketing and promotion expenses increased to $1,358 in the second quarter, compared to $673 for the same period in Fiscal 2017.  This reflects mainly the addition of marketing and promotion staff and higher travel-related expenses, printing and promotional materials, and research and development costs, consistent with our focus to prepare for the legalization of the adult recreational market.

For the six months ended January 31, 2018, marketing and promotion expenses increased to $2,426, compared to $1,450 for the same period in Fiscal 2017.

General and Administrative

General and administrative expenses increased to $1,770 in the second quarter, compared to $727 for the same period in Fiscal 2017.  This increase reflects the growing scale of our operations, including an increase in general and administrative staffing, consulting and professional fees, as well as increased compliance costs as a listed company.

For the six months ended January 31, 2018, general and administrative expenses increased to $3,046 compared to $1,244 for the same period in Fiscal 2017.

Amortization of intangible assets

Amortization of intangible assets increased to $207 in the second quarter, compared with $56 for the same period in Fiscal 2017, and $63 in the first quarter of Fiscal 2018.  The increase is the result of a change in the expected useful life of certain software as we prepare for the implementation of a new ERP system in the second half of Fiscal 2018, which will replace certain software programs we currently use.

Loss from Operations

Loss from operations for the second quarter was $4,739, compared to $774 for the same period in Fiscal 2017. The increased loss from operations is due mainly to higher expenses in line with the expanding scale of operations as we prepare for the legalization of the adult recreational market.

For the six months ended January 31, 2018, loss from operations was $5,120, compared to $1,193 in the same prior year period for the same reasons as the change for the three month period.

Other Income/Expenses

Other income/expense was ($4,213) and ($5,751) for the three and six months ended January 31, 2018 (($340) and ($350) for the three and six months ended January 31, 2017 respectively). Revaluation of financial instruments of ($3,330) in the latest quarter reflects the revaluation of an embedded derivative related to $3,275 of USD convertible debentures issued and converted in the prior year. Additionally, we incurred interest expense for the three months ended January 31, 2018 and January 31, 2017 of $1,094 and $354, respectively.  This increase reflects the interest related to convertible debentures issued in July 2017 and November 2017.

About Hydropothecary Corporation
The Hydropothecary Corporation is an authorized licensed producer and distributor of medical cannabis licensed by Health Canada under the Access to Cannabis for Medical Purposes Regulations. Hydropothecary creates award-winning innovative, easy to use and easy to understand products. Hydropothecary is rapidly increasing its production capacity in the lead-up to recreational adult-use cannabis. Expansion plans will result in a total of 1.3 million sq. ft. of production space, producing 108,000 kg of dried cannabis per year, making Hydropothecary one of the largest producers in the country. The first licensed producer in Quebec, Hydropothecary is headquartered in the province.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Media Contact Information

Shawn Lyons
Manager, Media Relations and Strategic Communications
819-576-3637
shawn.lyons@thehydropothecary.com

Investor Relations Contact Information

Jennifer Smith
Manager of Financial Reporting and Investor Relations
1-866-438-THCX (8429)
invest@THCX.com
www.THCX.com

Director

Adam Miron
819-639-5498