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Canopy Growth Corporation (NYSE:CGC)
Q2 2019 Earnings Conference Call
November 14, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Canopy Growth's second quarter Fiscal 2019 financial results conference call. Earlier today, Canopy Growth issued a news release announcing its financial results for the second quarter ended September 30th, 2018. This news release will be available on Canopy Growth's website and filed on SEDAR.

On the call this morning, we have Bruce Linton, Canopy Growth's Founder, Chairman, and Co-Chief Executive Officer, and Tim Saunders, Canopy Growth's Chief Financial Officer. At this time, all participants are in a listen-only mode and 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 measurements adjusted to EBITDA. These measures do not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is defined in the press release issued earlier today as well as in this period's management discussion and analyst documents that will be filed on SEDAR after the close of financial markets today.

Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following the 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. If you would like to ask a question at that time, simply press * then the number 1 on your telephone keypad. If you'd like to withdraw your question, please press the # key.

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

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Great. Thank you and good morning, everyone. I know we're all going to want to talk a lot about what's going on in Canada in the first 30 days. But I want to frame what we're talking about in a bigger, more interesting way. We've run through as a company the whole start-up phase in Canada. What you saw in this last quarter was really the ramp up. I think what you're going to see is there are three six-month segments of how this market is going to go. The first six-month segment is only 30 days old. But it's going to be three sprints, which are get out of the gate and get the stores filled.

The stores continue to be built out and the products are all in. The second part of it is going to be keep up with the channel demand as we enter to the third phase, which is the more comprehensive products. I'll come back to that. We don't generally give a comment on consensus or analyst numbers because this is such a new sector.

So, all I would say is I don't think analysts were wrong on the target number, but I think they were early on the quarter. I don't feel particularly concerned that you're way off for our fiscal year, but you need to look at the things we'll come back to later as the variables on that.

To kick off, what we've been focused on, the future, in our opinion, is intellectual property and converting cannabis flower into an ingredient and building it out to more value-add products. We haven't historically talked a lot about the 15 clinical trials that we have planned and structured. We've talked a little bit about the fact that we've been approved and are launching our Phase IIb primary insomnia trial. The animal treatment of anxiety trials have been improved, no objection letters in place and those are moving forward.

Really, that leads to some of the stuff we've worked on in this ramp up, which if you look at the companies that we've either got acquisition agreements with and all the internal work, the number of patents that we have filed and we think are quality patents are about 120. They go across hardware, product formulations, genetics, product formulations, medical treatments. This is not like a one space, one item.

The reason is I think what you're going to find is as we get into that third six-month sprint for recreational cannabis, the science we're talking about here will inform the definition of those products that will be differentiated and they'll be the ones when we talk about brands that people will be able to identify a better product in a specific product in a better package with a key name that will actually be the one they seek and they stay with. That's really the packaging of it.

We put something out on October 3rd that I didn't get a single question on, which is the Ontario Long-Term Care Association has embarked on a study of how do we make geriatrics' life better, which is up to a 500-person study over a six-month period and the whole point of it is to displace a whole bunch of pharmaceuticals that aren't necessarily benefiting the geriatric and aging crowd to the level of satisfaction of their physicians and they're causing a great deal of side effects that are displeasing their families.

That's the sort of thing that looks out and says, "How do we disrupt really deeply?" and carry it over. That kind of IP goes to where we're trying to get to with some of our international stuff. Maybe we should put press releases out for things that aren't done. It's not been our history and it's not what we're actually going to do. We've had a number of times where we've almost got to export to the US under DEA-approved exports, but the paperwork wasn't always easy to get done on this side of the border.

Now, we've exported to the US products which are GMP1, focused on meeting standards so institutions on the US side can actually use cannabis that's been produced in a way that can become inputs to a decision tree that may or may not result in more comfort with medical and/or state rights and things like that. That is a big deal.

The whole notion of what's happening with hemp -- we have a substantial hemp operation that we've been working on in Canada. We have intellectual property that we've developed around how to manage hemp. We thought that was prudent because I think hemp is going to happen in the US. When it does, that's not the time to start. You should have already been started up and ramped up. We think we are.

In that whole world, when we look at what the products are, the single-biggest challenge we've seen in the US is the fact that it's yes, illegal, but really, the claims made on some of these products are without science. So, the science in order to make a valid product has to be done and we're working on that. When we swing just over to the Caribbean, we put out a press release indicated that we have a license in Jamaica.

I think Jamaica is going to do a great job of not exporting cannabis but importing more tourists and Tweed Jamaica is going to be something when you're on vacation, you may become officially ill and have access to that product and it will make your vacation more enjoyable and the government more money and everybody a little safer in the process. The credibility we have in Jamaica has caused us to have an opportunity to export to another Caribbean island, which we haven't named, but we think is the dominoes tipping over to that region.

When you think about the number of tourists that will have exposure to brands, 4.2 to 5 million tourists in Jamaica, if we can get a brand in front of that cohort on the favorite week of their year, we think that cascades back to what they're going to be doing for the rest of the year which is earning their next vacation and choosing Tweed as their recreational product.

When you get down a little bit south of the US, our Latin America activities, everything we have down there is structured so that it's 100% ours as we go forward. It reels in and we're not in a margin-sharing model. We're in an execution of operations exporting our intellectual property and cranking up medical outcomes to a substantial middle and high income class in a region with a huge population.

So, our activities are principally headquartered in Columbia but very active and have been for a few years in Brazil and building up our capacity in Chile and as we go down through that area. So, quite significant and in both particularly the Jamaican circumstance, where others have struggled to have cash and the ability to move and build, we haven't. We've been able to figure out how to structure capital into the region so that we can actually build out the facilities and be ready to have our stores open.

So, maybe to come back to Canada -- as far as we can tell, we've been doing daily analysis of data from as many sources, provinces, in stores. Our analysis is that we're about 30% of the available SKUs. I can tell you as an investor you do not want us to sell only bud and bud forever. So, our strategy was and will continue to be first we launch with our core store bud brands because we think people wanted to walk in the store, buy dry cannabis and conclude that was interesting but what they expect is something better and different.

So, now, we've launched our gels, which are soft gels. They are essentially what I think is essentially the Canadian gummy bear equivalent. They're well-structured and will be continuously available. So, people tried another product at launch and that product sold out. What they're going to have is the second wave from Canopy, which is going to be sustained, differentiated in use and investor will love because it's a much better defendable margin model.

The next wave is pre-rolls. Maybe we in a ramp up did something a little bit different, but we actually have an engineering department. The reason we have an engineering department is we thought it was important to control our intellectual property, not share margins with people into the future and not get into circumstance where we couldn't continue to build better and bigger infrastructure for every circumstance that we needed.

So, our pre-rolls are created on an equipment set that meet the really tight and specific standards of weight per roll and the volume we expect to put through and that's our IP. Part of it is if you're at all interested in history, when you look at how the cigarette market worked, owning the intellectual property around creating cigarettes turned out to be a pretty good thing. We think we're in a good spot with that.

As we go down, there are only a handful of stores open in Canada and every week, there's trying to be more. Where we thought it was prudent to focus was on the stores that are open with sales people that can be trained. We've trained over 650 customer service reps for a variety of stores and provinces across the country.

Where sales reps can actually differentiate our product, make sure it's in the right position, make sure the education is correct so that when you win, it's not a random lottery. While we appreciate the change in Ontario and think it was prudent to dump the old plan, in the short-term, there's nobody you can educate. There isn't necessarily even really a wizard on how people make purchases.

So, while we try to support all stores and we know that we can fulfill all our commitments, our priority is on physical stores and the inclusion of our product where we want it and the inclusion of our gels and rolls as those stores come up. That will, in our opinion, turn into a much longer and more prosperous relationship than being in a random lottery and a website.

So, the inventories are there. We have the gel caps in inventory. We have the inputs and pre-rolls in inventory. We are in a mode where everything we're trying to do will feed into good science turns to good products turns to good outcomes. So, I do think you're going to see as we go through the first six-month sprint that the revenues come up but don't forget about the rest of the world.

I saw this announcement that Malaysia is contemplating governing medical cannabis as probably one of the three biggest announcements in the history of our sector. I'm not sure that it got pick up to the level that would make sense for the first company of that region to say they're thinking about medical rather than thinking about it as an illegal, threatening marijuana product.

It goes from what I mentioned at the beginning, when you can work in the long-term care and you can see regions of that sort of world evolving their perspective, the rate at which this market grows is going to be gigantic and those with the best science, the best brands are going to win.

So, Tim will describe some of the numbers we use for our ramp-up, but I'd say get ready for revenue up as well. Go ahead, Tim.

Tim Saunders -- Executive Vice President and Chief Financial Officer

Thank you, Bruce. Good morning, everyone. I think the key takeaways today are one, we had strong double-digit medical cannabis sales in line with management expectations. Two, strategic acquisitions and investments further strengthened our IT capabilities critical to our long-term success. Three, we are well-positioned for a strong start to the recreational cannabis market in Canada, and four, as Bruce outlined, we are building a strong presence in key international markets.

So, I'll now proceed with a review of the second quarter. Revenue for the second quarter ended September 30th was $23.3 million, representing a 33% increase over the same quarter last year. Revenues in the second quarter were in line with management's expectations leading into the opening of the recreational cannabis market. By intention, the company made limited test shipments amounting to $700,000.00 in order to test the supply chain systems and logistics before the launch of recreational cannabis on October 17th.

Volume sales into the recreational channels did commence after the quarter end. In the three months ended September 30th, 2018 and '17, oils, including soft gel capsules accounted for 34% and 18% of product revenue, respectively. The total quantity of cannabis sold during the three months ended September 30th was 2,197 kilograms and kilogram equivalents at an average price of $9.87 per gram, up from 2,020 kilograms and kilogram equivalents last year, which were sold at an average price of $7.99 in the same period last year.

The higher average price was due primarily to change I the product mix, including the increased sales in oils and gel caps and higher price strains as well as sales into Germany. The average price per gram sold in Germany during the second quarter was $13.58 per gram. We have and continue to invest a significant effort in capital and resources in activities and programs to ready the company to participate in and lead the Canadian recreational cannabis market. These investments continue to cover the company's entire business operations, including production, fulfillment, marketing, sales, and general administration.

In the second quarter of Fiscal 2019, the company harvested 15,217 kilograms, with close to 2 million square feet of greenhouses in BC, Quebec, and Ontario licensed recently, including 1.1 million square feet licensed in early October to bring our total licensed platform to 4.3 million square feet. We expect the amount of cannabis harvested to increase in the coming quarters.

Turning to gross margin, the cost of sales includes the impact of operating costs and subsidiaries not yet cultivating the selling cannabis, including our BC Tweed and Vert Mirabel facilities that were only partially licensed in the quarter, as well as higher overheads incurred while preparing operations for the legalization of recreational cannabis and the diversion of growing space in Smith Falls to create clones for transfer to the company's other growing facilities.

Excluding the costs associated with non-cultivating subsidiaries totally $7 million, the gross margin for the fair value impacts in costs of sales and other charges would have been $13.6 million or 58% of sales.

During the quarter, the reported fair value changes in biological assets and inventory charges or other charges netted to an expense of $40.6 million and included adjustments to net realizable value of inventory targeted to the recreational market, which reflects wholesale pricing and to a net write-off of approximately $16 million related to plants closing the quarter due to timing issues with respect to having infrastructure ready for licensing and receiving those harvested plants. Since then, the required infrastructure has been completed in the licensing since received.

Next, turning for a moment to operating expenses in the second quarter -- as has been highlighted previously, the company continues to make significant adjustments across all areas of our business to strengthen the company's leadership position in the Canadian global medical cannabis markets, as well as in preparation to lead the recreational cannabis market.

Sales and marketing expenses include costs associated with the development of branding, marketing, and education campaigns, the development of the new permitted product SKUs, the development of recreational product packaging, the development of cannabis retail and education programs as well as costs associated with the company's medical outreach program.

These expenditures represent the company's view that strong brand recognition is over time essential to the company's successful market share acquisition strategy, particularly in the new recreational market in Canada. These costs represent a strategic upfront investment, which management believes will have a long-term benefit in customer acquisition and retention. Further, the company is making these investments to aggressively seek new domestic and international business opportunities to build for the future.

As a result, sales and marketing were up significantly relative to same period last year, for the purpose of being ready for the future state recreation market, while at the same time developing international markets. Sales and marketing expenses from three months ended September 30th were $39 million or 167% of revenue, a big investment.

During this period, we launched our national "Hi" media campaign, which included digital placements across Canada, brand activations in communities from coast to coast and content creation, including the tweed.com website and marketing automation platforms and developing competencies in retail.

In respect to government regulations, all non-age gated properties were removed on October 16th, 2018 prior to the Cannabis Act taking effect. The company is continuing to invest in age-gated channels for both media and experiential marketing across all brands in adherence to C45 guidelines on promotion. In comparison, sales and marketing expenses for the three months ended September 30th, 2017 were $7.6 million, which was not purely medical market.

G&A expenses for the three months ended September 30th were $37.1 million. Of note, the second quarter Fiscal 2019 G&A included a provision for excess office space in Montreal, which is no longer occupied, and that amounted to $4.2 million. In comparison, G&A expenses for the three months ended September 30th last year were $8.4 million. Acquisition-related expenses for the three-month period ending September 30th was $3.2 million.

These expenses related to acquisitions of Hiku brands as well as the shares of BC Tweed and Canopy Health. In addition, costs were incurred due to the ongoing evaluation of potential acquisitions, building a pipeline of M&A potential targets and reflects increased legal, accounting, and strategic business consulting services required to complete or evaluate these potential or completed transaction.

We are likely to acquire additional strategic assets in the future as in the pursuit of our business strategy and as we communicated previously following the strategic investment consolation.

The non-cash share-based compensation expense related to options granted to employees who consult with the company and to acquisition-related milestones combined for the three-month period ended September 30th to $99.6 million, which $50.7 million is related to acquisition milestones. In practice, all employees of the company receive stock options as part of the compensation package. Acquisition-related milestone payments based on the future performance and related criteria have been treated as stock compensation expense instead of being allocated to the purchase price.

In comparison, the non-cash share-based compensation expense related to options granted to employees and consultants with the company and to acquisition-related milestones combined in the same period last year was just $7 million.

Now, I will turn my attention to other expenses and net income. Other expenses of $115.7 million are primarily native in fair value changes on financial assets and financial liabilities, the majority of which is non-cash. The amount was primarily made up of changes in the fair value of the senior convertible notes due to marketing to market, which saw the trading price of the convertible notes increase from about $102.00 to $149.00 per unit at the end of the first quarter to the end of the second quarter and resulted in an expense of $223.4 million on the new valuation.

This loss was partly offset by a gain amounting to $62.7 million related to the acquisition of Canopy Health Innovations and gains totaling $48.2 million, driven mostly by fair value changes on the [inaudible] of $44.7 million. $114.7 million and other expenses described above accounted for $0.52 of a reported $1.52 loss of basic and diluted share in the quarter, compared to a net loss of $0.01 per basic diluted share in the comparative period of last year.

The after-tax net loss in the quarter inclusive in non-cash shared compensation expenses, fair value impacts, and other expenses as just described amounted to a loss of $330.6 million or $1.52 per basic and diluted share and compared, as I said, to $1.6 million or $0.01 per basic and diluted share in the same period last year.

Next, I'll touch briefly on the supplemental non-GAAP measure, adjusted EBITDA. Adjusted EBITDA is defined as earnings from operations, as reported before interest and other expenses, tax, and adjusted for moving stock-based compensation expense, depreciation, and accounting for biological assets and inventory and further adjusted to remove the acquisition-related costs.

We reported adjusted EBITDA believing there's a useful financial metric that would help investors assess the operating performance with business before the impacts of investments, acquisitions, income taxes, and fair value measurements.

Adjusted EBITDA in the second quarter of Fiscal 2019 amounted to a loss of $57.7 million compared to an adjusted EBITDA loss of $4.8 million in the same period last year. We believe our deliberate and ongoing investments in building the company's production platforms, brands, international reach, partnerships, and operations which directly impacted our adjusted EBITDA during the period as necessary to strengthen the company's global leadership position.

Now, turning our attention to the balance sheet and cashflows, as of September 30th, 2018, the company's cash and cash equivalents totaled $429.5 million, obviously before the $5 million was closed on November 1st. This represents an increase of $160 million from March 31st, 2018. The increase was principally due to the issuance of $600 million in convertible notes in the first quarter, offset by the investment in the expansion of our production assets, strength in corporate capabilities, brand-related campaigns, and the establishment of physical retail stores in Newfoundland, Manitoba, and Saskatchewan.

The working capital deficit reflects a reclassification of the convertible notes after getting it back to a tender offer on the notes triggered by the investment by consolation. The value of the liability effects the fair value changes in the debt. The tender offer was made on November 2nd and runs to December 5.

As of today, no one has submitted the notes for conversion, but some may choose to do so before the tender expiry date. If any are submitted, the company intends to pay cash instead of issuing shares. After December 5th, any unconverted notes will revert to prior long-term debt status.

Inventory at September 30th amounted to $150.4 million, up from $101.6 million at the end of March 31. At September 30th, 2018, biological assets amounted to $20.7 million, up from $16.3 million at the end of March 31. Together, inventory and biological assets totaled $171 million at September 30th, up from $118 million at the end of March. Inventories are continuing to be scaled to meet management expectation of market demands, including demand from the legalized recreational market.

At September 30th, inventory quantities amounted to 31,214 kilograms of dry cannabis, 21,499 liters of cannabis oils, ranging from concentrated resins to refined oil to finished oil and 1,497 kilograms of soft gels. In comparison to March 31, 2018, we had 15,726 kilograms of dry cannabis, 6,969 liters of cannabis oils, and 356 kilograms of capsules. Management continues to believe that significant demand will develop for cannabis oil and in particular soft gels in the recreational market. As such, the company continues to increase inventories of extract-grade dry cannabis held for conversion and increase the quantity of cannabis oil in soft gel caps that we have on hand.

Of interest for primarily analysts on the share count as of today, we had 337,362,296 shares outstanding, with warrants, options, and RSUs, the fully diluted share count is as of today 518,386, 356 shares.

Bruce, this concludes my review of the financials for the second quarter. I'll turn it back to you for some closing remarks.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Thank you, Tim. I bet there are some questions and we might as well advance straight into those.

Questions and Answers:

Operator

At this time, I'd like to remind everyone in order to ask a question, please press * followed by the number 1 on your telephone keypad. We ask our analysts to please limit yourself to one question with one possible follow-up question. If you have additional questions, you are welcome to reenter the question queue.

Our first question comes from the line of Tamy Chen from BMO Capital Markets. Go ahead, please. Your line is open.

Tamy Chen -- BMO Capital Markets -- Analyst

Thanks. My first question is on the US. It's looking like the Farm Bill for CBD may come first before the States Act for federal decriminalization. My question is if so, could you talk about what your initial strategy into the US may be under the Farm Bill?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Sure. So, I had mentioned earlier in the call we have been hemp farmers for this past summer and busy on the processes related to drawing in the potential for extraction and scaling a bunch of IP. That results from an acquisition that we announced probably a year ago for some parties that had substantial hemp experience. We think a lot of that will carry over. What we want to do, though, is recognize that one hemp becomes convertible to CBD. That, I suspect, will cause the effective price of CBD to go to an extremely low point and so it's really going to be about the science of converting and its outcomes.

So, things like the clinical trial we're running on how do we make dogs less anxious will have, I think, implications on how do we make geriatric adults less anxious in products that will be registrable with actual claims based on science. And so, really, what we're looking at is what do you turn CBD into versus how do you farm it, despite the fact that we think we'll probably need to be in the farming extraction business as well.

So, I think we're well positioned with the resulting products you'd want to begin to launch that actually use the CBD in an effective fashion versus making claims that we see in the market in the US right now that are un-validated.

Tamy Chen -- BMO Capital Markets -- Analyst

Thanks. My follow-up is more on the EU side. We're seeing growing momentum for further medical legalization in Europe. Could you talk a little bit about Canopy's strategies for the Europe medical opportunity and what advs Canopy has relative to both other Canadian license producers and as well as other producers in Europe or Israel or Lat-Am with respect to getting into the Europe medical market over time.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

So, I think Europe is actually the most exciting activity going on. We've been busy in Germany. I think we've been sending product there for approaching two years. We have been educating physicians and pharmacists with our Spectrum educational package. I think we've had about 1,000 pharmacies in Germany move our product and we're in the process of seeking approval for upgraded formats of the product.

We have plants in the ground in a couple of countries in Europe already and greenhouses. We have unannounced activities tied up in some of the emerging locations because they're not material. We didn't announce them. We think what we found over the years is what we announce is a good idea and everybody tries to follow-up. Our prefer is now that we're executing before we're announcing and it will become evident what we're doing. Really, most of the places want proven medical outcomes. They're not just looking for the medical ingredient, which is essentially what it's classified in.

I think a lot of the work we're doing and that result and the methodologies would be able to be introduced into the other geographies as evidence. We're liking Europe a lot. We like the fact that the payee is often the government and the population seems to be somewhere in that 400 million to 500 million, depending who you want to roll in, including the UK right now. We've been quite busy there.

Operator

Your next question comes from the line of Martin Landry from GMP Securities. Go ahead, please.

Martin Landry -- GMP Securities -- Analyst

Bruce, you mentioned your SKUs obtained 30% of listings in physical stores nationwide.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

30% of the currently in stock inventory nationwide.

Martin Landry -- GMP Securities -- Analyst

Meaning as of yesterday or...?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

As we've been running up, it's hovered 25% to 30%, but yeah, what our expectation was is that people might take things away from the medical world, push everything to the rec world and as it sells out, they don't have things for either market. We wanted to be a sustaining, winning race rather than a flash out of the gate.

Martin Landry -- GMP Securities -- Analyst

My question was there was a limited number of stores operational. I find it helpful if you could talk maybe about your market share in Ontario, the largest market, how you fared.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

When we looked at it, we had to be polite about the prior plan, which was to have almost no stores in a population of 7 million people where there are over 800 liquor stores. So, when you're in this sector, you say it's a good idea because it's improper to say it's a bad idea to the government. It was a bad idea. When they then said, "We're flipping it. We're going to have the private sector create a lot of stores," that actually is a good idea.

But in the interim, where it's a website where you can't actually affect anything other than you put it up and somebody buys it and it sells out. Was it the right stuff? Did they make a good decision? Is shipping going to be reasonable? We've been pretty up the curve in Ontario.

I think the first place the OCS came to learn about cannabis was the Canopy store. It is our view that if they were successful in selling on the web, they would be unsuccessful in fulfilling because it is a very different business B2C than it is B2B. It took us four years to ship a million packages and they will have to ship a million packages in 30 days, probably.

So, we didn't push the OCS. We supported them. Where our push has been is where the physical stores are. It's been very intentional and will continue to add to what they have there, but it hasn't been our biggest priority to have the most product and push in Ontario, physical stores like Alberta, Quebec, New Brunswick, Newfoundland. Those jurisdictions have been where we've pushed as hard as we could.

Martin Landry -- GMP Securities -- Analyst

If you would have to think a market share you've achieved so far, can you give us some order of magnitude for us to work with?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

So, we've done 30 days of a launch where there were almost no stores. There were only websites in some places. What we're looking at is how do we sustain our delivery? How do we differentiate our products? How do we migrate people from buying bud to buying formats?

When you look at that over the 90-day period of Q3 for us and over the fiscal balance of the year to the end of March, we've stated our goal is that we would be disappointed if we had a 30-share, but we're working for that as the minimum. I don't think we're in a spot where we have the limited resources of cannabis or limited formats. I think we're going to be durable and get there. That's the revenue opportunity.

Martin Landry -- GMP Securities -- Analyst

Okay. Just finally, do you have any bottlenecks internally that could prevent you from attaining these numbers at this point?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Sure. Every day there is a different bottleneck, but I would suggest they're less of an issue. So, things like applying those damn excise stickers was a bottleneck because they didn't want to apply to certain things and we were running short runs, which meant we couldn't put as many packages through. I would say with our engineering and operations team, we feel like we're actually getting moving.

Maybe the mental image is we talk internally about watching the races where Usain Bolt would always win but he didn't start off leading because he had to get the momentum going. We felt we were in that mode, but moving around bottlenecks, that's where we have internal resources to run all of these things and not outsource. It feels like we're in very good shape to deliver the product, fill all the orders, have all the formats. It's feeling like a very solid position.

Martin Landry -- GMP Securities -- Analyst

Thank you.

Operator

Your next question comes from the line of Vivian Azer from Cowen. Go ahead, please. Your line is open.

Vivian Azer -- Cowen and Company -- Analyst

From a high-level perspective, I'm hard-pressed to find a quarter over the last four years where your revenue has declined sequentially. Yet, your first quarter where you're ramping into adult use, which I appreciate happens in waves and whatever, lots of fits and starts as the market transitions, I'm hard-pressed to understand how you guys posted a 10% sequential decline in revenue. Help us understand that, please.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Really, there was no product shipped. Functionally, what we were doing was stress-testing the system at a request with all the provinces to make sure their bar codes match with ours, their scanners match with ours. Really, there was, call it no revenue shipped to the provinces.

With all the hubbub around it, what we saw was a bit of a distraction in our medical customers and a couple of hiccups in terms of getting the normal run rate to Germany in terms of permitted exports and the product approvals and things getting across. I'd attribute half of the decline to just not normal course Germany and a little bit of a pause with the medical people.

That said, once rec happens, I think we're going to see an uptick in truthful conversations at doctor's offices because before rec was available, if you said to your doc, "I don't really like the side effects of my RA medication," they might look over their glasses at you and wonder if you just wanted to party. Now, you have that choice and when you have a doctor discussion, I think people are going to be more transparent.

We'll see over the next couple of quarters, but I think you're going to see a strengthening of the medical business and Germany, I think we're now back on normal track. So, it is the first time in our history that I'm aware of where we had a slowdown, but I think it was more a distraction than a pattern.

Vivian Azer -- Cowen and Company -- Analyst

To follow-up with that, given your commentary on consensus and despite the fact that we were materially below consensus, you came in below our estimates and the Street, so, I think it would be prudent for you guys to comment on the cadence of revenues for the back-half of the year, please.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

I think most were expecting that the provinces would be taking product in a material way. As you look across the entire sector, the provinces were not ready to take product and it became urgent and remains urgent on the product shipping. So, when we look at it, I think the way I opened it is I said you were early on the anticipated volume, but I don't thnk you're materially wrong and I can't comment on every individual, but as we across the general group, on what the year can look like for our fiscal.

I think we're starting to slide into the model as you're thinking about it. We tried to signal on September 27th that we were not shipping to provinces other than stress-testing, I think was the exact phrase we used. So, now, it's crank time and it's feeling like the provinces are starting to get their momentum as well.

Operator

Your next question comes from the line of Oliver Rowe from Scotiabank. Your line is open.

Oliver Rowe -- Scotiabank -- Analyst

So, you touched on it previously, but with the consolation deal closed now, could you just elaborate on your capital allocation plans, how you plan on putting that $5 billion to work and how you measure return on the capital?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Sure. So, we've been going through with our new board and with Constellation. We have a roster of elements we might wish to acquire, none of which are producers in Canada, but there are a number of technologies that we think make sense that are out there on a global basis. So that mix of cash and shares would probably nibble up close to $1 billion of things that we look at. I'm not saying we're pulling the trigger on all of them.

We're also building out a capacity to have a bottling line, which is now finalized and designed and site preparations have commenced. So, we think beverages will be a formatted product that makes sense of the regulations of Canada. There is no certainty, but we think that could be a be ready for Q4 calendar 2019.

So, that adds up a little chunk and then what we're trying to do is be ready as one of the callers talked about the crank in Europe is significant, but hemp in the US could be sooner than you think. So, we're going to have some dry powder ready to go rather than reacting and looking for capital and structuring that we will be instantly in. And so that build out, we'll use it all, but the first building, we certainly have a plan on.

And I don't know if Tim wants to comment more. We certainly looked at our models and we've become a lot more disciplined in NPV in the way we structure our acquisitions. I don't know if you want to speak to that Tim or further comment.

Tim Saunders -- Executive Vice President and Chief Financial Officer

It's certainly the kind of the transactions we're looking at the future. These are cash generating businesses or fifth strategic niches or needs that we have in the company so that they have earned themselves to more traditional ways of value these things as opposed to some of the M&A activity in the first couple of years of this industry where there was an unknown future, unpredictable cash flows.

So, there's a lot more rigor around the ability to valuate these investments and they're actually traditional valuation models to make sure that we're covering the cost of capital and generating good returns, but most importantly adding to the strategic needs that they need to build at this business.

Operator

Your next question comes from the line of Mike Hickey from Benchmark Company. Go ahead, please. Your line is open.

Mike Hickey -- The Benchmark Company -- Analyst

Yeah. Hey, Bruce, Tim. Congrats on the quarter, guys. Thanks for taking my questions. I guess congrats on the October launch as well. It sounds like you're prepared to map some pretty big resources to the US sooner than most people expect with hopefully passing the Farm Bill.

How big do you see the CBD market in the US because it seems to be exploding here, mostly anecdotal but I'm sort of curious about your intent to take a big move to the US. I'm also wondering as you think about building brands and products around CBD in the US if there's a natural extension to recreational cannabis or a medical cannabis down the road once we have the appropriate federal guidelines in the US.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

It's a bit of a touchy one to answer because with our weekly updates and what's going on with GR, it's hot, it's cold, but right now, the indications are Farm Bill is hot. CBD, I think, as an ingredient can be very disruptive across everything from anti-inflammatory scenarios, whether it's sports drinks to other scenarios of that nature to anxiety modification or management. It's going to come down to who gets the data to get the brand and product that actually works.

I think we're doing a very good job on that and I believe we have a leadership position on that. How big is the market? Is it going to be fragmented? Will they allow interstate commerce with CBD? What's going to happen with all the adjacent THC rights? The definition of hemp is that it has 0.3% or less THC. Well, if you think about how many hundreds of thousands of kilograms of CBD are going to be extracted from hemp, multiply that by 0.3 and you end up with a lot of THC. Well, we have the right to use that THC in scientific endeavors.

So, there's a whole bunch of adjacent elements to that whole hemp discussion and we haven't actually factored in any of the utilization related to disrupting cotton and things like that. To us, that's somebody else's business. Maybe it's a saleable product. The segment could be huge. The form factor, of what you feed into an extractor, as hemp is not a whole lot different than marijuana for THC. So, you'll see a value early as getting good at extraction as a preparatory step. You may see overspend to be extremely well-positioned, but I don't think that will be un-rewarded.

Mike Hickey -- The Benchmark Company -- Analyst

The second question for me is sort of how you think about second half calendar year '19 and the legalization of edibles and concentrates, if you expect a smoother launch or share expectations, etc.

On to that, just any updates, I guess, on your work with cannabis-infused beverages in terms of onset, duration, if you've had some success there and I guess how you think about the market opportunity for infused beverages beyond the dispensaries because at least in the states, Colorado or Washington, you have brand products, but it remains a rather niche market and you wonder if it's trapped in the dispensary where it's hard to justify for a lot of retailers to keep shelf. Your thoughts, I guess, on a small basket of questions would be appreciated. Thank you.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

So, I think the two parts were what about ingestibles because I don't think it's going to be just edibles in the second half of 2019. I believe no matter which government is in power, their objective will remain consistent, which is they're not going to hold back this program because it's not going to be about diminishing criminal returns and the returns on vapes and ingestibles are very good.

I'm reasonably confident they will for sure stay the course on that launch and then it will be questioned as to what evidence you have of efficacy, safety, etc. Our governors in every province or state are the liquor authorities. I think if you come to Canada, you'll find that they principally sell beverages which are shelf-stable and nothing else, so their comfort with that form factor, I think is going to be very high.

The second part is yes, we have been working on bioavailability flavorings. We have worked with consolation on branding, analytics of who wants what when. There has been a lot of work on beverages.

The fact that they have any share in most of the US markets surprises me because mostly, what we focused on is what's wrong with products that exist, which is it takes too long to onset, has too much for duration and generally isn't a particularly appealing beverage in terms of coloration or flavor because there's a lot of masking agents and I think our researchers have done a good job and I think Green Star, which was the consolation division spent money well to look at where we need to hit.

When I left our facility on Monday, we were clearing and preparing the site where the bottling line will be and it has a schedule of construction which I hope will stay on and complete some time in May as far as the structural building. I think we're lining up the governance model, the product, and the production, stuff could go wrong, but I don't think anyone else is in the same space of that process or position at all as we are.

Operator

Your next question comes from the line of Graeme Kreindler from Eight Capital. Go ahead, please. Your line is open.

Graeme Kreindler -- Eight Capital -- Analyst

Good morning, gentlemen. Could you please elaborate on the strategy of meeting and keeping up with growing demand in medical markets domestically and international on top of how you characterize it as sprints in the recreational market, how the company looks to stay ahead of the curve on all three of those?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Tim, correct me if I'm wrong, I think we're at about 4.3 million square feet of approved production assets, which include the capacity to extract and things of that nature. We have about another 1.7 million square feet we think is ready for and should be approved some of the buildings in New Brunswick and Newfoundland aren't at that stage, but we're talking 100,000-300,000 square feet of that.

Our commitment to medical patients was that if you're a patient on July 1 when it was announced, we'll always have the product for you. What we mapped out is what does the market look like for medical, what is the form factor for medical, which is shifting, as you can see in our price point, to increasingly gels. Then our production up in Denmark and some of the products we have in Spain, we're focusing on how do they meet GMP or GAP practices so they could actually begin supplementing our domestic production in Canada for product markets in Europe.

That combination sort of looks like it works quite well to get through the target revenues that we have. It does need to work but it's not all new to us. The practices we put in Spain and Denmark bore quite a lot of what we learned running greenhouses as a first operator in Canada. It feels like it's going to work. It's going to come down to form factor. The shift to oils seems quite steady.

Operator

Your next question comes from the line of Vivan Azer from Cowen. Go ahead, please.

Vivian Azer -- Cowen and Company -- Analyst

Thanks for the follow-up. I appreciate your strategy on focusing on brick and mortar stores versus e-commerce, but I'm having a hard time reconciling that commentary with the continued inventory build when a province like Quebec is so tight on supplies that they're closing their doors three days a week. Help me square that circle.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

I think if you look at Quebec and who's showing up with product, we're increasing our position on where we're fulfilling. I wouldn't necessarily attribute their absence of product to us and increasingly not -- the first province where we put our gel caps was Quebec. We think if they open and keep scarcity and our products there, its' going to do quite well. It's not all perfect. Everything is not balanced yet. It's a six-month window. That's the shift where we're doing it. I think they'll have a time where they start opening their doors more and the products they have represent more of us. Quebec is exhibit A why they chose to put our gels there first.

Vivian Azer -- Cowen and Company -- Analyst

Okay. That seems reasonable. You've got an e-commerce model only for the next five or six months. Help me think through why that province in particular, given how large it is doesn't deserve a different strategy.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

I think as you get further out, you will see more of our product there and find there's less of others and that we support the more and more. We're going to have more stores open. I don't think the objective of Alberta, 17 stores is a lot more. It's going to constantly a bottleneck balancing act. The initial order from Ontario was quite small and our subsequent order was quite large.

There were bottlenecks for them in that a truck can arrive, but maybe it doesn't get up to the store for seven or ten days. Those things are all being worked through. You will see more of our product there but we're talking about the first 30 days out of the gate and our view was that people will buy whatever is there.

There will be no opportunity to inform them. Then when we sustain ourselves, it's going to reward us with the topline growth you want over the three months and six months, not the first 30 days. Keep an eye on that site. As hard as it is to search stuff, if you've been on that website as much as we have, there are probably 100 things you'd like to fix on that website, but I bet they fix them and I bet we show up more.

Vivian Azer -- Cowen and Company -- Analyst

Fair enough. Thanks for the follow-up.

Operator

Your next question comes from the line of Martin Landry from GMP Securities. Go ahead, please.

Martin Landry -- GMP Securities -- Analyst

Thank you. Two follow-ups for me -- your gross margin I think came in about 28%. It was much lower than what we were looking for. I was wondering when can we expect things to improve on the production cost side? You're getting bigger scale. You're growing, which should be lower cost. At what point does your gross margin move up toward 60% to 70% of where it was at some point.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Go ahead, Tim.

Tim Saunders -- Executive Vice President and Chief Financial Officer

I think what you're seeing during that quarter, we went from a 2.3 million of 4.3 million square feet of licensed space. So, during that time, there was still a lot of underutilized capacity. We're now up to 4.3 million square feet after the most recent license upgrade in October, so you're going to see more utilization.

You've got approximately 4 million square feet of greenhouse space between Niagara, Mirabel, and BC Tweed. Once those are fully producing, you'll see higher utilization of that space. So, what we're seeing is a period of transition getting these facilities ready to produce. Those costs are pushing through right now in the P&L, but those will be behind us.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Martin, remember, when you think about all of the additional licenses granted, that was good news. What it meant though was much of Smith Falls had to be turned into a clone factory. Now, the clones are everywhere and they're propagating out of those locations and we convert back into the primary purpose of the Smith Falls facility, but you also get the yield of the other one. So, this past quarter, you saw quite a lot of that going on.

Martin Landry -- GMP Securities -- Analyst

So, if I hear you well, Q3, we should see a nice improvement on your gross margin line.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Yeah, it starts improving. At the initial point of rec in Canada, provinces are screaming, "Get me product," which means you don't necessarily optimize cost, you try to make sure you get them product. So, sometimes you might have to put it on a plane. Sometimes you're running a lot of overtime. We're finding that craziness for the first 30 days is starting to become a predictable, more reasonable model and we can actually start and really look at how we run the business versus how we satisfy the end of prohibition. I think you'll find that as we go through the quarter, we're really sort of locking down on that.

Martin Landry -- GMP Securities -- Analyst

My last question is you had a margin campaign, a national campaign with your Hi logo. Do you have any data points you could share in terms of brand awareness or clicks?

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

I don't have that right at my fingertips, but we're talking about it because in major markets, up until the night of the 16th, we ran really effective pop-ups, meaning engagement in community billboards and systems that put Tweed in front of mind further. Then we take them down and we did not receive a letter from Health Canada to say we were not in compliance because we actually took things down and ran in properly.

Now, if you go to a social event, which is perhaps in a bar which is 19 and over, you will see a stage backed by Tweet and you'll see bathroom posters where it's in those little steel frames. We're seeing quite good traffic and engagement, particularly on social media, where people are posting up, but I don't have the exact click through data. I'll make sure for the next call I do.

Martin Landry -- GMP Securities -- Analyst

Thank you.

Operator

And that concludes the Q&A portion of today's call. I'd like to turn the call back over to Mr. Bruce Linton for some closing remarks.

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

I think we've covered everything off and I will get now to explaining it to CNBC and CNN and other locations in New York. Thank you for your time, everybody.

Operator

This concludes Canopy Growth's first quarter Fiscal 2019 financial results conference call. A replay of this conference call will be available until February 12th, 2019 and can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day. Goodbye.

Duration: 57 minutes

Call participants:

Bruce Linton -- Founder, Chairman, and Co-Chief Executive Officer

Tim Saunders -- Executive Vice President and Chief Financial Officer

Tamy Chen -- BMO Capital Markets -- Analyst

Martin Landry -- GMP Securities -- Analyst

Vivian Azer -- Cowen and Company -- Analyst

Oliver Rowe -- Scotiabank -- Analyst

Mike Hickey -- The Benchmark Company -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

More CGS analysis

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