Nov 14, 2017
Executives
Bruce Linton - Chairman and CEO Tim Saunders - Chief Financial Officer
Analysts
Jason Zandberg - PI Financial Daniel Pearlstein - Eight Capital Martin Landry - GMP Securities Vahan Ajamian - Beacon Securities Jesse Pytlak - Cormark Securities
Operator
Good morning. And welcome to Canopy Growth Second Quarter Fiscal 2018 Financial Results Conference Call.
Earlier this morning, Canopy Growth issued a news release announcing its financial results for the second quarter fiscal 2018 ended September 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. 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 this period management’s discussion and analysis document 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. Bruce, please go ahead.
Bruce Linton
Great. Thank you.
Good morning, everybody. So the way I like to approach this quarter is, I am going to leave as often the case much of the details and really all the narrative around the historic numbers to Tim, because it seems that with our company and maybe this sector generally, the subsequent events are greater than the prior period’s total events and our subsequent events, and what we did in the quarter really are to set up where we’re going.
So Tim will give a fulsome disclosure on that. What I want to focus on is, what we have done and where we are going, and where we are on track.
And so, as you look around our company now, events that I think signal that we are in the right spot and what we are doing is on the right track is, getting the historic first province MOU in place for supply for 2018. And I highlight that, there are a lot of other things I could have hit first, but a big part of what makes a prudential bureaucrat comfortable and -- or for my friends in U.S.
a state leader, is certainty and probably two things that they have enjoyed most in dealing with us, I think, is the fact that we have been able to deliver reasonably large quantities of product, have built an inventory capacity and have built and are expanding not just creating the platform. And so when you look at our expansion, we have kind of announced about 2.4 million square feet of indoor and greenhouse growing, much of which is an expansion on either in an existing location or existing practices, and so we could talk bureaucrats through the reasonable certainty that, whether it’s a big greenhouse in British Columbia at 1.3 million or expanding the one we have at Niagara or putting up a new facility of 160,000 square feet inside an existing building in Edmonton or adding an expansion at our facility in Smiths Falls of 300,000.
All of those are pretty certain events, which I think is quite helpful when dealing with bureaucrats who are quite anxious, eager, uncertain, active, all those words you might expect for bureaucrats on a marijuana file for 2018. And then, we take that and add some of the things that we have sort of wanted to highlight, which are international.
You’ll note that we’ve been the first company into Denmark and historically we’re also first company and the way we become the first company is starting early. So, Denmark, with our Spectrum Cannabis Denmark going, getting Alcaliber for the people who may not have encountered or check out Alcaliber.
They are one of the most substantial producer of alkaloids and they are looking at a migratory path that includes having cannabinoids as a production platform, so tying those up in Spain. And I can now say that I’m actually the Chairman of a marijuana company in Jamaica, which certainly should improve my perception as cool, because in Jamaica we’ve established our partnership there, which, frankly, has been a year plus process of selecting the right party, making sure that we are on the right track for the licenses, but getting that to where we want to be.
And so the international opportunities are now increasingly happening, but we are also linking in our division called Rivers. And Rivers was able to put up quite a lot of money over the quarter in Canada.
We see a way that they are going to be a key part of our expanding supply chain in Canada but increasingly a new part of our international play. And further delaying down track, we quietly worked away and have filed 27 patents now through Canopy Health, which is a separately focused and funded division, designed to create intellectual property and outcomes around true medical research involving cannabis, so that we can have an array of products, which are for sale through and by Canopy proper and the intellectual property is developed and resides inside Canopy Health.
So as we focused on one indication and got those patents out, the next wave is what we are working on and over the next year we’ll spend the money to put together the necessary research to be sure that those patents actually have our novelty and knowledge incorporated into them, so that we think they are defensible. And so the company, I think, is doing what we usually do, which is really just driving ahead looking out a year 12 months, 18 months and making sure we are doing the actions today that establish us as the continued leader.
And the quarter, it’s kind of odd to be nonchalant about more than doubling your revenue, having growth in every category, introducing new products with higher margins, but I’ll let Tim take over those historic, yet interesting items. So over to you Tim.
Tim Saunders
Thank you, Bruce, and good morning, everybody. To begin my remarks, I’ll briefly touch on the refilling of our annual statements for the year ended March 31, 2017 on SEDAR yesterday and which is also disclosed by way of press release after the close of financial markets.
The restatement accounted for firstly the understated value of the 11% interest that we have in AusCann Holdings, as well as the options that we also hold in AusCann. The adjusted fair value increased the investment by $18.3 million and the options by $5.7 million at March 31, and the value was previously carried and its cost base was nil, which was the consideration that we paid for that minority investment.
The AusCann investment is considered under IFRS as a category called available for sale, which is a financial asset in an IFRS term. In addition, the options are considered a derivative financial instrument that is measured and re-measured to its fair value at the end of each reporting period.
So background to that is prior to February 3, 2017, the AusCann shares didn’t have a quoted market value and the fair value of its equity interests and options in AusCann couldn’t be reliably measured. So the equity interest and the options were carried at the cost amount was nil.
In the quarter ended March 31, AusCann completed a capital reorganization became listed on the Australian Stock Exchange. And following the IPO, Canopy gross shares and options in AusCann were escrowed until February 3, 2019.
So we’ve gone back to account for it as an asset held for sale under IFRS, which is measuring and re-measuring its fair value at each period end. In addition of matter of housekeeping, we also adjusted for the immaterial non-cash change related to the valuation of biological assets at March 31 as we previously disclosed in the first quarter.
So as a result of these restatements, the company’s reported net loss was reduced or improved from $16.7 million to a net loss of $7.6 million for the year ended March 31, 2017. So I am now going to proceed with the review of the financial results in the second quarter.
Revenues in the second quarter, ended September 30th were $17.6 million, representing a sequential quarter-over-quarter increase of 11% that is compared to Q1 and 107% increase over the quarter ended September 30th last year. And the three months ended September 30th oils including Softgel capsules accounted for 18% of the reported revenue.
Revenue in the six months ended September 30th totaled $33.4 million, representing a 115% increase over the same period last year when revenues were $15.5 million. It’s worthwhile highlighting that revenues in the six months ended September 30th already equal 84% of the revenue generated in all of last year.
The total grams sold during the second quarter was 2,020 kilograms and kilogram equivalents at an average price of $7.99 per gram, up from 1,169 kilograms and kilogram equivalents at an average price of $7.01 per gram in the comparison quarter last year. In three months ended September 30th, oils, including Softgel caps, as I said accounted for 18% of the reported revenue for each period and the higher average rev price, average price was due primarily to the improved mix of oil products, including the Softgel capsules that we introduced late in the first quarter of fiscal 2018 this year.
Year-to-date, the company has sold approximately 3,850 kilograms at an average price of $7.98 per gram, as compared to 2,153 kilograms at an average price of $7.05 in the same period last year. Next, I’d like to speak to the weighted average cost per grams cultivated and sold.
The weighted average cost per gram is a supplemental non-GAAP measure and is described as to its basis on page four of the press release and in the MD&A. Canopy Growth’s weighted average cost per gram is comprised of first, the cost of harvest, which include all of the cash operating costs, including principally growing labor, utilities such as hydro and water, grow nutrients, rents and allocated overheads.
Second, the post-harvest costs consist of cash operating costs related to the production of value added products, including cannabis oils and Softgel capsules. Post-harvest costs also include cash operating costs associated with trimming, mailing, drying, lab services and testing, and allocated overheads.
And lastly, our shipping and fulfillment costs consist of cash costs related to expedited carrier delivery to patients where applicable and royalties paid under licensing agreements to product and brand partners including Leafs By Snoop and DNA Genetics. Shipping and fulfillment also includes cash operating costs associated with labor for pre-packaging and dispensing and order fulfillment and shipping along with package materials such as bottles, boxes, labels and also over -- allocated overheads.
So getting to the numbers, in the second quarter of fiscal 2018, the weighted average cost per gram to the point of harvest was $0.72 as compared to $0.99 in the same period last year, representing a decrease of 27%. The decrease in costs to the point of harvest is due in part to operating efficiencies from adding 12 additional grow rooms, representing 100% increase in the flowery space at Smith Falls, now all operational and overall plant yields are up.
The second quarter of fiscal 2018 is the fifth consecutive quarter, when the cost to 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, including high-quality indoor production, as well as greenhouse production, and we may see further optimization as increasing percentages of each facility are brought online and efficiencies are fully realized.
In the second quarter fiscal 2018, the weighted average cost per gram during post-harvest include -- including cash costs related to the production of cannabis oils and Softgel capsules was $0.53 as compared to $0.71 in the second quarter of last year, representing a decrease of 25%. The decrease in post-harvest costs is due in part to gains in the efficiency of oil extraction, resulting from the use of the custom built industrial scale CO2 Super Critical extraction machine that was commissioned in the -- at the end of the first quarter in fiscal 2018, as well as efficiencies gained through other post production activities such as trimming and drying.
In the second quarter fiscal 2018, the weighted average cost per gram for shipping and fulfillment cost was a $1.48, as compared to the $1.01 in the same quarter last year. The increase in shipping fulfillment costs during the second quarter was due to higher investments in packaging, delivery and overall experience excellence since last year, investments that we see is key differentiators to the customer experience and affinity for the brands.
Next, I’ll briefly discuss the gross margin. The second quarter gross margin before the fair value effects of the IFRS accounting for biological assets and inventory was $10.1 million or 57% of sales, as compared to $5.1 million or 60% of sales in the second quarter last year.
The lower gross margin percentage was due primarily to the impact of a $700,000 write down and Hemp-based inventory due to the discontinuation of product lines and a $400,000 charge due to idle grow operations at the Creemore location while being reset under Canopy direction. Excluding these effects and the costs associated with non-cultivating subsidiaries totaling $1.8 million, the gross margin before the fair value impacts and costs sales would have been $11.9 million or 68% of revenue.
In the six-month period ended September 30th, gross margin before the effects of the IFRS fair value accounting through biological assets and inventory was $19.1 million and 57% of revenue, as compared to $9.3 million last year and 60% of revenue for the same period. Adjusting for similar exclusions that’s previously described, totaling $3.2 million year-to-date, the gross margin would have been $22.3 million or 67% of revenue.
Now turning for the moment operating expenses for the second quarter, sales and marketing expenses for the second quarter were $7.6 million or 43% of revenue. These costs include investments made in staffing and resourcing the marketing and sales functions needed in coming regulated recreational and international markets, costs associated with the company’s medical outreach program and the growing customer care center, which interfaces directly with the company’s growing base for customers.
Since September of last year, the number of customers has grown from over 24,000 to over 63,000 at September 30, 2017. Year-to-date, the sales and marking expenses were $14 billion or 42% of revenue.
Comparison sales and marketing expenses were $5.1 million or 33% of revenue in the six months last year. G&A expenses in the second quarter were $8.4 million or 48% of revenue.
These costs include investments in governance and supporting corporate infrastructure as we build the company, and more specifically, include higher accounting, legal and professional services fees of $2.2 million related to supporting those governance programs, as well as business development activities. In comparison, G&A expenses were $4 billion or 47% of revenue in the three months ended September 30, 2016.
Year-to-date, G&A was $15.9 million or 48% of revenue, compared to $6.9 million or 40% of revenue in the same period last year. Stock-based comp, depreciation and amortization, all non-cash expenses were approximately $11.2 million and $4 million, respectively in the quarter ended September 30th.
As a result of all of the above, in the second quarter of fiscal 2018, we recorded a loss from operations of $1.0 million and after income tax expense the company reported a net loss of $1.6 million or 1% -- $0.01 per basic and diluted share. This compares to net income of $5.4 million or $0.05 per basic and diluted share in the same period last year.
Year-to-date, we recorded our loss from operations of $5.4 million and after income tax expense and other fair value changes in the financial assets related to the -- primarily to the options on AusCann, the company reported a net loss of $10.8 million or $0.07 per basic and diluted share. This compares to net income of $1.5 million or $1 million, sorry, $1.5 million or $0.01 for basic and diluted share in the same six-month period last year.
Now I’ll talk to the non-GAAP measure adjusted EBITDA. Adjusted EBITDA, as the operator mentioned, is defined in the press release and MD&A.
Essentially it’s the income from operations reported before the interest and tax and also adjusted for moving other non-cash items identified in the P&L and the cash flows, as well as removing the effects of the acquisition related costs. Adjusted EBITDA in the second quarter of fiscal 2018 amounted to a loss of $6.2 million, as compared to an adjusted EBITDA loss of $1.9 million in the same quarter last year.
For the six months ended, the company’s adjusted EBITDA was a loss of $11.3 million, compared to an adjusted EBITDA loss of $3.2 million in the same six-month period last year. The higher adjusted loss relative to last year was due to the investments we made as described earlier in our corporate infrastructure, operations, marketing, sales and functions and to build -- building for the kind of company we’re going to be heading into calendar 2018.
As well as the other -- there are other costs that were identified earlier, that is cost associated with Creemore facility being idle for much of the quarter and to Hemp write-off of $700,000. We believe our deliberate and ongoing investment building the company’s production platform, brands, international reach, partnerships and operations, which directly impacted our net earnings and adjusted EBITDA during the period is necessary to strengthen the company’s global leadership position heading into next year.
Now turning your attention to the balance sheet and cash flows, at September 30th the company’s cash, comprised of cash equivalents was $108.2 million, representing an increase of $6.4 million since last year end. The increase is attributable to the combined net proceeds from a $25 million private placement, common share issuance that was completed in July, as well as Canopy Rivers’ first quarter private placement of approximately $36 million and the exercise of options and warrants mostly offset by cash used to fund operations, investments and facility enhancements totaling $25.5 million and investments made in and through affiliates totaling $13.4 million.
Investments and facility enhancements were primarily improvements at our Smiths Falls facility including the expansion into the rest of the building for future capacity and capability. Also the previous announced expansion on Niagara-on-the-Lake and construction at Bowmanville, Ontario, as well as an initial outlays for the Fredericton, New Brunswick and Edmonton, Alberta locations, as well as a deepening enhancements in our information technology capability.
Inventory at September 30th amounted to $73.3 million, up from $46 million at March 31 and the biological assets were $23.5 million, up from $14.7 million at the end of last fiscal year. Together, inventory and biological assets totaled $97 million, up from $60.7 million at the end of year end and the inventories, as Bruce talked about, everything scaled to ensure sufficient supply for the expected market demand especially coming from the provinces.
At September 30th, the company held 12,064 kilograms of dry cannabis and 2,683 liters of cannabis oils, ranging from concentrated resins or refined oil to finished oil. Including the dry cannabis quantities were 1,677 kilos available for sale in the company’s online stores, 3,355 kilograms in process of finishing or waiting approval for sale and 7,030 kilos of extract-grade cannabis held for conversion to salable oils and capsules.
So, Bruce, this concludes my review of the financials for second quarter and I’ll hand it back to you.
Bruce Linton
Great. Thanks, Tim.
And I’ll ask to open it up for questions.
Operator
[Operator Instructions] And your first question comes from the line of Jason Zandberg with PI Financial. Your line is open.
Jason Zandberg
Good morning, guys.
Bruce Linton
Good morning, Jason.
Jason Zandberg
I just wanted to, lot to go over here just -- and I don’t want to hog the floor too long. But just -- I wanted to first of all just talk about the upcoming rec market and provincial supply agreement.
So, we’ve seen you were successful in New Brunswick with getting a supply agreement there. Just wondering if, in that situation, the province looked upon those that were investing and supplying product from within the province, I am just wondering if that tends to be the same viewpoint from other provinces that you’ve spoken with in terms of having that local supply, given that Canopy, you guys are spread out throughout the country and are well-positioned for that, I was wondering if that is a key negotiating part to dealing with the provinces on rec?
Bruce Linton
So I would say it varies by province, probably New Brunswick has been…
Jason Zandberg
Yes.
Bruce Linton
… the fastest to establish that, I would say similar to many European geographies, this is not actually about marijuana production, it’s about economic outcomes, it’s about job generation and so in that province is a factor. I would say uniform across all the provincial discussions we’re engaged in is making sure you have the product that there is certainty that the product will be available, because they’re signing up to a commitment of you will get me this much and you’ll have some flexibility in format, but it has to be here.
And so job creation and embarrassment wouldn’t work, but it is a factor and I would say it’s more of a factor in the smaller provinces. So, I think, will be a helpful checkbox, but it isn’t the first thing we’ll look at.
Jason Zandberg
Okay. No.
Perfect. As well, do you have an estimate in terms of your capacity at the launch of rec, it’s -- like let’s assume it’s July 2018, do you have an idea what your capacity would be at that point in time?
Bruce Linton
We haven’t put it out there, but assume inside the place that for, since day one we’ve run construction review meetings, run these with think of Gantt charts and budgets, and delivery dates, and that we’ve amped up that capability year-on-year, so that now for every site we look at a schedule delivery obligations who is contracted for them and when the first day we expect to have product in for each site that we’re building out. And so because we’ve done enough builds, we’re pretty comfortable that we know how to deliver it on time and the effect of that is that that we can -- we think we can make a very big hit in each of the provinces that are going to commit and I know that’s not a specific thing, but look at the number of sites we built, bringing the first greenhouse on.
We acquired a greenhouse in Niagara. I believe it was the 18th of June or 19th of June and we had plans going in on the 11th of August.
The site had no fencing, no security and no approvals other than it had been proposed as a site and so I think we have a pretty strong history on both construction and meeting the criteria, and so I would expect with all those numbers of expanded square feet, we have a plan that they are going to be contributing for the 2018 window.
Jason Zandberg
Okay. Perfect.
And last question, I just wanted to ask you about those gel caps. It seems to be a strong category within the oils component.
I know when I was visiting Smith Falls, back in September, it’s a -- it seem like you could -- you couldn’t ship it out fast enough. I just wanted to get some color in terms of what you -- what you’ve seen since launching gel caps and what do you expect going forward?
Bruce Linton
Yeah. So gel caps is the a category.
I think we are the ones who have launched what I would call is a Softgel cap created in a GMP 1 environment, so you can get it to a different category of dosage and structure and delivery, and definitely strong demand. Part of our capital plan is we expect to see quite a lot more of that.
So we’re lined up on how to produce those. Where we see them taking up, I think you know, there’s a question of which clients do you migrate or patients do you migrate versus those detailed today by our physician reps who the first time they buy cannabis it is a gel cap.
And so you’ll probably find there is a higher adoption rate as new clients come into a portfolio and probably similar formats for the adult access than when you have already a base of people -- customer buying a certain style of product. But the demand and the margin and it’s like everything, where we’re going is to take the plant as an ingredient and turn it into a finished good, because you move from a cost plus to multiples on margin and that’s our path for every category.
Jason Zandberg
Okay. Perfect.
I’ll turn the floor over.
Operator
Your next question comes from line of Daniel Pearlstein with Eight Capital. Your line is open.
Daniel Pearlstein
Hey. Good morning, guys.
Thanks for taking my call. Let’s start-off again a little bit more on the provinces.
Can you talk about some of the logistics needed to be prepared for next summer, working in coordination with them, with the liquor boards, across multiple different provinces, can you give us a bit of a flavor over what needs to happen between now and being ready?
Bruce Linton
Yeah. And it’s interesting, Daniel, because, I am going to give you the best answer I can without fully informing others in the sector what they are not doing.
But what you’ll find is, these provincial authorities tend to have very specific and structured IT system that are not the same, but well-structured in each of the provinces from their liquor experience. And so whether or not they’re going to warehouse have us drop-ship to specific locations, they can have a combination of fulfillment options, which you need to make sure your IT system can plug into and that your inventory control system can actually reflect to the provincial buyers, what’s in the vault and what they can buy.
And so there is no uniform method in the country, other than I would say, you need to have an advanced platform capability and you need to be able to make sure that, if you’ve made allocations within your inventory control system, you actually have the ability to partition or effectively schedule your incoming growth finished products to replace products that get moved to different provinces, so you maintain your obligation of fulfillment. And so it’s a bit more like running a very advanced airport where the initial business we are in is much more about the production-only side and getting it to finished goods and making sure it is shipped to the right person.
I would say the off-take process is going to be way more complicated than our current system and you have to thought about that.
Daniel Pearlstein
Yeah. Okay.
That sounds great. Appreciate it.
Secondly, can you comment on some of the branding and marketing rules, as well as the suggestions suggested by a group of LPs, I believe it was last week. Can you talk about what was new or what some highlights were or some takeaways and how that may solve some misconceptions in the market about how the LPs will be able to brand and advertise?
Bruce Linton
Yeah. So I don’t believe we were overly allowed voice many of the LP groups.
You are describing where we are in interacting with the regulators over the last year-and-half, two years since change the government is the expectation is that the point-of-sale, there will be a ability to have the name brand on the product, details about the product and contact information on the product. Now that’s the point-of-sales, depending on the province, you will also have things that are advertising tear sheets.
So that the customer can make an informed decision and recognize the brand that they want to select and return to if they got what they wanted. And the reason they need to do that is if we all throw in the Ziploc bag, put it behind the counter or may be in somebody’s puffy coat, we’re not too different than the black market.
And so, I think, you’re going to find slight regional variances. Some of the provinces we’ve interacted with our way out there and what they like to enable.
And I think that this is a first day, first position, but it’s going to give the customer the ability as an adult to be informed before they go in the store, bought a name they like, see that brand, buy that brand, but it’s not going to have 25 color hippy-dippy packaging. It’s not going to be super appealing to kids.
It’s going to be informative to an adult. And that I think you’ll find that that’s a pretty good starting point and we’re quite well for the brands we’ve built out and that it will get more open over time as more different products come in.
Daniel Pearlstein
Okay. Great.
Thanks. That’s it for me for now.
I appreciate that.
Bruce Linton
Thank you.
Operator
Your next question comes from the line of Martin Landry with GMP Securities. Your line is open.
Martin Landry
Hi. Good morning, Bruce and Tim.
Bruce Linton
Good morning.
Tim Saunders
Good morning.
Martin Landry
The -- my first question is again on capacity, it would be very helpful if you can help us understand with precise numbers where you are in terms of capacity. I know that you’ve harvested around 4,000 kilos this quarter?
And if you could walk us through a little bit how that capacity is going to evolve to the opening of the rec market that that would be super helpful, because there’s a lot of moving parts here that makes us -- makes it hard for us to just really pin down a number?
Bruce Linton
Tim, do you want to tackle a bit where we had the harvest from and then I’ll explain what -- where we are with the various projects in the different geographies in terms of that the platform we have that’s expanding.
Tim Saunders
Look, I mean, yeah, principally the harvest in the quarter when the 12 additional grows, the 24 rooms now fully operating at Smiths Falls, that was a big part of it. The Tweed Farms harvest of course what happened after September 30th hadn’t started quite yet, so that was happening in the third quarter, which we’re currently in.
But also the Bowmanville also back up and running, remember if you are -- it was in idle mode during a good part of the first quarter, part of the fourth quarter. So between Bowmanville back and running, and 24 grows being harvested, that’s where it all came from.
Bruce Linton
Right. And what we have Martin is, we began to harvest now as the quarter ended for the first harvest out of our Saskatchewan facility.
We have -- during the quarter made the acquisition of the adjacent property in Niagara-on-the-Lake, which has a short fuse towards turning a portion of that building over to a production expansion. And we have a substantially moving through completion 220,000 greenhouse expansion at that site at the back of our current greenhouse.
So, those we would expect to see begin to be ready for approval and then product going in, in call it calendar Q1. And as we look east, we’re in demolition and evolution of the site in Fredericton.
We have our Québec site awaiting approval. So it’s essentially done and inspectors have been through we kind of open the mail every day, wondering if the approval’s in there, so that’s one at that stage.
As we go west beyond Saskatchewan, we’ve gone through the process of designing and electrical upgrades in the works for the Edmonton site and we have a pretty aggressive plan on the British Columbia one, so that it can have assuming we execute properly, plants in early 2018 would be our target for that one. So really what you’re seeing is current platform in Smiths Falls cranking up substantially, the one in the former Mettrum site up and sort of running fully now and expanded and then a whole bunch of stuff that we think falls into Q -- calendar Q4 for the farm, Q1 starts to see stuff with the other sites.
Martin Landry
Okay. Okay.
Any chance you can give us some sort of a range of production that you hope to have once the rec opens up.
Bruce Linton
Well, I think, the last number the Health Canada, which was quite some time ago had rated us that was about 31,000 kilograms, 32,000 kilograms. And I can’t even say how historic that number might be, but many, many months.
So we’re starting with that base. And the intent had been and it’s been stated before that we would expect to be sort of triple that as we get to the start of the second half of next year as sort of a baseline minimum and as you would observe, we’ve historically not been big on making grandiose commitments but just delivering.
Martin Landry
Okay. Okay.
Well, that’s a number to start with so thank you for that. Second question is on the patients at quarter end, we saw a big jump in your patient number in Q4 from Q3, but in Q1 and Q2, it looks like the growth has slowed down a little bit.
Is this what you are seeing in the market, are medical patients growth, is the number slowing down a little bit from what we have seen historically?
Bruce Linton
I think it’s slowing a little bit, but I also find that through our Mettrum acquisition we ended up with some range of clinics and we had services revenues from those clinics, because we found there were -- there are parties out there who would pay more to get a patient in this window than we think is reasonable in terms of referral fee. So, I think, we’re finding is there are a number of parties out there including ones that really had a heavy load from that and some others that are absolutely doing all they can to put something up on the Board today and they’re engaging in a process that in my opinion, well, frankly just to understand why would you be so aggressive to put a number up unless you just need a financing or something of that nature.
So we could have stomped on the gas and probably push another $2 million or $3 million onto the revenue line. But under a model it strikes me is irresponsible versus having an increasing inventory and a reasonable approach to business and so it’s a bit slower, a bit tighter and there’s a bit of irrational effort to get clients out there.
Martin Landry
Okay.
Bruce Linton
In my opinion.
Martin Landry
Yeah. I am sorry, I may have missed it, but do you have exports during the quarter?
Bruce Linton
Yeah. We had -- in Germany we had some sales.
Frankly the rate at which the German demand has grown has been pretty aggressive. So we’ve sort of reallocated and aligned some product that was for Q3 into these markets and we would expect to push more through.
There’s been an ongoing extension of activities in some geographies to try and get our fees done and so that just means that the domestic supply is further out than was anticipated. So we’re just kind of, okay, let’s move a bit more over to there, and I think, you’ll see that in the coming quarters.
Martin Landry
Okay. And a last question for me, in terms of your sales mix, oil extracts and gel caps were18% of your sales, it was stable or maybe just a little down sequentially, any reason or should we expect that proportion to move up over time, I mean, is that what you anticipate?
Bruce Linton
Yeah. I think, as a percentage, it was about the same 17%, 18%, but on a much bigger number.
And I think, you’re going to keep seeing formats evolve up and the percentage of sales, and I’d be completely shocked if we’re on a call about a year from now, where we’re not talking about the whole sector having a much higher ratio of that sort of finished product and just right cannabis. And at the end of the day, it’s -- if you want to have someone purchase a gel cap, often it helps the physician who they see has been detailed about the product and that there are packaging and branding opportunities around it.
And so, there is an initial onset of, oh, my god, there’s something new, I’m going to try it, I’m going to buy it, but the sustained growth really relates to our program and we get that we’ve been running that program now for about two quarters of education on these products.
Martin Landry
Okay. Thank you very much.
Operator
Your next question comes from the line of Vahan Ajamian with Beacon Securities. Your line is open.
Vahan Ajamian
Hi. Good morning.
A couple of questions, first off, in terms of inventory management, how do you allocate your inventory between satisfying your patients today, which I imagine is your top priority but then making sure you have blocks of inventory available come July 2018, will you have to take your foot off the gas a little bit on acquiring new patients for the next six months, seven months to make sure you have those blocks available for the rec market?
Bruce Linton
So, in Q, I think, October very substantial, very satisfied with the grow plan at the farm. So we have, I think, that’s the fourth year, we’ve done a fall, grow and harvest.
And each year you get probably twice as good as you were before as far as how you use labor the quality of the plant. So I think you’re going to see a substantial expected inventory coming out of that.
I don’t believe we’re going to have to do anything other than kind of what we’re doing, which is acquire patients in a normal business model, which keeps going ahead and then more detailing we do on doctors, the more I think will come our way, because gel caps are not all equivalent. We’ve told the market every medical patient, who is our customer on July 1st will have access to the products that they seek and need.
So it’s a priority market. It’s a right thing to do.
But it’s also a good business thing to do and so we’re doing that. So we don’t feel any pressure to take our foot off that detailing program.
For what we need for the provinces, I have kind of mentioned a couple of times, we have the platform and it’s a pretty predictable construction platform. We are using a lot of the same constructors or methods that we’ve used over the last four years.
So we know schedule. I expect that we’re going to be able to deliver really strongly for what the provinces want and seems that they have pretty good expectations of us.
Vahan Ajamian
Got you. Okay.
And question on the Hemp-based inventory write down discontinuing product lines. Can you just give an update on the Hemp business overall, where the outlook is for that?
Bruce Linton
Yes. So we have focused -- we bought a couple of different Hemp businesses and put them together.
We put them together under a really, I think, capable individual. And what we focused on is, what we think could happen in the legislation, how many hectors of land do we currently control, what products and formats we have and where the margin points.
And so what we’ve moved our focus to is, where the margin is or will be, which means you’re not making as many little crunch bars that in my opinion taste delicious, but in the market’s opinion, yield of margin isn’t practical. And so, where we’re moving to are or have moved to, are certain inventories and certain products that have a complicated sales channel, which are filled with other people who like to make simple food products to much more sophisticated and high margin targets.
And because what we’re doing is private, in a separate division, we don’t give out all the details, but assume that we have had a pretty thoughtful strategy on Hemp for over a year, we wouldn’t be putting those pieces together.
Vahan Ajamian
Right.
Bruce Linton
And now it seems to be fully realigned with what we want to do.
Vahan Ajamian
And on another kind of unusual item at Creemore, is that up and running now or is it still idle in the process of being rebooted or…
Bruce Linton
It’s up and cleaned up and running. It is a small site.
So it doesn’t currently show a material value as far as inventory. But we think it has a strategic fit.
It’s sort of a -- when you look at some of the things that we do with some of the other assets, how you work with them is more important than just running in a straight line and so, we continue to look at the small sites as areas in which we could probably create some better value than just running four growers or eight growers in it.
Vahan Ajamian
Right.
Bruce Linton
But we are we are doing that now. So you can go up to Creemore and take the 15 minutes and have the whole tour.
Vahan Ajamian
Yeah. Perfect.
Thank you. And it looks like some people are reporting that there should be some news coming out from Québec, possibly as early as tomorrow, I mean, any intel you can provide on what the province might do and where it sits currently?
Bruce Linton
So I mentioned that we were -- we’re satisfied that we’ve done everything at the site in order to be eligible for a license, so now we wait for it. As far as predicting provinces, not good politics for us if we’re interacting with provinces and pushing our agenda, we of course think that’s what they should do.
They don’t always do exactly what we want. So I wouldn’t want to misstep on that.
Vahan Ajamian
Got you.
Bruce Linton
I assume I should clarify for others on line that, in order to get what you want, you usually have started about a year and a half early. So when we entered Germany as a big surprise that we were the first to export there, we have been working on that a year and a half and so part of the reason we have a couple of people in government relations and have had for some time is, you need to have a point of interaction.
It’s the same reason as we announced having a Chief Marketing Officer coming over instead of staying and maybe doing the same at Molson and building his team here. These things with provinces, brands, they all need soak time and I wish it could be faster, but I find that it’s at least 12 months and often 18 months to get kind of where you want to go.
Vahan Ajamian
Right. Okay.
And you gave some good color on where your production might be come the start of rec sales in July. But I’m just thinking even sort of longer term, given that JV announced in British Columbia about a month or so ago, based on only the projects that have been announced, once they are complete, is there a sense of what your ultimate capacity would be I guess in Canada?
Bruce Linton
Yeah. We are -- I think it’s better for you.
I don’t want to take the tension off the trade by giving guidance, whether that’s exact numbers of revenue or platform, but we’ve given you square feet and you’ll start to see what comes out of the greenhouse as a harvest once. Some of the things we’re doing in the other greenhouses include, mixing some portions with curtains and lights, and some portions without.
So you’ll be able to make an estimate which is obviously intended to be much greater than the amount I put out there. Don’t overlook the fact that Rivers.
Our investment vehicle has really been active investing and that that turns into typically one-third of the assets that they go into if they’re producing asset, that stream comes through our store and let the CraftGrow is going to be bigger and bigger, because I think you’re going to find that, there’s two or three companies in the sector that aren’t for sale and that there’s a whole bunch in the mid-pack that it have to be for sale. And that the small guys will be able to operate efficiently as long as they’re an entrepreneurial in the building and they probably won’t want to have a point-of-sale that allows them to upload a lot of the obligations of dealing with the complicated IT, et cetera that you described.
And so, I think, the growth platform has multiple threads for us and we like those bets placed early.
Vahan Ajamian
Excellent. Thank you very much.
Bruce Linton
Thanks.
Operator
[Operator Instructions] And your next question comes from the line of Jesse Pytlak with Cormark Securities. Your line is open.
Jesse Pytlak
Hey. Good morning, guys.
Just kind of coming back to the provincial framework and retail distribution, can you maybe share your thoughts a bit on how you think like the supply contracts might look in some of the different provinces and just kind of our shelf space might be allocated?
Bruce Linton
Yeah. I think you’re going to find it varies quite a lot of province to province.
But I imagine you have the job of being the, I’ll call it, bureaucratic position of making it happen. You kind of make choices and they are all about risk and downside production.
So I think that they’re going to need to have core shelf space covered by one or two parties who can actually supply it and then they’ll cobble together probably at a differential rates not preferential rates, small suppliers into the portions that are available. And the reason they are going to do that at least for the first two years and we’re not all that interested in working with somebody on a one year basis, because I think what’s going to happen is, in the first two years if you structure the deals right, you can probably have a pretty nice structure for selling very simple products.
And then you have to recognize that over the next two years, if you’re thinking about running a business for two years, which is kind of we’d like to be here for many years, over the next two years what’s going to happen after adult access happens is the sophistication of the products is going to increase, for sure. And I don’t care if you call it edibles, ingestibles or drinkables.
Those are going to be available, [ph] I think, capable (45:41) and I expect the medical market to double again and again, because there are medical outcomes that we achieve. And so on the combination of those items, what I think you’re going to find is that, you can make deals with provinces that cover you off for two years, give them shelf space certainty and that you implement new products over the time that have much higher margins, and that as the provinces want in the third year a better take the product actually has better sharing capabilities.
And so, part of the reason I was quite excited to work with Constellation was that, I thought were regulated everywhere in this country by the people who regulate alcohol, not by the people who regulate grocery sales and I think that those parties are going to be quite more comfortable with a liquid structured product than they are with necessarily a gummy bear. And so, all that to say, I think, you have to look at it is layers and waves and probabilities of the evolution of the product and margin and if you’re big enough to help secure the first coverage, you probably have a nice play going forward.
Jesse Pytlak
All right. That’s great color.
And then just a quick question for Tim, just in terms of the weighted average cost per gram metric, can you kind of maybe talk a bit about the shipping and fulfillment expense, and kind of what are the major components of that number and what could maybe drive quarterly fluctuations and your ability to lower the longer term?
Tim Saunders
Yeah. I think probably the biggest part of it is, I think, with the packaging materials that we put in, they are -- if you have seen our boxes like the Leafs By Snoop and DNA Genetics, and well, pretty much all of the brands there, a lot of thought has gone into them in terms of the presentation.
If you keep in mind relative to last year Leafs By Snoop was only introduced in October of 2016, so you didn’t see that kind of presentation. So that was one of the biggest things.
We have also made improvements as well on the shipping and fulfillment activities themselves, but at the same time, it’s packaging that’s probably driving most of that increase. So in a way it’s -- you could consider it like a marketing expense but is otherwise going to cost of sales.
Jesse Pytlak
Okay. That’s it.
Bruce Linton
Even if the packaging, it’s kind of more simple in the second half of ‘18, having on people’s shelves and on social media if they wish to share, they are really awesome packaging of today, I think, it’s going to have some very nice residual value.
Tim Saunders
With brand affinity and such, yeah.
Jesse Pytlak
All right. Thanks guys.
Operator
I would now like to turn the call back over to Mr. Bruce Linton for closing remarks.
Bruce Linton
Well, thank you, everyone. And I anticipated incorrectly a bunch of questions about a partner we’ve -- a relationship we’ve established.
So I guess you all got enough news on that. So we’ll let everyone get to work and thank you for your time.
Operator
This concludes Canopy Growth second quarter fiscal 2018 financial results conference call. A replay of this conference call will be available until February 13, 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. Good-bye.