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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone, and welcome to the Aurora Cannabis First Quarter Fiscal 2021 Conference Call for the 3 months ending September 30, 2020. This call is being recorded today, Monday, November 9, 2020. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in the forward-looking statements. The risk factors that may affect results are detailed in Aurora's Annual Information Form and other periodic filings and registration statements. These documents may be accessed via the SEDAR and EDGAR databases. Since we are conducting today's call from our respective remote locations, there may be brief delays, cross talk or other minor technical issues during this call. We thank you in advance for your patience and understanding. I would now like to introduce Mr. Miguel Martin, Chief Executive Officer for Aurora Cannabis. Please go ahead, Mr. Martin.
Thank you, operator, and good morning, everyone, and thank you for your interest in Aurora. Since being appointed CEO in late September, I've established the tactical plans to succeed, and I've been working with our team on executing these plans. We intend to demonstrate that Aurora can be a profitable, growth-oriented leader in the global cannabinoid market. I would therefore like to spend our time today discussing the execution steps we're making in our business as well as our go-forward strategy. But first, let me comment briefly on the recent quarter. Q1 can best be characterized as transitional period. While there remains a significant opportunity available to Aurora in the Canadian consumer segment, the other legs of our business are performing well. We remain the leader in the high-margin Canadian medical market, and our international medical business saw 41% net revenue growth this quarter. Our CBD brand, Reliva, is the #1 ranked brand by Nielsen in the U.S. CBD sector, and most importantly, our platform provides us with significant optionality in the CBD market, as I'll explain later. As you can see from our earnings release, our quarterly results were generally in line with our previous expectations, with cannabis net revenues of $67.8 million and an adjusted gross margin of 52%, excluding ramp-up costs at Nordic. SG&A, excluding restructuring items, was $43 million, which was consistent with our run rate target of the low $40 million range. Finally, as it relates to Q1, we demonstrated progress with respect to narrowing our adjusted EBITDA loss to $10.5 million. This marked the third consecutive quarter of adjusted EBITDA trending toward breakeven.As you know, as part of our business transformation plan, we've made some very tough decisions and done a lot of hard work over the past year with respect to rightsizing our cost structure. This includes taking the largest cut to G&A of any Canadian LP. For context, we cut quarterly SG&A from $100 million to approximately $43 million per quarter and sharply reduced our CapEx. Under my leadership, we will continue our focus on fiscal prudence. I can say without hesitation that our entire company is in a different mindset now than we were previously, and I've empowered all levels of the company to look for opportunities for profitable growth and further cost efficiencies. For example, we have demonstrated the capacity to make difficult financial decisions in June, where we were one of the first cannabis companies to take the step to write down our inventory and recast our trim. I also think we have a real opportunity to better align production cost to sales and shift costs from fixed to variable. In doing so, we will manage our working capital investment more effectively so that we can get to cash flow positive generation more quickly.This longer-term cash flow objective goes beyond simply reaching positive adjusted EBITDA, our goal for the second quarter, our expectation for the second quarter and demonstrates our leadership in differentiating Aurora and setting the standard for building a value-creating global cannabis company. Back in June, we announced the closure of 5 cultivation facilities across our network. And I can confirm that a few of those facilities are now shuttered. But aligning production costs with sales encompasses more than that. Specifically, our Aurora Nordic 1 facility, which is a new EU GMP certified production facility located in Denmark, will allow us to more efficiently distribute products in Europe and around the world and better allocate production here in Canada.Before I discuss the performance of our business segments, and in particularly, our Canadian consumer segment, let me briefly address our recent capital raise under the ATM. The $280 million that we raised recently through our previous ATM was a responsible decision in today's challenging environment. The cash will ensure that we have the runway needed to complete the remaining elements of our transformation plan, execute our tactical plans to regain market share in the Canadian consumer business and be positioned for the rapidly changing global cannabinoid market.We appreciate the cannabis companies are being valued with respect to their business performance and their liquidity, and we wanted to ensure that we are addressing both sides of this equation without any perceived concerns with respect to liquidity. We now have a much stronger balance sheet that makes it possible for us to act opportunistically and allows investors to focus on our business execution. In fact, as I said earlier, we are squarely focused on generating operating cash flow as quickly as possible. And of course, as a matter of good governance, we have also filed a new shelf prospectus. This is a common step for most large companies to have available if needed. Now let's discuss our business itself, beginning with the Canadian consumer market, where we have much work to do to gain share, but also a strong sense of urgency to continue executing our well-thought-out tactical plans. As you know, there are 2 things to consider that are working in our favor and in doing so, providing us with considerable tailwinds. First, the category is growing, with Stats Can data showing 11% month-over-month growth in July and another 5% in August and more stores continue to open, particularly in the province of Ontario, which is very encouraging news. In fact, from the national data that we have seen, the current store count is approximately 1,200 and could reach 1,300 by December.And second, the consumer has demonstrated very dynamic tendencies with market share moving very quickly between brands, unlike in more stable CPG categories. This provides us with a great opening for our pivot to premium brands. These factors suggest to us that with the right accountabilities and focus, the right products, the right sales execution, including product availability, visibility, packaging and better engagement with the provinces, we can gain share in key growth categories quickly, all while achieving profitability.The data from Canada and other mature markets indicate that premium and super premium brands have been and will continue to be successful in all formats. Therefore, Aurora has a real opportunity for a more articulated and balanced portfolio offering with a greater focus on higher-margin and sustainable premium assets, such as vapes, pre-rolls and premium flower offerings across multiple price tiers. For example, gummies is a format where we have a #1 position, and we are allocating additional resources so that we can enhance and grow that format. We are also working to expand our leading concentrates and to refocus our dried flower business toward higher gross profit dollar pools. Of course, premium segments must also be supported with classic CPG sales, marketing, trade marketing and consumer engagement methodologies to build awareness, foster affinity and generate outsized returns.The key, of course, is to ensure that in doing so, we're delivering more dollars to the gross profit line versus simply just delivering low-margin revenue. We are, therefore, much more interested in our market share within premium and super premium categories, along with our market share of categories, such as vapor, pre-rolls and concentrates that are margin accretive compared to our market share in the deep discount flower business. While it's still early days, I'm happy to say that we're starting to see some green shoots from these initiatives and suggest to keep tabs on the headset data and other market data so that we can gauge our ongoing performance. For example, we're very encouraged by the great response to the Phase 1 of our vapes launch that recently hit the market. We're also seeing strong demand from our Aces pre-roll and are currently working through some supply constraints, but hope to have those issues resolved soon so that we can have broader distribution in that key product category.Let me also say that within vapes and pre-rolls, there's a lot of opportunity to bring classic CPG elements in packaging and alignment that traditional flower does not lend itself to. We have accelerated our focus on our premium brands, Aurora and San Raf as well as our super-premium brand Whistler. These are tremendous assets that balance out the total offering to our consumers. Our intention is to build an ecosystem around each of them through various formats to foster greater brand visibility and provide greater choices to the consumer where they can work up the value chain. As an example, we are working to extend these brands to include San Raf pre-rolls and a higher-quality Whistler vape. Through all these initiatives, our intention is to generate not just revenue, but quality revenue that will deliver a healthy gross profit dollar as opposed to essentially just a gross margin percentage.Whistler, for example currently delivers 10 times the gross profit dollars per gram that the discount brand might. So our path forward in putting more dollars to the bottom line is based on the notion that not all revenue dollars are created equal. On a related note, while we continue to support our Daily Special brand, we think the value segment may provide an opportunity to shift production and manufacturing cost to a more variable model, and we're exploring that opportunity. This variable model could also allow us to better control inventory build. In my 20-plus years of working with products in dynamic categories, I've seen many examples of there being an advantage to having more flexibility with a variable cost model.Now let me turn your attention to our domestic and international medical businesses, which are operating well and delivered a 4% revenue increase over the last quarter. While our Canadian medical revenue declined slightly over the prior quarter, this segment is an evolving landscape, and we're extremely happy with our ability to manage that business.We have moved our patient intake and experience online, and can now offer substantially more choices to our patients and veterans as a result. While the medical channel over time may see some migration to the consumer channel, we see opportunities to retain and grow key patient groups, like veterans to continue to grow the medical market.Our international medical segment has been a consistent performer and reported a 41% increase in Q1. We're already one of the leading providers of flower in Germany, and we continue to see opportunities in the oil market. We also just cleared an important regulatory milestone for the Aurora Nordic 1 production facility in Denmark. which just achieved GMP certification and its sales license for flower and oil. This facility is now able to ship from Denmark to Germany as well as the rest of the EU and other parts of the world. There is certainly a great lesson here from our success to date in the global medical market that has positive implications for our other opportunities, namely that it takes a lot of investment, a lot of compliance expertise and a lot of thought to be successful with the high standards that these international markets require. But once those capabilities are built out, they become very portable. We are bullish on the long-term international market opportunity and believe that Aurora, with our demonstrated expertise and medical market leadership, is very well positioned to continue to generate enduring shareholder value from international business as these markets develop. Lastly, our Nielsen top-ranked US CBD brand, Reliva, remains an enviable strategic platform, despite the temporary slow growth due to COVID. Our platform already provides us with a critical distribution and regulatory expertise and relationships, both advantages as the U.S. market continues to evolve. Reliva focuses on brick-and-mortar stores and is an exclusive CBD supplier for some of the largest retailers and wholesalers nationally, and our products are in over 23,000 stores. This may be seen as an unusual approach in a COVID environment given the general consumer shift to online sales, but our trade partners have taken a really dim view to those that have pivoted to online sales amid the pandemic, and we decided to stick with them for the long term. Given its variable cost model, Reliva is EBITDA positive and is an asset-light model that does not require any CapEx. Looking ahead, we're very bullish on what we've heard out of the FDA and anticipate positive action. So when the FDA moves forward, those companies with a history of compliance and experience in brick-and-mortar will win. We, therefore, think Reliva is a wonderful asset and will continue to be a significant EBITDA contributor -- oh, it will be a significant EBITDA contributor. According to the most conservative estimate, CBD represents about $2 billion in retail revenue. So when we talk about global cannabinoids and leveraging the Aurora's science and innovation, the non-THC parts of our portfolio could potentially be bigger than the THC parts of our portfolio, particularly with positive FDA acts in the U.S. I'll now turn it over to Glen to walk through the financial details.
Thanks, Miguel. Good morning, everyone, and thank you for joining us on today's call. I will take a few minutes to review our first quarter 2021 results, and please note that the figures I'll be going over today can be found in the press release we issued this morning and are all in Canadian dollars unless otherwise stated.I should also note that in accordance with IFRS standards, the comparative revenue figures for Q4 2020 have been reduced slightly to reflect the removal of discontinued operations results from our ancillary revenues.For our first quarter fiscal 2021, the period from July 1 to September 30, 2020, our net revenue, all of it from cannabis businesses came in at $67.8 million, a bit higher than the $60 million to $64 million range we previously provided. Our sales mix remained evenly split with the Consumer Cannabis segment delivering $34.3 million in net revenue and our medical cannabis segment delivering $33.5 million in net revenue.So let me dig into revenue a bit further. In the first quarter, our medical revenue was up slightly. Underlying this was a temporary decrease in Canada of about $600,000 as we transitioned all of our patients to a new integrated sales platform where they have access now to all Aurora Medical brands, including MedReleaf, CanniMed and Aurora, and soon Whistler. Aurora continues to have a significant advantage in Canadian medical market share. But more than offsetting that temporary decline was a stellar performance from our international medical business, which continued to show the strength of our expertise in brands with a 41% increase quarter-over-quarter to almost $6.5 million of revenue. I should remind you that our leadership in the Canadian and international medical markets is very important to our bottom line and long-term value creation, bringing sustainable growth expectations and a very solid gross margin profile averaging in the high 60% range in both Canada and internationally. Our Q1 consumer revenue declined 3% over Q4, this despite a growing overall market. Now Miguel has outlined both the challenges and the opportunity for Aurora in the Canadian consumer market, and we see Q1 consumer revenue as reflecting that period of transition for us. Despite the challenges, there were certainly some bright spots in [Technical Difficulty] including $2.5 million increase in derivative product sales and a $1.1 million increase in U.S. CBD revenues. We also recently launched our Daily Special vape offering, quickly capturing consumer attention and the #3 spot in Ontario. Of course, this is just the first vape launch in a planned full brand portfolio of vape offerings in the near term. Turning now to our margins. Adjusted gross margin before fair value adjustments on overall cannabis net revenue remained strong at 48% in Q1, and this compares to 50% in the prior quarter. But excluding the $2.6 million of ramp-up costs at our Aurora Nordic facility in Denmark, our overall Q1 adjusted gross margin was actually 52%.Medical margins continued to deliver important levels of profit at 67% overall, excluding the Nordic ramp-up costs, and consumer margins improved to 38%, due mainly product mix with the heavier weighting on 2.0 products in the quarter. While inventory levels increased about $27 million overall from the previous quarter, we are making progress in reducing this growth. And as Miguel has noted in his remarks, between the facility closures currently being executed and opportunities to align current demand and production needs at our ongoing facilities, we expect to bring this into balance during the fiscal year.Cannabis is a long lead time agricultural crop with a challenging demand schedule to forecast, so alignment does take a bit of time. Hence Miguel's remarks regarding shifting more fixed cost to variable over time are also very important to our plans to drive to sustainable positive cash flow in the near future. Looking now at SG&A, including R&D. We've successfully reduced SG&A costs, which we define as including R&D spending well, for our announced target of below $40 million range, taking it from over $100 million in Q2 2020 down to $43 million in Q1 2021. This excludes approximately $4 million of termination costs related to the business reset.As an important driver of our profitability and positive cash flow, I'm encouraged to tell you that we're continuing to operate our targeted quarterly SG&A run rate in Q2 and have the entire company incented to find incremental opportunities to hold and even reduce this important metric. We do believe this level of SG&A spend is quite sustainable and capable of supporting a much higher revenue line. So pulling all of this together, adjusted EBITDA in Q1 2021 was a loss of $57.5 million. But that included a number of previously communicated restructuring costs, including employee and contract terminations. Adjusting for these costs and in accordance with our bank covenant definition, adjusted EBITDA for Q1 is $10.5 million. This is the third consecutive quarter of improvement as we continue to work towards positive EBITDA and cash flow.I'll just make a couple comments regarding our cash position and cash flows now. So as of November 6, our consolidated cash position was $250 million, and that compares to $162 million as of June 30. This balance reflects the improvements in our recurring cash flows, which I'll describe in a moment, as well as cash raised through our ATM program in the last couple of months. It also reflects payments in October for our major annual costs of insurance and employee bonuses. And the balance on our term debt stands at $101 million at November 6, and we remain in compliance with all debt covenants under this agreement.We are very happy with the continued excellent relationship and ongoing dialogue we have with our very supportive banking partners. For cash flow, the amount of cash we used in Q1 was similar to that in the prior quarter. However, the mix within cash use showed significant positive progress. We used $25.2 million in cash to fund operations, excluding working capital investments, and used $47.4 million for contract and employee termination costs. These costs included the previously announced termination of the UFC agreement. We also paid $15 million for capital expenditures in Q1, down materially as many long way projects are now complete. Increases in net working capital used $37 million in the quarter, driven by a $14 million increase in accounts receivable and a $25 million increase in inventory. As both Miguel and I have described earlier, we continue to execute plans to more closely align production levels with demand. Finally, in the quarter, we also used $18.2 million in cash to reduce our term debt and lease obligations. So cash used in operations and for capital expenditures are crucial metrics in our drive towards generating sustainable positive free cash flow, and both have improved significantly and consistently over the past several quarters.As an example, in our Q2 2020 fiscal quarter, that's the last quarter before we announced our business transformation plan, we used $86 million cash in operations, not counting working capital though, and $128 million for capital expenditures, so a total outflow of $214 million for just these 2 items. This compares to our just reported Q1 total of about $40 million for these same 2 items.We made the decision to reposition our company to be a leader in our industry in driving the positive EBITDA and cash flow. The actions we have taken have improved cash outflow on these recurring items by over 80% within 3 quarters. Even with a solid balance sheet and rapidly improving cash flows, we still believe that access to capital is of paramount importance, particularly in an environment of rapid change and value-driving opportunities. So you will have noted that we recently filed a new shelf prospectus that is intended to protect the company and our shareholders as we navigate through an uncertain environment. But we are firmly convinced that our focus on getting the cash flow positive as quickly as possible will both demonstrate the excellent long-term value creation possible in this industry and will alleviate the need for additional equity capital as far as possible. As we have shown with our progress on the business transformation, we will continue to prudently manage our liquidity as we drive to positive EBITDA and cash flow. So to conclude, and as I mentioned in our last report to you, I'm incredibly excited for the vision and tactical plan that Miguel has laid out here. I am seeing the recovery in our Canadian consumer business showing signs of traction. And when you add that to the leading position we have in medical cannabis globally, the excellent gross margins we continue to deliver, a vastly improved SG&A cost structure, an important platform for U.S. growth and a much improved balance sheet, you may be able to understand why our -- why we are quite bullish for Aurora's future and for our shareholders.So thanks for taking the time with us in a very busy reporting day. Before we take questions, I'd like to now turn the call back to Miguel for a few wrap-up remarks. Miguel?
Thanks, Glen. I want to close by highlighting the steps of the plan we're executing now for the Canadian consumer market. First, we're focused on driving sales of premium brands in flower: Whistler, San Raf and Aurora. Second, we are focused on winning share in key growth formats: vapor, pre-rolls, edibles and concentrates. And third, evaluating and executing on opportunities to align our production and manufacturing cost to sales and shift our model away from fixed to variable costs.I'm very confident in the early execution of these tactical plans. We know what we need to do to be successful across our main markets and are already seeing early signs to run the right path. As CEO, it is my responsibility to ensure that the entire team is executing accordingly to their respective responsibilities. This entails continuously looking for more effective ways to capture top line opportunities that are margin accretive and extract even more efficiencies from operations.When we are successful, we'll not only strengthen our financial condition, but over time, build a sustainable and growing level of adjusted EBITDA and the base of positive free cash flow that can be used to invest globally over a multiyear horizon in both the THC and non-THC cannabinoids.We look forward to sharing our progress with respect to our plans and reaching these goals over the coming quarters. Thank you. Operator, if you could please open it up for questions.
[Operator Instructions] Our first question comes from the line of Vivian Azer with Cowen.
So understanding this is a transitional quarter, like maybe let's take it a little bit more near term, obviously, a lot of volatility in the market, elections are incredibly topical in the United States. So Miguel, perhaps this is the great opportunity for you to level set everyone on what you view as the tangible and likely regulatory pathways for a more notable entry into the U.S. beyond CBD?
It's a great question. I think like most things with me, my background really colors my opinion, and having spent 20 to 25 years in the tobacco business, you saw a lot of uncertainty and there are a lot of corollaries here. So first and foremost, while everyone is hyper-focused on potential federal action, I would really draw your attention to what's happening at the states. When you talk about controlled substances and you talk about regulated products, state-level actions in many ways have more applicability in the short term than federal actions. You see that in CBD today in the U.S. and the cannabinoid business, and you clearly see it in the THC-bearing cannabinoids. We had 4 really important states pass comprehensive cannabis legislation. And so that starts to move the ball forward in terms of when you get to this tipping point.Now on the federal side, the Biden-Harris position that is clear, and I think it's going to have to be a little more articulated on what the timing is. But depending on what happens with the runoff election in Georgia, the Republicans control of the Senate has a key impact. So all in all, if you boil that all down, I guess I would say the following sort of 3 things: first and foremost, very positive news at the state level. We see both in the U.S. and globally an increasing sort of openness towards THC-bearing cannabinoids and that bodes well for a company like Aurora. Secondly, there is work to be done to see what a federal construct looks like. And third, and I think this is the most important piece by far, is if and when you see countries, including the U.S., pass federal regulations and legislation, the experience is that the Canadian LPs have had in Canada as the largest federal construct on manufacturing, packaging, production, sales and marketing, all of those things instantly becomes really valuable. By the same token, the rigor is getting into a Germany or a Poland or an Israel, that is muscle memory that you can't just replicate really quickly. So we continue to learn, we continue to see those pieces as being portable. And at the time in which there is an opening for us in the U.S., we think that we'll have a ton of resources and a ton of interest because of all those experience. And so that's how I would couch it, and it's -- I'm not here to give a particular time line, but I think that's -- as you know, that's far way trying to predict legislation like this at federal level.
Absolutely. And I appreciate that perspective. Miguel, if I could squeeze in a follow-up then?
Sure.
As it relates to the Senate election, to the extent that the Democrats do not take the Senate, do you want to offer a view on what that means in terms of pathways and catalysts?
Yes. I mean I don't -- I mean it's easy to say that if Senate McConnell and the Republicans keep control of the Senate that, that's sort of it. I mean as we've learned with states like Illinois, the economic benefits of legalization of medical or RAC has become a bit of a by part as an issue. And so I think we'd have to see -- unfortunately, with the pandemic of COVID, you're seeing a lot of budget shortfalls and a lot of people are looking towards a responsible regulated version of cannabis in order to fill that. So I think that we will have to see, but I understand that historical positions would be that the Democrats are always going to support it and the Republicans always won't. That's not the case. We have not seen that in CBD, as an example. When you look at Republican governors particularly in, say, Texas or Florida, seeing the benefits of a regulated, thoughtful approach on non-THC-bearing cannabinoids. And I don't think it's a foregone conclusion that the Republicans, given their focus on fiscal prudence wouldn't also have a similar opinion under the right construct. And again, those companies that have acted responsibly in the compliance-driven manner in Canada, clearly are going to have an advantage when that construct presents itself.
Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald.
I guess the first question would be just following up on the last one. When you see Canopy Growth licensing Tokyo Smoke and Tweed to Acreage and building awareness for their brands and you hear Aphria talk about the strategic relevance of the SweetWater deal in craft beer to build relevance for their brands, do you think you need to do something similar to push you to start building awareness for your brands in the U.S.? Or it's just too early and there's still enough time to get behind that?
Well, thank you for the thoughtful question, Pablo. I mean, listen, I'm not here to be critical on anyone else's approach, particularly as it builds awareness. I think the 2 examples you gave are a bit different. One is about leveraging infrastructure and expertise and the second, to your point, is about awareness. My opinion is that when you have high-quality brands that can operate in a variety of different markets, as we do, I think there's opportunity there. The biggest thing though, Pablo, to me is all of your capabilities to be able to execute in time in which it makes sense, obviously, there are challenges -- structural challenges for publicly traded companies to operate today in U.S. That doesn't mean though that you can't build infrastructure and capabilities for a time in which it is federally regulated, and that's really what we're focused on. So we will be opportunistic. I clearly expect that a lot of folks will be deeply interested in what we've been able to do around the world from a regulated standpoint. I would also tell you that the science and genetics and genomics and experience with the plant may be one of the most portable sort of aspects of both our business and other pieces of the business. So it doesn't give me any pause that our friends at Canopy have done what they've done and the folks of Aphria have done what they've done with the craft brewery in Atlanta. We feel very confident with our position. We feel very confident that the researches that we have will be attractive. And then at the time in which it makes sense, you'll see us be there.
Okay. And just a quick follow-up on the Canadian market. I don't think there's much in the press release about outlook or comments on the quarter, but obviously, you beat in the September quarter, right, $68 million versus $60 million to $64 million. Maybe what drove that because guidance was given late in the September quarter? But more important than that, where are we? What comments can you give you in terms of guidance or the outlook for the December quarter in reg.With the -- I guess, with the slight concern on my side, and when I look at the market data, particularly high fire, I see evidence of the successful pivot in the derivatives and the premium brands, but I see a big collapse in sales of your value flower business, right, which is still relevant to your total revenue. So I wonder what that means to your total reg sales in the December quarter. So just some color there in terms of EBIT and in terms of where we are in the December quarter in reg?
All right. I'll take the second half, and then I'll turn it over to Glen to sort of talk about the first half. So it was mentioned, these are big ships to sort of move. Clearly, I've been unabashed in my focus on premium flower derivatives; vapor, which obviously have a long history and given I was running Logic. And so what I would say is this, there is a lot of folks that are pumping out low-cost flower at the low end, and that's had an impact. And you're going to see disruption as us and others rightsize production to consumer demand. And so that is what it is, and you can sort of get there. I think as you look at the percentage of the profit pool and you look at the margins associated and as I mentioned, Whistler is 10x per gram as a discount flower, you're going to start to see us move pretty strongly into the areas I've talked about.You've seen it on vapor, you'll see it on pre-rolls, you'll see it on concentrates. And so I'm not worried about the contribution of our profitability. Being reliant upon low-cost flower and the commoditization of that particular aspect of flower, I think, is not a great place to be. And so we're confident with our plan. And I think having -- being blessed with such premium assets is really going to be important. And for everyone that has this sort of belief, and I know you don't, but this whole thing, this gets me commoditized. I would draw your attention to what we're seeing in California and Colorado and a over 50 to 100 years of regulated products, there is clearly a place for premium products in the regulated space and clearly a place, as being demonstrated, for premium products in the cannabis business. And as you know, the margins of those derivative products or 2.0, as some may call it, are stronger. So Glen, would you please take Pablo's first part of his question?
Yes. Yes, listen. We do you give a range, and as we're kind of closing our books, it looks like we're getting towards the upper end of the range and potentially a little bit over. I wasn't comfortable giving you guys any sort of additional guidance beyond that range or shifting in until we got through all of this, the review, the close -- final closing of the books and the review of our auditors. And for instance, you'll see in our MD&A, where we disclose more -- we parse our revenues, in particular. Our revenue provision is about $1 million lower than it would have been in the previous quarter. And that all takes time to work through. So the outcome, we knew were at the top or maybe slightly over. In fact, as we looked at, as I say, finalizing the book and recording all the proper provisions and things like that, we ended up coming in slightly above the range, but that's about it.
Our next question comes from the line of Michael Lavery with Piper Sandler.
So can you -- even if the timing of any entry into THC in the U.S. is certainly unknown, how much thought have you given to your strategic approach? Or how you would plan to go to market? And specifically, curious how you view interstate commerce? Do you see that as an inevitability? And if so, would you wait for that to come into place before trying to make an investment or entry? Or would you go ahead and begin on a state-by-state approach? How do you think about that?
Well, first, as you look at the things that we have to do to be successful, say, in Germany or in Israel or in Poland, there are a lot of similarities to what you'd have to do in the U.S. If you look at everything we've had to do in Canada, there are a lot of similarities to what I believe you'll have to do in the U.S. So much of the -- I know it's fun to talk about brands and marketing and devices and formats, but the real heavy lifting is going to be on the back end. So IP, genetics, genomics, trademarks, science, compliance, manufacturing protocols, GMP, ISO certification, packaging compliance, testing protocols, sales and marketing. And so if I was to ask -- if I wanted anyone to focus on who are the companies that are going to win long term? Look at the companies that do that. Yes, clearly, having some brand awareness and excellence in terms of consumer awareness will be critical, but in a new regulated category, it's going to be all of the other stuff that I just mentioned that's going to clearly make a difference. And we're working on that every day, all day, not only in Canada but around the world, and that benefits us greatly in the U.S. Now Michael, as you know, the legal restrictions or the sort of different aspects of what a publicly traded company has to do in order to be compliant, will require some form of a federal construct. Now as I mentioned earlier, there are a lot of different pathways to get there that are not just sort of a red-blue issue that can be around economics and a variety different things. And clearly, I think for the U.S. and for the states to truly unlock the greatest amount of economic potential, interstate trade and shipment will have to be there. I mean if you look at somewhat of a corollary of the Farm Bill on CBD, it would be incredibly challenging if you continue to ring-fence these states and have to produce, register, license, grow and sell all within a state and that really creates, I think, limitations on how you -- the true economics. Now some might say, "Well, that's always going to exist because the states are going to want their piece of the pie of the economics of how that's grown." We don't see that in tobacco. We don't see that in alcohol. We don't see that in spirits. We don't see that in pharma. So I think as this proceeds really to unlock those economics and whether it's compliance or all these other aspects that would be there, you would have interstate and then at that point, you're starting to get into a federal construct and at that point, things open up. I do -- and -- while I think we have a leading position, I do think the expertise that the Canadians, LPs have will be in high demand for all the reasons that I've mentioned. There is nothing currently globally like Canada. And while U.S. FDA and DA and other regulatory agencies don't always follow international protocols, there's no question it's going to influence it because strong neighbor, already a lot of different interactions, and so I think there is a big advantage for those LPs that have successfully navigated.
Okay. And just a follow-up. You've mentioned genetics and genomics a couple of times. Can you give us maybe a little more color on how you see Aurora differentiated or standing out there? And then how that translates to marketplace execution, either with the consumer or anyone else?
So Aurora over its lifespan has acquired significant amount of companies and resources. And with a lot of those companies has become -- has come very significant library of genetics and genomics. And so like any other agricultural company, genetics have a lot to do with yields, a lot to do with durability of the plant, a lot to do with the output. And clearly, given the variances in how we see people use cannabis and the articulation of all those core metrics, whether it's intensity or onset or offset, genetic and genomics are really important in this category like they would in most of these regulated types of categories. So as you think about that expertise and the value of that and being able to leverage that in a market the size of the U.S., it becomes incredibly important. And again, it's the life cycle of it. It's the fact that these assets and these outputs have been tried and tested in over multiple crop cycles, in multiple markets, in different sort of environments. And so all of those things are valuable as you get into a market the size of the U.S. where you really can't be as nichey and there will be under a potential federal construct value for large-scale agriculture like you're seeing in Canada today. And so again, that all plays a role in how quickly and how effectively and how thoughtfully you can go to the market with the size of the U.S.
Our next question comes from the line of Tamy Chen with BMO.
First question is, I wanted to understand better the shelf with $500 million U.S. ATM, I mean it's quite significant amount. So I mean, how should we and investors think about that? Have you taken that on so you can ride out the challenged environment in Canada? Or is it also for how you're thinking about the U.S.? You mentioned opportunistic a couple of times. So I just wanted to understand that given it's a pretty sizable amount.
Glen, do you want to take that one?
Yes. I'll get started on that, Tamy. Just to correct something you said. It's not an ATM, it's a shelf prospectus and that just prequalifies shares for issuance or any securities for issuance and pretty broad. It would allow us to issue debt, it would allow us to issue shares, certainly, should we see an opportunity to do so. But it's not an ATM. If we were to use an ATM, we would have to file a supplement to be able to do that, and you'd see that should we do that at some point. So this is really, as Miguel mentioned in his remarks, just the hallmark of any mature company is having a shelf prospectus qualified and available opportunistically. So that's the way to think about it. It's not with -- it's not an ATM. It doesn't allow us to sell shares tomorrow under an ATM unless we file a supplement.
Yes. I guess, Tamy, the only thing I'd add to it. We mentioned this a bit earlier. If you look at cash burn or the cash component, which has become such an important metric for a lot of good reasons. On cost and cash use, We've cut about $60 million in cash expenses from our SG&A in 3 quarters. We've significantly reduced our CapEx over that time and now really at a run rate, really focused around maintenance CapEx going forward. So I think overall, the focus on cash is headed in the right direction. We look at the industry. We look at our peers. I'd say we're clearly well capitalized. But I think the big thing also is, understand, the market is appreciating both business execution and rock-solid liquidity. And when we prove to investors, we've executed on the plan we put forward, I really don't want that success to be overshadowed by perceived liquidity issues. And so as we move forward in the tactical plan, gaining back market share and growth of those premium segments in Canada, really want to have those financial resources available to be opportunistic, which you've mentioned. So I just would add that color about the importance of having both sides of it to really, I think, allow people to uniquely focus on execution particularly in the RAC Canadian business.
Got it. Okay. That's helpful. And I guess my follow-up is, if you could just elaborate a bit more on what you were talking about in shifting more production costs from fixed to variable. I mean is that consider even more facility closures and more leverage of third-party suppliers? Just can you elaborate on what you meant by that?
Sure. Sure, I'll be happy to. I mean, the base premise -- I mean, if you go back all these facilities, the amount of production in Canada in a lot of ways was built to service global opportunities and to service a market that just is bigger than it's currently there. And so I've got a long history of using variable versus fixed. And I will tell you, the one thing I can predict in this category is that things are moving very quickly. And so the hardwire yourself to these massive fixed cost not knowing exactly what the outcome is, I think, is not -- it doesn't best serve Aurora. Secondly, as we all know, there is plenty of great high-quality product available, particularly in Canada. So while we'll have to have the EU GMP facility over in Denmark, which is a tremendous asset to have and clearly, there's plenty of work for that, there's an opportunity in Canada, particularly with these large-scale facilities. So we've announced the downturn of 5 of them, a couple of them are already closed. And yes, we are looking at some external sources to give us greater flexibility so that we don't have to carry all those costs and also be in a good position. This would be both in flower and as well as a couple of other items. If you look at other businesses I've been a part of that some might argue have been quite successful, you don't hardwire huge fixed cost, you give yourself maximum flexibility. And then once a category really is on firm footing and you can determine exactly where it's going, I think you can make more educated decisions.So I'm very confident that you're going to find us to be in a strong position regardless of which way the category moves, particularly in between formats.
Our next question comes from the line of David Kideckel with ATB Capital Markets.
Congrats on the quarter. I want to just go down into your international medical cannabis opportunity a little bit more in detail, if that's okay? So just to note, one of your competitors also announced -- who also announced results this morning, for the international medical cannabis component, they -- sales were actually down quarter-over-quarter versus Aurora, you, sales are up. So my question is, given just how important this channel is for overall, as Glen, you mentioned gross margin in particular. Do you see this trend continuing with upward sales for -- on the international channel, specifically? And I'll just note to give that question some color. I mean one of the comments made by the competitor was that it's a very crowded space. So just any color you can offer with not only market potential there, but how is Aurora kind of navigating the complexities associated with medical cannabis on an international scale?
Yes. I mean -- so first and foremost, I think we're bullish. As I mentioned before, if you think about the permissive nature or the movement of legal cannabis across the globe, opportunities are more prevalent and are going to happen more frequently than the opposite. So I just would throw that out there as a general tailwind. Secondly, I will tell you that compliance, regulatory, having facilities in Europe and the navigation of specific aspects about infrastructure that's focused on science, technology and regulation are differentiators. As markets internationally are becoming more, I would guess, professionalized and more sophisticated, I think companies like Aurora will be advantaged if they can produce the quality cannabis in a certain manner with a certain level of infrastructure. And so listen, we're in early days here, and I'm not here to dismiss or be critical of any of our competitors because I have great respect for them. We like where we're at. We like the possibilities that the EU facility in Denmark provides for us, and we like the conversations that we're having with external partners based on our history of compliance and science-based production. And I think as long as those tailwinds continue of cannabis being permitted and being opened internationally, I think what we bring to the table and continue to invest in will be a compelling argument.
I'll just add a little bit to that -- sorry, just -- you will see in our MD&A where we pull apart the international business, you can see the revenue is mainly generated out of flower. And there is a developing market in Germany, actually quite a healthy one for extraction oils and things. So it's important to note that the licensing that we got at our Aurora Nordic facility in Denmark includes oil. So it's flower and oil. And we intend to use that facility to supply the European markets and the international markets, in fact, whether it's Europe, Israel or whatever, and free up those -- the Canadian facilities. But the oil licensing out of Nordic is important because that's an opportunity for us to grow in Europe in a part of the market we haven't actually been participating in very strongly.
Got it. Okay. That's helpful. So certainly, it sounds like there's a lot of room for growth there. My follow-up question is on just shifting gears altogether to beverages. I know Aurora currently does not have a presence in the beverage category, maybe that's because in the U.S., they've been kind of a flop. But with all the technology that Aurora and others have had, we're seeing an uptick of beverages, specifically in Canada. So I'm just wondering, do you have a preference either way moving forward as beverages category that you're looking to get into?
Well, we do have a beverage in Canada. We have a shot, which has done quite well. I mean my opinion on beverages, I guess, is a couple-fold. First is, in these categories, I would argue that there's not a significant advantage in being the first mover. We've seen that in a variety of other corollary categories around. I'm very respectful for what our competitor has done. I think what's more important is having a strong innovation system, can you bring high-quality products to market that meet consumer needs at a proper price point? And I believe Aurora is developing those capabilities, and you've seen it with vapor. Secondly, if and when there was going to be an opportunity in beverage, clearly, we have all of the other pieces put together and all of plant genomics and everything we would need in order to play in that category. What I do believe though is that this category is moving so quickly that to make outsized bets and presuppose exactly where the consumer is going is a mistake. So we are going to continue to offer a variety of consumer options, particularly in emerging categories, and I could argue that concentrates, vapor and pre-roll today have much more actionable opportunities from an economic standpoint. And if and when beverage or any other category like that emerges, we'll be there. I will also say that we see in California and Colorado, but those are really bellwether states and operate about about a year -- 10 months to a year from a consumer standpoint ahead of where Canada is at. And if we start to see inclinations that beverage or something else is really taking off in those markets or any other sort of bellwether market that we get consumer data on, we can quickly pivot. So I respect others making that push. We don't see it as an opportunity today. But if and when it was there, we'd be there. And like I said at the beginning, these categories are not one where first-mover status matters.
Our next question comes from the line of John Zamparo with CIBC.
The fact that you listed as being success indicators like IP, science and testing and packaging, I'm trying to get to how you monetize that? Does it assume a federal pathway to operate in the U.S. and Aurora is the one executing that? Or is -- do you think about it as selling that expertise to local state-level providers? Or is there an assumption of an additional equity investor partnering with Aurora? I know there's a great deal of unknowns there, but just would like to get a sense of how you think about monetizing the factors where you lead U.S. or international competitors?
Well, listen, it's a great question. I think there's -- the good news is there's a ton of different ways to do it. I mean if you look at companies like Monsanto or you look at other companies that are branded companies, there's a variety of different ways to get there. I think the main thing to understand is after the time in which the U.S. legalizes cannabis either at the medical side or on the rec side, clearly, the Canadian companies are going to have a massive head start in terms of understanding what that type of construct means. So listen, whether that means we're opportunistic through M&A, whether there's licensing, whether there's intellect IP, all types of things, what I do know is that our continued focus and effort in being compliant and being thoughtful around the globe outside of the U.S. puts us in a position where others are not. And I have -- listen, I have tremendous respect for the MSOs in the U.S. and what they've done, but the fact of the matter is they have not operated in a federal construct, they've not operated in all of these different markets, and that is a different animal. And so whether that's a partnership, whether that's a go it alone, whether that's a variety of things, I'm not going to stand here and sort of presuppose what that is. But what I can say is all the hard work that we're doing around the globe to be successful is portable, can be plugged and played into the U.S. and so there's no disconnect there. We don't have to take resources away from what we're doing to be more attractive to the U.S. We don't have to focus on that. So we continue to be in a good position of optionality. And like I said, it's -- the Canadian LPs are going to have a significant set of resources that upon federal legalization of either side will be, I would argue, uniquely valuable.
Our next question comes from the line of Matt McGinley with Needham.
My question is on cash bridge. You started the second quarter with $133 million in cash. And with the equity raises you did and with the cash balances that you had, I think on November 6, you had $250 million. It implies you still, I think, had around $15 million in cash losses. Are the 2Q cash losses still on the operating side and that the revenue isn't covering the cost? Or is this more related to working capital and CapEx?
Yes. Thanks for that. I think I mentioned in my remarks and maybe you just passed over fairly quickly that we did have a couple of the the larger annual costs in October, including our insurance, which is in excess of $10 million paid out in October and also our employee bonuses, which is in the same sort of neighborhood. So we take those out of that cash burn in terms of trying to focus on what operations is delivering right now.
Okay. And on the European facility, I know you noted an increase in production costs related to the ramp of the Nordic 1 facility in Denmark. When would we expect to see that fully operational? And I guess, when could that impact the medical segment revenue? And given gross margin rates are already pretty high in that segment, would that have a positive impact on those gross margin rates? Or is it sort of net initially because, I guess, more efficient larger Canadian operations would be offset by this smaller European operation out of the gate?
Yes. So it's operational now. I mean that's why you're seeing the ramp-up cost is to build inventory. We were simply waiting for all the licensing. All the licensing is in place. I believe just you'll see -- we expect to see sales from that facility in this quarter into Europe, into Germany and other places. Simply it's just the import-export permit that the -- is the typical process now and may take a week or 2 for those. So if a facility that was built with a lot of similarities to our existing facilities in Canada, built by the same -- we built it or we retrofitted in existing facility there. So it's a very efficient producer and operated by following Mads Peterson, who's third-generation agricultural grower in the Netherlands, and I believe is -- or in Denmark is one of the largest tomato exporters in the area as well. So a lot of history there, a great operator in a facility that's sort of built in a similar method to the way we built Canada. So we expect it to be both a high yield or a very efficient operator.
Yes. I guess the only other point I'd make there is that EU GMP is going to be an important designation for the -- all the other markets as well. And so while it's more expensive and harder, there's value there plus also navigating that again builds capabilities for us in other markets.
Our next question comes from the line of Owen Bennett with Jefferies.
Just the one question for me on dried flower. So sequential decline driven by Daily Specials, relatively in line with the new strategy and putting less focus there. But the balance being flat would also suggest share loss continues in the other more premium brands, which is not in line with the new strategy. Ideally, we'd like to see this moving upwards. Can you maybe speak a bit more to this? And when would you expect to see share on the premium brands in flower start to pick up with the actions that you are taking?
Sure. Well, listen, I've just gotten in the seat. And so some of these things take a little bit longer. What I can tell you is that you're going to see a significant focus on our premium flower and then we have some tremendous brands, as you know, Whistler, San Raf and Aurora. The company had gone through a lot of transition, as you know, in the first half of the year, and there was quite a bit of interest in getting to that transition. And then to be honest, that daily special launch that happened in February and March was so -- I think it took everyone by surprise. So there's a couple of things going on. First and foremost, it takes a little bit to get those premium brands resettled. Secondly, we've had very substantive and good conversations with our trade partners about that. And third, we have to look at, in some ways, looking in the better articulation on format and packaging, and those things take a little bit longer than just flipping a switch and saying, we care about San Raf, Whistler and Aurora. So I don't want to give you timing. I think -- listen, I'm impatient with all things. I think as you look at the headset and body data and retail takeaway data, you'll see it. What I can tell you is that you're not going to see competing priorities from us. You're not going to see us try to do both things exceedingly well because I don't think you can. So our focus will be on the premium flower and not on the deep commoditization that's happening on the low-cost flower. And what has not been mentioned today is that you've got 1,300 stores, which is an amazingly small amount of stores. And you can muscle 1,300 stores through marketing, trade marketing and sales execution, all of which I've got a long history with. And I can tell you that our focus of those resources will be on premium products and premium accretive margins such as vapor and pre-rolls. So I know that's not the exact answer from the timing standpoint you want, but you know better than anyone and have access to that data. You'll see how they're doing, and I'll be -- we'll be happy to answer it as we go along.
We have reached the end of the question-and-answer session. Mr. Martin, I would now like to turn the floor back over to you for closing comments.
Well, thank you. And I want to thank everybody for your questions. We really appreciate your interest in Aurora. And while it's early days under my tenure, I'm very excited about where we're going, and I really appreciate that all of you took the time here today. And lastly and probably most importantly, from all of us, we hope all of you are safe and healthy, and we look forward to seeing you soon in person in the future. All the best.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.