Still fixing.
Good morning, welcome to Canopy Growth's third quarter fiscal 2019 financial results conference call. Canopy Growth issued after financial markets closed on February 14th, 2019, a news release announcing its financial results for the third quarter ended December 31st, 2018. This news release is available on Canopy Growth's website and will be 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 Chief Financial Officer. At this time, all participants are in a listen-only mode. Certain matters discussed in today's conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company's annual information form and other public filings that are made available on SEDAR.
During this conference call, Canopy Growth will refer to supplemental non-GAAP measures, adjusted EBITDA. These measures do not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is defined in the press release issued yesterday, as well as the 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 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. At that time, if you would like to ask a question, please simply press star, then the number 1 on your telephone keypad. I would now like to turn the meeting over to Bruce Linton. Mr. Linton, please go ahead.
Great. Thank you. Welcome all. I truly enjoy our quarter ends, that's in part because I'm not in the finance department, but it's mainly because, in our world, the sector we're in and the company that we've created, taking time to reflect on what actually has occurred in a prior period only occurs when we do the preparation for this call because we're kind of busy thinking about the next seven quarters. When I think about this last quarter, it's almost possible to forget that the first sale happened and that the company with the first sale of the first legally sold gram of cannabis was us. To almost look over the fact that we went live at the beginning of the quarter on our next generation ERP system.
Which maps out the next several quarters of how that becomes a global platform and how we have done a number of acquisitions and that all the meaningful investments we've made in this quarter and I think in the next six, seven, eight quarters, keep showing really good yield on those investments. It's almost easy to forget that in October, we moved more units, more containers, about maybe give or take a couple than we did in the history of the company up to that point in time. All the activities around automation and creating that, and that we had cannabis coast to coast. We did a number of acquisitions that really, the reason we do these things is we look at and work with companies and keep an eye on them and get involved with them for years and then understand them.
When we make an acquisition, whether it's Storz & Bickel or ebbu, these things have a long time horizon. They add to our intellectual property. When I think about having 32 issued patents and over 140 patent applications, it's because of the combinations of investments and acquisitions. Tim's going to do a great job of walking through the puts and takes of the quarter. I'd like everybody on the call to also think about how we do, which use a five to seven-quarter horizon. What we're doing and where we're going and the investments we're making are on things like science.
Having an actual focus group called Applied Science and developing intellectual property, running clinical trials to create what will be phenomenal products for both rec and medical that will have the ability to be branded globally, but they start with science, outcomes, and IP. When you picture this building that we began in, we have another 240,000 sq ft over two floors, which is got phase I of it waiting for licensing, targeting to be in March. We'll see when it is. That is all about GMP manufacturing processes so that the science can turn into products, the products can turn into brands, and consumers can buy outcomes that are consistent and the same all the time. That platform is multiple years in the creation and will have multiple years of benefit.
The rules and regs, which we're now five days away from the inputs closing February 20th, the government will then say, "We've had all the input we want. Come to the next generation of recreational products." It has a contemplated category called beverages. We have a building that's a little bit more than 150,000 sq ft, which is being put up right now through the winter. The decision to do that building was made before there was actually the regs, but in contemplation of what was likely.
That building is expected to be complete May 1, which means that we can then begin to put all of the equipment inside so that we can then begin to make the beverages, which will use the science that we've been creating for 4 years to go into brand extensions of Tweed and a bunch that are behind the curtain that I think people on the call will like and that customers and consumers will love. They become the first of a kind, and they become something that's the reference file for the world. Then the 16 countries we're in, whenever they choose to have anything additional to medical that's federally permissible, we have the product set. You can see where that goes.
In the next 4 quarters in Canada, we're seeing, I think, a really well now stabilized, thoughtful program where the provinces have had a chance to get information and get organized even more and accelerate. We're seeing stores open on a model that we think makes a ton of sense in many of the provinces, which goes from us on wholesale to a box controlled by the government or a virtual warehouse out to private sector retail. That has been what we thought would work because people want to go to stores, they want to have discussions and conversations, and they want to do transactions in a place that they feel is part of the experience.
Our sales in this last quarter, the first quarter rec, proved our model out that that works and that what we're seeing is that is turning up from Alberta getting faster to Ontario now nailing it and the rest of the provinces turning them up. We're operating stores in several provinces. They include retail, face-to-face, as well as, in some circumstances, e-commerce. The data set we're getting and the platform we're building and the experience we're having is all looping back so that by the time we get to Q4 this calendar year, you're going to have a lot more stores and a lot more products and a lot more people who want to go to them. I expect by that quarter we're having clinical trials in Phase IIB that, if we're correct, starts to allow us to make claims on medical products.
Spectrum is this global product brand which starts to have specific and unique outcomes which start to make claims. That whole platform is now well understood and being educated in multiple languages. We are in a situation where I would say that the opportunity to export to certain European countries, there's probably what you could almost call a backlog that's formed a little bit because of the demand growing in those jurisdictions and the need to have GMP production assets so that we meet the standard. Those investments are turning up in that way. As we walk through this, one of the things I was thinking about this morning is, we probably could and should highlight the cash per share.
When you're actually buying our stock, there's quite a bit of embedded value called cash, and that cash is aimed at all of the things I've touched on, accelerating through our 140 patent applications so that we get enough data to move it. Making sure that with assets that we've acquired, like Storz & Bickel, we should probably be contemplating expanding it because this is an automated, internationally certified ISO 13485 factory that, with the things we're putting together, is going to have, we expect, more demand through the channel, and they're already in 50 markets.
As you'd make those investments, you can look out over a time horizon and contemplate that there's at least a company in this emerging sector that's investment-grade, long-term thinking, and we hope and expect continues to attract more and more institutional shareholders so that we can actually continue to see the migration up into those hands long only. On that basis, I'm very happy with what we've seen over the last year in terms of the names, quality, and total volume of institutional purchasers we've attracted.
I'm going to hand over to Tim shortly, but there was a note in there about the fact that Tim, as we looked at for our next three to five years, because everything in our world, I need three-to-five-year commits, that what the right thing was for Tim and for the company was to take that view and begin looking at an org chart that adds more senior and competent finance team members because we have a really amazing, but not really huge, not really actually sufficiently large finance team. You're going to see investments in that area so that we can not only do a great job in Canada, prepare ourselves for the U.S. hemp and other businesses and global, but also, we have a function called treasury now because we have capital.
Tim was thoughtful in where he was in life and career, but he's also clear that his objective is to be continuing, in assisting and accelerating what we do with the board by Tim helping to prepare that and what we do on our ongoing M&A, because he is a very trusted and competent resource. You may not hear him on the phone by the time we get to Q3 or 4, but he is in the building and that I do greatly appreciate how Tim has conducted himself and how we've worked through this, and I would like to hand it over to Tim to walk through the details. Tim?
Thank you, Bruce, good morning, everybody. I'll now proceed with the review of the third quarter ended December 31st, 2018. Gross revenue for the third quarter, including CAD 14.7 million in excise taxes, was CAD 97.7 million. Net revenue for the third quarter ended December 31st was CAD 83 million. Net revenues in the quarter represent a 282% increase over the quarter ended December 31st, 2017. Recreation accounted for approximately CAD 59 million or 71% of total net revenue. Medical was approximately CAD 16.5 million or 20%. The remainder related to devices, merchandise, and clinic revenues of CAD 7.5 million. The company also reported net income of CAD 74.9 million or CAD 0.22 per basic share as compared to CAD 11 million or CAD 0.01 per basic share and fully diluted share a year ago.
The Q3 fiscal 2019 fully diluted EPS was a net loss per share of CAD 0.38, that's due to the diluted impact of assuming the convertible debt was converted at the beginning of the quarter. I'll comment on earnings in a few minutes. The adjusted EBITDA loss, however, was CAD 75.1 million as compared to CAD 57.7 million in Q2 and a CAD 5.7 million loss in the same quarter last year. I'll also comment on adjusted EBITDA shortly. In the three months ended December 31st, 2018 and 2017, oils, including softgel capsules, accounted for 33% and 23% of product revenue respectively. In the third quarter, approximately 30% of recreational and 42% of medical sales were comprised of oils, including softgel capsules.
The total quantity of cannabis sold during the three months ended December 31st was 10,102 kilograms and kilogram equivalents, up from 2,330 kilograms and kilogram equivalents in the same period last year. Cannabis shipped on a wholesale basis to our provincial and territorial partners, which we call B2B, accounted for 7,831 kilograms. Sales through our own retail channels, stores, in Newfoundland and Manitoba under the Tweed and Tokyo Smoke brands and through e-commerce totaled 906 kilograms and kilogram equivalents. The remainder was sold through our traditional medical channel. The increase in kilograms and kilogram equivalents sold in the third quarter was clearly due to the launch of the Canadian recreation market in the third quarter, offset by lower medical revenue, due largely to the initial adjustment to the available legal recreational market, additionally, the migration to a more limited medical product range, impacts that we feel are short-term.
We remain bullish on the medical market in the coming quarters, particularly as more CBD oils are cleared for sale and become available online. The average price per gram of cannabis sold in the recreation channel was CAD 6.96. During the third quarter of fiscal 2019, the average price per gram of medical sales in Canada was CAD 9.77, representing an increase from 19% over the prior year. The average price per gram of international, which is really Germany at this point, for medical sales was CAD 13.28, up from CAD 12.61 in the prior year's quarter. Overall, during the third quarter of fiscal 2019, the weighted average sales price was CAD 7.33 per gram, representing a decline of 12% from the same period last year.
As I indicated just a minute ago, the average selling price declined in the third quarter relative to prior quarters due to the B2B pricing to the provincial crown corps in the recreation market. In the third quarter fiscal 2019, the company harvested 7,556 kilograms, down slightly from last year due to the timing of harvests which are occurring in the current fourth quarter and with the larger greenhouses undergoing fit outs and early pilot harvests at Mirabel during the third quarter that just concluded. As well as we had eight grow rooms in the Smiths Falls facility diverted to fulfillment activities to meet the recreation launch in October.
With close to 2 million sq ft of greenhouses in B.C., Quebec and Ontario licensed recently, including 1.1 million sq ft licensed in early October to bring our total licensed platform to 4.3 million sq ft, we expect the amount of cannabis harvested to increase in the coming quarters and reach productive utilization. Turning my attention to gross margin. The cost of sales included the impacts of operating costs of cannabis cultivation subsidiaries not yet fully operational, including our Delta greenhouse and a number of zones at the Aldergrove greenhouse facility, both going through fit outs, as well as Fredericton and our greenhouse in Denmark, also in their final inspection phases. Mirabel was also in its first pilot grow cycle last quarter, which combines the other non-producing assets to result in higher temporary underutilized overheads or period costs.
We expect to see Denmark beginning to supply European markets this coming September and also to contribute to the margin. Cost of sales also included costs associated with developing and testing edible and beverage products for which markets will be available in calendar 2019, later in calendar 2019. Excluding the costs associated with these not-yet-fully cultivating facilities totaling approximately CAD 13.1 million and medical excise taxes absorbed by the company of CAD 2.1 million, the gross margin before the fair value impacts and cost of sales and other inventory charges would have been CAD 33.5 million or 40% of net revenue instead of the reported CAD 18.3 million. On the medical excise tax impact, management decided to absorb the excise tax in order to ease the burden imposed on our patients.
The company believes gross margins will improve in the coming quarters when all of its cultivation facilities reach full utilization and cycle through the initial pilot harvest of the high-performing assets. In addition, margins are expected to benefit when edibles and beverages are introduced later in calendar 2019 with lower costs of active ingredients per serving, all combining to drive margins north of 50% in the coming quarters. Turning for a moment to operating expenses in the fourth quarter and fiscal year. Sales and marketing expenses for the three months ended December 31st were CAD 44.9 million, up by a little over CAD 5 million from the second quarter this year. The company made a strong push, such as the high pop-up and billboard campaigns in the lead-up to October 17th when the Cannabis Act went into effect, then placed further restrictions on advertising and promotion.
As has been highlighted previously, the company continues to make significant investments across all areas of our business to strengthen the company's leadership position in the Canadian global cannabis markets, as well as for the recently launched recreational cannabis market here in Canada. Sales and marketing expenses include costs associated with the development of branding, marketing education campaigns, the development of new permitted product SKUs such as pre-rolls, the development of recreational product packaging, the development of cannabis retail, as well as education programs and 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 here in Canada. These costs represent a strategic upfront investment, which management believes will have a long-term benefit in customer acquisition and retention.
The company is making these investments to aggressively seek new domestic and international business opportunities to build for the future. G&A expenses for the three months ended December 31 were CAD 46.1 million. Management believes the foundational investments that Canopy Growth is making across our corporate bench as well as in operations, IT, supply chain, finance, legal, and the aforementioned sales and marketing area represent a prudent long-term investment to strengthen our leadership position. Both sales and marketing and G&A expenses were up significantly over the prior year's third quarter and the most recent second quarter, management expects these expenses to level off in the near term, particularly in our Canadian operations. R&D expenses for the three months ended December 31 were CAD 5.3 million, or 6% of net revenue. In comparison, R&D expenses for the same quarter last year was just CAD 300,000, or 1% of net revenue.
The company's R&D team is researching a variety of intellectual property opportunities, including those related to growth patterns under different environmental scenarios and the genetics of various strains. The development of patent-pending technology related to equipment that the company has engineered specifically for the cannabis industry, and ongoing R&D work being performed in the company's dealer license area that is expected to lead to the development of new cannabis-based product form factors that will enter the market when permitted. With the acquisition of Canopy Health Innovations, the additional scope of R&D being undertaken, and additional resourcing necessary, R&D expenses were up significantly over the same period last year and are expected to increase in absolute amounts over the coming quarters. Acquisition-related expenses for the three-month period ended December 31 was CAD 4.5 million, and these expenses primarily related to the assets of ebbu and Storz & Bickel.
Acquisition-related costs were incurred due to the ongoing evaluation of potential acquisitions performed during the period and increased legal, accounting, and strategic business consulting services required to evaluate, negotiate, and complete these transactions. As we previously discussed, we expect to acquire additional strategic assets in the future as we pursue our business strategy. The non-cash share-based compensation expense related to options granted to employees and consultants of the company and to acquisition-related milestones combined for the third quarter to total CAD 63.9 million. In practice, all employees of the company receive stock options as part of their compensation package, and I note that we had 2,700 employees at the end of the third quarter as compared to 700 a year ago, and even 2,000 at the end of September.
Acquisition-related milestone payments based on 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 stock-based compensation related to options granted to employees and consultants of the company and to acquisition-related milestones combined in the same period last year was CAD 17.9 million, again, when we had 2,000 less employees a year ago. I'll turn my attention to other expenses and net income. Other income was CAD 235.2 million for the three months ended December 31, and it's primarily made up of fair value changes on financial assets and financial liabilities.
The amount includes a fair value gain of CAD 186 million, rising from the decrease in the fair value of the senior convertible notes from the end of the second quarter to the end of the third quarter, and a fair value gain of CAD 36.5 million on financial assets, principally the TerrAscend and Slang warrants. The company also had net interest income of CAD 18.6 million on cash and marketable securities. This income was partly offset by a loss of CAD 6.3 million as a result of the TerrAscend restructuring, which resulted in the exchange of the TerrAscend shares for the non-voting, non-participating exchangeable shares under a plan of arrangement. Third quarter net income after taxes was CAD 74.9 million, or CAD 0.22 per basic share.
As I mentioned earlier, due to the calculations involving the assumption of the convertible debt at the beginning of the quarter, it resulted in a loss of CAD 0.38 per fully diluted share. That compares to net income of CAD 11 million, or CAD 0.01 per basic and fully diluted share in the same quarter last year. Next, I'd like to briefly review our supplemental non-GAAP measure, adjusted EBITDA. Adjusted EBITDA is defined as earnings from operations as reported, before interest tax and adjusted for removing other non-cash items, including stock-based comp, depreciation, and accounting for biological assets and inventories, and then further adjusted to remove the acquisition-related costs. We reported adjusted EBITDA, believing it is a useful financial metric that will help investors assess the operating performance of our business before the impact of investment, acquisitions, income taxes, and non-cash fair value measurements.
Adjusted EBITDA in the third quarter amounted to a loss of CAD 75.9 million, compared to an adjusted EBITDA loss of CAD 5.7 million in the same quarter last year. The higher adjusted EBITDA loss is due to the matters I described earlier with respect to the non-producing facilities, which are temporary, and absorption of the medical excise tax, which was a conscious decision that we made to support our customers. Along with the investments committed in sales and marketing and corporate infrastructure to develop global opportunities, as I also just described. We believe our deliberate and ongoing investment in building the company's production platform, brands, international reach, partnerships, and operations, which directly impacted our adjusted EBITDA during the period, is necessary to strengthen the company's global leadership position. Quickly turning our attention to the balance sheet and cash flows.
As of December 31, the company had cash equivalents, and marketable securities available of approximately CAD 4,915,000,000, up from approximately CAD 322 million at the end of fiscal 2018. The increase from the end of last fiscal year was due obviously to the investment of approximately CAD 5 billion by Constellation Brands in November, June's issuance of convertible senior notes with an aggregate principal amount of CAD 600 million, offset by cash used to fund operations, as well as investments in facility enhancements that have totaled CAD 568 million year to date. The company's excess cash resources are invested in government-backed liquid Treasury bills and bonds. I'll comment now, actually, interesting, that we're now banking with or investing through most every major Canadian bank, five of them, as well as six major U.S. banks.
I should also observe that the fundamental change notice issued in September on the convertible notes expired in early December without any holders exchanging the shares so that the make-whole provision expired and the notes remain outstanding at December 31. Inventory at December 31 amounted to CAD 185 million, up from CAD 102 million at the end of March. And at the end of the quarter, biological assets amounted to CAD 31 million, up from CAD 16.3 million at the end of last fiscal year. Together, inventory and biological assets totaled CAD 216 million at December 31, up from CAD 118 million at the end of last year. Inventories are continuing to be scaled to meet management expectation of market demands, including demand from the legalized recreational market and sufficient choice for our medical customers. Management continues to believe that significant demand will develop for cannabis oil and particularly softgels 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 and softgel caps we have on hand. Now I'll just take a brief moment to acknowledge the CFO transition that was in yesterday's press release. After much consideration over the past number of months, I've made the decision to retire from the CFO role at Canopy later this calendar year, and I informed Bruce, Mark, and the board in December.
After being in this role for four very busy years, helping the company through an aggressive phase of growth with some 30 M&A transactions in OSI so far, multiple financings raising CAD 6.5 billion, and historic stock market listings, including the first for a cannabis company on both the Toronto Stock Exchange and New York Stock Exchange, I really believe now is an appropriate time to hand the reins over to a new financial executive to shape and drive the financial capabilities over the next three to five years as the company prepares for its next phase of growth. I have to say, I love being CFO of Canopy Growth, working with Bruce and Mark and the Canopy team, but with the personal commitment I gave, there is a toll on the family, and it is important for me to make my family a higher priority.
The company has already initiated a search for my successor with candidates identified, and we expect that person will be named in the coming months. I wish to stress that following the transition to a successor, I very much look forward to continuing to serve the management team and the board of directors in a strategic advisor role to help drive Canopy's future growth. The experience I've had working with this dynamic team, helping build this company in this new sector, has been a once-in-a-lifetime experience. I've often said I feel like I joined Seagram's in 1933. It's just been a fantastic opportunity. For the next phase, you will continue to see me go hard for Canopy Growth. I'll have fun, and as we say here, we will get shit done.
This concludes my review of the financials for the third quarter, and I'll turn it back to Bruce for some closing remarks. Bruce?
Great. Thank you, Tim. Just a couple of additions as we look out. Tim has isolated and highlighted on the investments we make and how those are coming on to yield. In Canada, we'll see that shortly. He touched on Denmark. We will begin over time, as you've noticed, our reporting to become more detailed and broken out. We're going to target giving you a picture over time, meaning this year, which will give you visibility of how Canada, as an instance, is operating and the appropriate allocations of that. That's one of our goals on our reporting for the investors. I do want to highlight that the objective of creating platforms will have other jurisdictions which will use cash, which is why we have cash.
As far as the U.S., and I hope there are some questions on it, we have identified the site and locked up the site in the New York State area with a couple of other backup options. We've had very productive discussions with the regulators, our license, and the platform we're building out, as well as some incremental pieces that we think would fit together. The U.S. action is moving quite quickly. Our Latin America activities haven't had as much visibility because we've been, I guess, eligible to keep them a little quiet. That group is now about 70 people operating across four countries with production assets well underway in construction, which will start to show up as real, I'll call it, both assets and yields over the balance of this year. I think now we could probably jump to some questions.
Okay. To ensure an efficient call that gets to the questions of as many analysts as possible, analysts are requested to limit one question and, should it be necessary, one follow-up question. In the event analysts have an additional question, they are welcome to reenter the question queue. Your first question will come from Tamy Chen from BMO Capital Markets. Your line is open.
Thanks. Hi, Bruce and Tim. I was just wondering on your average selling price for the rec channels, almost CAD 7 a gram. First, could you confirm if that's gross or net of excise tax? I was also wondering if you could elaborate a bit more on just exactly where and how you're seeing this strong pricing in the wholesale channel.
All the average prices that I've quoted are net of sales tax, that's after the excise tax is taken out.
Where we're seeing, Tamy, the most active selling points aren't correlated directly with the per capita number of people in the province. It's strongly connected with those places that have stores, and we expect in circumstances like Ontario will have stores, that that is a driver on people being informed. We've put quite a lot of time and money into our education platform, and I think we've educated over 600 people who work in the cannabis sector as salespeople with a self-paced training program, which means that the customer walking in is much more informed.
I expect the average price over time, meaning by Q4, to actually increase because the format and the stores will have much higher-end products, including, we expect, beverages, which when you get into our vape products, which we have been putting away oils for and building technologies for. Whether or not we get to make edibles of some sorts, we've worked through a variety of platforms, and the beverages, all of those we expect to drive to a higher margin per actual gram sold because of the other adjacent ingredients.
My understanding was that for many of these provinces, it was the provincial crown corp that was the wholesale buy. I thought pricing was through a more negotiated process. It's just surprising that it's such a strong pricing that you're seeing. Are you saying that in certain provinces, is there a sell-through directly to retail or-
No. The provinces negotiate them, and then the volume that goes through the province has connected to the points of sale the provinces have. We've seen strong sales in provinces like Alberta with more retail, and we expect the same to be increasingly true across the country as more stores open up. It's through wholesale. After that, we have certain circumstances where we actually also then have a point of sale. Think of Newfoundland or Manitoba or Saskatchewan, and coming up with Alberta. In that model, what we sell wholesale has been originally it was bulk cannabis, dried. As the quarter ended, it included gel caps. We've now launched our rolled joints, and I think our sales of those units are well through 50,000 units.
What we like about them is we now make them in one gram, half gram, and they're made on extreme narrow tolerance platforms, which we had to create and then file patents on. Those produce upwards of 10,000, call it, units we could produce in an hour. Now we're looking at how do we use that equipment in a variety of other locations that might make sense if you could export the technology. I think you're going to see the average margin go up as more and more of these products hit, the model is to the provinces and then through the stores.
Okay, got it. Thank you.
Your next question will come from Vivien Azer from Cowen. Your line is open.
Hi. Good morning.
Good morning.
I wanted to focus on the top line, Bruce Linton. When we spoke last quarter, you were confident in reiterating your confidence in consensus for the back half of fiscal 2019. Excuse me. Consensus has come down. The third quarter was in line, but your production in the third quarter declined potentially relative to Q2. How should we think about the fourth Q relative to three Q? Thanks.
Okay. Yeah, we're not giving exact EBITDA or top line, but we do have inventory growth, and we have harvests, as Tim Saunders called it, the timing of the harvest. Really, we're comfortable we have the product set that will get to the number. What we're always looking at is where is the demand, who's getting the stores up, what's the sell-through like? We think we do have, in fact, especially as oils are becoming presented as a more significant portion and what we think of as a bit of a backlog for exports to places like Germany. We're not pushing down or up on what we're looking at for the balance of the year.
Okay, perfect. Just to follow up on revenue. When you spoke at the CAGNY lunch in New York in December, you articulated that you believed that you would have the CBD products in the U.S. commercially available by end of calendar 2019. I just wanted to see if that still holds, number one. Number two, on CBD and your revenue outlook. You were quoted in an interview a week or two ago saying that you were open to investing as much as CAD 500 million against the U.S. CBD opportunity, and I just wanted to understand your thinking around that, because that seems like an awfully big investment for a market that I believe only generated about CAD 500 million or CAD 600 million last year. Thanks.
Yeah, a couple of things. We have put where we're going to be in New York State, and it's in large part because of the regulatory framework New York State's put in. People may have noticed a week or more ago where the regulators are starting to, at a New York State level, enforce the fact that CBD is something which needs to have proper claims, proper processes, source of access that's actually traceable. I think New York State's going to be a strong market. Right now, will we have it in Q4? I think we're still on a track that would expect to have products in the markets where they're permissible. Maybe New York State will be a terrific market. Perhaps California will be a tougher one, and that's more about regulation.
We're on track with acquiring the building, having third-party growers, having processing, and whether or not it's Q4, Q1, it's a function of a few things having to go right, but that's our timeline. As far as the total investment, we think there are going to be multiple states where we have to operate production and processing of hemp, and that they'll be industrial park scale. That asset group and the channel we sell through will lend itself extremely well to cannabis if and when. We view these investments as creating a lawful channel to a large box and a corner store sale point of products that are disruptive to sports recovery through cosmetics and certain medical fields. The asset group has a lot more extension over time, which could be activated very easily if states were to go.
That's helpful. Thank you so much.
Your next question comes from Michael Lavery from Piper Jaffray. Your line is open.
Thank you. Good morning.
Good morning.
Good morning. As you talk about looking out five to seven quarters, how should we think about the margin and earnings piece of that, and what sort of trajectory does that look like?
As we kind of touched a little bit, we're going to try to give you very good visibility on the earnings by country, by category, meaning medical, rec, and product type, so that we can actually help you, the analysts and investors, understand the yield potential on the invested assets in a country like Canada. What we wish to do is back out and normalize investments that we're making intended to be globalized. Tim will speak to the margin opportunity on a country like Canada, you will see bets laid down, meaning investments in assets that are in geographies that are beginning medical programs at a federal level, with the population sufficient to return in that country on the invested capital without exports. Europe as a region, we have a strategy of investment that covers four countries. South America, four countries. Australia.
Each of those will have yield that goes out over anywhere from one and a half to three years. Tim, I don't know if you want to speak to the margin that we are looking at, it is a sequencing of a creation of a very good business in Canada to reflect all the other jurisdictions where we think it can go.
Yeah. Where I commented that we had some non-productive assets in the last quarter, this is intentional in terms of what you did up at BC Tweed, the two Aldergrove, Delta facilities. Like I said, Mirabel was really just going through its first grows, which we would call the pilot grow. Those are now well planted and growing, and harvests are planned this fourth quarter. I think you'll see that they'll continue to improve the yields and the full utilization. Those margins will definitely move up as we get the almost 4.7 million sq ft of greenhouse and later, about 1 million sq ft of indoor grow being fully productive. That's just in Canada, of course. Then you've got, as we mentioned earlier, Denmark coming online later this year.
Getting full utilization will remove all of those costs that are hitting the margins today. At the same time, you get the other form factors that we talked about, the edibles and beverages. Also, I think you see the medical market, while there's some cannibalization in the last quarter, we also believe that those come back strong and those attract higher average selling prices. All that to say is that we set a northward march on those margins so that you get in the mid-50 range or plus in the quarters that are coming.
Sorry, what was the last part you said, the mid-50 range of?
50%, 60%.
Is that the margin?
Net revenue.
Yeah, the margin.
Okay. Just on the margin side, as you look at your, call it five to seven-quarter planning horizon, would you still imagine the total company picture to be investment mode and growth mode more than we should be thinking about any kind of positive earnings coming out?
You will see a model for Canada, it's a function of otherwise regulatory turn-up. How fast does it happen in America would obviously affect how much we're putting in. How fast the transition is, and we think it's happening quite quickly, from what was called medical marijuana to what we think of as cannabinoid therapy. The opportunity, if the IP results from our trials in Canada, that some of them are expected to have the potential for claims as early as Q4, that does start to put quite a bit more potential for margin because you're no longer selling medical marijuana, you're selling outcomes on a cannabinoid therapy. The walk around that, I guess, would say it depends on what happens on a regulatory basis, but we see a very good line of sight in Canada and Europe.
America is the big unknown at this minute.
Is that calendar or fiscal Q4? That's calendar year?
Calendar for the trials. Trials do have the ability to go slower or faster, but some of the work that we're doing on the phase IIB for human and some of the work on dogs, the current schedule would look at a calendar Q4 for initial results and ability to make claims or not. These are not decades out kind of activities.
Thank you very much.
Your next question comes from Martin Landry from GMP Securities. Your line is open.
Good morning, Martin.
Good morning.
If we want, I am going to assume Martin's question was about margin. I don't know if you want to take the next question.
Hi, sorry. I was on mute.
There he is.
My apologies. Good morning. It is on production costs and margins, actually, you are right. Just want to dig a little bit further into, when you say that we exclude your non-cultivating assets, your gross margins are on 40%. Your average selling price is CAD 7.30. That gives me a production cost of around CAD 4.25 per gram. It looks a little high, and I am surprised that it is not trending down. You have large facilities now in production. Can you explain to us a little bit better what is embedded in that cost and why it is at that level?
Yeah. Like I said, between Delta, Aldergrove, and Mirabel, they're not producing a product that is actually being sold. The operating costs, they're still being incurred during the quarter, and those flush right through the bottom line without the benefit of getting production out of it. Essentially, your denominator, there's no denominator of grams produced in those various ways you're doing fit out. It's a bit of an artificial number that's being created to come up with a cost per gram because it's not apples and apples. When those assets are fully producing, all those costs will be matched against production, and then you'll get a lower cost per gram. It's just a quarter that we had to invest in and make those changes in the facility so that they can be up and running and producing high yield plants.
Tim, maybe additional color to that. We're seeing at the end of this month and into next quarter, those harvests are actually coming off of a larger platform. When you picture a greenhouse, it's not 1.7 million sq ft. I know you've been out there once, Tim, but for others on the call, think of it as five to seven zones. What you can't do is plant it all the first day and then harvest it all the next nine weeks later. It's the rotation of getting all of the zones both retrofitted and then into production so that it's a continuous flow harvest. The good news is, most of that investment is complete, and the continuous flow harvest equipment has been thought through and some of it patent protected, seeking.
That the supply chain is near the top of the cycle to start producing out the two. The exception to that is our Newfoundland facility is the furthest out from completion, but we're looking at something there that's in August, September. Otherwise, New Brunswick, B.C., and Quebec are largely finished, with the next thing being extractors, not actual production assets, but conversion assets.
Okay. Maybe just switching gears. You're realizing a very high selling price internationally, I'm just wondering at this point, what prevents you from shipping more products internationally?
Excellent question. Last quarter, there were a lot of changes and the regulators were pretty busy and so were we. Getting actual approvals through, was not as fast or smooth as normal course. I believe we're returning to normal course. In the interim, there is quite a lot of demand, in those geographies. As we all know, Q3 was pretty crazy and being a regulator, and a producer, both of the parties were, I would say, full up. That has been a priority we've been focusing on since January with the regulator to increase the volume that we can ship. We'll continue to fill all the channels in Canada.
It's not a case of production not being available, it's just more a function of paperwork.
Each time you ship, it has to be requested by the foreign jurisdiction and approved by the Canadian jurisdiction, and then the product has to be available and go across. Principally, it has been the paperwork, not the product, and I think we're highly focused on the paperwork and the product being available this quarter and next.
Thank you.
Your next question comes from John Zamparo from CIBC. Your line is open.
Thanks. Good morning, guys.
Good morning.
Good morning.
I wanted to follow up a bit more on that U.S. CBD opportunity. It's encouraging you expect to have these products in by Q4. I was hoping maybe you could share what some of your most impactful products would be, what retail channels you're prioritizing, and just generally, can you talk about your discussions with the FDA and regulators in the states outside of New York?
Those are all great questions. I'd have to think that, if I gave a really clear, full answer, that would be advantageous to parties we're not here to help. When we look at who is interested in speaking with us, it goes from big box to corner store. What product producers, it goes from things that people are already selling into cosmetic to animal care. We've announced our intent on trials in the dog area and our, we think, capacity to create a range of products. We are going to be selling finished goods that are powered by and in many cases branded by, divisions that what you would call health and wellness. The FDA file has been and being developed, but the regulation is also a state level lead in a place like New York.
This was about a great launch platform with very good regulators that lead to a medium-term FDA file that we think will be quite helpful, but we don't have that and need it to start in New York. We have a very skilled and substantial team, which included people we took from Greenstar Constellation and really key people in our organization and hires that are all U.S.-focused and on this file. It is a really live, really active file and lots of moving parts, but I think it will have a potentially serious impact, before the year is out.
Okay. That's useful. Thanks. I wanted to follow up on a comment you'd made at the beginning of this call, Bruce, about moving to phase IIB of the clinical trials for insomnia treatment.
Yeah.
When might we see commercialization of this? Is the more likely result that you have new products to treat this, or is the benefit that you have now legitimate claims that your existing products can treat it?
It's claims on dosage and a uniqueness potential protectable on delivery mechanisms. It becomes a platform by which you can then increment and adjoin what we have with perhaps other claim-based inputs. It allows people to go to a doctor and say, "See, I told you. In fact, it does work, and I now want to have access." I think it moves the needle on legitimizing. I think what many people understand is that from our observational connections with our client base, the second most common reason they're acquiring cannabis is to fall asleep or stay asleep. If we can turn that into a form factor delivery mechanism and then a science set you really do move the needle, and it's just the first effort with the Drug Master File and stabilized ingredients that can add a whole bunch of other trials on behind.
We have a dozen plus that are mapped out and rolling up. It's a lot of leverage for the patients, and I think it gives us a really good platform product to go out with. Nobody really does love the current sleep options.
Okay. That's great. Thank you very much.
Your next question is from Owen Bennett from Scotiabank. Your line is open.
Good morning. It looks like you achieved a 30% market share in the recreational market this quarter. I think that's in line with your target, and it's in line with mine. My question is, as other producers catch up in terms of bringing production online, is that a target you expect to be able to hold? Is it one that you think you can bring into the international markets as well?
Well, I think within two calls we're going to hardly talk about production, and we're going to talk about conversion and conversion into what. Where we've made really significant and thoughtful investments has been to be in the conversion and creation of products that create customer demand and brand that wins. I would be kind of upset if we can't maintain or improve, because we're far enough ahead and have been thinking that way and working on things for three to five years that I think are just going to be ready to take hold in the next three to seven quarters. I hope someday people don't even want to know about how'd you grow that, because that's really a necessary step, but it's not the core focus.
Right.
Yes, we should dominate, and I will be extraordinarily disappointed if we don't do that through science and claims and products.
As a follow-on from the conversion angle, you've recently inked deals with third-party extractors. Could you discuss why you're moving a portion of that business out of house, and if this is more of a temporary measure as you bring your own facilities on, or is there a structural benefit to doing it out of house?
It's really an accelerant to the opportunity at hand. Our platform that we're building is quite a lot larger and more scale, and some of it's co-located with large production grow greenhouses. We just thought these were very useful sources of conversion. I bet there'll still be business with them to fill gaps. That overall model, I think, is a very thoughtful place for people to have created value. It's certainly not a core move out. We really have put a lot of IP effort on how do we get to API level of extraction. This is a really smart way to get a little faster now.
Thank you.
Your next question comes from Graeme Kreindler from Eight Capital. Your line is open.
Yeah. Hi, good morning, Bruce and Tim. Thanks for taking my questions here. I wanted to ask about the U.S. market. Flipping through the MD&A here, and understanding that the company doesn't want to invest in any company, or I shouldn't say invest, operate in any country where it is not federally permissible to operate cannabis. The MD&A mentions the STATES Act as a framework that they think would allow cannabis to be federally permissible. My question is, with something like a SAFE Act that reconciles banking, does that give you an accelerant towards potential investment or a strategic partnership in the U.S.?
Yeah. Anything, and there's many variants right now floating around, some are bipartisan working through, and our lobbyists and crew are watching it. Anything that would allow, at a state level, the activities that currently occur in the state not to be offside federally, and as a result, enable parties like NYSE to see it such that our listing would be maintained, immediately mean that we're in. There are a bunch of formulations that could result in us being able to immediately enact our plan in any of those states. It's feeling much more likely that it's sooner than later. It's politics, hopefully that helps, Graeme.
Okay, thanks. Just another question here. In terms of preparation for the edibles, ingestibles derivative market, and looking at the inventory balance at the quarter end, 65% of that balance was work in process inventory. How is the preparation for the products in that market being handled, while balancing also the allocation in the Canadian channels as well as internationally?
What's your demand forecast on Q4 of this year? We find that oils are an extremely likely stabilized ingredient to fit into everything from beverages to edibles to vapes. We're working on accumulating oils. Part of the prior question on why are you using these guys is because you need to have it in a state where you can actually then opportunely convert to where you want. Tim, I don't know if you want to speak to allocation, but it is a continuous active juggling act where the first to get it is science, second is patient, third is export, fourth is rec. It's a constant. Our Canadian COO has a full-time function of allocation. Tim, do you want to speak to any more?
Yeah, no, that's exactly it. The operations group constantly looking at supply and demand forecasts and allocating what do we need, the variety and formats. They think about that, sweat about it every day, and making those allocation decisions.
Yeah. This is not a stockpiling exercise at all. We're constantly looking at as the provinces are turning up more stores. We need to fill that warehouse. I think we're doing a solid job, but I would say that effort to continuously deal with allocation of the scarce resource is a top 3 priority in the company.
Okay. Thank you very much.
Your next question comes from Matt Bottomley from Canaccord Genuity. Your line is open. Matt Bottomley, your line is open. Okay, we'll move on to the next question from Mike Hickey, The Benchmark Company. Your line is open.
Hey, Bruce, Tim, congrats on a great quarter. The first quarter of adult use, too, pretty awesome.
I can confirm that it was a unique operating environment, a very unique operating environment.
I bet it was. Curious on sell-through, what are you seeing in terms of consumer demand for individual SKUs, if there's any standouts, and maybe in particular, the demand that you're seeing on adult side for softgels. I'm not sure how much visibility you have on sort of the legal framework that's taking shape around edibles, but would you expect to have gummies or chocolates as possible product SKUs? Thanks.
A few questions. I would say on the data for what's selling through, really, we were getting into December and January when we're actually launching in all of the softgels that we could across the country and pre-rolls. I think I'll be able to give you a much more accurate and crisp answer as we finish the fourth quarter, because we'll have had pretty much one full quarter. Everything that we can make, whether it's chocolate to drinks, we have been building out a platform. The people who've been to our site have observed the internal chocolate factory that exists and the bottling plant that exists. We've been doing a lot of testing and working through various formats. It's all going to come down to regulation.
The regulations right now, it's still speculative as to, I don't know, how the cap must work on a bottle for a closure versus whether or not the glass is colored. We will have every format you can contemplate, they are right now functionally driven by what the regs say, and the regs are coming to their final form. We have been waiting for the regs to get ready, that will affect what we get to put in the market, and if it's legal, we'll have it.
Okay, thanks. Do you have a sense of how draconian the packaging is going to be on the edibles? I mean, do you feel like maybe there's going to be a little bit of a lift of what they've done on the flower side?
Yeah. Just for everybody on the call, the packaging from our perspective is okay. What we're more concerned about is the quantity and weight and the fact that from a recycling and consumer preference, we wanted to launch with great packaging. We've done that, we're really pushing on packaging enabling this to be something that has some appeal, but for sure has some functional benefits over what's currently there. You're seeing it, right? The debate over how does a closure work on a bottle versus a can. It's getting tighter. We got out of the gate, everything that it was okay to good, now it seems like it's going to keep getting better. Keep your container. They may be collector items fairly soon.
That'd be good news.
Cool. Why don't we take one more call if there is one, then I think everybody probably has a job related to the markets.
Oh, I have one from Andrew Carter. Your line is open.
Good morning. Quick question for you on the medical side. Obviously, it was under a lot of pressure in the quarter. A lot of it's been obviously the transition out of Spectrum. Can you give us any clarity how Spectrum's kind of performed, how it was doing last year, how many doctors adopting, things like that?
Yeah. Spectrum has become our formal brand for all medical everywhere in the world, where that transition in Canada started to really take shape in calendar Q2 last year, where you started to be registered. In part, that was driven by provinces that didn't wish to have Tweed Medical and Tweed's rec. The Spectrum Canopy Health, education on that. Current actual number of doctors writing, I couldn't give you an exact number. Total number in Canada that have written in our sector appear to be about 20,000 with more referrals from other docs. Our patient count, Tim, I don't know if you have it at your fingers, but it's in that sort of 80,000 to 100,000 patient, I think would be a range right now, Tim, that's-
Yeah. We're just about 83,400 patients.
Yeah.
Just down slightly from where we were Q2, but I think it's premature to make a decision on that. We do believe that that will continue to grow.
Yeah. The medical platform will, I think, accelerate now that people can have frank discussions with doctors now that rec is there. They don't appear to be looking for a party, but a solution to their health. I think with the testing platforms we're putting out, I continue to believe that our medical opportunity on a global basis over the next three years potentially has the top line bigger than the rec because there are just going to be so many more people governed by it, and the products are going to actually evolve to being cannabinoid therapy, not medical marijuana. It is a big focus and a basis of optimism for what's next for us.
Thanks.
I have no further questions. Thank you. I turn the call back over to Mr. Linton for closing remarks.
No, that's great. Thank you, everyone, for your time and questions. Thank you, Tim. You did a fantastic job, and we look forward to next quarter and doing this again.
Yeah.
This concludes Canopy Growth third quarter fiscal 2019 financial results conference call. A replay of this conference call will be available until May 14th, 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.