Canopy Growth Corp (CGC) 2017 Q2 法說會逐字稿

Good morning and welcome to Canopy Growth's second-quarter FY17 financial results conference call. Earlier this morning Canopy Growth issued a news release announcing its financial results for the second quarter of FY17, ended September 30, 2016. This news release will be available on Canopy Growth's website and filed on SEDAR. On this morning's conference call, we have Bruce Linton Canopy Growth's Chairman and Chief Executive Officer; and Tim Saunders, Canopy Growth's Chief Financial Officer.

(Operator Instructions)

Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the Company's annual information form, and other public filings that are made available on SEDAR.

During this conference call, Canopy Growth will refer to adjusted product contribution. Adjusted product contribution does not have any standardized meaning prescribed by IFRS. Adjusted product contribution is defined in the press release issued earlier today, as well as in this period's 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)

Thank you. I would now like to turn the meeting over to Bruce Linton. Bruce, please go ahead.

Great, thank you. Good morning, all. I think I just want to start with a thank you to Tim, he will be speaking after me.

But this is our first quarter on the TSX, which means a shortened reporting time. And as you can see, we've been busy growing the Company but we also have put in infrastructure, if you will, and capacity to both comply with the TSX and be ready to expand our reporting capabilities, so thank you to Tim and the Board.

So this is the ninth consecutive quarter where we have had double-digit revenue growth. CAD8.5 million of revenue, is above the 23% increase over what we had in the prior quarter, and I'm sure you will note that we got to that interesting milestone, where we have sold over one ton of cannabis.

And in the quarter, we saw a harvest which was 1,700 kilograms, and it does not reflect the harvest which is the subsequent event in the current quarter from the farm, and we actually on this current period, are harvesting the entire farm. In the prior periods there were only a spring harvest for the farm, for a small portion. So lots of evolution and change.

We launched some of our new products that people have gone to the store may have noticed. DNA Genetics is one of our breeding partners, so we put out a product in the Tweed shop called Lemon Skunk, which is certified, and it is at a CAD12 per gram price point. Good reviews.

And in a subsequent event, people may have noted that we assisted Snoop Dogg in celebrating his birthday in Toronto, and hosting him at our greenhouse in the following day. Really, that was a effort to continue to grow the brand of Tweed, and position it for what where we think is a pretty interesting and soon market as far as recreational access.

What we have also done is we have grown our patient count, and it seems to be something that we are growing it on a systematized basis, so when we look internally, when we will consider the number of persons required to support the growth in patient count, it's decreasing over time. And it's really just a function of creating software applications, and controls and processes.

And for the people who are covering the sector, I continue to believe that everything that we are doing now will have interesting metrics, whether it's patient count or kilograms sold, or total shipments made. But really we are still in the stretching exercise process of creating companies that are going to have the scalability to handle what's coming next.

And so for the analysts, I pity the job you have to do, which is a predictive model for a sector which is growing at an unpredictable rate, for companies such as ours which are looking to be substantial at this year, next year, and the following year. But those shapes and curves and activities and geographic location, frankly are evolving as quickly as each quarter goes through.

And so you saw that in our activity in Germany, where we were the first Canadian Company to export to Germany. Germany is going to be a very interesting market. I can't say when or how, but it is opening up. They are looking at the Canadian regulatory framework, and they are viewing it as a good one. And so I think being a leader in that space will help.

You also saw, I'll call it a recent acquisition in Quebec. I think everybody will recognize that Canada is going to have a multi-brand multi-regional market.

You'll recall that the name of the Company is Canopy, and Canopy is a terrific place under which to place brands. And so the expression of those brands needs to reach the target of Canada, which is quite geographically and linguistically distributed. So I think that one is going to be a nice step forward.

We been working with the Vert Group since August, so we are well in the process of security clearances, and the necessary steps to take our standard operating procedures and key personnel to move that application forward, I think, in a reasonably structured and fast way.

Just a couple more points before I hand it to Tim. With the Goldman Group, we made an announcement that was, we have a financial partner that's quite interested to acquire properties with us. It won't be our only process of acquisition of properties, but it gives us a option for a very steady source of capital, which also has a construction expertise. So while it will be entirely non-dilutive to shareholders as we acquire more, it should be far less costly, more efficient, if we can find the right target properties to acquire with the Goldman Group.

And briefly you will note, that there is a couple expense comments related to Brazil. Brazil is one of the markets that I continue to be surprised we're hearing so little about. It's frankly true that anyone who's ever opened a corporation in Brazil will have found that to be substantially challenging.

I can assure opening the first cannabis Company in Brazil was more so, but it's done. And we have hosted a variety of very interesting parties from Brazil, that I think are going to shape policy and opportunity, and see that as a growth point over the next year or two that probably should be on people's radar.

So with that, I'll turned over to Tim, so we can get through some of his steps, and return to questions.

Thank you, Bruce, and good morning, everyone. So revenues in the second quarter ended September 30 were CAD8.5 million, representing a sequential quarter-over-quarter increase of 22%, and a 240% increase over the quarter ended June 30. Sorry, September 30 last year.

Revenue in the six months ended September 30, 2016 totaled CAD15.5 million, as compared to CAD4.2 million in the same period last year. As Bruce noted just a moment ago, Canopy Growth for the first time shipped more than one metric ton in the quarter. The total grams sold during the second quarter was 1,169 kilograms and kilogram equivalents, at an average price of CAD7.01 per gram, up from 984 kilograms and kilogram equivalents, which were at an average price of CAD7.09 in the first quarter of this fiscal year, and up from 319 kilograms sold during the three-month period ended September 30, 2015, when it was at an average price of CAD7.54 per gram.

So a slight reduction in average price was due to the proportion of Bedrocan sales, which sold its products at CAD5 per gram, and since just before quarter end, the selling price of Bedrocan dried product was increased to CAD6.75 per gram for new and renewing customers. It's worthwhile highlighting that the total products sold in the second quarter is almost 70% of what we sold in the entire FY16. Year to date, the Company has sold approximately 2,153 kilograms and kilogram equivalents at a price of CAD7.05, compared to 535 kilograms at an average price of CAD7.62 per gram in the same period last year.

Next, I'll briefly discuss the reported gross margin in three-month period ended September 30. The reported gross margin, inclusive of the IFRS non-cash gain on biological assets was CAD15.8 million or 186% of revenue, and in the comparative period of September 30 last year, the gross margin same basis was CAD9.4 million, or 383% of revenue. Again, this includes all of the non-cash IFRS accounting for the inventories of biological assets. Last year's second quarter gross margin was inclusive of a CAD12.5 million non-cash gain on the biological assets.

Now turning to a moment to our supplemental non-GAAP measure that we use here in the Company called adjusted product contribution. And as a reminder, the adjusted product contribution adjusts the reported gross margin to remove the fair value measurements required by IFRS, and instead measures the weighted average cash of grams produced, harvested, and sold, against the grams that were sold in the period. On this basis, with a weighted average cost per gram of CAD2.77 per gram, the adjusted product contribution in the second quarter of FY17 was CAD5.3 million or 62% of revenue.

In the comparative period last year, the adjusted product contribution was CAD1.5 million or 62% of revenue, with a weighted average cost per gram of CAD2.92 in the second quarter of last year. And year to date, the adjusted product contribution was CAD9.6 million or 62% of revenue, and in comparison, the adjusted product contribution for the same period last year was CAD2.6 million or 61% of revenue. The details are provided in the schedule to the press release, and the MD&A.

Next, turning for a moment to operating expenses for the second quarter. Sales and marketing expenses for the second quarter of FY17 ended September 30 were CAD2.8 million or 33% of revenue, compared to CAD900,000 last year, or 35% of revenue in that period.

The increase in sales and marketing expenses in the second quarter over last year was due in part to the addition of operations of Bedrocan Canada. As you recall, we acquired Bedrocan at the end of August, so last year, only one month of operations were included in that quarter, whereas now we have the burden of the full quarter.

In addition sales and marketing expenses included non-cash share-based compensation of CAD300,000 related to the previously-issued escrowed shares, as well as the increased patient support and medical outreach costs, all directly attributable to the increase in patient growth. At this point, it's worthwhile reflecting too, that the patient group has gone from 6,200 at September 30 last year, to 24,400.

G&A expenses were CAD4 million or 47% of revenue in the three-month period ended September 30, and that compares to CAD2.2 million or 91% of revenue in the same period last year. So the increase in G&A over the same period last year was due in part to the operations of Bedrocan Canada for a full quarter as opposed to one-month last year. Also, fees directly related to the graduation to the TSX, higher audit and professional fees, and also the initial costs of launching the Brazilian operations, which Bruce just spoke about. In addition, there were certain costs associated with restructuring certain parts of the Company.

Stock-based compensation, depreciation, and amortization are both non-cash expenses, of course and they each were approximately CAD1 million in that quarter. As a result of all of the above, the second quarter ended September 30, that we recorded income from operations of CAD6.1 million, and after income tax expense, the Company reported GAAP net income of CAD5.4 million or CAD0.05 per basic and diluted share. That compares to the net income of CAD3.9 million or 6% per basic share, and CAD0.05 diluted same period last year.

Year to date, we have recorded income from operations of CAD2 million. After income tax expense, the Company reported net income of CAD1.5 million or CAD0.01 per basic and diluted share, that's year to date. And that compares to net income of CAD4.9 million or CAD0.09 per basic share and CAD0.07 per diluted share in the same period last year.

Now turning our attention to the balance sheet and cash flows, the Company's cash was CAD45.4 million, representing an increase of CAD30 million from March 31, our year-end. The increase was attributable to the combined net proceeds from the April and August block deals, as well as the exercise options and warrants together, totaling a net CAD44.2 million, as well as a second debt round of debt financing to result in proceeds of CAD3.5 million, partially offset by cash used to fund our operations and investments in facility enhancements, primarily Smiths Falls, amounting to CAD8.7 million.

The assets on our balance sheet at September 30 included inventory valued at CAD27.6 million, up from CAD22 million at March 31, and biological assets of CAD13.7 million, up from CAD5.3 million at March 31. These biological assets are really attributable to the full use of the Tweed Farms, which I remind everybody is at 350,000 square feet.

The plants occupy the entire greenhouse, and are all in the later stage of their growth cycle at the quarter end. The harvested plants arrive to inventories in the quarter, and the quantities are being maintained to expect strain availability and the expected growing demand for oils.

Bruce, this concludes my review of the financials for the second quarter.

Thanks, Tim. Let's open up for questions, because frankly that's the portion I thoroughly enjoy the most. So please, operator, if there are questions let's begin them.

(Operator Instructions)

Martin Landry from GMP Securities.

Bruce, wondering, would you be able to tell us how much, or what's the proportion of products sold that was coming from the greenhouse this quarter?

I'll let Tim hit it, if there's an exact number, of which is going to be a very small number, just so that everybody on the call gets the cycle. We run currently three grow cycles per year at the greenhouse. The one which was harvested in April was where we were only growing in 10% of the facility, because it was still the stretching exercise for that facility.

Then in the spring-summer we put plants into 100% of the facility, so going from call it 36,000 square feet to 350,000 square feet of plants. And those plants, the harvest process for those plants is in, they just finished three days ago, and so all of that conversion from biological assets happened after the quarter and the product would be available for sale late in the current quarter, and all of Q1 from the greenhouse.

So Tim I don't know if you have a breakout number if you want to share it. But from a cycle, it would be very little, because frankly, the ability to transfer what we harvested in April for sale had a process, because everything has a process, and that right to transfer the harvest from April didn't even occur, to my current recollection, in the quarter.

Bruce, that's exactly right. The proportion is rather small in the quarter. We really will see the benefit of product coming out of the Farm, as I said, at the end of this quarter and into the next quarter.

We had, at the end of September 30, a greenhouse full. In total the biological assets had an expected yield of about 4,400 kilos, so that's a lot of product coming in to the pipeline in the latter part of this quarter and next.

So almost zero, if not zero, Martin. And that would be changing through this quarter and for sure Q1.

Okay. So almost nothing from the greenhouse, but I mean, it seems like the big kicker to your margin will happen when you sell your crop, when you're greenhouse is at full capacity. And from the sound of it, that may not even be the case in the Q3; is that correct?

Yes, so in Q3, the harvest is complete, and it's not a single harvest. So the process with Health Canada is each grouping is called a lot. Each lot can be tested and released independent of the others, so they are harvested in a sequential order. So we expect in the next days or weeks to have our first lots being up from the Farm, and available for sale.

So you will see some of that in Q3. Part of it, I think what you are driving to is the GM. Much of what we're doing now, and I always think about everybody's models that they generate, much of what we are doing now is, yes, it's about being a very substantial platform in Canada. It's about prepping and positioning for rack, and it's about international.

And so I would look at the margin, the GM, more on an annualized basis, based on what you see coming out of the end of this quarter, and for sure Q1. Because we are now planning a minimum of three full cycles a year of the greenhouse, which will mean that we will have a much better blend of that product into our offering, but we wanted to have traction of quality product, before we went to volume.

Okay. So does that mean that, or were you constrained on product availability during the quarter?

So part of what we had was we put a big push on Bedrocan to get that facility up and into utilization. So people recall that we made a press release and dropped the price to CAD5 a gram. Had such things as same-day shipping if you paid a premium in the GTA, and that really did get a response.

But now what we have made, we evolved that, so anybody who was signed up to CAD5 a gram can stay on at CAD5 a gram for the duration of their medical access permit. But in the quarter, we announced that the price is going to CAD6 a gram.

So there was a mix of sales which reflected the fact that when you are willing to deliver marijuana that's legal in Toronto for CAD5 a gram plus shipping same day, you start to get your platform fully utilized. And so we started moving up utilization of that. I think you will start to see over the next quarter and quarters, a more balanced mix of the brands represented, and the products and the price points.

Okay, that's helpful. Thank you.

Jason Zandberg from PI Financial.

I wanted to drill down a little bit on the Tweed Farms harvest, as well. Just any initial metrics, in terms of yield per plant on that current harvest?

So it's much of it's still in the drying, Tim has created a model in IFRS. I don't know, Tim, if you wish to give a generalized number. I will caution that the grams per plant is very different for each harvest, so in the fall harvest, we might have 1/10 of the plants with 8 to 10 times the number of grams per plant. In the winter, we will have a higher multiple of plants but a lower yield. So Tim, I don't know if you want to share the modeling number that we use for the Farm for the fall harvest?

Yes I think it is helpful, because it helps also to understand the magnitude of the gain on the biological assets. So the range is fairly broad, but on average, the average yield per plant is 750 grams per plant, so quite significant. That's a big change from the indoor grow yields that we seen.

Okay, great. And if I could ask one more question. Just, you mentioned your sales of your CAD5 and now CAD6 per gram, what about --?

It's actually CAD6.75, actually.

I wanted to get an idea in terms of your sales profile of your more premium strains, the CAD12 strains. Are we -- are you seeing some good demand on that side, or is that still relatively minor in your overall scheme?

So in Q2, there really wasn't much of that available, and the beginning of Q3 when we launched some of Snoop's brands, I would suggest they created the worst day in the history of our shipping department, because the response was pretty strong. And I think you're going to find the point of the exercise with Lemon Skunk, for example, with DNA, is to create a product which has both a branded and quality appeal that will attract those premium prices.

And so with the launch of those products, we are seeing a strong response from the current customer base for those premium branded products. And some of them will start coming out of the Farm, because this crop has some strains which really did yield, and produce a quality of product that should be a premium, as well.

Okay, so we will see more of that in the coming quarter?

Yes, what you are finding is this is a sector that the product mix, the price mix is going to keep evolving every quarter. I think that everybody who is looking at a model should contemplate that as there's increasing demand, there is going to be probably more price support. And that for the last two years what we've been trying to do is educate a sufficient number of physicians so that the population of the patient count can keep growing. But with every article that shows up in the newspaper, a lot more people figure out that there's a path to access.

And so I think this whole sector is changing in a bunch of ways inside it, and it's a function of validation from -- it seems bizarre, but the credibility media provides. So I do think you'll see the product mix, the positioning of the product mix, it really starts to look a lot more like you would expect out of the consumer packaged goods range of offering, versus what started off as a pretty restricted perspective of medical offering.

Okay great. That's great.

Daniel Pearlstein from Dundee Capital Markets.

Okay, I'll start off just on patients and doctors, more medical, and what's going on now. What new products are desired by either of these groups for wider spread adoption, and what feedback are you getting in this medical environment, before we focus on rec too much?

So format is increasingly relevant, and what I mean by that is there's an interest of things like gel capsules and dosage based vaporization, if that was a permissible structure, so the doctors can actually get an understanding of milligrams per milliliter when consumed under certain structured programs, so they can actually measure against indication and efficacy. And so we are well down the path on creating a gel capsule structure that would enable us to sort of move into that.

I think generally, the medical sector probably still experiences some question as to what is going to be rec, and what is going to be medical, and how the formats change. We saw the announcement in the quarter, after the quarter, about Shoppers. But I think most parties who are going to do medical want to see things that can either be a topical, gel capsules, really structured not to look at all like what it began with, which was we are only allowed to sell dry cannabis flowers. So that evolutionary path, I think is moving quite quickly, and it's really often right now at the hands of Health Canada, which to whether or not they will let you approve format, more than whether or not the market or the doctors want it.

Got you. Okay, thank you. And then more on I guess the recreational front.

Can you comment on how -- anything new commentary that you are hearing from the government of the task force, and how they view being ready for recreational sales, and how that relates to your expansion efforts overall? And even in different provinces, as it relates to different distribution

So we are still operating on the assumption if you're a liberal and you want to run for reelection, this has to happen, and it has to happen with enough window of operation to validate the model, so that when they run for reelection, there hasn't been a sale that took place as the first sale the day before the election. So we are still operating on the assumption that they'll need at least a year of this being implemented in some range of provinces.

Now, the range of provinces, the debate about whether or not it's LCBO, or how trees will be handled, seems to be dying down. And for the most part, the big question is really on branding and positioning. So part of the benefit of having staked Tweed as a brand and a position early is, we have no idea whether or not there will a white paper package or bottle that only has the stylized name of the producer. If that's the case, I think we will do quite well with the Tweed brand.

Or if it's going to be a bit more like liquor distribution. So how restrictive the guidelines are on how you can brand yourself is one open question. The other, and there's been an awful lot of input from our part, is on formats of product.

And so what I mean by that is vape pens as an example. Clearly that is a terrific piece of business for the illegal producers. If we are allowed to make that because it fits medically and recreationally, that's a big piece of business for us. And so the tension on the trade is always, whatever we don't do, the bad guys will keep doing.

So you can imagine the frequency of input is high. Whether or not we win that debate, I think will come down to a bunch of inputs and decisions, but it feels like we are on the right side of the argument.

Okay, that sounds great. Thanks, guys that's it for me right now.

Alan Brochstein from 420 Investor.

Bruce, Tim, how are you doing?

Great, and this proves that we did in fact fix our queuing process, because Alan is this time allowed to ask a question.

That, also you improved my family life because you didn't host this on the US Thanksgiving day, so I appreciate that.

First in three years, and I did think of that.

I appreciate it, I know it was for me. Speaking of the US versus Canada, any update on US listing, now that you've listed in Canada? And also, as part of that, your symbol was supposed to change to WEED; any update on that?

So, a couple things. Tim and his team, we implemented July 1, NetSuite, as a finance ERP system. Got that up and running, and tidied up. As you can imagine the TSX considerations for signing off took a bit of work.

I'm not particularly interested in crossing over and formalizing some OTC, and we have not begun anything on it, but I do believe that we would qualify for a more quality listing, which would probably be a good investigation topic in the new year, in the US. Because frankly, it doesn't matter that MassRoots gets excluded, the criteria by which they were excluded I don't believe applies to us as a fully legal operator from a foreign jurisdiction.

As far as changing the ticker, much rumored, quite likely, and timing is to be determined. And frankly, it's a function that the TSX is moving to, and enabling four-letter symbols, and it just seems that if anybody should have the ticker WEED under what's going on, on a global basis, it would likely make sense to be us.

There you go. In a follow-up question, previously you were involved in litigation with Peace Naturals. Can you provide any update on that?

Yes, so we were able to resolve part of that with -- Peace Naturals is owned by PharmaCan, in my mind, but they have a new name which I continuously forget.

Cronos Group.

Cronos Group. And we resolved one of the two items outstanding, and have established a good working relationship with them, in that they were a small part holder of Vert. And so we each put a press release out on the occasion of that closing, to reflect that we were evolving that. And so there is one outstanding item, but that cuts to half the items.

Can you clarify which is the outstanding item?

Yes, so there was two items. One was related to some genetic materials that were part of an acquisition when we acquired MedCann Access, and that one has been resolved. And it's been resolved I think as a specific word, not dropped. And the second one is where, prior to our acquisition of MedCann Access, they thought they were going to become part of Peace, and when that didn't occur, the founders began an action, which we inherited.

Got it. Okay thank you. I'll jump back in queue.

Mason Brown from MPartners.

Just had one question. I was wondering if you could, I noticed that you provided the revenue breakdown on oils, so thanks for that. I was wondering if you could provide any color on the average selling price you're seeing for oil, and what margins you're currently running at?

So Tim will backfill a couple of specifics but on a philosophy basis, when you convert a cannabis flower into an oil, all you've done is changed the format. You haven't really added a great deal of value. So our approach was to capture the incremental costs and a small amount of incremental margin, but preserve the goodwill with clients, such that when we actually do the steps which should generate more margin, whether it's putting it into a gel capsule or filling a vape cartridge or mixing it with some kind of liquid fraction, on those occasions the margin of the oils will increase, because it reflects a change in state and function. So Tim may want to give you a specific breakdown, but it really wasn't viewed as a chance to jam a customer group just because you did a service that had functionally more value -- no more value than that service.

Yes, that's exactly right, Bruce. We haven't premium build -- or factored in the pricing for the oils, so it's just marginally higher than what the margin might be on a dry pod sale. The sales price, we sell them in 100 milliliter bottles, the equivalent about 10 grams per bottle. These were for prescription purposes and the bottles range in price from about CAD110 to CAD185, depending on the particular strain. Margin wise, it's just slightly higher, but not significantly so.

Okay great, thanks.

Noel Atkinson from Clarus Securities.

I was wondering if you could talk about, on page 17 of MD&A, there's a mention down near bottom of the page it relates to an expected yield of 4,419 kilos. Could you explain what that is? Is that just Niagara-on-the-Lake, or is that for the whole operation?

Yes, so this is Tim. This would respect-- these numbers are all consolidated, so it would be reflective of everything both at Smith Falls at Bedrocan in Toronto, as well as the Farm. So that's the entire expected yield from all three locations.

And over what time period?

Well to harvest, at the point of harvest. So it depends, like the average, I think on average, I think it's around 55% the growth stage, so you are looking at -- during this quarter coming up, the Farm, the plants were probably 85%, 90% at their maturity stage.

Okay, so I shouldn't be taking the 4,400 kilos mentioned at the greenhouse, and saying that's your total?

No. No this is just I hate to intervene on the super topic of IFRS biological assets, but Tim, I think that is a notional number, calculated by a bunch of percentages of the achieved finished date for plants.

Correct.

So in other places, actually you can imagine our license amendments with Health Canada don't use IFRS, but use other logic, that actually reflects the expected yields.

And then secondly, on your wholesale shipment, were there any wholesale shipments in the quarter?

Just the shipment to Germany. In July.

To no other LPs in the quarter?

Not to my recollection, despite the fact that there were numerous inquiries.

All right, thank you.

Jason Zandberg from PI Financial.

Just a follow-up question. I just wanted to find out, you track patients pretty closely, and your number has grown quite a bit. I wanted to know if you've seen any change in terms of prescribing doctors, in terms of numbers, in terms of geographic. Any change in terms of profile of doctors in this last quarter?

So there's two groups of doctors, right? There are the ones which have been through CMEs and they may be your physician or my physician, and so on average, we see a fairly substantial difference between a general physician or a physician not in a clinic type operation, where the duration of the script is much longer, and the quantity per day is often higher. So there's that division.

Where we have historically seen a lot more in Quebec, we are seeing some more activity in the western provinces, and part of the reason we moved on Vert is, Quebec has been a really idled market, which our view is that some of the necessary things such as trials are in place, and we think Quebec is probably over the next short to midterm, one of the growth provinces, relative to others that began much more organized. So really the two types of doctors, and I'd keep on eye on Quebec.

Perfect. Thanks very much.

(Operator Instructions)

Chuck Krangle, Private Investor.

Just a quick question. One, have you noticed any -- I want to say patient decrease, due to lack of product? Just wondering about that, and then I have a follow-up question.

So people always like to see a variety of medium to high THC at reasonable or low prices, and so we cycle in and out of what we have available. I wouldn't say that it turns into attraction or repulsion, but more happy or less happy. And as long as you can keep coming up with the cycles, which frankly part of the reason we are internally excited about the Farm, is it happened to be a terrific year for growing, and it will mean the shelves will be pretty full for the winter.

Okay. And quick follow-up question, Martin and you guys answered most of them. Given that now the greenhouse has been fully approved, and you have had a full crop with the full greenhouse, do you expect really to have any product or lack of product issues going forward?

So greenhouses and indoor grows go well together, and so that everybody gets the picture on our platform, what we have is three locations. The greenhouse runs three cycles. The fall crop is always a tricky one, because you're really battling humidity. It turns out this year we had a very low humidity cycle, and a really terrific growing window.

Then we will grow a winter crop there, which frankly is quite small plants that yield really tidy nice product, because there are very few competitors. Inside of Smiths Falls, we had been running with 12 rooms, we just got another 2.5 approved, and we have another 12 that are scheduled to be released for production in January. And so, in Smiths Falls, in about a six-month period, we expect to about double the output of that platform. And so those are the two real expansion points.

The Quebec opportunity we are working through to get a license. It has a small facility that would be followed by a build-out of a fairly large indoor facility, and so the platform seems like it's continuing to increase in step with, or sometimes just almost in step with the demand, and that's really because we began about three or four years ago, with some substantial assets that you just have to fill in all the necessary steps you can produce.

Okay, great. Thanks.

(Operator Instructions)

Alan Brochstein from 420 Investor.

Thanks for taking the follow-up. I had a question about just bigger picture, some analysts have tried to get around this, but your cost of production, because of the indoor facility, is higher than it's going to be ultimately. Are you able to give a projection on what your cost per gram would be coming out of the greenhouse?

I won't put a number on it, but I'll let you have the input so you can calculate. There are three types of structures for growing. There's the indoor, which you've all become familiar with, and that is a function of scale. So at Smiths Falls, we have I'll call it 168,000, 170,000 square feet, but we had been using 12 rooms of what we will ultimately become about 39. And so you can imagine your can caring additional overheads until you fill in that space, and I mentioned how we are filling in.

At the Farm the cost really isn't driven by per gram -- percentage utilization as much as the method, and so there, we have very low draw fans, we have louvered windows which are consistent with the Dutch growing style, and we harvest CO2 from the boilers. And so when you are growing product there, unless you have to buy municipal water, you harvest the rainwater.

And so our input costs are sunshine, water to be mixed for nutrients or nutrients as required, and a low draw for electricity, and then a trimming process, which we have honed to be quite low, in terms of cost per gram, across the indoor treated facility in there. So how much does it cost per gram on a full platform, to grow products in the sun, with vented windows, and trimming that's really efficient? And the number you will come to isn't going to be a very large one, I bet.

Okay. Something to think about. And one other issue is you are investing very heavily to build up market share. I understand that. You have communicated it very clearly. But with the move towards legal, and the uncertainty about what distribution is going to look like, are you concerned at all that this is a sunk cost that may not have a long duration to the benefits?

I think market share right now is, it's really more about brand awareness, and so our market share I would more correlate to if someone walked into a legal point of sale in 2018, there is a reasonable probability that they will know Tweed's brand above anyone else's. And if we provision the products into that well-known brand, they represent, whether it's a combination of formats or Snoop's and DNA's, I think what we are really doing, market share is almost product of brand building.

Not that it's the purpose of market share, but it's just an indication that it's working. So I don't think it's a sunk cost, I think the risk really is, if you don't do it now, and they open with a restricted market, and you try to build a brand inside those restrictions, I suspect it will be very difficult rather than having establish what we've established.

And earlier, you said that you see two different scenarios. One where the worst case is that the Tweed name will go on there. A better case would be that a lot more detail. But is there actually any scenario that's possible where even the name Tweed would not be on the product?

I suspect any scenario is possible, but typically even on cigarette sales, you need to be able to identify a brand, and I think the policy framework is going to be more similar to alcohol than it is tobacco. But customers need to be able to identify from whom did they purchase it, and if they had inquiries about the product, who do they contact? So I don't think we are going back to Glad Baggies Ziploced up. we are going to have things that are in proper presentation formats, where at least where the producer's name as a minimum. That frankly will look pretty well for us, and I expect it will be more open than that.

All right. Thanks a lot, Bruce.

(Operator Instructions)

Martin Landry from GMP Securities.

Just one last one for me. Touching on your partnership with the Goldman Group. Wondering when would you expect the next facility to be built by Goldman, and how much -- how many facilities you think you are looking at for the next five years with them?

Oh my gosh, Martin five years. So we've been tripling or more than that our output every year since we started, and I think that model should continue for 2017. So why? You've seen that the budgetary office indications of numbers, and we all know that there's a substantial market with an under-supply. We have looked at, I think, I spoke to Murray yesterday, I think we've looked at 30 or he's looked at 30 buildings across Canada as possible acquisition targets.

And while he won't be our sole source of acquisition, nor will he exclusively cover every item necessary to build the facility, he would and has made to date a terrific landlord. And so I think we will pull the trigger before 2017 is out on something that can begin a process of becoming a licensed facility. No certainty, but we are doing the work now because Health Canada has a process, and they will still have a process, I think, under any form of act as to control the supply chain. And what you begin now, you might hope to see some benefit from in 9 to 12 months, in terms of new locations, not expanding our current locations. That goes much quicker.

Okay. So you would be looking at new facilities, new locations, new licenses with the Goldman Group?

Yes, and to be clear, they do own one of our locations, which we believe has the capacity to expand. We are working through that process right now for the Bedrocan facility.

Okay. Thank you very much.

[Graham Kirkland], private investor.

Could you please clarify which countries you are doing business in? And may have -- looks like it's probable that you will do business in, imminently going forward. And secondly, could you clarify what Snoop Dogg actually does for or with the Company? I know he's got good branding strength, but? Thank you.

Yes, okay. Sure. We only go where it's federally legal, which is still not America. So federally legal does include places like Germany and Brazil. There are other countries on those maps, but I'm not going to identify prospects, I'll identify the ones where we have announced where we've either exported to, or have a partnership or licensed approach pursuit.

So that is Brazil and Germany. And those were intentional, in that I think if you wanted to play into the EU or South America, those are probably two good starting points. And we are following a process that, despite being perhaps in Portuguese or German, has an awful lot of central similarity in our view to that Canada implemented about five years ago.

What does Snoop Dogg do? A lot more now, that he's been to the Farm. When I say that, we have a branding relationship with him. We appreciated how we operated and he was providing things such as Lease by Snoop, which is his branded product.

The way the operation is, such that he has built a brand, he has an identified expertise as far as cannabis goes, and an active social media world. So when his product is available, people seem to seek it out. And for that, there is a I'll call it a royalty type relationship, which appears to be beneficial to both parties.

Having been to the Farm and observed our methods, he's a very knowledgeable guy about medical access, and really, I felt, took a much brighter and bigger view of how we operate after a couple of Fridays ago visit. And so I think that relationship is strong now, and has the potential to be more, because he understands how we credibly produce.

So he is like the Oprah for your business?

He is one of the actors which signals to people who are pretty interested in cannabis that we are probably doing a terrific job. And there are other folks from different celebrity positions that can do that, but he's the best one to bring in first and signal to the market. Recall, it was February of last year when we brought him on. At that time, it was considered quite shocking, and now it seems like interesting, but maybe just a good idea.

Okay, am I mistaken in believing there was some possible business that was going to be done with Australia?

So we have a 15% stake, which was granted to us in Australia. We have not invested any capital to date in a Company called AusCann, and we assist them with certain guidance around standard operating procedures, as they evolve the licensing regime in Australia, and I sit on their Board of Directors. I like the business, like the space, but frankly, it's pretty far away from Canada, and it's not a huge market. So I suspect our participation will really be with AusCann more than directly in the near-term.

Thank you.

Noel Atkinson from Clarus Securities.

Two quick follow-ups. I wondered if you could provide the split of the harvest in the September quarter between Smiths Falls and Bedrocan, if Niagara-on-the-Lake didn't provide very much?

Tim, do you want to comment to that? I don't know how far we want to get into reporting on it, but certainly we've covered the fact there is none out of the Farm.

Yes, that's right. We are not splitting up the harvest in each location, but predominantly between Smiths Falls and Bedrocan.

Okay, and secondly could you talk to supply in the ACM PR market overall? Are you seeing shortages across the industry? Or you mentioned that you had LPs interested in buying wholesale from you.

Yes, I think supply is tight, and I think supply will continuously be tight, as we go through 2017 and 2018. And the simple reason is that each evolution of format increases the number of supporters for the product, and there's a substantial lag on the control process of expanding the platform. So we field calls inbound. I don't really think you're going to see any of the supply constraints change in the short term.

Okay, thanks very much.

[Tina Walker], a private investor.

Congratulations, everything is just so awesome, I can't believe how well you've done in the last couple of months. It's really remarkable. I have two quick questions, and I won't hold you up. Firstly, a lot of it's already been addressed this morning with respect to Germany, but I'm wondering do you have a standing order with them? Are you shipping to them quarterly, do you have a regular order that you send out to them, and do you know what their sales are like?

Yes, Germany has just come on stream a little bit more, if you will. So I think there's about 1,000 patients, and the process is that our partner takes the product, receives it in either a bulk or package format, and then redirects it to pharmacies in Germany. And that process seems to be gaining traction. So that's the now.

The next is that Germany is being pretty orderly, and I would expect Germany to continue being orderly, which means that they will take imports for a while, and then they will expect to create a supply chain in their own country. And they will expect to create medical evidenced-based claims, so that if it's going to be part of socialized medicine, it has a reason you get it, not just a process.

So I think with, what, they have about 82 million people, Germany is probably a pretty good spot to watch. But don't rush to expect something super exciting say in November or December. But 2017 should be sort of us stepping up for the country, and I think if you do well in Germany, your ability to represent yourself in the European Union, is stronger than if you went in through other doors to the EU.

Okay, thank you. My next question is with respect to Snoop, and I know that he's been wonderful for marketing for us, and I know that he has previously changed his identity to Snoop Lion at one time. Do you think you'd consider using Snoop Unicorn?

Yes, maybe Unicorn, maybe Snoop Tweed, we really haven't gotten into that chat with him, but I think the Dogg part is working pretty well, but maybe we will try him on for the Unicorn when I see him next in LA.

I think Unicorn would be the way to go, considering your most recent article in the National Post.

No, thanks. And the market cap, I was genuine with the National Post in that achieving any level of market cap only has relevance in that it allows us to look at new parties to work with and new projects to take on, which keep creating, I'll call it more durability to the business. Because I don't think anybody wants us to be the very best farmer with no intention of vertically integrating all of the products and the branding and the scientific evidence. And so our business is not about trading on earnings per share, it's about creating a real and deep and broad business.

Well it looks like you are off to a head start. Congratulations. Thanks for taking my call, have a great day.

Chris Damas from BCMI Research.

Bruce, could you ever envision organized license producers in the sunbelt of California all the way to Nevada now, producing and exporting to Canada? And you think Trump's election actually just reduced those chances, given federal legalization is diminished?

So what I'm happy about is that I suspect there's going to be a bit more chaos for a bit longer time in America, which allows us to get a bit bigger, a bit stronger, a bit more intellectual property, patents, trademarks, all these sorts of things. And if and when America opens up, if it's medical, I want to have the evidence necessary to sustain differentiated business, but I really, looking in the tea leaves, I don't see America becoming federally organized for a broad-based program in the next short-term.

Who knows, but I didn't hear it as the top 79 priority items from Mr. Trump. I think Bernie was the only person who spoke specifically to the topic, and so I think you're going to see state-by-state, and that means no federal protections on the intellectual property like patents and trademarks, and it means a lot a fractioned environments.

How much marijuana do you think they sell in the Pacific Coast?

Giant amounts.

More than estimated 28 tons a year here?

I got one call that said do you think that there's going to be a huge volume change in California, now that it's going to be legally available? Have you been to Venice Beach and observed the guy dancing in the green furry outfit who is --

He's still there?

He's still there. It's $44 to get a license. Do you think there is going to be a massive change in access? I don't know anybody in California who wants cannabis who doesn't already have access to it.

Right, is there any big legal producer down there, or is that all co-ops?

I've been trying to get tours of big ones, and it doesn't seem -- they may be aggregated to become big, but frankly, as far as having access on an organized basis, it hasn't been particularly easy gain.

So you might able to -- you won't get imports from the US, then? That's the big vulnerability, right?

I think the import-export business on this product is going to be so curtailed by so many non-tariff and other types of funny barriers, that really the question is going to be, can we learn enough that if we were to step into a market as a producer, that we could bring practices, methods, and brands, that could be substantial if and when we could go to Colorado or Denver or to Nevada or California. I think what we are learning will have applicability, but I don't expect to get to use it in America in the near-term.

Okay, thank you very much. Great quarter.

[Susan Nann], shareholder.

My question this morning is, can you just comment on basically your position in relation to the competition in the country right now?

I pledged a note to myself when I began this, never to mention anyone else's name, so we're going to keep that off. I believe we have the most substantial production platform by some quite reasonable multiple, and the reason I hope that's relevant to you as a shareholder is, we've been building for three years and raising capital for three years, which gives us a platform that, I don't know, is it 2, 3, 4, 5 times more than anyone else has.

I believe we been able to retain the media's interest, which is important when you can't advertise, and continue to have as much or more coverage in the media as all the other entities in the sector combined, each time period you want to measure. So what we've been trying to do is build a big platform and have everybody know about it, so if and when they choose to access it by either medical or rec, we become the number-one choice to be compared with everybody, and I think we are doing okay at being in that conversation every time. More than that being on the TSX, we are the only one. It's a lot more meaningful in terms of your operational controls than I think people generally give credit to it.

Okay, thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Thanks everyone. I think we should get to work and see that we can achieve about another year's work in the next three months, because that's the way this sector seems to be growing. Thank you, everyone.

This concludes today's conference call. You may now disconnect.