Hydropothecary Quebec’s marijuana supplier

1. The story and the fundamentals:

The Hydropothecary Corporation, [HEXO], has a three-year strategy for growth. In the first year, The Hydropothecary intends to focus on the recreational and medical marijuana markets in its home province of Quebec and expand into Ontario, Alberta, and Manitoba. The next year, the company plans to enter the British Columbia market while in the third year, it should make its move into the international marketplace. (Noted is that Hydropothecary has already entered into a memorandum of understanding with British Columbia’s Liquor Distribution Branch (BCLDB) to supply the province with its Elixir products, a line of easy-to-use, discreet sublingual cannabis oil sprays in 15-millilitre childproof bottles). Hydropothecary has currently signed a 5-year supply agreement with the SAQ or Quebec’s liquor board that will give it a 35% market share in Quebec’s recreational marijuana sales. The company is gearing up to an annual production capacity of over 100,000 kilograms by H1 2019 with an average cash cost of dried cannabis of CA$0.97 per gram that was already pegged in 2018. So with this partnership with Quebec’s monopoly of both liquor and marijuana, the smoke is in the air!

2. Financings:

January 30, 2018: Bought deal public offering of $149,500,000 underwritten by a syndicate of underwriters led by Canaccord Genuity Corp. and Eight Capital and including Cormark Securities Inc., GMP Securities L.P. and Beacon Securities Limited.

Under the Offering, the Company issued 37,375,000 units at a price of $4.00 per unit composed of one common share of the Company and one-half of one common share purchase warrant exercisable with one full warrant into one common share of the Company at an exercise price per share of $5.60 for a period of two years from the date of issue.

November 7, 2017: $69,000,000 7% unsecured convertible debentures underwritten by a syndicate of underwriters led by Canaccord Genuity Corp. and including Beacon Securities Limited, Cormark Securities Inc., Echelon Wealth Partners Inc., Eight Capital and PI Financial Corp.

Under the Offering, the Company issued 69,000 Units at a price of $1,000 per Unit, including 9,000 Units issued pursuant to the exercise in full of the over-allotment option. Each Unit consists of $1,000 principal amount of 7.0% unsecured convertible debentures of the Company and 227 common share purchase warrants at a conversion price of $2.20 per share. The Company may force the conversion of all of the principal amount of the then outstanding Convertible Debentures at the Conversion Price on 30 days’ written notice should the daily volume weighted average trading price of the Common Shares is greater than $3.15 for any 10 consecutive trading days.

3. Technical Analysis:

HEXO has range-traded for the year with prices trending between a $3.30 to $4.45 zone until May 2018 when it broke into a $4.45 to $5.41 trading zone. In mid-July 2018, the stock has re-entered the previous consolidation zone and we are now aggressive buyers towards the $3.30 area.

Summary: “3V-Analytics®” on The Hydropothecary Corp:

By partnering with a provincial monopoly, (SAQ), to distribute marijuana products, the outlook is for strong growth in an uncharted sector. Micro-caps have high risk and if a young company in a brand new industry is deemed as not being a safe investment, then you are right. But on the other hand, this once in a lifetime lifting of a prohibition law deserves a second look. Bill C-45, the Cannabis Act that was passed by Canada’s Parliament, creates a legal and regulatory framework for controlling the production, distribution, sale and possession of cannabis in Canada. So the risk and reward show us that the company has solid funds to grow forward in a newly legalized cannabis regime and as the stock should be accumulated on any weakness, we are buyers towards supporting levels of around $3.30.