GATINEAU, QC–(Marketwired – June 29, 2017) – The Hydropothecary Corporation (TSX VENTURE: THCX) (“THCX” or the “Company”) today reported its third quarter results, for the three and nine months ended April 30, 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.
“So much of the business of marijuana relies on execution. THCX has continued to refine processes and control costs, while increasing yields and quality. We are very proud to be able to share with our shareholders not only an improvement on our best in class cost per gram but to now cement our position as one of Canada’s cost leaders in the dried marijuana flower.” said Sebastien St-Louis, CEO.
Operating Highlights
Operating highlights for the third quarter ended April 30, 2017 include:
- 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.
- Establishment of relationships with 5 new clinics, further diversifying its patient base and presence in the marketplace. The Company had relationships with 85 clinic locations at the end of the quarter.
- Number of full time employees increased by 50% from 46 at the end of the second quarter to 69 at the end of the third quarter, to 81 at June 27, 2017, and continues to grow as the Company prepares for the construction of “Building 6”, its new 250,000 sq. ft. production facility.
- Realized revenue per gram was $8.62, down from $10.10 in the prior quarter as anticipated with the increase in sales of the Company’s mid-market product lines, H2 and Decarb.
- Shipments for the quarter ended April 30, 2017 are up 51% from the prior quarter, from 90,518 grams during the second quarter to 137,123 grams for the third quarter.
- Cash cost of inventory per gram was $1.32, down from $1.47 in the prior quarter.
- Biological assets increased 324% for the quarter ended April 30, 2017 over the prior quarter, as “Building 5”, the Company’s new 35,000 sq. ft. production facility became fully operational.
- Receipt of sales license for cannabis oil from Heath Canada. Sales of the Company’s new cannabis oil are expected to begin in early summer 2017.
- Raising approximately $4.4M through issuing 6,778,674 common shares in two private placements.
- The conversion of existing convertible debentures into 5,138,484 common shares eliminating the Company’s debt. It also resulted in an increase to equity of $12.0M, a revaluation of financial instruments of $10.1M and a revaluation of the associated warrant liability to $2.2M.
Subsequent Events
- On May 2, 2017, the Company announced a voluntary stop-sale of all products after testing by Health Canada indicated the presence of trace amounts of Myclobutanil of 0.012 parts per million (ppm) and 0.023 ppm in leaf samples taken on mother plants on March 8, 2017. To determine the root cause of the contamination, the Company carried out an in-depth investigation.
- On May 16, 2017, the Company announced the reintroduction of its products, after the completion of additional screening showed no signs of contamination on specific lots. Additionally, the Company announced a voluntary recall of fourteen lots of medical cannabis which were supplied between February 1, 2016 and May 1, 2017 which had tested between 0.01 ppm and 0.08 ppm. Health Canada has deemed this a Type III recall, defined as “a situation in which the use of, or exposure to a product is not likely to cause any adverse health consequences.”
- On June 5, 2017, the Company announced the results of its Myclobutanil root cause investigation. During the course of the investigation, the Company tested 281 samples derived from all harvests ever completed by the Company, all production inputs and the forensic sampling of equipment and key physical locations. As a result of this in-depth investigation the Company was able to determine how the contamination occurred, and implement new preventative measures to mitigate the risk of a similar event occurring again. Additionally, the Company announced an expansion on its voluntary product recall, recalling nineteen additional lots of medical cannabis, grown prior to September 16, 2016.
- As a result of the detection of trace amounts of Myclobutanil and subsequent recalls, the Company recorded a write down of inventory in the amount of $474,512 in the quarter ending April 30, 2017. This write down represents all affected lots of inventory identified by the Company’s investigation. The Company did not include a reserve for customer refunds as the amount proved to be insignificant. As part of the investigation the Company accrued $200,000 related to one time testing, shipping and other labour costs, which are included in general and administrative expenses for the quarter.
- The Company’s growth has been impacted by the loss of revenue and patient growth during the 14 day stop sale and loss of inventory related to the Myclobutanil contamination. However, with Building 5 now in full production, the Company expects to resume its aggressive sales growth strategies.
- The Company has changed auditors from UHY McGovern, Hurley, Cunningham LLP to MNP LLC effective May 25, 2017. The Company selected MNP LLC as its new auditors after evaluation options for auditors for the next phase of the Company’s growth following the completion of the business combination between BFK and Predecessor THCX.
- On June 21, 2017, Health Canada granted the Company a licence renewal that allows the Company to produce as much medical marijuana as it can store and removes all annual sales limits for dried marijuana, oils, plants and seeds. The renewed licence is valid for two years.
- On June 21, 2017, Health Canada also granted the Company approval for two additional buildings within its Gatineau facility, for an expanded sales team and order packaging. The new buildings were approved without an onsite pre-licence inspection, under Health Canada’s recently announced measures to streamline licensing. This approval also reflects Hydropothecary’s high level of regulatory compliance.
- On June 27, 2017, the Company announced a $25 million bought deal private placement of 25,000 convertible debenture units at a price of $1,000 per unit. Each unit will consist of $1,000 principal amount of 8.0% senior unsecured convertible debentures and 313 common share purchase warrants, that will mature on June 30, 2019. The Company has also granted the underwriter the option to purchase up to an additional 5,000 units for $1,000 each, prior to the closing of the offer. Interest is payable semi-annually in June and December. The convertible debentures will be convertible at the option of the holder at a conversion price of $1.60 per share. Beginning on the date that is four months following the closing date, the Company may force the conversion should the daily volume weighted average trading price of the common shares of the Company be greater than $2.25 for any 15 consecutive trading days subject to 30 day prior written notice. Each warrant has an exercise price of $2.00 per share and a maturity of two years following the closing date of the offering.
- The Company issued finder warrants to CCFL Capital or its nominees exercisable to acquire up to 342,852 common shares of the Company at a price of $0.75 per share until March 14, 2022 in consideration for services rendered by CCFL Capital to Predecessor THCX in connection with one of the financings undertaken by Predecessor THCX in March 2017 prior to the completion of the business combination with THCX. The issuance of the finder warrants to CCFL Capital remains subject to approval by the TSXV.
- Effective July 1, 2017 the Company will end its market maker relationship with Integral Wealth Securities Limited.
| Financial Reporting Highlights | ||||||||
| Income Statement Snapshot | For the three months ended | For the nine months ended | ||||||
| 30-Apr-17 | 30-Apr-16 | 30-Apr-17 | 30-Apr-16 | |||||
| Revenue | $ | 1,182,497 | $ | 617,239 | $ | 3,235,096 | $ | 818,459 |
| Gross margin | $ | 1,377,029 | $ | 648,437 | $ | 3,385,712 | $ | 892,683 |
| Operating expenses | $ | 2,385,018 | $ | 933,776 | $ | 5,584,910 | $ | 2,458,774 |
| Loss from operations | $ | (1,007,989) | $ | (285,339) | $ | (2,199,198) | $ | (1,566,091) |
| Net other income/expenses | $ | (10,800,275) | $ | (115,660) | $ | (11,152,913) | $ | (417,215) |
| Net loss | $ | (11,808,264) | $ | (400,999) | $ | (13,352,111) | $ | (1,983,306) |
| Weighted average shares outstanding | 67,563,381 | 30,054,630 | 52,723,599 | 29,667,306 | ||||
| Net loss per share | $ | (0.17) | $ | (0.01) | $ | (0.25) | $ | (0.07) |
Revenue
Revenue increased over 92% from $617K in the third quarter of 2016 to $1.2M in the third quarter of 2017 and increased 395% to $3.2M for the nine months ended April 30, 2017 from $818k for the nine months ended April 30, 2016. The Company also realized a 51% increase in quarter over quarter shipments in the quarter ended April 30, 2017, with 137,123 grams shipped compared with 90,518 grams shipped in the quarter ended January 31, 2017. Revenue per gram decreased in the third quarter of 2017 to $8.62 from $10.10 in the second quarter of 2017. This decrease is attributable to the increase in sales of the Company’s H2 line, a mid market offering, and the continued effect of Veterans Affairs Canada placing a cap on patient reimbursements to $8.50 per gram in November 2016.
Cost of Sales
With the completion of Building 5 in the second quarter of 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. The Company also realized a decrease in the cash cost per gram of inventory from $1.47 at January 31, 2017 to $1.32 at April 30, 2017.
Operating Expenses
Operating expenses increased 14.3% from $2.1M in the quarter ended January 31, 2017 to $2.4M in the quarter ended April 30, 2017. There were increased payroll related costs as the company’s continued expansion allowed the number of full time employees to grow from 46 in the second quarter to 69 in the third quarter. 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.
| Adjusted EBITDA | ||||
| For the three months ended | For the nine months ended | |||
| 30-Apr-17 | 30-Apr-16 | 30-Apr-17 | 30-Apr-16 | |
| Net loss and comprehensive loss attributable to shareholders | (11,808,264) | (400,999) | (13,352,111) | (1,983,306) |
| Interest expense | 79,264 | 115,660 | 219,673 | 340,004 |
| Interest income | (30,737) | – | (49,008) | – |
| Stock option expense | 184,059 | 62,294 | 465,532 | 167,609 |
| Amortization of property, plant and equip. | 115,528 | 43,169 | 225,407 | 102,238 |
| Amortization of intangible assets | 51,102 | 31,931 | 167,359 | 95,791 |
| Financing charges | – | – | 228,578 | 77,211 |
| Write-off of inventory | 474,512 | – | 474,512 | – |
| Recall testing expense | 200,000 | – | 200,000 | – |
| RTO listing expense | 796,475 | – | 796,475 | – |
| Revaluation of financial instruments | 10,148,196 | – | 10,148,196 | – |
| Fair value adjustment to biological assets | (1,406,067) | (296,200) | (2,408,601) | (470,406) |
| Adjusted EBITDA | (1,195,932) | (444,145) | (2,883,988) | (1,670,859) |
| Revenue | 1,182,497 | 818,459 | 2,052,599 | 201,220 |
| % of Revenue | -101% | -54% | -141% | -830% |
| “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
“We are thrilled that our strategic initiative to move into mid market with our H2 line and the introduction of our Decarb CannaCap product has been so warmly welcomed by customers. We have achieved growth of 51% in grams shipped this quarter over last quarter. We anticipate that our innovation strategy will continue to be met with great customer excitement resulting in an increase in market share and revenue. Additional investments in quality assurance and capital expansion have resulted in us pushing back our profitability to Q4 2018. We are confident this is the right investment the company and industry need at this time.”
“Spearheaded by Dr. Shane Morris, THCX undertook an in-depth investigation to determine the source of contamination at our facility. We tested 281 samples, identified the problem, rectified it and conclusively proved to our customers that our product is safe. As part of our ongoing focus on quality we have increased our personnel in quality assurance bringing on new technologists and scientists. We are focused on not only meeting the strict regulatory standards, but on meeting the even stricter demands of our customers.”
“Last quarter we promised we would achieve production capacity of 250 kgs a month by May 2017 and we have. We are now committing that focus to completing Building 6, a 250,000 sq. ft. production facility in 2018. The Building 6 expansion is our most ambitious expansion plan to date. We will leverage the knowledge we learned from our Building 5 expansion, and move one step closer to our goal of $1 cost per gram of dried marijuana flower.”
“Our focus remains on the medical and upcoming recreational market in Canada and on our core business which is making great products for our customers.”
“The market has responded incredibly well to the new products we have launched so far this year. We are very pleased to note that doctors have started specifically prescribing our Decarb products. They see this line as a safer alternative to smoking/inhaling and better patient experience than the currently available ingestible oil products. We are continuing to explore new research and development opportunities, and in fact our regulatory team is in the final stages of approval with Health Canada on an innovative new oil product that we expect to share with the public this summer.”
“It’s exciting to see movement at the Federal, Provincial, and municipal levels of government as we get ever closer to the July 1, 2018 conclusion date of legalized recreational cannabis in Canada. As we move towards the future recreational market the ability to deliver a quality product while achieving a profitable bottom line will become more important than ever. The strides we have made in the last 18 months have allowed us to increase production and lower our costs, placing us in a position to compete with many of our larger competitors.” concluded 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 Company assumes no responsibility to update or revise forward-looking information to reflect new events or circumstances unless required by law.
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.
For further information, please contact:
Sebastien St-Louis
Chief Executive Officer
The Hydropothecary Corporation
1-866-438-THCX (8429)
invest@THCX.com
www.THCX.com