Bruce Linton - Chairman and Chief Executive Officer Tim Saunders - SVP and Chief Financial Officer.

Vivien Azer - Cowen & Company Martin Landry - GMP Securities Vahan Ajamian - Beacon Securities Jesse Pytlak - Cormark Securities Neil Maruoka - Canaccord Alan Brochstein - New Cannabis Ventures Jason Zandberg - PI Financial Russell Stanley - Echelon Wealth Partners.

Good morning and welcome to Canopy Growth's Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. Earlier this morning Canopy Growth issued a news release announcing its financial results for the fourth quarter and fiscal year 2017 ended March 31, 2017. This news release will be available on Canopy Growth's website and filed on SEDAR.

On this morning's call we have Bruce Linton, Canopy Growth's Chairman and Chief Executive Officer, and Tim Saunders, Canopy Growth's Chief Financial Officer. At this time all participants are in 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 adjusted product contribution and adjusted EBITDA.

Adjusted products contribution and adjusted EBITDA do not have any standardized meanings prescribed by IFRS. Adjusted product contribution and adjusted EBITDA are defined in the press release issued earlier today as well as in this period's management's discussion and analysis document that will be filed on SEDAR.

Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by Mr. Linton and Mr. Saunders, the Company will conduct a question-and-answer session during which questions will be taken from analysts and investors.

[Operator Instructions] I would now like to turn the meeting over to Bruce Linton. Bruce, please go ahead..

Thank you. Good morning, everyone. So the last time we did this I believe the greeting was happy Valentine's Day because I think it was on the 14th of February.

And when we had that call I would have liked to - told you that we were reasonably certain that the federal government would put the regs to the house and that things would move along and that adult access was going to happen in 2018.

We were pretty confident of that but that still wasn't a position to necessarily occupy in a public forum like this and it seems more appropriate now.

And the reason I focus on that is we have that view strongly sort of as a kick off to January 1, 2017 and everything that we were doing and are doing was to make sure that we are where we want to be for the beginning of 2018 because I wouldn't be too surprised if a good time to start adult access would actually be for ‘20 not much later.

So this quarter and some of the things we're doing in the first half of 2017 show up in the way that our business looks and Tim will get into the numbers. But I just want to make sure everybody understands that what we've been up to.

So we've been certified by a entity out of Germany for GMP certification both for greenhouse and the facility at the Smiths Falls. That is not a light touch exercise. It is one that took quite a bit of effort and we thought if you're going to be GMP certified why not have the entity that does the certification also be German.

It carries us well into Germany. But I think it conveys a standard that people would be fairly comfortable with. We also just launched pharma grade soft gel capsules, getting that up and running and turned to the permitted sale with Health Canada. You know, that that was a good part of the year that we've been working away at that.

Having it now done I think positions us for a bunch of things that will look pretty strong for the medical and the response has been very good.

Now you have to have stuff to put inside the soft gels which is why for the first - well a bit of the end of the year and a bunch of the first quarter and some of this quarter getting a really large scale extractor up and running so that we can actually have a large volume of oils that are of a grade in process that will work both medically and adult access.

You'll see an inventory in our vault that is waiting for that machine and that machine is running now and running well. So it's sort of a conversion ready and we wanted to get that done in the first half of 2017 not wait until Q4 2017 to see if we can make it work. So I think we'll be moving pretty well at that.

During this quarter, people may have noted this store evolution from a bunch of stores each selling individual products to a platform which sells all products and then the beginning of the edition of what we call Craft Grow brand. So start to think of it as a multi point, multi product single point of sale.

If under adult access the government wants to supply product to people who wish to register at a website.

As you can go to say the LCB and buy your bottle of gin and have it shipped to your house with the same courier as we currently ship our cannabis and present the same ID that you need to present when you receive our cannabis you would receive your liquor, I think we're well scale for that.

There's a bunch of items behind that that we're going to build up a bit more. But that platform and the customer care capabilities I think are starting to firm up in a way that probably could work very well for a bunch of platforms and that's meant a lot of software upgrades, a lot of training.

We now have over 100 trained people in our customer care center and so that I think positions us well as we go forward. And then maybe just [indiscernible] we've got construction start going everywhere and it’s expansion, it’s not initiation of something totally new.

So you know we're getting a bit more predictable when the rooms come online what the products going to be like.

In some of the construction that I think will make a big difference is we have a zone called the dealers license area which is a regrettable name applied to areas in which you can do formulations of products which currently can't be sold under the current regs for adult - for medical, but allows us to work through a bunch of I’ll call it methods of creations that could have great medical application and or future adult access application.

It's a major build up lab. You'll know that we have that license now for more than a year, but we're expanding the functionality we have there.

We have been pretty active I think you've noticed creating something called Canopy Rivers which gives us access to more products, less dilution and I think it's going to be a bit of a lever for that market and you'll start to hear a little bit more about Canopy Health.

We've been quietly working way for about a year on this initiative that allows us to do medical research but also secure intellectual property. And that has some notable parties involved. Marc Wayne, who was the founder of Bedrocan, Dr.

Mark Ware who many may know from panels are collaborating again and what they've created I think is quite a good focus on a number of indications that should have substantial market value and should have intellectual property available to us.

And then finally, there may be a path down the road where Hemp becomes part of the process of people finding access to CBD through a conversion process. Canopy Hemp is something we've had initiated prior to the acquisition of Mettrum.

With Mettrum we've taken Mettrum originals and melted that with HEMP.CA and that asset’s coming together nicely where it’s actually beginning to be I’ll call it breakeven revenue entity, but also the ability to actually look at processes and research in the event that the regulations evolve.

That would give us I think very good position on the Hemp assets. So there is quite a lot going on. I think you'll see many of these projects coming to fruition as we enter Q2 and 3. And really the aim is to be the best ready and the best positioned as 2018 hits. So I’ll let Tim step through the historic numbers of the last year..

Thank you, Bruce. And good morning, everybody. Revenues in the fourth quarter were $14.7 million, representing a sequential quarter-over-quarter increase to 50% and revenues for the fiscal year ended March 31 were $39.9 million, up from $12.7 million last year, representing a sequential year-over-year increase of 214%.

The total grams sold during the fourth quarter was 1,740 kilograms and kilogramme equivalents at an average price of $8.03 per gram, up from 1245 kilograms and kilogram equivalents at an average price of $7.36 per gram in the third quarter of this same fiscal year and up from 700 kilograms sold during the three month period ended March 31 last year at an average price of $7.16 per gram.

For the fiscal year the company sold approximately 5200 kilograms and kilogram equivalents at an average price of $7.40 per gram and in comparison the company sold about 1700 kilograms and kilogram equivalents last year at an average price of $7.34 per gram.

Next I'll briefly discuss the IFRS reported gross margin for the quarter and for the year ended March 31.

During the fourth quarter of fiscal 2017 the company developed a plan to sell the Tweed Farms Sun-Grown products at a reduced price commencing in the first quarter fiscal 2018 and we took this into account when valuing the Tweed Farms Sun-Grown inventory at March 31.

So accordingly the fourth quarter gross margin was primarily impacted by the new pricing introduced subsequent to year end..

As a result the IFRS gross margin for the quarter ended March 31 inclusive of IFRS accounting for biological assets was $1.4 million or 10% of revenue and the comparative period last year the gross margin in the same basis was $2.7 million or 53% of revenue.

The IFRS reported gross margin for the year was $37.6 million or 94% of revenue for the year ended March 31. And in the comparative year the gross margin in the same basis was $19 million or 150% of revenue.

In both cases of course the annual IFRS gross margin was primarily influenced by the unrealized gains and changes in the fair value of the biological assets.

Now turning for a moment to our supplemental non-GAAP measure, adjusted product contribution which is defined in the press release and just as a reminder the APC or Adjusted Product Contribution adjust the reported gross margin to remove the fair value measurements required by IFRS and instead measures the weighted average cost of grams produced against the grams sold in the period.

On this basis the APC in the fourth quarter was $9.6 million or 66% in revenue, as compared to Adjusted Product Contribution of $3.2 million or 63% of revenue in the same quarter last year. For the year the Adjusted Product Contribution is $25.2 million or 63% of revenue.

And in the last year the adjusted product contribution was $8.1 million or 64% of revenue. Now turning for a moment to operating expenses for the fourth quarter and the year ended March 31.

While SG&A has declined as a percentage of sales quarter-over-quarter, year-over-year the absolute spend has increased and represents investments made by the company to scale and expand with the growing market. Sales and marketing expenses for the quarter were $4.1 million.

These costs include two months of Mettrum operations, also included higher patient assistant payments directly attributed to patient growth, other expense growth related to increased marketing related staff, costs associated with expanding the company's medical outreach program, branding programs and increasing the client care centers, as Bruce just mentioned a few minutes ago.

All of these customer - the people the customer care center interface directly with the customers growing base of clients. In comparison the sales and marketing expenses for the quarter last year were $2.4 million and sales and expenses – marketing for the year ended March 31 was $30 million, and as compared to $5.7 million last year.

And details of major changes are as pretty much similar as just described for the quarter and are also found in the press release and MD&A. G&A expenses for the quarter were $6 million, as compared to $2.6 million last year. G&A expenses have declined from 51% of revenue in the quarter last year to 40% of the revenue in this quarter just completed.

These costs include two months of Mettrum operations, also included is higher accounting and professional service fees, higher finance charges such as credit card payment processing fees due to an increased usage of credit cards by customers. G&A expenses during the quarter also included the impact of increased staff levels to support the business.

Extensive use of consultants and advisory services while expanding and commercializing the company’s operations. Facility costs have also grown as we expand across the country.

So these are up in all locations and also the G&A includes the compliance costs associated with meeting Health Canada requirements, as well as other public company related expenses including related professional fees. G&A for the year was $16.9 million as compared $8.2 million last year.

G&A expenses have declined from 64% of revenue last year to 42% of revenue this year. Overall the increase in G&A reflects the company's growth and building the commercial capacity and capability and listing also as a public company with the TSX. Acquisition related expenses for the quarter were $5.4 million.

Acquisition related expenses for the quarter include $4.6 million related to the acquisition and Mettrum and the rest related to M&A advisory services and other acquisition activities related to evaluating targets both potential and those executed. In comparison the acquisition related expenses for the quarter last year were nil.

Acquisition expenses for the year ended March 31 were $7.4 million, that's compared to $1.2 million last year. The acquisition expenses in fiscal 2017 related primarily to the Mettrum acquisition, but also to the acquisition of MedCann GmbH that can GmbH or what is now Spektrum Cannabis GmbH, as well as Vert, Hemp.CA and other M&A advisory services.

The acquisition expenses last year in fiscal 2016 primarily related to the acquisition of Bedrocan Canada.

The Canopy Growth may require additional strategic businesses and assets in the future as it pursues its growth strategy and such the company will and more likely will incur related acquisition expenses, including legal, accounting, strategic business consulting services these [ph] and so on.

Stock based compensation depreciation and amortization both on [ph] cash expenses were $5.7 million and $3.1 million respectively in the quarter. In comparison the stock based comp and depreciation accounted for $1.6 million and $780,000 in the same quarter last year.

For the year stock based comp and depreciation amortization again both non-cash expenses were approximately $10 million and $6 million respectively in the year ended March 31. In comparison last year stock based comp and depreciation amortization were approximately $3.7 million and $2.3 million respectively.

Now next I’ll comment again on another non-GAAP measure that we use adjusted EBITDA, as a reminder we introduced this in the last quarter.

Adjusted EBITDA as defined as earnings from operations as reported before interest tax and adjusted for moving other non-cash items, including stock based comp depreciation and the non-cash effects of accounting for biological assets and inventories and further adjusted to remove the acquisition related costs.

We reported adjusted EBITDA believing it's a useful financial metric that will help investors assess the operating performance of our business before the impact of investment, acquisitions, income taxes in non-cash fair value measurements.

On that basis, adjusted EBITDA in the quarter amounted to a loss of $5.3 million as compared to an adjusted EBITDA loss of $4.4 million in the same quarter last year. For the year the adjusted EBITDA amounted to a loss of $70 million compared to an adjusted EBITDA loss of $40 million last year in fiscal 2016.

As a result of all of the above in the fourth quarter of fiscal 2000 ended March 31, the company reported under IFRS a net loss of $21.1 million or $0.14 per share. This compares to a net loss of $5.1 million or $0.05 per basic share in the same period last year.

For the year ended March 31, Canopy recorded an IFRS net losses of $16.7 million or $0.14 per basic share, and this compares to a net loss of $3.5 million or $0.05 per share in the same period last year or last year.

We'll speak as Bruce has talked about earlier - about the investments we've made in both OpEx and CapEx this year and we'll talk about that again on this call.

Now turning attention to the balance sheet and cash flows, at March 31 the company's cash, comprise of cash and cash equivalents totalled out and $1.8 million, representing an increase of $86.4 million from last year, principally due to cash received from the bought deal financings that closed in April and August and December of 2016, a private placement that closed in March 22, 2017, and options exercised as well during the year combining – combined to total $129.3 million net of share issue costs.

The increase also included $3.5 million to mortgage proceeds received in the second quarter on the Tweed Farms facility and $12.3 million in net cash acquired at closing of the Mettrum acquisition, all of this offset by capital expansion across the company but primarily in Smiths Falls and amounting to over $29 million and also cash applied to funding the operating activities.

Investments and facility enhancements were primarily improvements at our Smiths Falls facility, including the conversion and construction of additional growing rooms to retrofit an expansion of our Bowmanville South facility and in the expansion of cannabis oil extraction production capacity and also for the production of gel capsules, as well as information technology as Bruce just mentioned too.

Assets on our balance sheet at March 31 include inventory valued at $46 million, up from $22 million last year, biological assets at the end of the year equal $13.6, up from $5.3 million on March 31 year ago. At March 31 2017, the company held 8,360 kilograms of dry cannabis and 3049 liters of cannabis oils.

Included in the dry cannabis quantities were 377 kilos available for sale in the company's online stores and 3,173 kilos in process of finishing or awaiting approval for sale. In addition, the inventory at March 31 included 4,810 kilograms held for extraction.

With the recent commissioning of a new industrial scale cannabis oil extraction system at our facility in Smiths Falls we expect to move through most of this – extract the inventory well before the end of the calendar year. So this concludes my review of the financials for the fourth quarter and for the year ended March 31.

And I'll now turn the call back to Bruce for further remarks.

Bruce?.

Great. Thanks, Tim. Your voice is getting louder every time we do these calls, that's good. I will ask if there are any questions and I suspect that maybe a few..

[Operator Instructions] Your first question comes from Vivien Azer from Cowen & Company. Your line is open..

Hi, good morning..

Good morning, Vivien..

Morning..

So, Bruce I wanted to touch on a comment that you made earlier in terms of the transition to the adult use market.

I totally appreciate that it would be cute and clever that the market would open up on 4/20, but is there actual - like is there a dialogue around that or is there any reason to think that that's the right date as opposed to July 1, 2018, if you could expand on that, that would be helpful?.

Yes. So I am not a politician, though someday I might be. And if I was there's no chance [indiscernible] for the 151 anniversary, it’s going to be get high first day and the news reports on it.

So I think it's going to be before July 1st which has been the indication and I think there's a history of this government being hip [ph] you may or may not have seen the media. Mr. Trudeau was in the Pride parade but he also had some funky socks sending out a secondary message.

They love the social media kick and they use 4/20 to announce that they were doing this two years ago, just theorizing but it would - it would play to the crowd that they wish to reach too I think. And so I would be not too surprised that they came out earlier than people are expecting, other than that no specific dialogue.

But I wouldn't bet against them looking for a good PR position on that..

Okay. That's well taken, yeah, that picture was super cute with him hi-five-ing that little girl who was wearing a Roman costume. A lot of admirers of Mr. Trudeau down here south of the border..

I am telling you the guy has an expertise primarily in how to be great at social media..

Got it. So kind of with that timeline in mind, I mean okay, maybe it's April, maybe it's July, either way we are rapidly approaching the market transition.

I'd love to hear how you're thinking about patient acquisition, whether there are any useful analogues in the United States where as consumers anticipate a transition to an adult use market you know, do you think that there will be a slowdown in terms of medical patients coming onboard? Thanks..

Yes. So it may soften that somewhat in that, not necessarily the patients but I've - we've had some feedback where there have been some physicians saying well why do I need to do this if there's going to be a reg [ph] market or an adult access market.

And you know we've been pretty active on the detailing to make it clear there were going to be two markets going forward and that there is one which if you picture three years from now is materially different than the other.

And when I say that you're going to have products which have VIN [ph] numbers, you're going to have products which have intellectual property and have shown efficacy we believe against certain key indications. And so it may - it may slow a little bit with the docs.

I think it's temporary because of the work that I see us doing in places like Canopy Health that turn things into actual insurable covered products or OTC type thing. So not expecting a material, but some of the docs certainly have pushback..

Got it. Thank you. And one last one, Tim for you please. You know as we think about the investments that you guys are making in terms of expanding capacity ahead of the market transition, the cash cost per gram you know continue to kind of creep in they crept kind of all year along.

How do we think about that cadence for next year please?.

Yeah, this is Tim.

So I guess you know, we’ve kind of a I guess alluded to it in the capacity expansion in the press release that came out on the weekend, but just in respect to the fourth quarter you know when we acquired Mettrum we actually did a reboot there at the grow operations restarting all over again and then did a reconfiguration of the rooms as well.

So that for that quarter otherwise resulted in mostly idle operations. But the benefit of those investments are really going to see itself come through in the next quarter. So that's part of it.

Also to, Bruce also talked about the investments we made to get to industrial scale oil extraction and build up – sort of building up an inventory of the gel capsules and getting that right.

And so those efforts also if you measure that against lower harvested grams in the quarter, particularly with the farm there was no harvest in the farm in the fourth quarter, the harvest actually occurred in just the first quarter. So those factors combined together caused the weighted average cost per gram to creep back up.

So - but I think as you start to see these things turn on and then especially with the industrial scale oil extraction taking through that there's almost 4000 kilos waiting to be processed and which should be processed relatively quickly. We'll see the benefits or economies to bring the cost average cost back down..

Terrific. Thanks very much..

Okay..

Your next question comes from Martin Landry from GMP Securities. Your line is open..

Good morning, Bruce and Tim. My first question is Bruce on if you could paint to us a picture of where you are in terms of your production capacity versus demand right now. Are you aligned or are you capacity constrained.

Any color on that would be helpful?.

It's a constantly shifting thing if you will. So we had a number of rooms built and waiting for some time that you – I think saw a release on Saturday that a number of those were approved. That will be helpful, but will be helpful in Q2.

With the oils it has been our biggest constraint for capacity, it took some time to get the equipment up running fully commissioned approved. And so that probably if I was going to pick one primary constraint for the first part of this year has been the ability to produce enough oils to meet the demand for the oil and we have that now.

But you know it's taken a good part of the first year to get there. So different constraints. The quality of what we're growing in Smiths Falls and the quantity continues to improve per room with the genetics and methods.

And so part of the thing that Tim talked on as far as the Sun-Grown it was essentially an effort to differentiate the crop growing at the farm, then the crop growing indoors for the same strains. So I would say we're starting to have not just capacity but differentiated capacity.

And so it's coming together Martin, but there's always a choke point and for sure oils were and are [indiscernible] the first half of the year..

Okay. So if we then translate that to your patient acquisition. How active are you in terms of on-boarding patient, are you pedal to the metal or are you slowing things down.

Just to give us a bit of a sense of how you're looking at the - how have the last quarters and then looking forward to the next quarter?.

So for and everybody knows that we have unaligned quarters, but for our Q1, so the second calendar quarter of the year we continued to push it but not as hard as would be normal on client acquisition because we wanted to get the oil mix. We are there now.

And so I would suggest that client acquisition has been pedal to the metal for the last three or four weeks, but it's been more of a natural growth where we wanted to get the oils and because increasingly things like gel capsules are what people want that are going to physicians and physician detailing goes much better now that we can have something new to talk about.

And so that's kind of been you know make sure we get it right and then really hammer it hard as we've been finishing up Q1..

Okay. And maybe Tim if you can. You know I sort of the contribution of oils was over 20% of sales versus probably around 12% in Q3. So you’ve had a good contribution of oils, but despite that your gross margin has gone down you know, from Q3 levels.

Would it maybe possible to maybe get a bridge of your adjusted gross profit margin from Q3 to Q4 that would be helpful to understand a little bit the puts and takes to it?.

Yeah, I mean, I think the bigger one was - so what I talked about earlier being the value in the - are taking into account the Sun‑Grown pricing for this farm that was really the biggest driver and the change from quarter-over- quarter.

Previously you know, at December 31 the Tweed Farms product was sold under the Tweed brand at a higher price and with the marketing adjustments made subsequent to year end we took that into account when we value to price the inventory at March 31. So that was by far the biggest impact quarter-over-quarter. So that was probably the biggest component.

Particularly just to product contribution as a percentage of it’s - relatively in the same ballpark. So that's so significant a change..

And Martin, so well the oil percentage has climbed, I believe it would have been substantially higher if inventory was available. So when you looked in our store the amount in quantities and varieties of oils weren't as we would like them because we're transitioning to the substantial capabilities. But the market's moving to that space quickly..

Okay. Just to circle the loop here on the Sun‑Grown. Can you can you quantify that and why - can you maybe give us a little bit more color what is that Sun‑Grown, why are you saying that at lower price and why are you writing it down.

I mean, if you're under capacity constrained I mean, why would you sell your products at a discounting price?.

So let Tim hit the second part of it. So picture a stream which has the same name grown in two occasions one indoor outdoor. What we found is the indoor growing in Smiths Falls has increasingly had higher and higher quantities and quality reviews.

And so we had a choice we could jack the indoor price up in Smiths Falls but this is still a medicinal market, as a way to differentiate it from the stuff which is growing in the greenhouse which is more variable.

Or we could hold the price line because we are seeing more quantities and quality in Smith Falls hold that price line and reduce the price of the Sun‑Grown to reflect it is a more variable crop. And so we took the second choice and that's the logic of why it has a different brand and a different price point.

I’ll let Tim hit the specific numbers on the impact..

Yes. The specific amount is you know there's another ways to disclose and but it's – it was certainly taken into account in the pricing of each of the strains that are grown in the form only to say that I mean, when you look at partially a 10% it would have been probably more approximate to where it was compared to last year.

So it was in terms of the impact on percentage it would have been in double-digits for sure in excess of 20% impact on the margin..

And Martin, ultimately what we love about Green House is that it produces volumes for oils.

But we didn't have the capacity to convert all, but picture about this time in 2018 when people want oil and we're going to perhaps be able to make a varied format or shortly thereafter if concentrates [indiscernible] the greenhouse product will turn up as oil that won't turn up very often or necessarily with any frequency as a product [ph].

Okay. Thank you very much..

Your next question comes from Vahan Ajamian from Beacon Securities. Your line is open..

A couple of questions. First off I noticed on the balance sheet there's certain asset classified as held for sale.

Can you give us a look at what those assets are?.

Yeah, you know this is the – I don’t know, if you follow the Mettrum story before we acquired Mettrum. This is the Bennett Road North facility which was sold to – or is in plans to be sold to the Canadian candidates CCC. That transaction is still progressing and actually that was also addressed in the domestic expansion of data on weekend.

And so the transaction was in other words progressing, but it was a transaction that was entered into by Mettrum before we acquired it. So we separated that asset on the balance sheet..

Got you. Okay.

And with Q1 almost over, can you give any sort of color as to how things look?.

Well you know we have a history of making it work and not giving any guidance. But I did give an indication that getting oils up and getting equipment in and things like gel capsules in the market, We put on a lot of - we try to front end load to the year, all of our efforts that we thought would give a exit velocity.

That's the kind of rate you want to be going out for 2018. So Q1 - our Q1 wasn't about trying to jam you know, another - you know adding a couple of thousand extra patients per month. It was about a bunch of management of the absence of oils and things.

So you know we really have moved along, but we didn't try to go all in on current period revenue at the expense of all the – our culture plays. And so that's as close to guidance as I can get. But it's been a pacing where we want to kill it in 2018 which means get ready now..

All right. Got you. Okay.

And just on Canopy Rivers, can you give any color as to what deals may look like and what type of snack [ph] brackets in terms of investment per partner you're targeting?.

Yes. So probably the business busiest point of contact in the Canopy over the last three months has been reverse [ph]. There are increasing number of applicants and essentially the structure as we look at - I'll give you a generic scenario that there are three categories of people who have a great location and a dream.

People who are at some stage of approval and people who have a license who want to expand.

If they wanted to increase their capacity say by a thousand kilograms for easy numbers we might lend in where we have a target rate of re return that could be 12-ish percent to say and that what we would secure is one third or 333 kilograms whatever the greater of the production that costs, say the cost comes across that was a buck.

So the operator that location still has two thirds of their products to sell.

The product comes across to Canopy Rivers and then is moved from cost to wholesale price into Canopy and whether or not we wish to run it as a another brand under the Craft brand or a white label, its kind of up to us and affects us meaning Canopy's sales point under Tweed Main Street and the line-up to get that is quite long and building because it's not just cash.

We actually take our qualified people who've gotten us through nearly 200 inspections and go to the site and help them design, spend and evolve the expenditure to ideally make it so that instead of getting a thousand kilograms they get 1200 kilograms and we all win because you know we get a third of it greater then and the producer gets it.

So it's cash and capabilities and I would expect over the balance of the summer to announce some of our first ones which because it's a sub co [ph] we're not saying who we signed we'll be clear when they're turned up and when we start to see cash flow positive sort of sub co there..

Perfect. Thank you very much..

Okay, thanks..

Your next question comes from Jesse Pytlak from Cormark Securities. Your line is open..

Hey, guys. Good morning..

Good morning, Jesse..

I am just kind of wondering internally how are you managing your bandwidth right now to kind of tackle the Canadian opportunities both in medical and the upcoming reg [ph] market and then all the global markets that are opening up as well.

Like are you feeling constrained anywhere or are you comfortable?.

Well, you know you guys are seeing we're growing our G&A, so you know we were able to recruit away a person who worked in one of the - once great Canadian tech companies to head up some of our international expansion operations and then each country we go we have a small but really I'll call it high end team.

So in Germany the crew we have has depth and confidence that you know through the coordination makes sense. Under medical I would say the one area we've kind of stabilized the capability and that doesn't take too much direct energy is the medical outreach program and physician education.

So that continues and is operated by you know, again I'll a competent and senior person, but it's something we've been doing since April 1 2014. If you look at the adult access there's a bunch of things. Day one we're probably going to be permitted to sell exactly the products we sell today.

And then that’s going to be a process by which we can bring forward well thought of formulated branded offerings which differentiate in the market.

So there's a lot going on behind the curtain on what do those things look like and how do we pull them together so that we can have a properly prepared package to take the bureaucrats to see if they approve the new offerings and we have a pretty good science team on that. Things like genetics and breeding.

We're doing a number of things at different universities. And again it's - I'll call it a goal driven, but self-manage area.

So increasingly the company looks like and I think you see in our press releases an organization that’s scaled for execution rather than what it might it look like two years ago which was a few guys running around pretty fast and not too much staff and team. So I think you're going to be happy with how we can execute because we've built for that..

Okay, great.

And then just kind of moving on in terms of your footprint expansion into Edenton and Fredericton, can you just give any color on what those facilities are currently being used for and what type of work will need to be done in kind of the [indiscernible] your use and then just why you chose both those provinces and what considerations you made with using the Goldman partnership for Edmonton versus [indiscernible]?.

Yes. So let’s start with the West. The Goldman group has done an announcement that's been around for a while and we just need to find the right place at the right time and we pulled the trigger.

If they - as some people would love to call beautiful building it is it will be the best current building in our inventory and that it is a soon to be fully vacant well constructed asset that we have a design that we've evolved over time and will submit. I would expect sometime in July our application to Health Canada for that facility.

We've met with the municipal officials and have good support. So that one will march along and our plan is just to essentially build the whole thing out. The reason we use the Goldman Group is I don't have to buy the building today yet in five years when we've put a lot of I’ll call leasehold improvements or assets into the building.

We have the right to buy the building. So at that time I expect banks will be there with real debt instruments and we'll be able to roll it over. And so that works quite well for us.

The one down east, I think its going to be a good spot to use reverse [ph] as a purchasing agent and some of the capital and we want to be in that market because New Brunswick is I think probably the most organized province about adult access and how they're going to govern.

And so we'd like to be in that market because there may be some advantages to being a producer on the problem [ph] and we expect again in July to put that application in..

All right. Thanks, guys..

Your next question comes from Neil Maruoka from Canaccord. Your line is open..

Good morning, guys.

First question on just your soft gels and really your medical strategy what kind of opportunities and plans for new formulations and maybe forms of delivery do you see or have in the pipeline and what is really the regulatory process here, is it a lot different from what you saw with your soft gel?.

So the soft gels, we put quite a lot of effort to make them, it’s in a GMP room.

They truly are soft gels and they – I will say we've learned a lot about how that equipment works and how to make the gels of the exact – I’ll call thickness or strength that you want the coloration which does make it a lot easier now if you're thinking about doing a clinical trial because to make the placebo inside a soft gel which is just the oil agent say non-GMO sunflower versus one with the active ingredients is pretty easy.

So that can feed nicely into Canopy Health. I would say Tim mentioned using expert consultants the amount of time and effort we've put into looking at delivery devices for medical and or adult access is pretty substantial.

How do you get them approved? Well, the device may or may not need to be approved unless the content of the device is in a different form perhaps dried in terms of the dried medicine rather than a liquid gel then it's an approval process through Health Canada.

For medical there appears to be a reasonably good fast track we think for approval through Health Canada.

And we're exploring that currently with the Canopy Health folks, but it's really going to be another year or 18 months of what we are going through three years ago which is how it works will be defined by interaction between the regulator and the regulated. And I expect that to eat up quite a lot as we exit this year..

Okay.

And maybe just on your patient numbers what kind of trends are you seeing in your patient usage, and maybe this was answered questions for Martin, but – and because that might be related to supply constraints and the ramp of oil production, but your average consumption per patient might be less than what we could see from the Health Canada data.

So what are you seeing in terms of the usage that you have per patient registered?.

Tim, I don't if you want to comment on the most recent quarter, but we for lot of the entire history of acquiring patients under just a non- on just a normal way, it seems they've been about 0.7 to 0.8 grams per day and the only way to change that number is if you by patient through some interesting transactions which are now closed down and we didn't do that.

So Tim I don’t know if you want to comment on that, but 0.7 seems to be sort of a steady number..

Yeah, that's true Bruce. I mean, it’s otherwise been fairly consistent of that account and so no other difference..

Okay. And final question for Tim.

We kind of find it in the notes, but could you break down the nature of the costs in some $17.4 million of the cost of sales or is that primarily related to trying to grow?.

Well, we haven't certainly broken that down and we look - we aggregate all of the strains together, but so the – so it’s not broken down..

Okay. Thank you..

Yes..

Your next question comes from Alan Brochstein from New Cannabis Ventures. Your line is open..

Hey, guys..

Good morning, Alan..

I just had one or two questions.

The first one is that there's a lot of debate right now about whether start this July 1st or earlier, whether the market will be undersupplied and also there's discussion about how quickly it might take to get oversupplied, what's your views on this at this time?.

There's no debate it will be undersupplied. And I think it will be before July 1st for the reasons I stated earlier. Will it get oversupplied? Maybe but I think that's a multi year issue. And by then I don't think people are going to be drawn buying very much for right cannabis that's going to be an ingredient.

And so will there will be oversupply of inputs maybe, will the price and value of branded discrete specific products probably be stable. I think so.

And so the real game is are you building branded formulated specific IP products that go to both adult access and medical or are you farming the lowest cost input which may or may not get to the problem you described..

Okay.

And then my last question is can you give us an update on what's going on in Germany and your positioning there any of the other international locations that you think are especially timely?.

So Germany had their RFP close, I think three two days ago and it's close and we did submit a fairly heavy application as you would have expected, since the close they pushed the timeline out slightly on when they're going to get back because it was unreasonable, I think they had said that it would close on June 6th or something and they would get back to everybody by the end of June….

Yes, that makes a lot of money..

Yes. Now right now they have the summer which they don't have to use all of it, they'll get back.

And as I understand it they will review it and whether or not everybody who applied gets - could go to the next stage of the function of the scoring which we thought was quite suitable in terms of looking at your production history in a number of other considerations we like.

And then you go to the next piece which is they've divided their demand into 10 segments.

No one company as I understand it can win more than 7 of those segments and it will be a combination of qualifications and price in the next stage and then they'll negotiate the final prices and I kind of believe they expect that construction would occur sometime starting in Q4 of the calendar..

Got it..

The actual market is currently growing at a pretty good rate. So we're seeing more demand since March 1 and so we're having to schedule which crops go there because it is a much easier process to become a patient in Germany since March 1..

Okay. And then my last question is Health Canada has kind of changed the rules now how big is your vault is the big question and are you able to tell us how big your vaults are in aggregate? Are they big enough and its a big number..

It's a very large number for the farm and for Smith Falls.

It's a moderate and reasonably large number for the Mettrum site and it's a more than reasonable number at Bedrocan, we’ll get from an ex colleagues at square feet but people who've been to our spot you can picture the sort of 5000-ish square foot tall vault and you know it's another way to measure things.

We like it better frankly because it accelerates the process of getting your rooms approved and filling the vault..

So it's I mean, we do disclose it in the MD&A and its in aggregate, it's like $450 million..

Got it. Okay..

It’s a big number..

Thanks a lot guys..

No problem..

Your next question comes from James Baker from James Baker and Company [ph] Your line is open..

Yes. A quick question, when do you all expect to start turning a profit.

And secondly when can we expect to see a positive cash flow on an operating basis?.

Good question. So we're - it may sound odd but we're intentionally not turning one now so that we can make a more substantial hit in 2018. Maybe we'll be turning one as we finish this year we'll see.

And the analogues that I've used for a couple of years has been saying you know when you look at Amazon Web Services the point of the exercise is as people fundamentally transition to a new way to do business. Amazon's done a very good job of acquiring long-term clients.

And so what we're trying to do right now is really be ready and occupying the best spot as prohibition ends rather than doing what we could do, like any time if we wanted to be profitable there are things we stop doing which are preparing for tomorrow.

And so it's not to me a function of could this business be profitable today, it would it be prudent and I think it's better to keep investing for at least another quarter or two..

About the cash flow the negative cash flow?.

Well, Tim you can comment to them I think there are two things we're doing, one is we're substantially investing in assets, so we're using cash to build tangible assets. If and when real lending occurred that wouldn't be all our cash it would be levered.

Our total debt instruments, I think some to what $7 million dollar revolver, about $13 million line term?.

Yes, we’re actually with $50 million together with the $4 million line and the rest is mortgage based and so financing..

Yes..

And we are entertaining term sheets just for leverage on all facilities..

So it does drive me a bit nuts that we have all these tangible assets that are generating real revenues that we currently can't lever, but for the first time we're actually now dealing with a possible bank type syndicate to give us debt to build these things rather than just use cash.

So that is a big think and use of the cash versus just the operating costs..

Thank you..

No problem..

[Operator Instructions] Your next question comes from Jason Zandberg from PI Financial. Your line is open..

Hi, guys. Just most of my questions have been answered. But just wanted to drill down a bit more in on the inventory, it show it shows here just over 3000 kilograms of products waiting for approval from Health Canada.

What was the timeline, what's your expected timeline on getting that approval and having us all available for sale?.

Well, this is all going to QA through internal lab testing in the outside lab testing and this is, I mean, there are all different stages too, right.

So as each lot is approved it can take some number of weeks as they get to qualify for sale and they're categorized whether for its extract and [indiscernible] each state's extensive QA process that they go through some 150 pages per lot in terms of documentation to get those approved.

So it's measured in weeks as to go through each lot and there are a lot of lots..

It's going to be a continuing rolling thing Jason. I would offer that the process one of the things we focused on in the last two quarters is how to shrink the timeline from harvest to release. And we're finding - we've kind of half the time out of that over the last six months..

Okay. And then there's also almost 5000 kilograms of product that's held for extraction, Tim I believe you said that you'd extract that by the end of the year.

Could you give some more color on that in terms of what the timing would be to transfer that over to available are available for sale?.

Well this is all really tied to the you know, bringing up the industrial [ph] equipment to full capacity and so you'll start - we'll start seeing that getting processed in the next couple of quarters to come. So I think you know I was just saying to work through that on an average basis it will take you probably through another six months.

And when you could - I mean, this is as Bruce has said to this on a rolling basis we'll have other product coming into Q as well that you could easily process that number of volume through over the next number of months before the end of the calendar year..

Okay..

Yeah..

Your next question comes from Russell Stanley from Echelon- Echelon Wealth Partners. Your line is open..

Good morning, guys..

Hello..

Just congrats on the GMP certification.

I'm wondering if that's something you intend to pursue at the other facilities on an ongoing basis or if it'll just be Smiths Falls and in three terms for now?.

No I think you'll find that as we turn out new ones, we learned a lot getting this one done even. Even with all the SOPs [ph] we actually had you know external consultants and experts prior to having the German inspectors and then we had probably six or eight weeks of work after.

But once you've been through it once - it's quite a lot easier to make all subsequent ones meet the same design process. So I would expect for sure to look at places like Alberta and the ones that come on that way. Not sure we'll go back and retro necessarily Mettrum facility..

I guess that dovetails into my next question on Mettrum, I'm wondering if you can give us some color as to where you're at on integrating the back end there as you know you know, where you’re at in terms of realizing whatever the cost savings you can extract out of that process?.

So we consolidated oils extraction not at Tweed Smiths Falls, so that consolidates that – that we consolidated fill hipping for all of our locations for Smiths Falls, so we can get that locked and loaded and then we can start thinking about how we would take that methodology and drop it into other geographies so that you can start to have a strategy for the country on that same day next day everywhere.

And so we got that pulled together. Finance is tied in and we'll get to that IT. It actually has been probably the smoothest cultural change and we have customer care operating at two sites Smiths Falls and Bowmanville. But the whole transition on that's going well.

We essentially did a full reboot on the growth because we want to make sure there are zero things that we don't like and headaches that could happen. So it was just better to absolutely you know start over and clean out and then and go. And so that's what you'll see as we enter Q2 is the output of that exercise in terms of Mettrum products..

So the other big event was the launch of the Tweed Main Street online store where we integrated of all of the brands together. So really to get to one front end was a significant effort also which required a lot of IT investment to make that happen.

Also introducing the you know, the spectrum tool that could be applied to all of the cannabis offerings, not just Mettrum alone. So there's - that on the front end also was completed. We will continue to expand to across Canada and internationally looking at – continue to transform the company the build in and the capability so it can scale up.

That means there will be further investments in the IT and back office with finance and HR and supply chain and the like. So there's a concerted cross-functional effort to make that happen and that will that be happening over the next quarter, of course of the next year as well..

Great. And thanks.

Just one last question, I'm wondering on Craft Grow, do you have any targets you can share with respect to a number of partners you'd like to have or [indiscernible] like to be able to secure through third parties?.

We haven't plugged it in as - you must do this much. It's more like people want selection and diversity even if it's not always the same thing that there is a reason to join and be part of the Tweed process because of that.

And so you saw that you know if I said we found some great product that we're bringing from an island in Canada for sure you're going to think Vancouver Island, that’s a bit more like our style to bring in from Princess Reiland [ph] And so that one's on, there's a queue of them forming that want to be in and what's in it for them is to get a lot of people seeing their product and they get sales and we look after you ship to us bulk and we'll test it and containerized it and make it ready for sale.

And so kind of it really works and it seems to have caught a lot of attention of the small people, small growth that really want people to see the product. So I think you'll find that it's going to be a really nice mix each month or each quarter there may be some more interesting products..

Great. Thanks for the color guys..

This includes our call. At this time, I will turn the call over to Mr. Linton for any final remarks that he may have..

That's great. Thank you everyone. And I look forward to having the next couple of days to finish Q1 and back at this again and I guess probably about 48 days, yes, August 14th. Thanks, Aaron..

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