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Canopy Growth Corp
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Good morning, and welcome to Canopy Growth's Third Quarter Fiscal 2018 Financial Results Conference Call. Earlier this morning, Canopy Growth issued a news release announcing its financial results for the third quarter fiscal 2018 ended December 31, 2017. This news release will be available on Canopy Growth's website and filed on SEDAR. On the call this morning, we have Bruce Linton, Canopy Growth's Chairman and Chief Executive Officer and Tim Saunders, Canopy Growth's Chief Financial Officer.[Operator Instructions] Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are made available on SEDAR. During this conference call, Canopy Growth will refer to supplemental non-GAAP measures, weighted average cost per gram, gross margin and adjusted EBITDA. These measures do not have any standardized meaning prescribed by IFRS. Weighted average cost per gram, gross margin and adjusted EBITDA are defined in the press release issued earlier today, as well as in the period's management's discussion and analysis documents that will be filed on SEDAR.Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by Mr. Linton and Mr. Saunders the company will conduct a question-and-answer session, during which questions will be taken from analysts and investors. [Operator Instructions] I would now like to turn the meeting over to Bruce Linton. Mr. Linton, please go ahead.
Great. Thank you. Good morning, everyone. I can see on the screen as more and more folks are logging in and want to maybe think of is, some of those names have been doing this for about 3 years with me now. And the first one we did was 3 years ago and it was for a period ended December and we had about an extra 10 or 15 days to announce because we were on a venture and some of the questions were about -- you have I think $600,000 or $800,000 in the bank that seems okay and you have got a single building working and the second one maybe working and some inventory that might happen. And so it could be that and that I think the company you are on the call with has always put a lot more into what's next than what's now. And we had a great quarter, but I'd like to pause and just sort of reflect on sort of things that maybe slip by if you don't look at them the right way. So we did $21.7 million in revenue, but that adds up now to more than $100 million since we began the company. So you can sort of see a shape of a curve happening.And when you look at what we've been doing, it's kind of, in my mind, we've been working, having a great time, creating what we think is going to be a great company. And it feels like the big rig is just starting to move along the track now. And I think this is a market where there is quite a bit of hype about what's being done or might be done or could be done sometime and then there is head down getting work done. And so, I hope you come off this call with a clear understanding that the culture of the place has been for some time head down, get work done, look out and see what the rest of the world needs and be ready for it. And so when Tim walks through the numbers, it's going to be about 3 years ago we began working on Germany and at the current period what is $1 million in sales. Well, that's a nice uptick, but I think Germany is just getting started. I suspect they are somewhere in the 20,000 patients neighborhood and the program really only started in force March 1. So we're not even to a first anniversary. And when you look around at how the Canadian platform is being observed and adopted, our logbook of who comes in is very interesting. And it was just, I guess, in the last 4 days or so we had the privilege of helping the senators, not the hockey team, but the ones from the Hill begin to understand and observe production. And most of them had not been to a production facility. I'm glad they came to ours so that we could walk them through what -- what's about and how it works and why this supply chain should be viewed as something they can be proud of for regulating and responsible in the way they do it. And so I think for the sector we're doing a fair bit and it turns out to benefit us quite a lot.You'll see in this -- this last quarter, it seems like forever ago when we announced an association with Constellation. That really feeds into the what's next, now -- what's now. And yesterday, I'm having meetings with them and as we look at the way we're regulated in Canada, I am sure everybody has observed that we're regulated entirely by local authorities across the country. And it's nice to have announced 4 of them that have come out and all 4 of them are participating in. But I think on the what next basis, you should be considering if a regulator regulates liquids only across their country, are they really going to be happy to sell dried cannabis in a smokable format primarily or is the format going to change and probably change quite rapidly as we get through 2019.And as a company, we put a lot of effort and fund to that and I think we're well positioned. So it is more work, more heads down, but I can tell you that the culture and the enjoyment of creating this is not lost on anyone. And I would say the #1 observation I have from every guest who comes through is, the staff morale here seems fantastic. Now being Tweed and Canopy the employees will often reference that we have very high employee morale because they think they are hilarious, but that's the kind of workplace that creates value for shareholders because people show up, they want to work, they want to create, and they're collegial in how they interact. And the effect of that is we can grow rapidly and we can produce great products. And while there is stress and rapid growth, I think it's generally understood that that's a great stress. And so thanks to Tim and his team for getting the accounting done on what was a stressful quarter because of all those transactions we did. But Tim, if you could walk through the numbers that would be great.
Sure. Thank you, Bruce and good morning everybody. Revenue for the third quarter ended December 31 was a record $21.7 million and that represents a sequential quarter-over-quarter increase of 23% and 123% increase over the same quarter last year. Included in the revenue for the third quarter was $1 million in sales as Bruce just mentioned, generated by our Germany subsidiary Spektrum Cannabis. Oils, including soft-gel caps, accounted for $4.5 million or 23% of product revenue in the quarter and that compares to just $1.2 million in the same quarter last year, which has been 13% of product revenue.Revenue in the 9 months ended December 31 totaled $55.1 million representing a 118% increase over the same period last year, when revenues were just $25.2 million. In the 9 months ended December 31, 2017, oils including soft-gel caps accounted for $10.8 million and that compares to $2.9 million for the same 9-month period of last year although in the period last year it was oil only.The total quantity of cannabis sold in the quarter was 2,330 kilograms and kilogram equivalents at an average sales price of $8.30 per gram. That's up from 1,245 kilograms and kilogram equivalents same period last year, which was done at an average price of $7.36. The higher average price was due primarily to the improved mix of oil products including oil-based soft-gel capsules and partly to the higher selling price of medical cannabis sold in Germany. The average selling price in Germany was about $12.61 per gram.Year-to-date, we've sold just under 6,200 kilograms and kilogram equivalents at an average price of $8.11 and that compares to 3,399 kilograms and kilogram equivalents at an average price of $7.12 per gram in the same period last year.Next, I'm going to talk about the weighted average cost per gram. In the third quarter, the weighted average cost per gram to the point of harvest was $0.59 as compared to $0.87 in the same period last year, representing a decrease of 32%. The decrease in cost to the point of harvest is due in part to the operating efficiencies from the capital investments that we've made to the facilities and infrastructures and increasing the utilization of the facilities themselves and the higher overall plant yields.The third quarter fiscal 2018 is the 6th consecutive quarter when the cost at point of harvest was less than $1 per gram and fell relative to the previous quarter. These costs are competitive within the industry and especially competitive for a product mix, which includes both high-quality indoor production as well as greenhouse production. We may see further optimization as increasing percentages of each facility are brought online and the efficiencies are fully realized.In the third quarter, the weighted average post-harvest cost per gram including the cash costs related to the production of cannabis oils and soft-gel caps was $0.44 per gram as compared to $0.54 in third quarter last year. That represents a decrease of 18%. The decrease in the post-harvest cost is due in part to the gains in the efficiency of oil extraction resulting from the use of an industrial scale extraction machine that we implemented and commissioned at the end of the first quarter of this fiscal year as well as efficiencies gained through the improvements in the company's post-harvest processes. And in the third quarter, the weighted average cost per gram for shipping and fulfillment cost was $1.48 as compared to $1.17 in the same quarter last year.The increase in shipping and fulfillment costs in the third quarter relative to last year is principally due to higher investments in packaging to enhance the branded experience. A significant portion of the packaging costs are investments that we make to create a vastly superior customer experience. And we believe that brands and experience matter and have invested in premium packaging worthy of our brands in which we try to seek a key differentiator in the cannabis market.Next I'll briefly discuss the gross margin for the 3 and 9-month periods ended December 31. The third quarter fiscal 2018 gross margin, before the fair value effects of the IFRS accounting for biological assets and inventory, was $12.5 million or 58% of sales that compares to $6.2 million or 64% of sales in the third quarter of last year. The lower gross margin percentage was due primarily to the impact of cash operating costs of subsidiaries not yet cultivating or selling cannabis. That would include BC Tweed and Edmonton for example. Excluding the costs associated with the non-cultivating subsidiaries totaling $2.9 million, the gross margin before the fair value impacts and cost of sales would have been $15.5 million or 71% of sales.Now turning for a moment to the operating costs in the third quarter, sales and marking expenses for the 3 months ended were $9.4 million or 43% of revenue and in comparison to the sales and marketing expenses of the same period last year, were $3.8 million or 39% of sales.The sales and marketing expenses include an increasing resources to the marketing sales functions as needed in the coming regulated recreational and international markets that we're going after, also making investments in branding and costs associated with company's medical outreach program and the growing customer care center which interfaces directly with the company's growing base of patients. Since December 31, 2016, a year ago, the number of patients have grown from over 29,000 to over 69,000 at the end of December, 31.Our significant investment in sales and marketing activities is consistent with the company's view that strong brand recognition is essential to company's successful ongoing customer acquisition strategy, particularly in the coming recreational market in Canada. These costs represent strategic investment which we believe we'll have a future benefit in customer acquisition and retention and brand affiliation. Further, we make these investments to aggressively seek the new domestic and international business opportunities to build for the future.On G&A, G&A for the quarter was $11.1 million or 51% of revenue compared to $ 4 million or 41% of sales in the same period last year. The G&A expenses include higher legal and professional service fees related to investments in governance, expanding operations and supporting business development particularly internationally, as well as expanding the company's information technology capability. G&A expenses also reflect the growth in staff levels and talent mix, necessary use of consultants and advisory services while expanding and commercializing the company's operations.Overall, the increase in G&A reflects the company's growth and building of commercial capacity and capability. As international expansion forms a key component of the company's business growth strategy, the company expects to incur related costs such as legal and tax advice and other services while pursuing these business centers in the future.On the non-cash expenses included in operating expenses, to start with the non-cash stock-based compensation, which is $9 million in the quarter. In addition, there are contingent acquisition-related payments based on future milestones. And under IFRS these are treated as non-cash stock-based compensation expense, which in the third quarter amounted to $8.9 million as well.Other non-cash expenses include depreciation and amortization and that amounted to $5.2 million in the quarter ended December 31.I'll comment on the adjusted EBITDA in a moment, but first to comment on the reported operating loss and the reported IFRS net income for the quarter. In summarizing where we are for the third quarter, we recorded an operating loss of $26 million, which included almost $23 million in non-cash operating expenses offset by about a $6 million net gain related to the IFRS fair value impacts on the inventories and such.However, if you continue on recognizing the non-cash gains on the financial assets due to fair value changes and the gain on the partial disposal of Agripharm, the after-tax net income was $11.1 million or $0.01 per basic and diluted share. This compares to net income of $3 million or $0.03 per basic, and $0.02 per diluted share in the same period last year.Year-to-date, we have recorded net income of $227,000. The net loss per share attributable to Canopy Growth on a year-to-date basis was $0.05 per basic and diluted share. That compares to net income of $4.5 million or $0.04 per basic and diluted share in the same period last year. The net income is inclusive of both the non-cash unrealized gain on changes in fair value of biological assets discussed earlier and the other non-cash expenses related to stock comp and depreciation.Now just I'll briefly touch on the supplemental non-GAAP measure adjusted EBITDA. Just to remind everybody, adjusted EBITDA is defined as earnings from operations as reported before interest, tax, and adjusted for removing other non-cash items such as the stock-based compensation, depreciation, and the non-cash effects of accounting for biological assets and inventories and further adjusted to remove the acquisition-related costs. We reported adjusted -- we report adjusted EBITDA believing it is a useful financial metric that will help investors assess the operating performance of our business before the impact of investments, acquisitions, income taxes and non-cash measurements.As a result of all this, the adjusted EBITDA in the third quarter fiscal 2018 amounted to a loss of $7.1 million compared to an adjusted EBITDA loss of $1.4 million in the same period last year. And on a year-to-date basis, adjusted EBITDA amounted to a loss of $18.3 million compared to a loss of $4.6 million in the same period last year. We believe our deliberate and ongoing investment in building the company's brands, expanding our international reach through business development into 7 countries so far and building partnerships and scaling operations which all directly impact our adjusted EBITDA during the period is really necessary to strengthen the company's global leadership position both in Canada and internationally and heading into next year.Now turning your attention to the balance sheet and cash flows. At December 31, the company's cash was $237.7 million, up from $101.8 million at the end of fiscal 2017. Keep in mind this is before the $200 million bought deal we closed on February 7 and a net $20 million private placement of Canopy Rivers that was placed in early January. The increase in the end of fiscal 2017 was mainly due to the cash received from Canopy Rivers private placement of $36 million in June, a $25 million private placement of common shares in July and the investment of approximately $245 million by an affiliate of Constellation Brands and the exercise of options and warrants totaling $8.2 million offset by cash used to fund operations of $44.6 million, investments in facility enhancements totaling $87.1 million, all connected to the expansion and investments made directly and indirectly through Canopy Rivers amounting to $46.6 million.Investments in facility enhancements were primarily improvements at facilities in Smiths Falls, Ontario; Niagara-on-the-Lake, which is Tweed Farms; Fredericton, New Brunswick; Edmonton, Alberta; Mirabel, Quebec and at 2 locations in the lower mainland of British Columbia. Investments also include information technology upgrades and new systems as we scale up.So today, we have approximately $400 million in cash on hand to fund both our domestic and global expansion plans. Inventories being built up, we're getting ready for the recreational market at December 31 a total of $93.2 million, up from $46 million at the end of last fiscal year. And at December 31, the biological assets were $15.1 million, up a little bit from $14.7 million.Together the inventory and biological assets totaled $108.3 million at the end of the quarter, up from $60.7 million at the end of fiscal 2017. Inventories are continuing to be scaled to meet management expectations of market demands and that includes a legalized recreational market that's expected later in this calendar 2018 so that we'll be ready.At December 31, the inventory quantities amounted to 16,837 kilograms of dry cannabis. Of that amount 2,606 kilograms was finished goods available for sale, 6,059 kilograms of product is in the process of testing and awaiting release of sale and 8,000 or over 8,000 kilograms of extract-grade cannabis is being held for conversion to oils and gel caps. This compares to March 31 when it was about half of that when total of 8,360 kilograms dry product was in inventory, a smaller amount of finished goods waiting for sale, which was only 377 kilograms at that time and about over 3,000 kilograms of product that was waiting for approvals to be released for sale. And at the time we also had 4,800 kilos of extract-grade cannabis being held for conversion to oils and gel caps.In addition, the company had a total of 5,919 liters of cannabis oil, ranging from concentrated resins, or refined oil, to oil in its finished state and available for sale and [ 291] kilograms of capsules on hand at December 31. That's up substantially from where we were at the end of last year when we had only 1,800 liters of -- held in inventory.So this concludes my review of the financials for the third quarter ended December 31. And I'll turn the call back to Bruce for some closing remarks. Bruce?
Great job as usual, Tim, and thank you. I think it's best we just move to questions, and I know that there is a substantial queue forming.
[Operator Instructions] Our first question comes from Vivien Azer of Cowen.
Perhaps we could just start with your pricing which continues to improve sequentially as your mix shift continues to evolve towards extract. Could you offer a little underlying color on your pricing evolution by product type?
Sure. And this is -- I think it should foreshadow where I think it's going. So dried cannabis, people talk about it as a commodity, it's not, it is a input for creating products. So think of it as an ingredient and as we convert and move up margins compound. Tim will walk through a little bit more from dried cannabis flower to bulk oil to gel cap. But just keep drawing the line straight and when we start to being able to make more sophisticated products that will include vapes, I'll call it liquids that are competitive and toxicants to alcohol in a form factor that we think is going to be much easier governed by the liquor authorities than, say, gummy bears. The margin model just keeps going up. So, I don't know if Tim you want to shine a little bit of light on that. We do not try to extract maximum margin. When you just take the oil out of the plant, you need to put it into a different form factor for higher margin, but go ahead Tim.
Well, that's certainly true, I mean, on the oils and gel caps and it really does move up the value curve and so that's coming out at a higher selling price, but even on the dry flower that we have, we had higher product availability across all categories in strains and price points as well so that we were able to offer more than sort of the basic entry price point for dry cannabis. So there has been also improvement on the dry side. But to Bruce's point, as you move out of the value chain, the average selling price increases substantially for oils and gel caps as well.
Okay. Looking at your patient count, you've seen a really nice acceleration in terms of the quarter-on-quarter growth over the course of fiscal 2018. Has there been any tweaks to your strategy in terms of patient acquisitions that's driving that?
I think what you're seeing is, it started on April 1, 2014, where we were going on educating doctors and that program is a slow-build, being able to present gel caps and talk about stabilized medicines and identical milligrams from milliliter helps a lot. I would suggest we are not pushing really hard. We are just working along a path. We're not being ultra aggressive in the market to get more clients. They are coming to us and it's because we know that there is a -- our commitment is, if you're a patient on or before July 1, you will have your order filled before product goes anywhere else. So it would be nice if that number continues to climb, but it just -- it isn't that we are being aggressive in that channel and going after patients with aggressive deals or anything. It just seems to be working.
Got it. And my last question and I'll turn it back to the queue. Can you offer any kind of high-level updates on portfolio structure as you think about the transition to adult use in your domestic market?
Yes, it's a -- so portfolio structure I think comes down to a bunch of things. One is what format can we deliver and then what information can we provide and that's going to have some variant by province. So we're pretty engaged with every province and some are a little more aggressive on the idea that brands will be quite visible and that whether or not can you make a role product format and things like that. So I would think that between now and probably August 1, we've always used that as kind of a kick date, you'll start to see specific examples of the product format. The names will be on that products. Our clients can reach back to our call center and/or chat sessions because the onboarding at customer is going to be a lot about the portfolio, the information exchange. I don't think we need advertising, we need education and we've been recently onboarded for that in New Brunswick, where we're going to be to providing a great portion of their training for retail salespeople. And I think all of those things combined, we will see us have a very nice opportunity for a big market share in all the enhanced markets.
Your next question comes from Martin Landry of GMP Securities.
My first question is with regards to your contract with the SAQ. I'm wondering if you can talk a little bit about it. Curious to see what is the length of the contract and also what's the value of the contract.
Well, we said it was important to get approval to put that information out there. So I think it was good that we were able to get that out this morning so we could reference it. It's I think referred to as a multi-year. We haven't disclosed more information than price and duration. But the whole -- every province is fairly similar right now. And that the reason they're announcing multi-year agreements is that then we will be able to commit to them and deliver and fulfill the channel so that they can build up. I'm not -- we're not very interested in 1-year deals, half-year deals because I think our strength right now is that we have inventory and we have brands that we can fill a channel. So I assume our priority is typically 1 to 2, sometimes more years on an agreement for any province. And I wish I could give you more specific details, but I think you'll find the margin opportunity for us is not really compressed in any of the transactions we're doing and it will look like a pretty busy year if we can move through all the provinces who knows. Maybe we need somewhere, I think this brings us to about 25,000 kilograms of commitment across all the jurisdictions that have been announced and all of them are only 4. So I can't tell you the price, but I can tell you that we think these are really sound business deals for the company.
Yes, and that's a good segue into my next question. Obviously, you're selling wholesale to a big buyer. So pricing is going to be different from what you're realizing now in your medical market where you are direct to consumer. So with regards to the economics of the contract, wondering if you can talk a little bit about what's going to be the impact on your gross margin? Is it safe to say that your gross margin is going to be a little lower than what you've realized with that last quarter at 71%?
I don't know that it's so safe to say that. I think what you find is that we are going to be bulk shipping rather than individually shipping. So that changes a bit of the cost profile. Second is, as we run more and more platform, Tim describes spending $80-plus million that will become about 70% greenhouse, 30% indoor. Our operating costs and cost per gram, I would expect to continue to drop our sale prices and going to drop materially. And then you start to look at 2019 when the format of product starts to become more advanced consumable products, whether it's vapes, ingestibles or drinkable products and the margin model on those is much, much better for us, which means that, as a channel takes their cut, I think our margin opportunity gets more robust so does the branding ability of the products. So I don't -- I wouldn't shape a model that really knocks that down and I wouldn't do it for very long if you did at all.
Okay. And then do you -- can you give us any visibility on what's the product mix out of the gate? The proportion of dried versus oil versus pre-rolls?
I would suggest that what we're finding is, there isn't a day where we're not conversing or interacting with the provinces as they try to nail what they want to have in the store. Remember, this is a channel that's filling up from zero inventory and so the mix, nobody is absolutely sure. But I think we'll be able to give you better color probably by about July, so when we do our next call, than we can today because that's an open discussion.
Okay. And just lastly, Tim, there is a $2.9 million cost in your cost of goods sold related to non-cultivating subsidiaries. Wondering what is that exactly and is there like sales related to that cost of goods sold?
No, that's -- that's the point, is that they aren't really generating revenues at this point. So BC Tweed, the 2 locations that we're building out right now which at the same time incur lease costs and other costs that don't have an impact on the, say, the cost per gram being produced or sold. So these are period costs that properly go through the cost of sales line, but they're not generating revenues at this point. We are building those out. So that will the Edmonton, BC Tweed and the like.
And why is it in your cost of goods sold rather than in your SG&A?
Well, this is -- these are the some of the operating facilities and that's where those costs will ultimately land. So that's where -- they are production facilities and that's where it belongs.
Your next question comes from Daniel Pearlstein of Eight Capital.
Wondering if we could start off, if you could describe a little bit more around the evolution of the online business and how the provinces are thinking about that? We're familiar with the LCBO having an online model. But how do other provinces think about these online sales? And how does that match up with what you guys have been doing so far in the medical market?
Good question. So there's a real mix out there. You saw I think yesterday or perhaps it was Friday, SAQ announced, or sorry, Ontario announced Shopify as a platform. I think you are going to find there is a real mix across the country where some of it will be originally structured, some of them may still yet rely on us to transact and remit, and it's a function of time. I expect over time all of the provinces will have their own platforms, but not 100% sure they will all have them on time. So we've built what's called Tweed Main Street, it's a bit of like -- should feel a bit like an Amazon shopping experience with all the different brands and there are more than -- depends on the week for your 50 or 60 products. And so I think you are going to find that platform stays pretty busy. Once the air clears around, what is rec and how does it work, what the format of work that we're doing at Canopy Health and how we're putting the products, I expect the medical market to actually accelerate again in the back half of '18 because there are a lot more doctors educated and there is a lot more indications that are sort of getting a positive response. So I think the Main Street store will be quite busy and maybe sort of replicated or look like that store in a couple of the jurisdictions.
Okay. And then as talking about the Tweed Main Street storefronts and kind of the education centers, has that been part of the strategy to tackle any of the provinces approaching private retail?
Yes, so we were awarded the first private stores which are in Newfoundland. We've applied in other jurisdictions where they're going to be, I'll call, restricted retailers. We're doing retail for branding in provinces where it's restricted. We're not doing retail in provinces like Alberta where it's wide open. And the reason is, I think there are about 1,450 liquor stores in Alberta. And I think they have the option to switch if they like. And there will be certain restrictions only in that they can't have a liquor store and a cannabis store, I think, immediately adjacent to each other. So you'll be able to see in open market a switching, and so what we're trying to do in those geographies is think of us more as co-op dollar support or working with the mass market where if they want to brand with Tweed Main Street, we do that. But I don't want to participate in retail and get my 67% EBITDA in the open geographies. Tweed Main Street, go to Newfoundland I think you'll see some looks great like that.
Okay. And I guess last question for me would be what -- there's a lot -- lot of -- lot going on obviously in the company, lots of different subsidiaries and partnerships, but what might be a couple of subsidiaries you think could be highlighted here partnerships otherwise?
We're quietly working away in things like Rivers. So we said -- we announced there is another financing, the first financing that we did for that gave us an obligation to look for a public listing by July. So that one I would think you would find bulking up in its capabilities. It looks like a nice -- nice income together with positive cash flow and EBITDA and doing what you would expect for a streaming royalty company and doing it very well. Health, we've announced 27 patents filed towards sleep. It's not a very good idea to announce what patents you might file next. But we do have a handful of indications we're pursuing. And that one -- we've been out for now getting on 2 years and I think what you'll find with that is that you create products which runs through process, that turn into potentially drug identification number or clearly medical products and that because we have, call it, 250,000 or 300,000 patients in Canada that can be accessed to be in trials we can actually get hits on indications in a really organized way compared to anyone in the world, file the IP, prove it out and then if we can help somebody sleep in Canada or stay asleep in Canada that program would work just as well for, say, Germans. And so that's big hit, that isn't like tomorrow, but it is pretty soon.
Your next question comes from Jason Zandberg of PI Financial.
I wanted to drill down a little deeper into your sales to Germany. So you've given the kilograms sold and the average price. Just wanted to sort of get an idea what we should be looking for in terms of, are you seeing that average price move at all in Germany up or down and what would we expect to see a ramp-up in actual volumes to Germany in coming quarters, in sort of just general terms as opposed to any specifics.
So the general sale price in Europe from us to the pharmacies and we have -- I think, we're now in excess of 900 pharmacies, which have carried or currently carrying our product. And when I say our product, that's product produced by us in GMP certified facilities in Canada. That product seems to sell for about euros equivalent to what we would say if it's a buck here it's like a euros there, kind of thing. The number of patients is growing rapidly. If you compare to Canada, we did this call 3 years ago, everybody is asking will any doctors actually support this. Well in Germany from my understanding of the current stats, there is about 20,000 patients up from maybe 1,000 or less on March 1 about 75% of them gets fully socialized medicine coverage, which means that if they're prescribed cannabis and they go to the pharmacy, the government pays for it. And so I think you have to look at both ends of the transaction, who is paying and what they're paying and much of Europe is going to be an interesting format because of the socialized medicine approach. And so we find it quite worth our time to put product to that jurisdiction.
Okay. And then turning back when -- I was just going over some of your production and saw that your harvested product was 8,000 kilograms, great number. Just wanted to get maybe some more clarity in terms of, I know Tim had mentioned your improvement, can we get some more color just in terms of how that's progressing. I know this quarter would have had a large component of Tweed Farms in it. Can we get just kind of a bit of an update in terms of how that's -- how those have been progressing sort of on a year-over-year harvest-by-harvest basis?
Go ahead Tim to tackle that one. I'll just put the caveat that I remember a call 2.5 years ago, where one of the questions, not from you Jason, was don't you have too much cannabis? What's the problem? What are you going to do with that? I am not expecting that question today. So maybe Tim you can talk a bit about the ramp from the farms and the harvest.
Yes, I mean, it was right across the board too. We've also commissioned another 12 grow rooms at Smiths Falls too. You remember in prior quarters, we also talked about the retro for the reset at our Bowmanville facilities we've picked up through the Mettrum acquisition and so those are all producing now as well. And then of course then you have the farm which is pretty much humming along. I think it was really just over a year ago was the first big fall harvest that came due to the summer grow, doing that again, but this keeps continuing to improve. So, yes, just everything is kind of turning on. Other facilities soon to be coming on as well. So, yes, just it continues to uptick, Jason.
Okay. I think I'll leave it there and congratulations as well on Quebec [ entry ].
Your next question comes from Vahan Ajamian with Beacon Securities.
Congratulations both on the quarter and the big allocation in Quebec from SAQ. Couple of questions, first off, you mentioned about having to stockpile inventories. You got 4 provinces now you will be supplying as they have been announced. Clearly, they're all going to want product on the shelf on day 1 for seeding their initial inventory. So how do we think about the next 6 months in terms of how much of your production will you have to sort of stockpile to get ready for that initial inventory supply versus when you'll be selling to patients?
Well, suppose there is 250,000 to 300,000 patients today, maybe by the end of next year, that number doubles. So, I don't know, take 500,000 to 600,000 patients because I think with the format and the work that could be happening. I bet today there are at least 27 articles in the media about cannabis. And so I think that there is going to be a great number of Canadians who want to try it, so they are going to buy it. And I think you can pick a number that there is 5 million or 6 million Canadians who are going to be sufficiently interested and the fact that the governments at all levels are saying this is legal and fine and we're granting it to you. You won't be so shy to walk into the store and buy it. It's not going to be taboo or just be a taboo enough that for sure you want to buy it. So I think the reason we have to move through all of this stuff is, we really expect the front end of the channel building to be significant and the refill rate pretty high and the growth of medical on those curves. And so when you look at that, the reason we're moving to a 70%-30% mix of indoor -- 30% greenhouse, 70%-ish is that we think we're going to need a lot of oils as we enter 2019, dry cannabis quite a bit in the first 2018. And so that product mix and channel fill, you guys will add it up, but we're at 25,000 kilograms just now signed up and we think that some of the provinces will need more from us because maybe others can't actually produce and deliver. And there is still, I think, about 7 provinces to go.
But for the next 6 months, obviously you had a really good sequential growth and revenue this quarter and you kind of mentioned in the opening remarks that you aren't kind of taking the foot of gas in terms of aggressively getting new patients. Should we expect revenue growth to slow a little bit in next 6 months so you have enough volume of inventory to seed the shelves on day 1?
Yes, we're not -- we are not stopping. What I'm saying is that if we have a choice to be very aggressive in terms of sharing profits versus just having clients come to us. We're finding with 40, 50 products in the store we're getting more and more patients turn to us because they like the stability and diversity of the products. So I wouldn't expect that to let up. But it's really a function of them finding us versus us chasing them.
And so on the SAQ contract, some of the mechanics have been set out like -- is there one big SAQ depot that you'll be sending all your products to? Or you have to be sending your own trucks to each one of their 20 or 40 stores every few weeks? Or how is that logistics all going to play out?
So there is a bunch of discussions going on still and I think you'll find that how each province handles. Most of them probably won't set up their own warehouse, but there are third parties that can handle that, maybe sometimes we can involve them. But really the SAQ announcement, we appreciate how responsive they were because it was sort of [ leaped out ] yesterday, and that wasn't how it was intended to be. So they were quite responsive and got something up for markets today so we could comment on. I can't comment more on the specifics, but only to appreciate the fact that they reacted quite quickly and put it out there now in an appropriate fashion.
Okay. And finally on another province, Manitoba, the RFPs for retail stores, my understanding was it should be announced sometime in January or early February. Is that still kind of on track for some news out of that province soon?
We hope so. We've put a really diligent effort together to make sure that our application, we thought, was quite capable, competent, covered everything off. So now the provinces will do what they need to do when they want to do it. And I think generally what we find is that they're all moving at a great pace, but finish lines and start lines were not the same. So, Nova Scotia was one of the last ones to announce, but we're seeing them moving very quickly and I think we expect some in Manitoba. I'm, from an experiment perspective, most interested in what happens in Nova Scotia because there is going to be a single store with a glass wall. And as I can see you can probably go to one side of it and pick up a couple of bottles of wine and maybe in 2019 go to the other side of wall and pick up a bottle of our product. And that will be very interesting because now we'll start to see over time what the true substitutional fact is when you have that kind of competitive framework. So I recommend you guys keep an interesting eye on how plays out Nova Scotia, especially through 2019.
Your next question comes from Neil Maruoka of Canaccord Genuity.
Firstly on your cash costs, just to get a handle on that. The first part of my question is pretty straightforward. Are those production costs all cash costs? And the second half maybe relating a little following on Martin's questions, what is included in the $50 cost for shipping and fulfillment and what's the opportunity to get those costs lower as you shift to the rec market?
Sure. So just to confirm, in each category that describe the weighted average cost per gram, those are all cash costs. So that's directly -- there's no depreciation in those numbers, just kind of costs. Yes, the $50, I mean the most specific -- the biggest component of all of that is really the packaging. If you look at the packaging that all of our products come in, whether it's dry flower, oil gel caps all of these we put in a category premium cost. I sometimes internally suggest that you can almost argue that those are marketing costs, because it really is in terms of design to support the brand. So that's where probably our biggest significant investment has gone. We have certainly meet efficiencies on the shipping fulfillment side in terms of pulling from pre-pack and getting product at the door. But I would have to say the most significant part of that is really the packaging costs.
And are those packaging costs going to be significantly higher for medical patients as opposed to rec?
So, right now, it's all one and the same. We are certainly evaluating what the packaging might look like in the future for recreational products. There may be also other things that we'll look at to further support and enhance the brand because brand will be key in terms of building affinities and choices. So, yes, there will be puts and takes and also as Bruce mentioned earlier that as we ship into recreational market, we're shipping bulk. So you don't have the high cost, individual shipping costs, so those will come down. So there will be -- I'd say at the end of the day there are some puts and takes.
Okay. Second question, just you've got 25,000 kilograms in supply tenders secured already. Revenue ramping to Germany [indiscernible] in the quarter, you had $100 million inventory. How will your revenue evolve over the next 12 months? And really what I am asking is that when do we -- at what point do we get to an inflection point on this and you start shipping and filling those outstanding orders?
It doesn't line up in accounting, but we talk about August 1, 2018 to August 1, 2019 as a period where I think that's the window where you'll see a marked growth change and over that same time period shift in the products offered at the rec base. Everything else medical growths as I described, I think Germany continues to move forward. But I'd line up on August 1 to August 1 and say what happened in that window because I think is going to be the transformation of Cannabis in Canada.
Okay. And final question, the international opportunities for Canadian LP, they are very intriguing. You now have a beachhead established in Denmark. Can you discuss how you might use that as a production hub and which markets might require new facilities and more boots on the ground as opposed to being able to shift from a country like Denmark where you are producing?
This is Bruce. You may not be the one that everybody subscribes to, but I think if you ask the United Nations particularly members in Asia and the Middle East, Cannabis is an extremely dangerous product and has to be controlled under U.N. Narcotics Treaties which means for sure there is no windows in which you can ship product around the world that's related to recreational consumption, there's no contemplated route or method for that. So each country is going to have rec cost of their own. And then you need -- if you want product to move from country A to country B, you need the receiving country to request it, I can't tell them, they have to take it. And I think you are going to find that that logic holds true for some time in Europe even despite the EU Association, the UN governance drives it. So I think what you are going find is most countries, we can ship to for a period of time and then they want their own domestic production because frankly the best places to produce Cannabis are in jurisdictions where they have empty buildings, lots of electricity and high unemployment. And so I think you are going to find that the global production platform will be one where we export our intellectual property methods patents as it relates to finished goods and medical outcomes. But I bet we don't get the ship stuff for more than 3 or 4 years into any one country until we start see the curve in our own country fill up. And so Denmark will be a great way to prime into other countries. But over time I think you should look at every country a company participates in, do they have a domestic market that makes that company sensible in that geography of the capital we spend. So, a bit of a hang on, but I really do see that as a pattern of priming not permanent export.
Just finally for me, a question on your intellectual property you're talking about filing patents around, running trials in different indications. How do you -- and some of this might be sensitive, but how do you create that mode around those products, given that you could kind of look at this as a bit of a generics market, because there's a lot of producers out there. You've got a smaller number of cannabinoids that -- where you could have a method to be using, you are not going be able to get composition of matter. So what is your kind of general strategy around creating those barriers?
So it starts with oil not bud, it starts with oil which you can start to get to the point where you isolate cannabinoids and we can cock them into formulations. And then it combines with devices for delivery, which give a combination of, I'll call it active ingredients and unique and novel methods of delivery so that you can actually have a, I think, a much more robust patent. And so that's the path we've taken. We have 3 different patent pharmacies that have been working with us. Again we started over 2 years ago, looking at the field and what was out there. And so I don't think anybody is going to be very successful in trying to pursue simple, this is my bud or simple this is my oil extracted, but I think there's quite a lot of freedom to operate areas when you do a review that takes a path I described.
Your next question is from Keith Carpenter of Altacorp Capital.
A couple of questions for Bruce and then one for Tim. I guess, Bruce, the first question, when you guys have discussions with the SAQ and they seem to have moved along quickly as of late and then of course there is ongoing discussions with Ontario. When they talk about originally their retail brick and mortar outlets, I think everyone agrees that they're woefully short of where they should be. Have you had discussions with them or do they seem to be moving along such that they understand that they need to move that up significantly from where they are publicly now?
We haven't pushed them on that, I would say that they appear to be one of the provinces most strong on IT and technology for delivery. So if you end up being a bit light on physical maybe you'll be outstanding on an e-Commerce model. And I'm fairly optimistic, they have a very strong and capable focus group which is driven with a lot of technical skills. So I'm not sure that every province will do exactly the same ratio of the front doors per capita, but I think, we'll see which way is the best. And I'm not -- we're not particularly worried about the starting line anywhere yet. We are a bit worried about provinces announcing who's doing what, because if you win in certain provinces, you have an obligation to actually build the stores and those are supposed to be kind of ready in about 4, 5 months. And so there is a couple of those that we're pushing a bit, but it's nicer down east, where we at least have certainty and we can pick up retail locations already and things like that.
The other question, Bruce for you is can you discuss your work or discussions at least that they have been completed to date with Constellation since your November announcement or how that's evolving in those discussions since you've gone public with that with regards to future products?
Sure. So we finished the deal and we announced it and then we worked our way down to actually having a meeting at their head office in, you can call it, Rochester sector, New York. And that was a kick-off meeting where we talked about future products and it was the occasion where we introduced some of the future products that we had we thought quick carefully created that they didn't know about during the negotiations, because if you show everybody everything while you're negotiating and you don't close the deal then you might have informed what could be a future competitor. As recently as about 9 o'clock yesterday having meetings with their key people so they have put together a contingent in Canada. They continue to recruit key staff into their office and functional structure in Canada. We're structuring what's called a joint steering committee. We've identified the key persons for that. I would think that given that it's only about 3 months, the level of connectivity and interaction has been outstanding. And I think both sides feel really positive about how to work together and I mean we're on to specifics of brands, flavorings, formats. We're kind of head down making sure we'll have great stuff for 2019.
Okay. Then Tim, just a question for you on EBITDA. Do you expect that upon first quarter of recreational market that you'd be, I guess, forced into adjusted EBITDA positive? And just discussing a time line...
Yes, rather forced into it, certainly welcome it. No, I think that all that Bruce has talked about so far in terms of rebuilding this inventory and capacity for this demand, that is going to substantially increase. And you'll see that we will have an initial dry down our inventories meaning, I suspect, a major spike in sales. So I can't see a situation where you wouldn't be EBITDA positive on an adjusted basis, excluding the non-cash items going into the second half of this year assuming the recreation starts sometime in the summer. So yes, I think you'll see the immediate impacts almost straightway.
Your next question comes from Chris Damas of BCMI Research.
I'm shocked my question is going to be allowed. Thank you very much. I want to ask where are you going to sell that cannabis, Bruce.
Where are we going to sell it all? I think you're seeing the sign-up agreements building pretty quickly, and I think a couple of years ago, the question is do you have too much. Frankly our worry is to make sure that we don't disappoint because if we tell a province we're going to deliver say 12,000 kilograms, I don't think they want it on the last day of the first year.
Yes, of course, and you don't also want to give competitive information out that you're going to sell it to Antarctica or anything like that.
Yes.
Do you have any intel on the provincial store? I think we're kind of seeing a dichotomy between the private model and provincial store. Is it going to be like the beer store in Ontario where you have a back room that's kind of cold and all the suppliers will be represented or most of them?
I don't think they're all going to be there. If you go into the liquor store, there are probably 100 kinds of vodka in the world and I suspect you find there is 8 or 10 available. It depends on provinces. I've seen concept designs in renderings for some of the eastern provinces that look fantastic and that will basically have -- think of it as colors and zones of cannabis under which our appropriate products would land, so if you are higher THC or lower THC and certain brands will land there, but everywhere it is going to be different. And it's going to be a fascinating experience, I don't think we'll know what the normalized buying pattern is for the format of products and the total market size into the back half of 2020 because there's enough moving parts on locations, formats or products, distribution channels. But I think you are going to see a ton of demand and it's going to evolve into pretty interesting stabilized sales pattern back half 2020. And we'll see then who's the winner and loser, can't say for sure now.
It's going to be fascinating, but isn't it true that the cannabis want to stay in the back?
No, I don't think so.
No?
It depends on the province, it really depends on the province. And some of those -- like think of Nova Scotia is going to actually have a single store, which will have a glass wall, but it's going to sell cannabis on one side and alcohol on the other, so that will be the experiment. And we have nowhere on the planet currently that retail on a private basis has zero switching cost to go from liquor to cannabis. So Alberta is going to be fascinating in that if you're in U.S., where it's federally legal if you switch from alcohol to cannabis, it changes whether or not you can finance inventory, I suspect it changes whether or not you have a multi-state business and whether or not you want to be off-site. So like on -- if you have 1,450 stores in Alberta, what number are going to switch over the first 18 months to selling cannabis and what effect does that have on market share of cannabis versus alcohol. I think it's --
We know 170 stores will be converted because who already just bought them.
Yes, but I think you are going to find that probably there will be 700, 800 that could convert. And so the effect of that...
Right, for many stores -- many stores it's about private margins as opposed to provincial margins which are upwards of 150% in Ontario.
And their margins on -- the reason you're going to see a lot more advanced format products is everybody can actually make more money and it's a much more socially normal to consume an intoxicant in the form factor of a liquid in a bottle. And so I think given our regulators and the opportunity at hand, you're going to see a shift where formatted products turn from ingredients to end products, and everybody wins.
Do you have any intel on when Ontario is going to announce?
I'm not sure yet. I think they're big enough and dominant enough. They may not even have to announce. You may have to actually subscribe to and commit to, but they may not have to tell the world who they pick because it's a slightly different demand profile right, like they know they have power and can get product, the question is who will sign up for it.
Your next question comes from [ Arman Vakili ], an investor.
I've 2 questions. First one is related to the press release that was issued yesterday on the common shares issued. Are you guys able to comment at all a little further as to what the intellectual property know-how is related to?
Tim, do you want to comment on that one?
Yes, as we move forward and think about the future recreational margin, we think about different aspects and then formats that we will be using in. So the IP that we are acquiring is really in anticipation that that will support new varieties of formats in the future. More oils and the methods of innovation and the idea that over time you want your device and your cannabis oils to communicate because they have different temperatures and optimal settings and it would be pretty smart to have them linked together.
Got it. And will that -- will the name of that whoever the intellectual property is will that be announced at a later date?
It will probably. Think of it as maybe we will carry the name or maybe the technology comes into being branded along with Tweed line of products. It's more --
May the wind catch up.
Yes.
Okay. And then my second question is related you guys -- what your future outlook is in the next 12 months, call it, with the cash you guys have on hand. I believe you said about $400 million. Is that going to be in your perspective more for production ramping and building out capacity or more sort to actually go into international markets or branding or what do you expect the next 12 months look like as far as use of proceeds?
I think a lot of our construction will be ramping up, most of it before we get to the midpoint of this year. There will be some specific purpose buildings, perhaps as we finish the year, but not big production. And really now we are finishing and working through our way in Denmark. I expect there will be 3 or 4 other countries that we need to build in, but that could be late 2018 or early 2019 when we start having to ramp more construction in other countries. Okay, I think this is our last question so we can jump onto other things, if there is one.
And that question comes from [ Mathew Tiski of Credit Homes ].
Actually my questions have already been answered. So I appreciate everything.
Okay, thank you for calling in and thanks to everyone else. Now, we can go deal with the media, so we make sure that the world knows what we are up to. Great thank you.
This concludes Canopy Growth's Third Quarter Fiscal 2018 Financial Results Conference Call. A replay of this conference will be available until May 14, 2018, and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day. Goodbye.