Q1 2017 Canopy Growth Corp Earnings Call
Aug 29, 2016 AM EDT
CGC.TO - Canopy Growth Corp
Q1 2017 Canopy Growth Corp Earnings Call
Aug 29, 2016 / 12:30PM GMT
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Corporate Participants
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* Bruce Linton
Canapy Growth Corporation - Chairman and CEO
* Tim Saunders
Canapy Growth Corporation - CFO
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Conference Call Participants
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* Martin Landry
GMP Securities - Analyst
* Daniel Pearlstein
Dundee Capital Markets - Analyst
* Jason Zandberg
PI Financial - Analyst
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Presentation
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Operator [1]
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Good morning and welcome to Canopy Growth first-quarter fiscal 2017 financial results conference call. Earlier this morning Canopy Growth issued a news release announcing its final results for the first-quarter fiscal 2017 ending June 30, 2016. 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 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 your questions can 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 and 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 analysts will have the opportunity to ask questions. (Operator Instructions).
I would now like to turn the meeting over to Bruce Linton. Bruce, please go ahead.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [2]
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Thanks, Carol. The only thing I would pause on is your comment that said prepared remarks for the people on the call familiar with my style I would suggest that prepared means that I have been thinking about these things rather than writing them down.
So we had another nice quarter. It feels like the team that make these things happen are just sort of gelling now and coming together and largely filled out the team. We have one key hire that will start in the next couple of weeks to take our IT platform to another level. But it is working but for the investors and the people represented on the call, I think questions that I would like to plant in your mind is we have had revenue growth but we have spent quite a lot of money and I think you will see the benefit of that as we go forward because the curve of demand in medical, the framework of recreational access, the demand for international product exports all mean that you need to have a substantial platform today, not a plan to build one today.
And so a number of the people on this call have been to see the facilities in Smiths Falls, Toronto and Niagara and I think most walk away with a first reaction which was wow. So as we go into the fall the greenhouse having spent much of two years securitizing, testing methods, getting initial product cycles through is full. And when I say full, I mean the entire place is being used as production not to its maximum density but to the entire space. And so I am quite hopeful that when we exit the harvest period in the fall you are going to start to see substantial increase in the amount of inventory which about a year ago someone asked is it an issue to have too much inventory. Clearly the rate at which we are growing customer sales, more inventory capacity is pretty important.
An event that Tim will touch on but I would like to highlight is demand internationally. So we have now shipped our first product over to Germany on the first time an export permit for dry cannabis has come from Canada to my knowledge to match with an import permit in Germany from any Canadian supplier. And that means that patients in Germany can be right now receiving that product.
Things like Brazil; we mentioned in prior calls that we were establishing a business there. That has moved along nicely and many people have told me Brazil is a tough place, they've been watching the Olympics. True, tough to get set up but the laws of Brazil have been amended such that it is going to potentially be a very interesting market in that people can now go to a doctor and gain access to cannabis but don't have an organized supply chain. And I think we are well-positioned for that type of offering.
So please don't think just about what we did, think about the platform we have and the demand on that platform and they are pretty substantial.
Finally, the financing. People are asking why did we raise more? We are currently in construction mode so while we have had support from a lender which we couldn't identify as who they are, it is the first time we have had or they have had a repeat customer in the marijuana sector they have supported which allowed us to bring some debt against what was an equity spend.
But we have a lot more growth requirements so Smiths Falls as an example has a construction platform right now to add 12 more rooms. But the way that we are constructing them they can become multilevel and so we are really trying to learn from our last builds how do use space better, how to get more yield and all of that has a demand for some capital. Perhaps down the road we will see real lenders come to this market but at this point in time it is really limited and so the equity that we have raised I think will help accelerate us as we exit this year.
So sort of with that framework, I would ask Tim to walk through the details and we can get to the questions.
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Tim Saunders, Canapy Growth Corporation - CFO [3]
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Thank you, Bruce. Good morning, everybody. Revenues in the first quarter ended June 30 were CAD7 million representing a sequential quarter-over-quarter increase of 39%, that is over fourth quarter and a greater than 300% increase over the quarter June 30 last year.
Total products sold in the first quarter was approximately 984 kilos or kilogram equivalents at an average price per gram of CAD7.09. In the prior year period we sold 216 kilos at an average price of CAD7.74.
It is worthwhile highlighting that the total products sold in the first quarter is greater than 50% of what we sold in the entire year last fiscal year.
Next I will touch on the gross margin in the three months ended period of June 30. The gross margin in Q1 was inclusive of the IFRS non-cash gain on biological assets was CAD3.4 million or 49% of sales and the gross margin last year was CAD4.1 million or 239% of sales.
Now turning for a moment to the supplemental non-GAAP measure that we call adjusted product contribution and just as a reminder to everybody, the adjusted product contribution adjusts the IFRS gross margin to remove the fair value measurements that are required and instead measures the weighted average cost per gram produced against the grams sold in the period. So on this basis, the adjusted product contribution is CAD4.4 million or 63% of sales in Q1 as against CAD1 million or 60% of sales last year in the same quarter.
Details of this reconciliation can be found in the schedule to the press release and in the MD&A as well.
Turning for a moment to the operating expenses, sales and marketing expenses in the quarter ended June 30 totaled CAD2.3 million as compared to CAD1 million in the same period last year. As a percentage of sales, sales and marketing expenses declined from 59% last year, that is 59% of revenue, to 32% of revenue in this quarter.
The sales and marketing expenses remain focused on medical outreach programs, patient acquisition and retention including expansion of our call center capabilities as well as branding.
G&A expenses in the first quarter of fiscal 2017 totaled CAD2.9 million compared to CAD1.4 million last year in the same quarter and as a percentage of sales, G&A declined from 81% last year to 41% of sales in this quarter just completed. Overall the increase or the dollar increase in G&A reflects the Company's growth from the early start up of last year while we are continuing to build commercial capacity and capability such as the information technology improvements that Bruce just mentioned.
R&D expenses in Q1 totaled approximately CAD400,000 compared to just CAD38,000 in the same period last year and the increase over Q1 last year was really due to the extension of our R&D activities related to oil extraction, development of potential delivery mechanisms, phenotype selection and as well as the Company's support for the equal clinical research initiative.
Stock-based compensation, depreciation and amortization both of which are non-cash were approximately CAD890,000 and CAD910,000 respectively in Q1. As a result of all of the above that I just described in this first quarter, we recorded a net loss of CAD3.9 million or CAD0.04 per basic and diluted share. This compares to net income of CAD1 million or CAD0.02 per basic and diluted share in the same quarter last year. The net loss is a reminder of what is inclusive of non-cash unrealized gain on changes in fair value of the biological assets such that the impact in the prior year was more pronounced in terms of a positive impact on the bottom line.
Now turning our attention to the balance sheet and cash flows at June 30, 2016, the Company's cash and cash equivalents totaled CAD19.5 million representing an increase of CAD4.1 million from the end of the fiscal year at March 31, and the increase is attributable to the net proceeds from the April Bought deal as well as options and warrants exercised in the quarter together totaling a net CAD11.5 million. This was offset partially by the cash used to fund the operations as well as capital investments made principally in Smiths Falls together totaling about CAD7.4 million.
The capital investments that were primarily at the Smiths Falls facility included activities such as room conversions for additional growing capacity, the expansion of cannabis oil and extract production capacity and also capital investments in information technology.
The assets on our balance sheet include inventory valued at CAD24.2 million, up from CAD22.2 million at the end of the year and we still believe that as Bruce talked about, this growing inventory level is more than sufficient and required to meet the demand over the next couple of quarters.
Bruce, that is the end of my review for this Q1 and I can turn this back to you.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [4]
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I think that captures business as usual for folks on the call. Let's turn to questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Martin Landry, GMP Securities.
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Martin Landry, GMP Securities - Analyst [2]
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Good morning, Bruce and Tim. First question is on your gross margin was stable on a sequential basis and I am just wondering how much product sold was coming from the greenhouse this quarter?
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Tim Saunders, Canapy Growth Corporation - CFO [3]
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Thank you, Martin. Not so much in this particular quarter. We had a big harvest at the beginning of the quarter. Much of that product was then brought into the pipeline for the further conversion for oils and such. So not such a significant impact in the first quarter. But with a full harvest or full growth going on right now at the farm, you should see a higher proportion or mix of farm product in our sales going forward.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [4]
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Martin, I would highlight when we do a harvest there, there is two formats we think about the proportion, we allocate to oils in proportion we allocate to dry cannabis form and so even the harvest which we just did finished up in the last week or so will start turning up for sales shortly in the bud format. And we expect to sell a substantial portion of the fall harvest as an option in bud format and so it is just starting to come up.
The spring grow used about 10% of the facility as you have been a tour with a few others with 100% of the platform full and the size of the plants that we go through this cycle. Subject to it all turning out well, this could be a substantial first time harvest in October and November.
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Martin Landry, GMP Securities - Analyst [5]
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Okay. So is it fair to say that roughly less than half of the products sold is coming from the --?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [6]
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Way less, way less.
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Martin Landry, GMP Securities - Analyst [7]
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Okay. And then can you -- I know it is a hard question to answer -- but can you give us some color on the production cost differential between the greenhouse and Smiths Falls again?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [8]
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So we don't issue but I will give you the input so you guys can calculate it. Simple little things like the greenhouse is a farm so its local tax rate is nominal to nothing. When we grow there as we are doing this fall, our electricity costs are nominal to nothing, just normal operating alarms, etc. This summer we had to pay for water because there was so little rain but that is not particularly expensive. So the cost per gram when you have the full greenhouse going and all of the overheads associated with having a property filled, you can calculate how much the sunshine and water and nutrients cost, the labor ratio is as low or lower at the farm than it is in Smiths Falls.
In Smiths Falls, our production over the last I will call it 14, 18 months per room -- Tim, correct me if I'm wrong -- but I think has increased by more than 50% again in this period. So the output from the same rooms over that time has increased 50% as compared to like 18 months ago or 16 months ago. Correct, Tim?
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Tim Saunders, Canapy Growth Corporation - CFO [9]
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Yes, that is right, Bruce.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [10]
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Yes, so the cost on Smiths Falls continues to decline as a function of reducing labor while increasing the productivity per room. But I don't think you would be wrong to calculate the cost per gram at one location being twice that of another location.
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Martin Landry, GMP Securities - Analyst [11]
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That is helpful. And then in terms of oils, maybe could you give us an idea of how much sales of oils you did this quarter and what kind of demand you are seeing out there for oils?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [12]
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I will speak to the demand and Tim can give you the reasonably precise percentage of sales. One of the things that we always are working on as a challenge is to have an increased license capacity for the amount of oils we can produce and store. And until probably November when we install what I will call an industrial scale production process, one of our challenges now is to be able to be lawfully allowed to produce and to store a sufficient amount so we don't run out. And that is just a capital asset constraint more than anything and the AES machine should resolve that. As far as percentage of sales this quarter, Tim, go ahead.
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Tim Saunders, Canapy Growth Corporation - CFO [13]
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Sure. Just remind everybody, Tweed began selling oils just at the very beginning of the first quarter and Bedrocan started selling their oils in the last month of the quarter. So in terms of oils as a percentage of revenue, it is single digits but approaching 10% just under that level.
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Martin Landry, GMP Securities - Analyst [14]
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Okay, that is helpful. Thank you very much.
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Operator [15]
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Daniel Pearlstein, Dundee Capital Markets.
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Daniel Pearlstein, Dundee Capital Markets - Analyst [16]
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Good morning, guys. Thanks for taking my call. So to start first question is though the jurisdiction that your partners reside in may lag in federal-wide regulation or even near-term paths towards a recreational market, what kinds of processes or key learnings, maybe even outside of the Bedrocan platform can you bring from overseas to the home front that would set up the platform-wide to be prepared for a dual armed system?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [17]
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If I get the question correctly, are there learnings we can take from foreign jurisdictions to apply in Canada for rec. The countries we operate in, the answer is no. So in Germany or Brazil or Australia, they are lagging Canada materially in medical access so we are taking the intellectual skills and some of the technology platforms we have created to go there as our second act once we export product there and see the business volume.
Where we look to interesting packaging and unique products tends to be south of the border and while it is not federally legal, there have been a lot of creative efforts on branding, packaging, instruments for consumption and so we are I will say selectively meeting with and picking up opportunities to include technology or branded products from the US into Canada. And that won't put us offside because we are not actually conducting business in America but really that has been a hotbed of creativity between California and Colorado and a couple of other jurisdictions.
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Daniel Pearlstein, Dundee Capital Markets - Analyst [18]
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Okay, great. Can you give us a bit of an update on the vision of the platform as in what key roles will each domestic facility be responsible over the near-term?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [19]
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Surprising to me in how much I agreed with them. Mike Harcourt, the former BC Premier, who had a nice story in this weekend about the fact that the system to be announced in April has to build on the LP platform as a securitized platform otherwise we are going to get nowhere. And so really over time what we are going to have is multiple facilities I expect across Canada that are essentially -- it kind of sounds callous -- but they become pot factories. And what they are doing is they are producing the volume of output necessary to go into the upgrading applications. When I say upgrading applications, that is converting things to an oil. Great.
But then the second steps after oil is how does this fit into a medical environment so how are you encapsulating it and dosing it or how does it fit into a recreational environment, how are you making this into something quite tasty and interesting for the consumer?
And so as you go through those steps the pot factory purpose really has to be cost-effective production with high-quality strains. And so I think shipping and freight forwarding and logistics factor into why we want multiple locations as much as branding does.
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Daniel Pearlstein, Dundee Capital Markets - Analyst [20]
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Okay, cool. Quickly, on the oils, is all of the oil in inventory all that 10 to 1 ratio?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [21]
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That has been our path before, yes.
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Daniel Pearlstein, Dundee Capital Markets - Analyst [22]
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Okay, cool. And then lastly on that same topic, is there any specific feedback from patients or physicians on the oils or even the education for non-inhaling delivery methods? Anything that you can share more of on even a qualitative basis there?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [23]
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I would say it gives another visit reason. So when we are calling on doctors to be able to explain we now have oils so we have had 16,000 plus visits to physicians offices and explaining the offering. This gave another visit reason. As we get to the next stage which tends to be things like encapsulation so you can have a soft gel capsule which has a pill count control and really does look very medicinal, I think that will unlock a number of more physicians and applications.
But for the most part it is really just increasing what we have to offer which gives us a better competitive comparison to dispensaries and other I will call it less lawfully or safely operated options.
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Daniel Pearlstein, Dundee Capital Markets - Analyst [24]
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Okay, that sounds great. That is it for me for now. Thanks, guys.
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Operator [25]
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Jason Zandberg, PI Financial.
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Jason Zandberg, PI Financial - Analyst [26]
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Thanks for taking my call. I was just wondering if you could remind me just in terms of your current capacity right now to manufacture oils and also just what the CapEx looks like on that in the next couple of quarters?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [27]
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Sure. So Tim will touch on the CapEx or [AES] machine and some of the facilities around it much of which have been built out. So what we have are a couple of CO2 extraction machines from the US. We are running two shifts of data to maximize that throughput. We have converted the room which is adjacent to the extraction to a GMP certified room so that when we put a thing like an encapsulating machine in there, it is now running on a GMP or a pharmaceutically expected platform. So that kind of gets where we are.
That platform when running two shifts a day all out I think will keep up with the demand between Bedrocan oils and Tweed oils between now and November. But if we were trying to live on that platform as we are in Q1, it is way insufficient which is why the AES machine I think you will find gets us a multiple of the throughput that is somewhere in the 8 to 10 times range and that will make a material difference in terms of where we are and how much we are putting out and that is intended to come online as we finish the year.
Kind of related to oils and didn't set it out specifically in the press release, we have an unfortunately named license that we have sought and we have been inspected for which is a segmented separately built area which includes its own vault called the dealer's license area and given what we do, the fact that is the name from Health Canada seems quite remarkable. But it does enable us to then create oils and do formulations of those oils or export the oils to foreign markets for trials and use in medical discovery. So our oils demand I think is going to be not just domestic but international and not just for daily consumption but for actually creating formulations that show efficacy across indications whether it is a certain PTSD disorders or others.
And so the demand I feel is kind of compounding and I'm feeling a bit urgent about getting that machine in. Tim can speak to the budget but we are well down the path in implementation.
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Tim Saunders, Canapy Growth Corporation - CFO [28]
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Yes, thanks, Bruce. So we have quite an ambitious construction program that is really going to take us through principally to the end of the calendar year and some of it will go into the last quarter as well. This is the buildout of additional growing rooms, a multilayered growing room here at Smith Falls and also we are nearing completion of the breeding and dealer license area which Bruce was talking about. So that part will be completed in this quarter.
But the other growing rooms, the oil extraction, the equipment, the AES equipment will get delivered by the end of the calendar year and getting that installed up and running. So the cost for all of that was just as described in the short-form prospectus that was just filed last week, I believe it was the 18th. So we are looking at about CAD12 million to CAD14 million between now and the end of the fiscal year applied to those activities.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [29]
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And Jason, just so you get it, if you buy a piece of equipment, it is like anything in your house, buy it and then multiply it by about 2.5 at least 1 times more for the room it is in but then you need the staff, etc. So with the AES equipment we already have the staffing on. We just had a separate area we had to put it in so we can have multiple oil extraction rooms.
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Jason Zandberg, PI Financial - Analyst [30]
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Sure. That is great color. You, Canopy does a fantastic job in terms of spending money and doing a lot of great work in phenotyping. I'm just wondering if there is any color you can provide in terms of progress made, number of streams that have been developed, I mean some way to sort of give some color around that whole program?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [31]
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Some of the evidence of why we are doing it is the about 60% increase in productivity over the last year plus from the rooms. A lot of that comes from phenotyping where you are picking the most productive and it is not just volume of production, it is duration and time for production, certainly reliability, a number of attributes on the phenotypes. So that is kind of locked and loaded across I will call it getting up towards three strains.
But now what we have is concurrent with that. We built out an area which is I think probably the most thoughtful and organized breeding facilities for marijuana plants that have ever lawfully been created. And the reason for that is as we will enter recreational markets and as we want to evolve strains towards certain medical indications, we want to be able to take the test select mothers, crossbreed them with appropriate males to create the target outcomes.
So it could be something as fashionable as a really cool pink kush or something which has a strong expression of myrcene so that people can actually get relief from inability to sleep. And so we spent about two years in partnerships with people like VNA and internal scientists to get where we are. Those advantages I believe start really turning up as we enter 2017.
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Jason Zandberg, PI Financial - Analyst [32]
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Okay, that is great. That is all of my questions. Thank you very much.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [33]
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Thanks, Jason. It is one of those things unless you do the work now you can't expect to benefit next year and so we have been kind of at I would say a number of long-term projects when it wasn't so fashionable.
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Operator [34]
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(Operator Instructions).
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [35]
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Does that mean we are hearing no others?
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Operator [36]
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I have no other questions in queue at this time. Would you like any closing remarks?
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [37]
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No, if there are no other questions, I think it was a very nice and productive quarter that was achieved without any extraordinary heroic efforts but more of a team that is coming together and functioning well. So with that mode of operating we kind of feel like we've got a foot on the gas and can try to accelerate, not try to determine how could we possibly have achieved that. So it was a predictable and pleasant conclusion and it feels like we've got the right people together to make it keep going. So now we just have to keep working.
Any other questions or should we let everyone get to work?
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Operator [38]
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We have no further questions at this time.
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Bruce Linton, Canapy Growth Corporation - Chairman and CEO [39]
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Thank you everyone and we will reconvene a little sooner next time now that we are on the TSX. We need to get our word out a little bit earlier.
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Operator [40]
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This concludes today's conference call. You may now disconnect.
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