Hydropothecary Earnings: Three Positives Explained

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Hydropothecary Earnings

With Canadian marijuana legalization on the way, many companies are trying their best to expand production capacity in anticipation of the October 17 green rush.

One such company, Hydropothecary Corp (OTCMKTS:HYYDF, TSE:HEXO), recently released its third-quarter earnings. The Hydropothecary earnings report had a lot to like, and the Hydropothecary stock price has been up as a result.

Three major positives came out of the Hydropothecary earnings report. I’ll explain what they are, and what they mean for the future of the company.

Quebec Deal

The biggest boon to HEXO stock from the earnings report was the company’s confirmation of a Quebec deal that will see it supply some 200,000 kilograms of cannabis to the province over a five-year period. (Source: “Hydropothecary reports fiscal 2018 third quarter results,” GlobeNewswire, June 28, 2018.)

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Hydropothecary Chief Executive Officer and co-founder Sebastien St-Louis said the following:

In the past quarter, we finalized a long-term supply contract as the preferred supplier to the Société québecoise du cannabis (SQDC) for approximately 200,000 kg of cannabis, over a five-year period. This gives us the second highest recreational revenue certainty among licensed producers for the first year of the adult-use market in Canada, with 20 metric tons committed, representing 35% of the Quebec adult recreational market.

St-Louis added, “We also launched HEXO, a new brand that will serve the recreational cannabis market and transferred the first plants in to our 250,000 sq. ft. greenhouse expansion a month ahead of schedule.”

This was a huge win for HEXO stock, helping the stock price jump about three to four percent since the earnings report was released.

Chart courtesy of StockCharts.com

Increasing production capacity and landing deals with Canadian cannabis peddlers is all the rage right now as Canadian marijuana legalization nears.

Hydropothecary stock was able to score a big victory with its Quebec deal, putting it front and center in the marijuana game in Canada’s second-most populous province.

Strong Financial Numbers

Income Statement ($CA) 

For the three months ended

For the nine months ended

April 30, 2018 April 30, 2017 April 30, 2018 April 30, 2017
Revenue $1,240 $1,182 $3,523 $235.00
Adjusted Gross Margin $761.00 $441.00 $2,130 $1,883
Gross margin $2,666 $1,377 $5,881
Operating expenses $5,319 $2,385 $13,654 >$5,585
Loss from operations -$2,653 -$1,008 -$7,773 -$2,199
Net of other income/expenses $682.00 -$10,800 -$5,069 -$11,153
Net income -$1,971 -$11,808 -$12,841 -$13,352
Weighted average shares outstanding 179,889,233 67,563,381 115,516,079 52,723,599
Net income per share -$0.01 -$0.17 -$0.11 -$0.25

Revenue per gram is an important metric to determine just how profitable a marijuana company can be, since  production costs fluctuate.

Hydropothecary Corp’s productivity increased to CA$9.24 per gram from CA$8.99 in the previous quarter, and from CA$8.62 in the third quarter of fiscal 2017. The financial figures were also very strong in the most recent earnings report.

Furthermore, the company showed cash and short-term investments of CA$248.9 million as of April 30, with a debt-free balance sheet.

We did see an increase in operating costs, but that’s to be expected as the company continues to grow.

The positive cash flow (at least in terms of debt) is another major win for the company, especially in an industry rife with overspending and overvaluation.

Expansion Plans

The Hydropothecary Corp announced in May its intent to expand further into the recreational marijuana market. That makes sense, considering that its home base is in Canada. Being a marijuana company on Canadian soil and not expanding into the recreational market seems downright unthinkable at this point.

The Hydropothecary earnings report also detailed the planting of its first product in a new 250,000-square-foot facility.

This is another positive sign as the company appears to be gearing up to increase its production capacity in anticipation of the marijuana legalization date.

Considering the success of its Quebec deal, Hydropothecary stock could be greatly helped by expanding its production and seeking out another long-term supplier contract.

Analyst Take

There was a lot to like in the most recent Hydropothecary earnings report, and that is reflected in the HEXO stock price.

Not only has Hydropothecary stock jumped about four percent since the Q3 results were released, but it’s up about 25% since the beginning of this year.

That makes the stock one of the top gainers in the legal marijuana industry so far in 2018, a year marked by volatility and a general regression across the board for many marijuana stocks.

Aside from the three positives featured in the earnings report, there’s a lot more to like about HEXO stock.

The stock recently graduated to the Toronto Stock Exchange from the more volatile and less renowned TSX Venture Exchange.

The company is also looking to change its name to HEXO Corp., which, if anything, is pithier than Hydropothecary Corporation.

With a market cap under $1.0 billion and a stock price under $4.00, Hydropothecary Corp is a company with a lot of potential for growth in the near future.

Its Quebec deal, strong numbers, and expansion-centered mindset make it one of the more enticing marijuana stocks this year, as evidenced by its 25% gains.

HEXO stock is certainly one to keep an eye on and a marijuana stock with the chance to be a real player in the Canadian pot market.