The Hydropothecary Corporation Reports Fourth Quarter and Fiscal Year 2017 Financial Results

GATINEAU, QC--(Marketwired - November 02, 2017) - The Hydropothecary Corporation (TSX VENTURE: THCX) ("THCX" or the "Company") has released its financial results for its fourth quarter and year ended July 31, 2017. The Company's financial statements and related management's discussion and analysis for the period are available under the Company's profile on SEDAR at www.sedar.com. All amounts are expressed in Canadian dollars.

"As Hydropothecary enters the next stage of its journey working towards becoming a great cannabis brand, we want our shareholders to know that we will remain focused on execution, quality and cost control. Moving forward, I also want to underscore our commitment to safe, responsible cannabis use. At Hydropothecary, we are conscious that with great opportunity also comes great responsibility," said Sebastien St-Louis, CEO.

The Company is pleased to report revenue of $4.1M for the fiscal year ended July 31, 2017 compared with $1.9M for the fiscal year ended July 31, 2016. The Company reported a decrease in revenue from $1.2M for the third quarter of fiscal 2017 to $862K for the fourth quarter of fiscal 2017 as the result of a 14 day stop sale.

Fiscal Year 2017 Highlights

Highlights for the fiscal year ended July 31, 2017 include:

• Shipments for the year ended July 31, 2017 were 404,158 grams, an increase from 133,493 grams during the prior year.
• Completed new 35,000 sq. ft. greenhouse, known as "Building 5", which was licensed by Health Canada in December 2016. Production capacity has consequently increased from 600 kg. per year to 3,600 kg.
• Launched three new products: H2, a mid-market offering; Decarb, a novel pre-activated cannabis product for consumption in capsule form; and Elixir No. 1, Canada's only legal sublingual oil based medical cannabis mouth spray in a naturally based peppermint oil.
• Received oil sales license in March 2017.
• Heath Canada license renewal in June 2017 allows the Company to produce as much medical cannabis as it can store and removed all annual sales limits for dried marijuana, oils, plants and seeds.
• Completion of the business combination between BFK Capital Corp. ("BFK") and the former The Hydropothecary Corporation, the predecessor private company to THCX ("Predecessor THCX"), resulting in the Company. Under the transaction, the shareholders of Predecessor THCX became shareholders of BFK under a reverse take-over, BFK changed its name to "The Hydropothecary Corporation" and the directors and officers of Predecessor THCX became the directors and officers of the new THCX.
• Commencement of trading on the TSX Venture Exchange (the "TSXV") under the ticker symbol "THCX".
• Head count increased by 200% from 30 full time employees on July 31, 2016 to 89 on July 31, 2017, and 98 on November 2, 2017.
• Closed four financings, raising $47.6 M.
• Converted existing convertible debentures into 5,138,484 common shares, resulting in an increase to equity of $12.0M, a revaluation of financial instruments of $9.1M and a revaluation of an associated warrant liability to $2.2M.

Fourth Quarter Fiscal 2017 Highlights

Highlights for the fourth quarter ended July 31, 2017 include:

• Realized revenue per gram was $9.00, up from $8.62 in the prior quarter as clients increased their purchases of higher priced products.
• Shipments for the quarter were down 30% from the prior quarter, from 137,123 grams during the third quarter to 95,735 grams for the fourth quarter, as a result of the Company's 14 day stop sale in May 2017.
• Cash cost of finished goods inventory per gram was $1.05, down from $1.54 in the prior quarter.
• Biological assets increased 62% for the quarter over the prior quarter, as the Company continued to increase production in Building 5, as well as a change in the fair value per gram used to calculate biological assets.
• Established relationships with 7 new clinics, further diversifying the Company's patient base and presence in the marketplace. The Company had relationships with 101 clinic locations at the end of the quarter.
• On July 17, 2017, the Company closed a $25.1M bought deal private placement.

Subsequent Events

• In August 2017, the Company entered into a contract with Havecon Projects BV for the delivery and installation of a new 250,000 sq. ft. greenhouse at the Company's Gatineau facility. On October 12, 2017 the Company broke ground on the expansion. Construction is expected to be completed by July 2018 and will increase facility size to 300,000 sq. ft. and annual production capacity to 25,000 kg.
• On September 4, 2017, the Company appointed former BC Health Minister Terry Lake VP of Corporate Social Responsibility and Pierre Killeen VP of Corporate Communications and Government Relations.
• On September 8, 2017, the Company granted 651,000 stock options with an exercise price of $1.37 to certain officers and non-executive employees. The options vest over three years and have a 10-year term.
• On September 19, 2017 the Company announced it was granted kosher certification. It is the only kosher certification currently granted to cannabis products in Canada. The certification included Decarb, Elixir and the H2 line of milled products.
• On October 5, 2017 the Company appointed Nathalie Bourque to its Board of Directors.
• On October 30, 2017, the Company announced a $60,000,000 bought deal of 60,000 unsecured convertible debenture units at a price of $1,000 per unit. Each unit will consist of $1,000 principal amount of 7.0% unsecured convertible debentures and 227 common share purchase warrants. The Company has also granted the underwriters the option to purchase up to an additional 9,000 units for $1,000 each, for up to 30 days following the closing of the offering. Interest will be paid semi-annually in June and December. The convertible debentures will mature three years from the closing date and will be convertible at the option of the holder at a conversion price of $2.20 per share. The Company will be entitled to force the conversion of the debentures should the daily volume weighted average trading price of the common shares of the Company be greater than $3.15 for any 10 consecutive trading days subject to 30 days' prior written notice. Each warrant will have an exercise price of $3.00 per share and an exercise period of two years from the closing date of the offering. The Company will be entitled to accelerate the expiry of the warrants should the daily volume weighted average trading price of the common shares of the Company be greater than $4.50 for any 10 consecutive trading days subject to 30 days' prior written notice.

Financial Reporting Highlights

Revenue

Revenue increased 119% to $4.1M for the year ended July 31, 2017, from $1.9M in the prior year. The Company also realized a 203% increase in year over year shipments for the year ended July 31, 2017, with 404,158 grams shipped compared with 133,493 grams shipped in the year ended July 31, 2016. The growth of revenue year over year is driven by an increase in the number of clients since sales commenced in October 2015.

Revenue decreased approximately 18% from $1.1M in the third quarter of 2017 to $860k in the fourth quarter of 2017, as the result of a 14 day stop sale. Revenue per gram increased in the fourth quarter of 2017 to $9.00 from $8.62 in the third quarter of 2017 as the Company saw the growth in the sale of products with a higher per gram cost of between $10 and $15, this increase was offset by the continued effects of changes in reimbursement caps for medical cannabis implemented by Veterans Affairs.

Cost of Sales

With the completion of Building 5 in the second quarter of fiscal 2017, the Company continued to increase production capacity in the new facility to meet anticipated demand related to the Company's newly launched H2 and Decarb product lines and consequently saw an increase in production expenses as well as a significant increase in the revaluation of biological assets related to the change in the fair value per gram used. Cost of sales for the year ended July 31, 2017 includes a write down of inventory of $495K related to the Company's voluntary recalls in May 2017 and $118k of inventory that was subject to water damage. The Company also realized a decrease in the cash cost of finished goods inventory per gram from $1.54 at April 30, 2017 to $1.05 at July 31, 2017.

Operating Expenses

Operating expenses increased 101% from $3.9M in the year ended July 31, 2016 to $7.9M in the year ended July 31, 2017. There were increased payroll related costs as the Company's continued expansion resulted in growth in the number of full-time employees from 30 in the prior year to 89 in the year ended July 31, 2017. There was also an increase in facility expenses as Building 5 commenced full production, along with an increase in costs related to the Company's compliance costs as a public company following the completion of the business combination between BFK and Predecessor THCX, and marketing costs as the Company continued to expand its product offerings and patient outreach.

Adjusted EBITDA

"Adjusted EBITDA" is a non-GAAP financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. It is a metric used by management which is net loss, as reported, and adjusted by removing interest, tax, other non-cash items, including the stock based compensation expense, depreciation, and the non-cash effects of accounting for biological assets and inventories. Management believes "Adjusted EBITDA" is a useful financial metric to assess its operating performance on a cash basis before the impact of non-cash items and acquisition related activities.

Outlook

"This is an exciting time to be at the helm of THCX as we continue on our journey working towards becoming a great cannabis brand. In the last two years, we have helped thousands of Canadians access safe and responsible medical cannabis and have brought new, unique and exciting cannabis products to market. Our goal for the next three years is to continue to innovate our product offerings and to become a national adult-use cannabis brand with the eventual legalization of that market," said Sebastien St-Louis, CEO.

"By necessity, we started out as a cultivation company. We are now a products company. Next, we hope to become a great brand. Great products alone won't build a great brand. We will need world-class distribution. To enable that distribution, we plan to work with the largest retail partners in Canada to address their needs: reliable supply at scale and great products at a fair price."

"Our greenhouse expansion and the accompanying infrastructure for consumer packaged-goods, is scheduled to be completed in time for the expected legalization of recreational adult-use cannabis on July 1, 2018. With these new capabilities, we expect to produce 25 tons of dried cannabis per year."

"We expect to raise $69 million in our latest bought deal financing round and significantly bolster our balance sheet to enable growth. By being one of the best capitalized companies in the industry, and through our responsible stewardship of capital, we've moved beyond the "licensing barrier to entry" and we are now deploying our capital in support of our evolution into a cannabis products company."

"Getting better at innovation and bringing a systematic approach to research and product development will be hallmarks on our path to cannabis products excellence. With a strong balance sheet, plans to expand our facility and our dedicated team, we believe we have the tools to become a leading cannabis brand for the adult-use market."

"As we prepare for the legalization of recreational cannabis in Canada, we expect to play a leading role in bringing the industry together to develop wholesale and retail solutions for the market."

"As the only Quebec-based licenced producer, we are committed to working with our partners in Quebec to build a Quebec cannabis industry and to ensure that Quebec shares in the economic and social benefits of the cannabis industry."

"Throughout our journey, there has been one constant, our commitment to bring safe and responsible cannabis experiences to people. As we prepare to capitalize on the opportunities before us, I want to assure our customers and our shareholders that our commitment to safe and responsible cannabis use will always serve as our guiding light," continued Mr. St-Louis.

About The Hydropothecary Corporation

The Hydropothecary Corporation is an authorized licensed producer and distributor of medical marijuana licensed by Health Canada under the Access to Cannabis for Medical Purposes Regulations (Canada). Hydropothecary provides naturally grown and rigorously tested medical marijuana of uncompromising quality. Hydropothecary's branding, marijuana product offering, patient service standards and product pricing are consistent with THCX's positioning as a premium brand for a legal source for medical marijuana within this new marketplace. In addition to medical marijuana production and sales, Hydropothecary explores various research and development opportunities for cannabinoid extracts, drugs and combinatory chemistry. In addition, the company is investigating the development and patenting of novel technologies related to medical marijuana, as well as the import and export of medical marijuana.

Forward-Looking Information

This press release contains forward-looking information based on current expectations. Examples of such forward-looking information include statements about future operational and production capacity, including expected resulting production cash costs, the impact of enhanced facilities and production capabilities, and expected available product selection. These statements should not be read as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. The forward-looking statements included in this press release are made as of the date of this press release and the Company assumes no responsibility to update or revise forward-looking information to reflect new events or circumstances unless required by applicable securities legislation.

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.