Aug 15, 2017
Executives
Bruce Linton - Chairman and Chief Executive Officer Tim Saunders - Senior Vice President and Chief Financial Officer
Analysts
Martin Landry - GMP Securities Daniel Pearlstein - Eight Capital Vahan Ajamian - Beacon Securities Ltd. Neil Maruoka - Canaccord Genuity Jesse Pytlak - Cormark Securities Alan Brochstein - 420 Investor Victor Bonilla - Carlson Capital
Operator
Good morning and welcome to Canopy Growth first quarter fiscal 2018 financial results conference call. Earlier this morning, Canopy Growth issued a news release announcing its financial results for the first quarter fiscal 2018 ended June 30, 2017.
This news release will be available on Canopy Growth's website and filed on SEDAR. On this morning's call, we have Bruce Linton, Canopy Growth's Chairman and Chief Executive Officer, and Tim Saunders, Canopy Growth's Chief Financial Officer.
At this time, all participants are in a listen-only mode. 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.
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.
Bruce, please go ahead.
Bruce Linton
Thank you and good morning all. Let me sort of frame where we are and how we see the world and then I’ll hand over to Tim to walk through some details.
So, effectively January 1, 2017, the view of our world was industry segments. It is – think of it as six-month tranches.
So, the first half 2017, second half 2017 and the first half 2018. And in those phases, what we're working on is to implement platforms system.
Then in the second half of 2017, it's about scaling, tuning those up and then it's about – as we move through into 2018, it's the scale necessary to be a dominant provider in the key markets. And we're focused on this as there are no really, in our mind, five channels to market.
There's going to be the continued medical system, which is male. There's going to be…
Operator
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference.
Please hold and the conference will resume momentarily. Thank you for your patience.
Bruce Linton
Hello.
Tim Saunders
It's Tim. Just got disconnected.
Bruce Linton
Sorry about that guys. I've gone to cell because my phone line got cut.
Anyhow, where I was is we're really focused on five channels to market and we want to make sure that we're scaling through three phases. The channels are going to be the continuation of the medical channel as we see it today.
There is going to be – as we hear about it retail through a variety of provincial channels, which are all in the buildout, and we're going to see that buildout builder continue probably for two to three years, there is going to supplemental to that provincial system, we anticipate, and Mr. Morneau, our finance minister has indicated, which will be direct registration with sales points like a Canopy environment.
There is likely to be pharmaceutical distribution and those formats probably aren’t going to be dried cannabis because it's a smokable product. So, they're going to look for liquids and gels.
And finally, there's going to be an intermittent international opportunity for exports as countries like Germany welcome our exports, then welcome our application process to produce and shutdown the import market. So, that's where we focus on our implement to and scale over the three phases.
So, that’s driven much of our operational activities in the first half of 2017. That's been about scale, giving the implementation the baseplate.
So, we took a deliberate step to stress at our platform. And in some cases, we caused it to break.
You may recall on February 1, we did over $1 million of sales on that day. That was intentionally a stress test and did stress things.
It stressed specifically areas of our platform related to fulfillment and it gave us a view of how we needed to structure our platform, so that we could evolve forward. Since that day, we've implemented many processes, infrastructural changes.
One of the joys of being a leader in the sector is much more often than not, we're the first to express many of the challenges facing the sector. And let's be clear's, I'd sooner knock the challenges down and lead the charge to 2018.
So, one of the, I would say, biggest or most arguably important events that we did is we've created Tweed Main Street online marketplace. Marketplaces are commonplace in many sectors, but they did not exist in the Canadian cannabis states.
So, what we did is rather than continuing to maintain three separate e-commerce sites, all the customer databases, inventory management, all the complexities that existed after the acquisitions, we transformed that complexity into our marketplace where many customers are asking to be able to have access to a variety of brands. We launched with all brands under one roof that also gave us the opportunity to introduce CraftGrow.
So, now you have a marketplace that has owned brands as well as built brands. So, we brought together a diversity of products.
And in many ways, it's been referred to as Amazon-like. I don’t want to infringe on their activities, but certainly we wanted to take as many good pages as we could.
And as we committed in a press release today, the process of launching Tweed Main Street did negatively affect the month of April. Tim will get into the details, but when you merge and move, you have to slow down or shut down.
And so, we're willing to take that hit and it seemed to be certainly worth it because, as we run forward, it's much easier and much more scalable. On the next wave, we had a big increase in supply of product in our store.
If you look what was in the store in sort of the late April, mid-April, up to now, we've grown what we offer in terms of extractions and the scale of that. And that was a big step.
But we've got five partners today in our CraftGrow program. We've got in a multimillion dollar investment that we've put together into the development and production of the world's first – or Canada's first cannabis oil soft gel caps, which have really sold well.
You'll see them in the store. Typically, you see them in batches.
They last about six hours. And then, they're sold out.
We're scaling the productions, so that that is not a sell-out function, but we who've been in the sector for some time have seen everything sell-out that’s new. Then you get scale.
So, if you look at last week, Tweed store had about 30 products and had a nice range of oils, dried product, high THC strains, hybrid THCBD strains – high CBD. We also have CBD soft gels and a broad range of seeds.
So, the store is starting to fill and that drives customers to select us. The team has been working hard, so that we can actually have the products on a rotation, so that the clients always have the selection and the effect is we're seeing fairly positive feedback from the market.
So, production capacity, well, in the quarter, we announced Smiths Falls and our Bowmanville South operations had increased their capacity by 33% and 200% respectively. It's just platform for production.
We have received our license for grasslands. So, production began in Saskatchewan and that process is going well.
And we think we're near the end of the cycle for a license in Québec with our efforts at Vert Cannabis. We now just await final inspection having completed all the buildout and SOPs as we're familiar with.
Finally, we've made some announcements about Fredericton, New Brunswick and Edmonton, Alberta. Both of those were made in the quarter and it's a process by which we'll overlay our known methodologies and we think we can step quite quickly through the licensing process.
As we go down this, we're really trying to, if you will, develop a playbook that continues to secure lead in the Canadian market, but we think that lead is really a lead in the warm-up. So, we felt it was necessary to keep thinking big and moving through these ideas of get the platform, tune the platform and be ready for 2018.
And when I look at things like soft gels, it took us a year to get soft gels in all the formats we wanted, to get the oils through the processes to be approved and have them launched in the market. I'm glad we took the year up until the launch of those, so we actually have that as a new product.
As we think about where we are now, how do we scale, more active in partnership negotiations. There's a variety of third parties that we want to work with related to manufacturing, marketing, sale.
Everything that federal regulations will allow, we're looking at how do we think bring strength of our skills and offering to the best-of-breed from other sectors. And we think that that's going to be a very important formula to scale to global access and I hope that you'll see some of those further come out.
One of the first small ones that we announced recently was the K-Cup products in Canada and how if they can be permitted under federal relations. We'll incorporate those into our offering.
Ultimately, for our company, cultivating cannabis is producing a flower, which means an ingredient extraction is a conversion. Customers want to buy brands.
They want to buy finished goods. They want to buy indications against medical affect.
So, Canopy Health continues to grow and accelerate. Rivers, as you will have noted in our disclosure, has had its initial transactions, which increases our capacity.
All of these continue to come together. And I think that the back half of 2017 will see a strong effort to tune them and position extremely well for 2018.
So, with that, Tim, I’ll ask if you could walk-through some of the details.
Tim Saunders
Thank you, Bruce, and good morning everybody. So, our revenues for the first quarter fiscal 2018 were $15.9 million, which represents 127% increase over the same quarter last year when revenues totaled $7 million and it's an 8% increase over the revenues in the previous fourth quarter fiscal 2017 when revenues were $14.7 million.
As Bruce talked about just a few minutes ago, at the year-end call, we had commented that Q1 was all about setting the stage for the rest of the year and going forward by investing resources to reset the Mettrum operations and consolidate our customer base on to a common online storefront and expanding our oil production capability. Launching the Tweed Main Street online store in the first half of April required moving individual Tweed, Mettrum and Bedrocan e-commerce sites offline and migrating over 55,000 customers to a single database and new e-commerce platform, which naturally reduces the sales activity over a period of approximately ten business days in April and some of the days after that followed for our customers to acclimate themselves with the new format and logon.
Since then and as of today, we've broken through the 60,000 patient level, so continue to grow. In addition, the sales reported in the first quarter were partly due to the lower availability of Mettrum products during the first quarter as a result of Mettrum growing operations being mostly inactive through the last part of the fourth quarter of last year and also through much of the first quarter of this fiscal year, while being integrated with new standard operating procedures and quality control procedures as well as a new production layout configuration.
The total grams sold during the first quarter was 1,830 kilos and kilogram equivalents, at an average price of $7.96 per gram, up from 984 kilos and kilogram equivalents or up 86% at an average price of $7.09 in the same quarter last year. Now, next I’d like to speak to the cost of gram cultivated and sold.
This quarter, we are introducing a revised presentation of the weighted average cost per gram in our MD&A and it's also in this press release, which we hope will provide more clarity as to the components driving the cost per gram and the impact at each major stage. Specifically, the new presentation breaks out the cost per gram grant to harvest, which is from clone to harvest, and this includes all the cash costs, including growing labor, utilities such as hydro and water nutrients, rent and allocated overheads.
Second, the presentation also includes postharvest cost per gram, which includes all the cash operating costs associated with, among other things, trimming, milling, drying, conversion to oils and gel caps, lab services and testing and also allocate overheads. And finally, the presentation also shows the cost per gram for shipping and fulfillment, which includes all those cash operating costs associated with labor for pre-packaging and dispensing and order fulfillment and shipping along with packaged material, such as bottles, boxes and labels, as well as all shipping costs allocated overheads.
Further, royalties paid under licensing arrangements are also included in the cost per gram for shipping and fulfillment. So, saying all that, in the first quarter, the weighted average cost per gram of cultivation to harvest and post-service costs, excluding shipping fulfillment, was $1.28 per gram.
This compares to a $1.64 per gram in the same period last year and to $1.46 per gram in the most recent fourth-quarter. The total weighted average cost per gram to produce, harvest and sell cannabis including shipping fulfillment costs in the first quarter was $2.78 as compared to $2.65 in the same quarter last year and $2.90 in the most recent fourth quarter.
The weighted average cost per gram decreased from the fourth quarter, primarily due to improving efficiencies in the drilling and post-harvest activities. But the first partial offset was due to the higher fulfillment costs principally due to premium packaging employed to market, our diverse brands and to the impact royalties paid on certain strains driven by the sales mix of associated strains.
Next, I’ll discuss the gross margin. The presentation of the cost of sales is new and has been redrawn to better understand the nature of the margin and impact of the IFRS fair value accounting for biological assets.
The gross margin is subtotaled to present the cash gross margin before the impact of the fair value changes of the biological assets that's in the inventory sold as well as for the unrealized changes in the fair value of biological assets themselves. The total gross margin includes all of the above.
As a result of the new presentation, we no longer present the non-GAAP measure that we previously referred to as adjusted product contribution. Gross margin before the non-cash gains and losses over the three months ended June 30 was $9 million or 57% of sales.
However, this number includes costs amounting to $1.4 million related to resetting the Mettrum grow operations and centralizing the various shipping fulfillment activities to Smiths Falls. As well, it includes the operating cost of those subsidiaries not yet cultivating or selling cannabis.
If you were to exclude those costs, the gross margin would have been $10.4 million or 66% of revenue. In the same quarter last year, the gross margin before non-cash gains or losses was $2.8 million or 60% of revenue.
Including the accounting for the non-cash changes in the fair value of biological assets, the gross margins were $19.7 million or 124% of revenue. And in the same quarter last year, the gross margins $3.4 million or 49%.
Now, turning for a moment to operating expenses, sales and marketing expenses in the first quarter were $6.4 million or 40% of revenue and this compares to sales and marketing expenses last year of $2.3 million or 32% revenue. The company has been committed to building strong brand recognition, investing in customer acquisition program, which we consider to be a strategic investment.
Management believes the investment will strengthen both customer acquisition and retention. In addition, the company is aggressively seeking new domestic and international business opportunities to lay the future foundation and has been very active on this front.
G&A expenses in the first quarter were $7.5 million or 47% of revenue and $2.9 million last year or 41% revenue respectively. These higher admin costs reflect the expansion of Canopy's activities since a year ago and including both domestically and internationally.
So, these naturally attract higher professional advisory fees, staffing, higher facility costs due to new locations, as well as investments made in information technology support and compliance costs associated with being a TSX-listed company. Overall, the increase in G&A reflects Canopy's growth and building a commercial capacity and capability as well as being a public company.
Stock-based comp and depreciation and amortization, both non-cash expenses, were approximately $4 million and $5.1 million respectively in the quarter. In comparison, stock-based comp and depreciation and amortization were each approximately $0.9 million in the same quarter last year.
As a result of all of the above, in the first quarter of this year, we recorded a loss from operations of $4.2 million. And after income tax, the company reported a net loss of $4.4 million or $0.03 per basic share and diluted share.
The net loss in the first quarter includes acquisition costs of approximately $836,000, non-stock compensation and depreciation totaling $9 million; and is included – inclusive in the non-cash gain, effect of the IFRS accounting for biological assets and the inventory sold, amounting to $10.7 million. In comparison, the net loss was approximately $4 million or $0.04 per basic share in the same quarter last year.
As the new financial statement presentation lays out the cash and non-cash amounts in earnings for readers, we'll no longer present the non-GAAP measure adjusted EBITDA. Now, turning our attention to the balance sheet and cash flows, at June 30, the company's cash comprised of cash and cash equivalents totaling $115.5 million, representing an increase of $13.6 million from the end of last year.
The increase from the end of fiscal 2017 was mainly due to $35.3 million in cash raised by our subsidiary Canopy Rivers, which is consolidated in our accounts. And it's partially offset by capital expansion totaling $10.2 million, principally at Smiths Falls, Bowmanville and, to a lesser extent, at Drummondville and to fund our operations.
As I said, investments are primarily improvements at our Smiths Falls facility. It includes the conversion and construction of growing rooms, new drying rooms, and expanding fulfillment rooms to centralize all related activities, and to the retrofit and expansion of our Bowmanville South facility, as well an expansion of cannabis oil extract production capacity at Smiths Falls.
And further, we are also continuing to make improvements in our information technology to scale the business. At June 30, inventory amounted to $65.5 million and biological assets were $9.3 million, together totaling almost $75 million.
At June 30, the company had 10,715 kilograms of dry cannabis and 2,683 liters of cannabis oils in various states from concentrated resins to finished oils. Included in the dry cannabis quantities was 1,235 kilos available for sale in the company's online stores, 2,974 kilos are in process of finishing or waiting approval for sale, and 6,506 kilos are held for extraction.
And with the commissioning of the AES industrial capacity extraction equipment and recent launch of soft gel caps that's now available for sale, the extraction inventory is expected to be converted to oils and capsules over the next few quarters. I apologize for the long harangue, but this concludes my review of the financials for the first quarter.
And I'll turn the call back to Bruce for closing remarks.
Bruce Linton
Thanks, Tim. I really appreciate the format evolution and I think the listeners on the call will find it quite helpful for comparison purposes.
I'll turn it over now if there are questions, so we can move into that step.
Operator
[Operator Instructions]. Your first question comes from Martin Landry from GMP Securities.
Your line is open.
Operator
Your first question comes from Martin Landry from GMP Securities.
Bruce Linton
Good morning, Martin.
Martin Landry
Hi. Good morning.
First question is on your – I really appreciate the breakdown you’ve done on your cost per gram to harvest, the post-harvest cost and then the shipping and fulfillment. So, it begs the question then, we are seeing your cost per gram for shipping and fulfillment going from $1 to $1.50 over the last five quarters.
You did touch a little bit to it. So, you did mention premium packaging and royalties.
Is that really what drove that cost higher?
Tim Saunders
Yeah, exactly, Martin. We have the Bedrocan, you've got Leafs By Snoop, the DNA Genetics products are all under license.
Those all have – especially with DNA and Leafs By Snoop, there are premium packaging that are associated with those. But all of them attract royalties as well.
If you think about it, Leafs By Snoop wasn't introduced until October of last year. So, there was no comparison in the prior year.
Bedrocan was too still emerging, coming out of – sorry, to really grow around that time. So, the proportion of those sales make up a bigger portion of our total product sales.
So, yeah, royalties and the premium packaging are the biggest drivers in that cost.
Martin Landry
Okay. And I think I've heard you, Tim, talk about patient count being over 60,000 patients.
Just wondering at what point – when was that patient count you were referring to? What's the date…?
Tim Saunders
And, Martin, in the period during the quarter, we really didn't have our foot on the accelerator for adding patients because we're doing those steps that we discussed. Where we are now is we're back on the accelerator and feel pretty confident that we have traction and can keep the store full, which will be a big advantage to bringing people in, so they can buy what they want and stay with us because the variety is there.
Martin Landry
Okay. And then last question, you do talk about in your MD&A that your general and admin expenses have gone up because you've used a bit of consultants and advisory services.
And then, in your opening remarks, you were talking about a lot of activity on the international front. Just wondering, aside from what we have seen and heard about Germany and Australia, are there other markets that you see are moving rapidly and that present good opportunities for you?
Bruce Linton
Yes. So, anywhere that it's federally and state or provincial legal, we are active in.
Think of that now as approaching a half a dozen countries. And so, things that Tim is describing in general terms are having an international tax plan, when you are doing RFPs, making sure you are fully compliant with EU laws, other jurisdictions.
But, certainly, we are seeing EU, Australia, as we've mentioned, South America, opportunities opening up and establishing our framework of how we want to conduct business there, which is to essentially either enter into a partnership that becomes a wholly-owned subsidiary over certain milestones or establish a wholly-owned subsidiary off the get-go. And it's essentially that model, so that we can drive the bus in each of the countries and consolidate back up effectively.
Martin Landry
Okay. So, is it fair to say that EU is occupying most of your time right now in the international front?
Bruce Linton
I would say it's occupying 62%, but there's quite a bit of activity in other areas.
Martin Landry
Okay, all right. Thank you.
Operator
Your next question comes from Daniel Pearlstein from Eight Capital.
Daniel Pearlstein
Hey, good morning, guys. Thanks a lot for taking my call.
Bruce Linton
Okay, great. Good morning, Daniel.
Daniel Pearlstein
Could we start with a little bit more clarity on the integration of Mettrum? This is, I guess, this is the first full quarter of the Mettrum operations within – under the Canopy.
So, could you talk a little bit more about, I guess, the phases of – through coming out of the recall? And then, you touched a little bit on some of the operations.
But if you could really dig into, what are some of the processes that are being put in place or focus on the cultivation that attributed to the potential increase in production capacity that you recently press released?
Bruce Linton
So maybe Tim and I will tag team on this. So, we struck the deal knowing what had gone on in terms of myclobutanil.
We knew they needed a reboot. We took over Feb 1 and that became a reboot on varieties of areas from customer care to grow.
That also required certain parts of the infrastructure to be tuned in, so that they met our standards, so that people weren't battling pressures in terms of pests and/or spores. We did that through the quarter.
And Tim will speak to the numbers. But now we have an integrated and trained grow team, a customer care team.
Everything is sort of run now as we run the trains. And it feels like culturally the transition for the folks in that place has gone very well and that they embraced the methods and procedures.
So, Tim, maybe you can put some detail around that, as far as numbers.
Tim Saunders
Yeah. In terms of the impact in the quarter, it was a bit little over $1 million that we spent in terms of realigning all the activities.
And so, that's about the size of the cost in the quarter, but that's all pretty much behind us now. We are seeing product flowing back through Smiths Falls now.
The shipping and fulfillment activities were also moved and centralized in Smiths Falls. So pretty well from an operation standpoint.
This is – it's now considered integrated.
Daniel Pearlstein
Okay. That sounds great.
And then, maybe as a follow-up to that, as the platform is becoming more stretched across the country or just more diversified, is there any specialization of any of the facilities that you are seeing in terms of product or strain or, I guess, focus, either if it's the Bedrocan or the Mettrum campus or even Smiths Falls and Tweed Farms? Are you seeing more specialization in any of these facilities?
And then, I assume that everything is kind of still run mainly through Smiths Falls, but could you give a little bit more detail around how you see operations across the country being, I guess, different from one another?
Bruce Linton
Obviously, you have the primary point of variances, indoor versus greenhouse grow. And so, we're tuning in on both of those.
As you have seen in our numbers, our cost per gram of production continues to decrease, and I would argue that the quality increases. And so, we are scaling indoor grow and greenhouse.
Smiths Falls is the campus at which we focused on getting it right. And when I say getting it right, oils production and GMP certification for encapsulation, shipping and fulfillment.
But you can imagine, as we contemplate the rest of the next 12 months, we are thinking about how we replicate fulfillment across a variety of locations, so that anybody who is our client under both systems will enjoy ever-shorter ship times because you start to work your way through logistics. And then, we'll probably have a second campus for extraction because extraction over time is going to be a big quantity where you don't want to necessarily ship bulk materials for that purpose across the country.
But once you've nailed it and dialed it in, doing it the second time, we expect it is quite a lot faster and easier. And so, that's something that we'll step through over the next 12 months.
Daniel Pearlstein
Okay, that's great. Thanks very much.
That’s it from me for now. Thank you.
Bruce Linton
Thanks.
Operator
Your next question comes from Vahan Ajamian from Beacon Securities. Your line is open.
Vahan Ajamian
A couple of quick questions. So, you mentioned that the consolidation of the three online stores into one, Tweed Main Street, an impact of about the first ten or so days of shipments in the quarter.
Is it possible to ballpark a dollar figure to the impact?
Bruce Linton
Tim might put that out there, but think of it as April having less volume of sales than March. And each month, we've ever operated seems to have been in continuous growth.
And it wasn't just that it was a merge of all the things. After it went live, you work through still some hiccups, so that it tuned in.
If you went to our site two weeks ago, even the image and the presentation of the product was less elegant than it is today. And so, I would say that probably all of April was not smooth and easy for orders, but there was really a specific window of ten days where it was impossible or not really a transactional platform.
Tim Saunders
That's exactly right. There were no customers being onboarded for those ten days, no orders being processed.
And then, when you introduce a new store, people being people, it just takes a while to figure in and figure out that they need to log in. How is it laid out?
So, I think that there were some days that followed as well that would have slowed the order process. But by the end of April, pretty much everybody was accustomed to how it was working, and so it was back in business.
Bruce Linton
Vahan, the key thing is, once the marketplace is built, it doesn't mean it's filled with goodies. And so, if you watched our store, as many people have – April, May, June – there were comments about the insufficient variety or things that people wouldn't want in terms of different strengths and formats.
We've been dialing that up and you'll notice now it is looking like a marketplace.
Vahan Ajamian
Yes. We have definitely seen the increase, especially on the Tweed banner of products that have been available over the last several weeks.
So, that's been great to see. So, I guess, there were two sort of structural issues that impacted sales this quarter.
The first being this new launch of Tweed Main Street we just talked about. And the second being Mettrum, obviously, not being fully up and running.
So, I guess, in terms of looking forward here, seems like most of these issues have been addressed. I guess the sequential increase in sales was about 8% this quarter.
It's historically been in the 20s. I don't know if we will get that high, but is it reasonable to expect an uptick this quarter and going forward relative to the 8%?
Bruce Linton
Yes. I think that you are going to find us having the variety that we do and now pushing again on patient acquisition, it should pick up.
And I would only temper that in that there is a lot of folks out there who really are aggressively looking for patients where we are trying to do a great job of serving them and have them tell other folks why they should come to us without getting too crazy on referral programs because I do think that could be a pressure in the sector.
Vahan Ajamian
Got you. And final question on R&D expenses.
It seems pretty low this quarter, $133,000. Is there a lot of a reclassification between what's R&D and what's SG&A or should we expect them to tick up or stay more or less here going forward?
Tim Saunders
No. I think it's always been in the sort of the range of hundreds of thousands of dollars as opposed to – it can fluctuate easily by $100,000 or $150,000 from quarter to quarter.
So, yeah, you're right, it's a little bit on the low side, but it's in the range of a couple hundred thousand worth. That's the typical run rate.
Bruce Linton
Yeah, and do remember that Canopy Health is now funded and operating as a separate entity. And so, much of the IP work in terms of both what we file patents against and how we pursue it is now being done under Canopy Health, which is not reported in the same fashion as it's a minority position.
Vahan Ajamian
Okay, thank you very much.
Bruce Linton
Thanks, guys.
Operator
Your next question comes from Neil Maruoka from Canaccord Genuity. Your line is open.
Neil Maruoka
Hi. Good morning, Bruce, Tim.
First question, just on some of the accounting changes. We know that when you're valuing biological assets to inventory, it's non-cash, but when revaluing to inventories sold, is there a cash component to that or is that all non-cash?
If, Tim, you can provide a breakdown of that line fair value changes to inventories sold. And then final question on that, similar to last quarter, did you have any revaluation of the Tweed Farms production in Q1?
Tim Saunders
No. So, the short answer on Q1 for Tweed Farms, no.
That was all a Q4 change. No, the way that it works with the inventory is that it's starting base for cost is the fair value of the plants when they are harvested and they get moved into inventory.
So, really all of that sort of starting point is the non-cash element. And then after that, [indiscernible] cash costs associated with all the post-harvest activities where there's the trimming, drying, processing, all of those things.
Those are all cash costs layered on top of it. And then, at the end of the day, then you do a – there is another valuation adjustment, sort of just the typical NRV adjustment where you compare against the sale price and consider discounts that might be provided, compassionate pricing that might be provided.
So, when you look at the inventory balance, its starting point has its origins in a fair value or non-cash approach. And then, as that inventory moves into – or gets sold, there is that fair value component that sits down below.
You'll see it here, the fair value changes in biological assets and inventory, the $11 million. That’s sort of the fair value component.
And then the cash component of that is up top in the inventory production cost, expensed to cost of sales. So that's where you split between cash and non-cash.
It was always hard to see before because we had just disclosed the inventory expense, which is both cash and non-cash. So, we did a lot of work and tried to carve that out and being responsive to people's ask for more clarity on the cash and non-cash pieces.
Neil Maruoka
Okay. And could you provide a breakdown of that fair value changes to inventory sold?
Tim Saunders
Well, the $11 million, you will see that comes off the balance sheet and into the income statement. So, in terms of the inventory, you were talking about what's on the balance sheet...
Neil Maruoka
No, no, just on the income statement.
Tim Saunders
Yeah, it's the $11 million. That's the non-cash fair value piece.
Neil Maruoka
Oh, non-cash, okay. Thank you for that.
And maybe just on your cash cost, they look very competitive this quarter. How well can you get this given your projected indoor versus greenhouse production ratio?
Tim Saunders
Well, I'd say it's – certainly, we're getting economies of scale, particularly you get to the – you'll get some fluctuation with the summer harvest at Tweed Farms, when you get probably the biggest harvest of the year. So, you'll see that and more coming out in September and also in the quarter – the third quarter ended December, you will see the impact of that.
So, we'll keep tweaking it. So, you'll see probably sequential improvements, but we've seen that now for the last four quarters.
Neil Maruoka
Okay, great, guys. Thanks for the color.
Tim Saunders
Okay, thanks.
Operator
Your next question comes from Jesse Pytlak from Cormark Securities. Your line is open.
Jesse Pytlak
Hey, good morning, guys.
Bruce Linton
Good morning.
Jesse Pytlak
Just kind of going back to the earlier commentary on how the focus for the first six months has been on building the platform and kind of stressing it. And so, now you're kind of in a phase of fine-tuning it.
So, just with respect to that, like, are you finding any gaps or shortcomings still that you need to further tune or kind of how comfortable where you are today with your platform?
Bruce Linton
Well, we spend all our time looking for gaps. So, as an example, the extraction equipment is now commissioned and running.
Now, what you want to do next is make it running 24 hours a day and you want to automate processes to reduce labor, pre-fulfillment. So, if we prepack all products, so that it prepared, so that if you order by 3:00, the target is to ship by 5:00.
We have steps now to automate the prepack, which reduces the labor demand by, say, eight headcounts. All of those things are in the implement tune mode or scale, but the base line is operational and it's how do we crank it up.
So, I would say we feel very good, but what we want is multiples of the throughput. But the baseline is working.
Jesse Pytlak
Okay, that's helpful. And then, I guess, just kind of turning to Germany, can you comment at all just how the market has been developing for you there?
Like how often are you shipping or are the ship volumes growing or kind of how that – what's the trend being with that?
Bruce Linton
So, the demand has been growing fairly rapidly since March 1, when material changes occurred there in terms of access for patients. Shipping, it should be more often, would be the way I would phrase it.
We are now catching up on which products are scheduled because you don't just ship anything you want. You have to ship what is a permitted product and the permitted product has a process.
The products have to be produced in the facilities which have been GMP reviewed or approved, which includes Smiths Falls for us and the farm. And so, I think you are going to see a little bit longer run on the import market in Germany because there is a bit of pushback right now on the second phase of the RFP, which was to happen in mid-September, maybe a bit later.
But we're liking what we're seeing. And Spectrum, as our brand evolution over there, would be the brand that we would use if we're permitted to grow.
Right now, we're shipping Tweed.
Jesse Pytlak
Okay, thank you. Those were my questions.
Operator
Your next question comes from Alan Brochstein from 420 Investor.
Alan Brochstein
Hey, guys.
Bruce Linton
Good morning, Alan.
Alan Brochstein
I think I'm going to start with Tim and then let you finish, if that's all right, Bruce.
Bruce Linton
Go ahead.
Alan Brochstein
So, Tim, you called out a lot of costs today that were kind of short term in nature or when we look at the company a year from now will be behind. And I just want to make sure I'm not missing any and wondering if you could just kind of just big – ballpark the overall costs that aren't really recurring.
And the ones that I heard you come up with were running facilities that aren't producing yet, Mettrum integration and getting Tweed Main Street up and running, but maybe international also.
Tim Saunders
Yeah. It's not so much the costs associated with the Tweed Main Street store or anything like that.
But, certainly, I talked about the $1.4 million that's included in that line inventory production cost expense. The $1.4 million is about $1 million of that really is more in the nature of one-time.
This is the reset for Mettrum with – you've got idle staff, non-productive, growing operations. The other costs, these are our pre-licensed applicants like Vert.
And the rTrees, for most of the quarter, was waiting for license, but they had only started growing operations in July after the quarter. So, those expenses just flowed through.
And they'll factor in as they start to produce flower and the like and become part of the normalized inventory production costs. But I wouldn't characterize that as non-recurring.
There is about $300,000 or so related to those operations. But then, otherwise, we continue to grow, but these are all investments, again, for the future.
This is for the long term, not just the next couple quarters. This is really trying to lay the foundation both on the sales, marketing and branding.
But in terms of the infrastructure too, supporting the scalability of the company, supporting operations coast to coast and internationally too. So, these will all continue to be foundational costs that we'll continue to incur.
Alan Brochstein
Okay. And then my second question is, are you able to kind of shed some insight on customer loss?
I understand you had a net gain, but between the downtime maybe on the Tweed Main Street platform as well as what's been going on with Mettrum, are you able to kind of break out the adds and the declines, at least not the exact number, but to the extent that that's going on?
Bruce Linton
There was definitely some churn. We should think about how we put that out there, but I would suggest it was principally on the Mettrum clients.
And a lot of communications in that front went into both informing them how the evolution was going and to make sure that when we switched to the Tweed Main Street, you'll notice on the left-hand side that we put a method to look at all products the same way as Mettrum was presented. So, the Spectrum applies as a way of selecting product across all products produced by any vendor.
And so, that was quite helpful in making them have available product which was similar in format or strength, but not necessarily produced in the Mettrum facility. So that was a driver on getting the marketplace up and going and keeping churn down.
Alan Brochstein
But the ten days of not being able to order for some people, would that result in losses?
Bruce Linton
Well, it made some people send me e-mails and call me. And our call center was busy.
But the effect is that once you are registered, there is a bit of stickiness there. And once you started coming back on, and as we built the inventory, people who went from disappointed but received communications, I think, are feeling pretty good about it.
And so, there was some churn, but certainly not a major step back.
Alan Brochstein
Okay. And then, my last question is kind of big picture question for you, Bruce.
And that is, you guys are definitely differentiated from the other large producers who didn't have – not the diversity in terms of both geography and indoor versus greenhouse. How do you see that playing out as the country moves towards legalization to your advantage?
Bruce Linton
Our constitution, unlike yours, actually describes [indiscernible] sales in it. And I think that you're going to find cannabis sales probably have a provincial bias to production in that province.
So, I think there'll be some advantage to us being a multi-jurisdictional producer. I also think that, when people want to buy a product, a big difference in what we're doing is we're moving through how do we make finished goods rather than ingredients.
And I think in Canada, dried cannabis as a sale point will – or sale item will probably be lower than in other jurisdictions. And so, I think our branding, our geographic access and quick shipping as well as maybe point of sale will probably be quite advantageous.
And the brands and the media – so Tweed is our forefront brand when we go to Quebec [ph]. That brand has been built quite strongly with the Medium [ph] engines and the associations with key actors.
So, we're preparing to have a big market share and we don't want to disappoint people by running out. So, the greenhouse part helps quite a lot on that and we are pushing hard to expand that as part of our platform as well as more indoor growth.
So, I would say stay tuned through the second half of 2017.
Alan Brochstein
All right. Thanks a lot, guys.
Operator
Your next question comes from Victor Bonilla from Carlson Capital. Your line is open.
Victor Bonilla
Hey, guys. Thanks for taking the question.
Bruce Linton
No problem.
Victor Bonilla
Just thinking about the balance sheet. So, there's about 65 million bucks of inventory against only 7 million bucks of inventory expense.
That's about 850 days of inventory. Why so much?
Is that related to the $11 million write-down this quarter? Thanks, guys.
Tim Saunders
No. Okay, so I will have to provide clarity here then.
So, that $11 million is not a write-down of inventory. This is just simply – under IFRS, the inventory expensed for this period would be in aggregate about $16 million – or $16.88 million to be precise.
And it combines both the $11 million that you see in the cost of sales, plus the majority of what is in the – up above in the inventory production cost expensed to cost of sales. So, there's no write-down in this quarter.
This is just simply the IFRS accounting for the fair value component of that inventory expensed. Likewise, on the inventory numbers, as I talked about earlier, the origins of the cost base for the inventory before, up to the harvest point, includes our fair value adjustments.
So, it's – there's two different things going on there. Just to be clear, there was no write-down in the quarter.
Bruce Linton
And maybe just – let's step one step back. Right now, what are there, maybe 175,000 patients in the medical system and a bunch of doctors who are really getting comfortable with the format of things like gel caps.
So, let's assume, by next year, at this time, the market for medical patients has maybe doubled, but also so-called 300,000 patients. Next year, at this time, they'll also be incremented with adults who cannot gain access maybe by coming directly to our store.
And what's that, 3 million people. So, the number of days of inventory changes quite differently if you think that there's maybe 3.3 million to 4 million potential customers, when currently there's 175,000.
And so, I wouldn't want to miss the fact that, if you put this product into certain states, it becomes highly stable and available for future sale.
Victor Bonilla
Got it. Thanks, guys.
Much appreciated.
Operator
Your next question comes from Jason Zandberg from PI Financial.
Bruce Linton
Good morning, Jason.
Victor Bonilla
Good morning. Just wanted to find out if I could get some details on the recent harvest at Tweed Farms just in terms of comparing and contrasting it to what you experienced the last harvest.
I know it's a different time of the year. So, obviously, there is going to be a yield difference based on that.
But just whether there was some, yeah, improvement on what the yields look like, what that THC volumes were, any sort of comparing and contrasting to that last harvest would be helpful.
Bruce Linton
Yes. So, the only comparator that you could do is winter on winter.
And I would say that we increasingly are, I would say, happy with how we are producing down there, in that we're managing everything from the humidity in winter or the porosity of the soil based on prior cycles. And so, each time feels like an improvement in comprehension of the building and the crop, and the output would reflect that.
And we are feeling and seeing the same despite a very humid summer in Ontario, unlike where you are. We are feeling that we are really dialing in the crop again this fall.
And I know those aren't exact numbers, but you're running a building where, each production cycle, you expect to see more and you see better. And I would say that it feels like the team is pull that that through.
I think you will see it in the store, if you look at the store. When you seeing products which are sun grown, you start to see the range of available product.
Victor Bonilla
Okay, okay. No, that's helpful.
But, I guess just generally you are seeing an improvement in every cycle with Tweed Farms in terms of – and I guess I realize that it's time of year dependent, but...
Bruce Linton
Greenhouses When you first get a greenhouse going, it is a new thing and a painful thing. That was several years ago.
I would suggest now we're getting much more comfortable with dialing things in. We have made some infrastructural changes, whether it is screens and controls on that.
It is now a managed environment and it feels like a process and platform that we like and would like more of.
Victor Bonilla
Okay. Well, that's great.
Thank you very much.
Operator
[Operator Instructions]. Your next question comes from Stefano Solma, private investor.
Your line is open.
Unidentified Analyst
Hi, Bruce. I'm just looking for -- I'm wondering, what is the current total licensed square footage?
Bruce Linton
Wow. So, let's just walk through.
A license gets allocated to an address. So, 1 Hershey Drive is the venue where we have our first license.
We are using about 168,000 currently, but we are constructing another – renovating another couple hundred thousand square feet at that facility. So, call that maybe 350,000, which either is licensed or can be licensed activities.
We added doubling the facility down in Bowmanville. Total number square feet, I'll have to scratch my head and think that through.
Bedrocan is about a 60,000-square-foot facility. We have another smallish one up in Creemore, which gets you tens of thousands, but it's on a large plot of land.
And so, we are working through how to expand that. The facility at the farm is about 340,000 square feet of glass and a processing building.
And it's on some land that you could add another couple hundred thousand square feet there. The facility in Saskatchewan is about, we will call it, a few tens of thousands built out that got the initial license.
But once you have a license, accelerating and expanding the balance of the building, it's quite sensible because it's an addition to a licensed capacity rather than an achievement. And so, you can imagine, that's a big push right now to think through how we take the whole building on which is, call it, 60,000-ish square feet.
And the one in Québec is a small facility that existed that we tuned up and put SOPs in, but it's on about, I am going to say, 90 acres, which could be built out to be larger. And then, we've announced about 140,000 square-foot-ish facility in Alberta that we brought the Goldman Group together with us and are moving through the application process and about a 50,000-ish square foot facility that could expand in Fredericton.
So, when you add that all up, you will pretty quickly get into the million-plus square feet current and/or soon.
Unidentified Analyst
Okay. Thank you so much.
And just to expand on that, are there any – are you guys looking into any other potential acquisitions or, from this point on, are you looking more to expand on the lands and licenses that you have such as, I believe, Mettrum. You have 20 acres of leased land with Mettrum?
Are you looking more at – yes.
Bruce Linton
I would say yes to both. So, we see everything that's for sale or could fit in.
So, we look at a bunch of things, but my eagerness to buy more upfront is modest. When we think of acquisitions now, it's about vertical integration.
And Canopy Rivers has pulled the trigger on a couple or a few of these, so that rather than acquiring the whole asset, you get the flow of product on a preferential basis for a portion of the output. And so, I think our activities of acquiring will be a bit, but more international growth.
You need acquisitions and more finished products. Things like devices might need acquisitions to get them into our portfolio.
Unidentified Analyst
Okay, thank you so much for the information, Bruce.
Bruce Linton
No problem.
Operator
At this time, we do not have any questions. I will turn the call over to Mr.
Bruce Linton for closing remarks.
Bruce Linton
Well, thank you, everybody. It was a congested morning for results and we'll manage that through, but I appreciate your time on the call and look forward to describing our tuning exercise as we go through the next quarter or two.
Bye.
Operator
This concludes Canopy Growth's first quarter fiscal 2018 financial results conference call. A replay of this conference call will be available until November 14, 2017 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.