© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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. Welcome to the Aurora Cannabis Fourth Quarter Fiscal 2019 Conference Call for the 3 months ending June 30, 2019. During today's call, Aurora will be referring to an earnings presentation which listeners are encouraged to download from the Financial Reports section of the company's investor website, investor.auroramj.com.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 risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these 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 SEDAR and EDGAR databases.I'd like to remind everyone that this call is being recorded today, Thursday, September 12, 2019.I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley.
Thanks very much, operator. Good morning, everyone, and thank you for joining today's call. With me today are our Chief Executive Officer, Terry Booth; our Chief Financial Officer, Glen Ibbott; and our Executive Chairman, Michael Singer. For today's call, I'll start by discussing some of our operational highlights, and then Glen will discuss our financial results. I'll then briefly return to present our outlook for the rest of the year and beyond, and then we'll take your questions.As we do every quarter, we'll start with a few initial framing comments before shifting into the formal comments.As mentioned by the operator, I'd like to draw everyone's attention to the dashboard of key performance indicators that we provided, once again, viewable on our investor website at investor.auroramj.com. This is a really useful tool, one of our innovations, essentially a green light, yellow light and red-light tool to help track the company's performance. And as you'll see, most of the KPIs are in the green, and we've highlighted 2 that we've identified as yellow. We'll speak to each of these in more detail, but for now I'd like to focus on the big picture for Aurora in our fiscal Q4, the quarter ending this past June 2019, and it was yet another strong quarter for ACB.Among the highlights included continued growth across all our distribution channels: Canadian medical, Canadian consumer and international medical, a massive increase in kilograms produced, increasing 86% quarter-over-quarter, a further 20% decrease in our cash cost to produce now reaching $1.14 per gram. And I should note that at our flagship highly automated Aurora Sky facility at Edmonton International Airport, we're producing at about $1 a gram with further improvement anticipated.In addition, our gross margin improved by a further 3% reaching 58%. The 2 KPIs that we've designated as yellow are average net selling price per gram and our SG&A. And we wanted to call them out as a matter of transparency. The reasons for this are as follows. Our average net selling price per gram, which we'll get into in more detail a little bit later, came down as a result of actually increased sales in the consumer market as well as some bulk wholesale sales that we actually managed to achieve a very attractive margin on higher than our overall gross margin. And then our SG&A obviously is increasing a little bit at 9%. It's higher than it was in the last quarter at 1% growth, but I think that's explainable in large part because we are heading into essentially cannabis 2.0 with the new product forms coming on board toward the end of this year.I also want to acknowledge that we slightly missed our guidance on our overall net revenue. We projected $100 million to $107 million in overall net revenue. We came in 1% below that at approximately $99 million. That shouldn't have happened. The reason why it happened we will discuss a little bit more, but it's essentially these things. One, these were not our core cannabis revenues. On our core cannabis revenues, we came in right at the top of our guidance at $95 million. By the way, the largest revenue figure in a quarter that any cannabis company has ever recorded for cannabis revenues.And on the overall net revenues, we missed slightly based on our ancillary or noncannabis revenue. Couple of reasons for that. One, those are more variable than our cannabis revenues. We also have a little bit less visibility into the performance of our noncannabis units that are independent that have a separate governance structure.And then finally, we actually required a lot some of our ancillary companies and operations, specifically with respect to our analytical testing and our patient counseling. And we can't record revenue internally for intercompany transfers.Now the big picture, most important takeaways here before we get into the formal comments. I'd emphasize the fact that we've established at Aurora leadership in this sector with respect to not just production but also revenues on a global basis in terms of innovation, and this is the biggest quarter, the biggest revenue that any company in this sector has ever recorded. So we're very pleased at the progress that we've made. And now we'll shift into the formal comments.Now the past year has been transformational for the cannabis industry overall. It's rapidly maturing into an established operating industry. At Aurora, we prudently build a business that is efficient, scalable and highly adaptable. We are a leader in markets around the world. We're committed to defining the future of cannabis globally, and that commitment underpins everything we do.In the quarter, Aurora continued to be a strong performer in the Canadian consumer market with leading market share and brand awareness. We achieved 52% growth in consolidated revenue compared to Q3, driven by a strong increase in production, particularly at Aurora Sky. While retail distribution in key provinces has been a constraint in fiscal 2019, we will see retail infrastructure expand in 2020 through the launch of new brick-and-mortar stores across Canada. With more stores, we expect to see further consumer engagement. Providing safe and reliable access to medical cannabis remains at the core of Aurora's business. And our revenues from this market increased 10% compared to Q3. Domestically, our patient roster increased by 10% to over 84,000 patients. Driving this growth are continued referrals from our CanvasRx clinic and a network of over 60 clinic partners. Internationally, Aurora continues to be the leader in working closely with government regulators and policymakers to implement medical cannabis programs and open new markets.In Italy, we were selected as the only winner of a public tender that market -- to supply that market with medical cannabis for a period of 2 years. While the initial quantities are small, this is an important opportunity to build our connection with patients, doctors and pharmacies who have come to know and appreciate our products over the past 2 years. This also underscores our ability to open new global markets by engaging with local governments and acting as a trusted partner as we continue to work to ensure patients have access to the high-quality medicines they need. As well, in addition to the 2 EU GMP, that's European Union Good Manufacturing Practices, certified facilities we currently operate. We are in the final stages of certification for our Aurora River and Aurora Vie facilities, one in Ontario and one in Quebec. This will bring our EU GMP-certified facilities count to 4, making us the license producer with the most EU GMP certification, something that's rapidly becoming a global standard and ensuring our continued access to international markets where this certification is simply a requirement.We recently announced our first major partnership in the United States market, our science-driven partnership with the UFC, the mixed martial arts organization, to study the effectiveness of CBD, cannabidiol, as the treatment for pain and recovery in high-performance athletes. This groundbreaking research will generate the data required to establish CBD as an accepted therapeutic ingredient. The intellectual property from this research will lead to the creation of science-backed hemp-derived CBD product that will combat the rapidly growing market of untested CBD treatment. We're excited about the opportunities ahead for us in the U.S. market and will continue to take a measured but strategic approach to how we enter this space.Furthering our scientific leadership, we also announced that we began cultivating cannabis outdoors. The new sites at Aurora Eau in Quebec and Aurora Valley in British Columbia will be used for cultivation research to develop new technologies, genetics and intellectual property to gain further efficiencies in our indoor grow facilities and advanced learnings about cannabis cultivation. This is important work that needs to be done to ensure sustainable cannabis agricultural practices that are developed to safeguard both our environment and global consumers.The first harvest of our outdoor-grown cannabis is expected to occur later next week at Aurora Eau in Quebec. This cannabis will be sent for extraction and further testing, and we look forward to applying the learnings from these test sites to next year's crops. We're committed to defining the future of cannabis on a global basis, and we're well on our way. While we may still be in the early innings of the cannabis industry, the work that we've accomplished to date has created a company that is uniquely positioned to lead.And that concludes my opening remarks. I'd like to turn the call over to Glen now, who'll discuss the financial highlights of the fourth quarter.
Thanks, Cam, and good morning, everyone. My comments here today reflect the success that Aurora has achieved as we continue our focus on the execution of our business plan. The figures I'll be going over can be found in our financial statements and MD&A, and all are in Canadian dollars.As Cam mentioned, our fourth quarter fiscal 2019 results showcased the drivers of our continued strong quarter-over-quarter growth. We reported total net revenue of $99 million, a 52% increase over the $65 million in the third quarter. Our cannabis net revenue was $95 million, representing 61% sequential growth. This growth was predominantly fueled by additional production capacity and available supply from our Aurora Sky and Aurora River, formerly MedReleaf Bradford, facilities, which drove a $15 million increase in consumer cannabis net revenues as well as an $18 million increase in wholesale bulk cannabis trim sales.For the full 2019 fiscal year ending June 30, net revenue was $248 million. Of this, $226 million was cannabis net revenue, an increase of over 427% compared to the prior year.Our fourth quarter 2019 Canadian medical cannabis sales increased 9% to $25 million, driven by our continued success in growing our patient base, which currently stands just shy of 90,000 clients. International medical cannabis revenue for the quarter was $4.5 million, up 12% over the prior quarter. For the year ended June 30, 2019, overall medical cannabis net revenue increased by 150% to $107 million. This increase was primarily due to the addition of revenue from MedReleaf and CanniMed acquisitions, increased European sales as well as the ramp-up in production across our production facilities.During the fourth quarter, our growth in the consumer cannabis market continued with net revenue of $45 million, an increase of 52% over the prior quarter. We finished the full fiscal year with $97 million in consumer cannabis revenue.As you'll note, our fiscal Q4 included approximately $20 million is wholesale bulk cannabis revenue. We sold cannabis trim for an average price of $3.61 and a margin of 61%. In the future, we expect to sell into the wholesale channel opportunistically and when pricing and terms are appropriate. We caution against expecting bulk sales of the magnitude we achieved in Q4 2019 to be consistent or repeatable. However, we do maintain a focus on the bulk sales market, and we do believe there will be further opportunities there in the future.Given our patient first commitment and belief that medical cannabis should not be subject to excise tax, we continue to absorb the cost of these excise taxes on behalf of our medical cannabis patients. As a result, excise tax has negatively impacted our Canadian medical cannabis net revenue and gross margin by $3.3 million and 4%, respectively.Let me address our reported revenue as compared to our updated outlook in August in a bit more detail. We reported at the top end of the range for our cannabis revenue of $95 million. This is our core business, and we are proud to have delivered such a strong quarter. However, revenues from our ancillary businesses, particularly those that are purposely managed independently at arm's length, were lower than expected.We had expected relative consistency from quarter-to-quarter. But when they reported into us, we needed to eliminate significantly more revenue than expected for intercompany work. While we do not have day-to-day visibility into these businesses, we do need to improve our ability to forecast these businesses. However, because of the lumpiness of these revenues and their relative financial immateriality, we will not be including them in future guidance.Now continuing further down the P&L. Our gross margin on cannabis net revenue increased to 58% in Q4 2019 compared to 55% in the prior quarter. The increase in gross margin is primarily due to ongoing improvement in our production cash cost per gram. As Cam mentioned, our cash cost to produce per gram of dry cannabis decreased to $1.14 per gram, down by $0.28 or 20% during the quarter compared to the last quarter.This is primarily attributable to the positive impact of the greater economies of scale and manufacturing efficiencies achieved from the increase in production in the period, particularly at our Aurora Sky facility. On a stand-alone basis, our Sky facility is now in around $1 per gram, and we expect further improvements in the coming quarters with the result in increases to our overall gross margin. We see our strength in highly efficient production and the resulting industry-leading gross margins as core to our future success. It allows us the opportunity to continue to invest heavily in the future growth of our business. At the same time, it's progressing towards positive EBITDA.During Q4 2019, Aurora produced just over 29,000 kilograms of dry cannabis as compared to 15,590 kilograms in Q3. As production from our higher-volume facilities increasing through the quarter, we expect to see a further increase in production in Q1 2020. We have also ramped up our internal extraction capacity and now have enough to meet our current and future needs.In Q4, we continued to invest in the corporate infrastructure and talent required for expansion and growth of market share globally. The increase in SG&A expense compared to prior periods was primarily attributable to increased shipping and fulfillment costs related to higher revenues and preparation for the launch of new products into the product development and branding development, which includes our UFC research initiative.Reflecting the year-end audit adjustments that Cam mentioned earlier, our Q4 SG&A would have been about $88 million, an increase of approximately $20 million over the prior quarter. We have built a diversified and vertically integrated company currently capitalizing on the tremendous opportunity of the global cannabis markets.In Q4, our reported adjusted EBITDA loss decreased $11.7 million as compared to $36.6 million in the prior quarter. Considering the impact of year-end audit adjustments, we estimate our delivered EBITDA loss to be approximately $25 million, an improvement of over 32% from the previous quarter.I'm extremely happy with the underlying achievements we've made in the last 9 months in driving towards our EBITDA target. We have more work to do, but I'd highlight that nearly all of our KPIs are showing sequential improvements. We've solved previously identified production bottlenecks, and we're seeing strong sell-through on our products at the retail level.There are remaining constraints to face the growth in the Canadian market that we would like to see resolved, including the timing of currently approved and future retail stores. The resolution of these constraints will impact the timing of our EBITDA positive target, but we do expect these constraints become less of an issue over the next several quarters. As we continue to execute on our strategy, the company expects adjusted EBITDA to improve in the future due to higher sales, improved gross margins and prudent SG&A growth.As at June 30, 2019, we had $218 million in cash and cash equivalents compared to $89 million last year. In August, we announced the upsizing of our secured term debt facility to $360 million with an accordion feature for an additional $40 million of capacity. Further, as I'm sure many of you have seen on September 3, we announced the disposition of our remaining equity investment in the Green Organic Dutchman generating approximately $86 million in gross proceeds. With these 2 transactions now closed, we believe we have more than adequate financial resources in the near term to execute our growth plans.I should also note that we continue to evaluate our global capacity expansion. We have identified opportunities to defer certain CapEx as we rebalance the growth of demand with our increase in supply. We're continuing to build out our full production facility pipeline but in concert with the growth of the total global cannabis market.As I conclude my remarks, I would like to note that I am proud to be a part of the best-performing LP in the Canadian industry. Aurora delivered strong revenues and patient numbers, improved an already robust LP margins, produced a consistent and meaningful supply of high-quality cannabis and is well positioned to continue to keep the gas pedal down for growth while also moving to EBITDA positive in the short term -- long term. This makes Aurora unique in the Canadian industry.I am very pleased with how the Aurora team is focused on solid execution and operational improvements this past year. We are in a good financial position. We have numerous options at our disposal to execute on the growth strategy.I'll now pass the call back to Cam.
Thanks, Glen. As you've heard today, we have built a solid platform for growth that's generating continued positive results. Before I open the call for questions, I wanted to provide an update for our outlook for fiscal 2020.The opportunity in the global cannabis and hemp markets is tremendous, and Aurora will continue to make the necessary investments today to build long-term value for shareholders. However, Aurora will take a balanced approach to these investments with the focus on operating a sustainable and profitable business.[Audio Gap] to establishing a substantial operating footprint in the U.S. As part of the U.S. market strategy, the company is considering its shareholders and how various state and federal regulations will affect its business prospects. A number of alternatives to grow Aurora's presence in the U.S. market are under evaluation right now, and the company is committed to only engage in activities, which are permissible under both state and federal laws.There are market opportunities that are legal at both state and federal levels that can add operating cash flows and be critical pillars of Aurora's strategy and long-term success. The introduction of new product format to the Canadian consumer market this fall represents a significant opportunity for the company. We're very excited to introduce a line of new, high-quality products across the country in a variety of product categories. We have invested the time to study consumer habits in legal U.S. markets, which have driven the development of products that consumers will desire and that are compliant with Health Canada's regulations here in Canada. As we previously discussed, our initial focus in the derivative product market will initially be on vapes and edibles. To support these new product formats, we've invested significant capital to staff up and scale our operations in terms of both our cultivation and extraction capacity and in developing new production hub to ensure that sufficient product is on store shelves for December 17.On that front, both of our Aurora Air and Polaris facilities are progressing very well, and I can say that as of today, we are in commercial production of vape pens, mints, gummies and chocolates and in the late-stage development in other product categories. As I said of the top of the call, while many in the industry are trying to decide how they will build their cannabis business, we already have built a solid growing business, integrated across all value chains, in fact, the global leader.I'd now like to ask the operator to open the call up for questions.
[Operator Instructions] Your first question comes from Tamy Chen with BMO Capital Markets.
First question is, Glen, could you talk a bit about -- in the EBITDA reconciliation you've got for the quarter from net income to adjusted EBITDA, there was a note there about, I think there was some change in accounting where it reduced the operating expenses in the quarter by about $15 million. Can you just talk a bit about what was that accounting change there?
Tamy, so it wasn't a change. It was our year-end audit adjustments. As we went through our year-end and scrubbed our financials, we identified some adjustments from prior periods that we needed to correct in order to satisfy our audit and get our full year financial statements in good shape. So effectively what happened there is we did record some adjustments in Q4 that possibly should have occurred in previous quarters. Our previous quarter should have -- the result should have looked slightly better, and we recorded those through in Q4. So overall nonmaterial adjustments, but part of the audit cleanup. They fall into a couple of buckets. So when -- mainly driven by the level of acquisitions and integrations we did as we scrub through some of those acquisitions, find some costs that have been recorded as overaccrued and then that we also identified some costs that should have been capitalized earlier in the year. So we made those corrections as part of our audit.
Okay. My follow-up is just wanted to understand the CapEx spend in the quarter. I think it increased quite a bit sequentially. How should we think about that? I mean, what was the capital deployed into during the quarter? Is this the go-forward rate? Just kind of commentary about that would be helpful.
Sure. Yes. Cam, I can start on that.
Yes. Do you want to?
Tamy, you know a couple of the major facilities that are under construction, Sun and Nordic, and we've mentioned couple of others. You're also aware that we got Polaris and Air and an innovation center in Comox for R&D, for our research. There is a lot of work going on in Aurora right now as we scale up, not only for international but within Canada to make sure we're efficient distributors, distribution centers across the country and manufacturing for the new products and things like that.So the CapEx, let's say, Q4 and spilling into Q1 a little bit would be a peak CapEx for us or over $100 million into Aurora Sun build. It's progressing quite nicely. As we indicated a little bit earlier in our comments, we are looking at the timing of CapEx and matching the demand to -- matching our supply to the demand.As you saw when we launched Sky, we were able to get certain base licensed in operation before the entire facility was built in a phased approach. We're certainly taking that approach to the larger production facilities. So we have just kind of an awful lot going on. As you know, we're heavily into technology, automation and things like that. So these are long-term investments that will pay off in our operating costs, reduced operating costs, reduced production costs over the long term. So that's where we're at right now Tamy.I think you would expect in Q1 to still see a significant CapEx spend and then it will start to reduce over future quarters, particularly most of these facilities are nearing completion, and then we'll just have a couple of larger production facilities still ongoing...
Next question comes from Matt Bottomley with Canaccord Genuity.
I just wanted 2 items, one on the some of the commentary on potential volatility going forward and then again on the EBITDA commentary as well. So on the volatility side, given that you had a good wholesale bump in the quarter and then within your recreational consumer revenues, there could be some speed bumps there depending on how retail's rolled out, what's the best way for, I guess, analysts to look at this considering that the wholesale may not be repeatable? Obviously, you can tell me if that's different and the recreational revenues could still be potential headwind, but just trying to anticipate the potential magnitude of the lumpiness going forward.
Yes. I'll take the first crack at this and then hand off to Glen. First thing is, the demand is actually there for wholesale product. And you'll note that we got an extremely attractive price for trim, $3.61 a gram, and that the margins were even better than our overall gross margin. So if we have opportunities and it's likely that we will, we will proceed with additional bulk wholesale.But the bigger question you're asking is with respect to volatility. And I think what we're signaling here is just to be aware. As a lot of observers have suggested, we're anticipating that there may be a bit of a plateau between now and the advent of the cannabis legalization 2.0 products anticipated somewhere around the end of the year. I think that's really what we're anticipating. This is likely to be across the sector, little bit of a plateau between now and then. Glen, do you want to add to that?
Yes. Matt, what we're signaling there, and you know Aurora and you know how consistently our revenue continued to ramp quarter-to-quarter-to-quarter. The revenue curve is a nice move, continuously increasing curve, and we specifically for us just want to call out the fact that there are constraints on the consumer system right now and the provinces are starting to show that as well and have seen in July and August where they're trying to work through some of the inventories that they have and slowed their buying and we expected to pick up and continue to pick up through the next quarter, but we did want to kind of signal that our continuing sort of 48% quarter-to-quarter growth may take a bit of a pause just due to industry dynamics.That being said, we still expect to see growth in the core businesses. And as Cam said, the bulk opportunities may be there. And if the pricing is right, we'll execute on those as well. This is -- one of things that heartens me and I think I look forward to, is from the data we see from provinces is we are #1 in the country in sell-through rates. So our products continue delivering the right product, right quality that consumers are preferring, so as long as we continue to sell-through at healthy rates. And then as the bumps kind of even themselves out and the retail stores roll-out and we'll benefit disproportionately I think from that increased market size.
Matt, it's Terry. And just to...
Go ahead, Terry.
I just want to reiterate -- I know Glen was talking about retail. And a good example would be Alberta. Alberta lifted the moratorium on retail stores. Stocked up a considerable amount of cannabis, those stores have been granted licenses but they are not yet opened. They are doing their build-outs. And I remember that all we're providing right now are tinctures, joints, bud and gel caps. We have another Cannabis 2.0 coming into Canada, which we think is going to significantly drive our revenues for value-adds.
Got it. That's very helpful. And then maybe just tying that into some of the comments you made on EBITDA, so in prior quarters in discussions you've kind of been hoping to reach that inflection point in calendar Q4 of this year. Now the wording is more sounding like short term, which to me sort of sounds similar points in time. So is the reason for that slight change is just given that plateau you were talking about until the December cannabis 2.0 comes on and then it's a bit of a reset with respect to that inflection point towards EBITDA positive?
I'll take the first crack at this. Glen, maybe I can just sort of frame this for a second and then hand off to you for the details. So we put our guidance at the beginning of the year that we were targeting positive EBITDA, and that created a sea change in our behavior, and I think people have noticed. We went from a period of very rapid M&A to shifting gears to a period of really focused and disciplined execution, and I think that's been reflected in our results.Now would we have like to be at positive EBITDA at this point? Sure. Part of the reason that we're still working towards that is, as Glen mentioned earlier, we would have liked to have seen greater retail infrastructure in Canada. More stores, obviously is better for the whole sector and disproportionately beneficial to us as the leaders in the consumer market.So we still are focusing on that, and I think it distinguishes us a little bit from our peers some of whom have not emphasized that pathway to profitability as much as we have. This is something where we have listened to what institutions have told us about the importance of having a credible pathway to profitability, and we're sticking to that. Glen?
Yes. Matt, I think Cam's done a great job of describing that. In terms of our language, how we're doing is we are still at the mercy, I think, of the timing of the retail footprint rollout, how strong it is. We're excited that Ontario has licensed a number of new stores, but they should be licensing hundreds of new stores. So there's still a lot of room to go, and the timing of that will dictate exactly how large the market grows over what period of time. And certainly, we don't yet know exactly when the provinces will start loading in for the new products for consumer 2.0. So will they start buying in advance in December? Or will they wait until towards the end of the year? So there's some timing there quarter-to-quarter that we're a little comfortable with, and we'll have to wait to see how that rolls out specifically.
Next question comes from Vivien Azer with Cowen and Company.
This is Steve Schneiderman sitting for Vivien today. So in reference to some of the performance in the oil, I mean, some of the commentary that we've heard from some of the other LPs have been there's been a little bit of destocking across the board. And question that how much has that impacted you? And are you seeing a similar trend in your oil and extract-based sales?
Glen?
Yes. I can tackle that. So Steve, yes, for sure, the consumer market -- okay, let me start with medical. Our medical market is still running at roughly the 2/3 dry flower, 1/3 extract based that it has for a number of quarters now. Relatively, we had a small increase, right, I think 37% in Q4 in terms of extract-based products, but that's relatively consistent.Definitely, the consumer market seems to be heavy preference right now with the products that they have to choose from for dried cannabis. They prefer to smoke the cannabis right now until they get new product forms launched in 2.0. Our quarter Q4 was over 90% dry flower. So I think we've seen a few of the -- few of our peers that loaded in halfway on the extract-based products and that they have recognized some returns in the recent past. We don't have that issue. We have another issue. But for sure, the consumer market right now is heavily dominated by dry flower, not a lot of extract-based sales.
Great. And just a follow-up to your earlier point about what we're seeing in the channel. It would seems to be a little bit fuller than we previously would have expected. How do we reconcile that with the narrative that the market has been grossly undersupplied in the past? Has that now caught up to the point where we've received balance? Or are there other factors that are weighing in on that?
Glen?
Yes. Cam, I can take that initially. When we talked in the past, Steve, and certainly we've been fairly consistent is that we expect that this is such a new market that we're currently at the launch of new market. In fact, we haven't launched even most of the products that should be in this market. So there is going to be, I think, month-to-month and quarter-to-quarter, there will be a continuing sort of mismatch, I think, of demand and supply.Certainly, I think what we're seeing is that several months ago, there wasn't enough supply in the market and the provinces would buy whenever they could. Now in certain SKUs, I think, they've overloaded. As I said earlier, our strong sell-through is important for us. It's an indicator that our products are moving, but they have kind of overshot, I think, in terms of inventory build on some SKUs, and they're going to have to work that out as we wait for retail.
Yes. Steve, it's Terry here. I just add to Glen's comments. If you look at the statistics on retail sales of adult usage, again, we're limited in there, the number of products that we supply them. But Alberta outpaced Ontario and British Columbia, and that is not statistically historical rather correct, right? The British Columbia and Ontario have a lot more cannabis people, and I think it's a reflection of the number of retail stores that are opened in those 2 provinces.They both are little bit of a slow roll, but they both had government changes on the rollout, October 17. So they're a little bit behind the 8 ball in getting retail rolling. We're starting to see a significant uptick in British Columbia and certainly we expect the same in Ontario. If they start selling as much cannabis per capita. As Alberta, you're going to see quite a bump there. We don't know when that's going to happen. We don't know what's going to happen in the next 6 months, but it may not be next week.
Steve, this is Cam, let me add to that further to Glen's comment. We are seeing some interesting developments beyond straight supply and demand for product in the Canadian consumer market, and that is discrimination by consumers towards higher-quality products. And we're seeing the results of that. If you take a look at how some companies in this sector have to deal with significant returns in a quarter, and that's not an issue that we're facing. So there is some increase in discrimination where consumers are, they're voting with their dollars as to which products they want, and we anticipate that, that will continue on a go forward basis. And once again, we think that, that militates toward Aurora because we have this reputation for producing particularly high-quality cannabis products.
Next question comes from Doug Miehm with RBC Capital Markets.
This question is for Terry and Michael and it has to do more with strategy. I know that you've slowed down sort of the acquisition pace, but I was wondering if you could elaborate a little bit further on what you are thinking. I know everything is going to be approached fully legally, federally at the state level, but what you are thinking about in the U.S. If you can give us some little bit more information about your approach and perhaps timing that would be great.
Michael, do you want to start this off?
I am actually going to start it off, Cam. It is Terry.
Okay, fair enough.
You wouldn't think that our M&A activity has slowed if you sat in my chair and the amount of work that we're doing with the amount of opportunities that we have in United States. We started out into United States with our little brother, Australis Capital, which we have some back-in rights. They trade on CSE, AUSA. They have done 9 deals themselves, smaller deals, but they set a footprint and actually really teed up some good people to help us with the different regulatory issues and various problems. We have gone on a significant MSO review tour of the States. They have some common knowledge out there in the markets, and we are laser focused on CBD derived from hemp and the various opportunities that exist in that. When USA passed the Farm Act, they leapfrogged across the rest of the world or over the rest of the world in CBD derived from hemp. Some called it CBD frenzy, but I don't believe it is because we know that it works. And having it descheduled in the U.S. is a tremendous boon to the CBD industry and our strategic partners in Trian Capital are helping us talk to some of the top companies in the world with respect to that in itself. And there is a couple of more hurdles with the CBD industry, including the FDA ruling on ingestibles and we have a good idea on how that's going to go. But to say that we slowed our M&A activity, we have now closed a bunch recently, but I'm very busy in that regard, probably 90% of my time is dealt on new opportunities.
And it is Michael. I'll just add that we see the U.S. market as a tremendous opportunity and I could tell you that this is now a key objective for us in fiscal 2020. We expect with based on what Terry just described that we will have a significant footprint in the U.S. in the coming quarters. And our UFC is an example of a great first step in that direction. So we're certainly encouraged with the progress that we're making and stay tuned because we're excited about our opportunities.
Okay. Great. And then just a follow-up for Cam. Again just looking at a couple of quarters with 2.0, I know you talked about the fact that you are going to be launching vapes and some edibles, et cetera, et cetera. Maybe just on the vaping side, you could give us your thoughts on this whole situation that we're starting to see on the safety side with respect to vaping and e-cigarettes and what your approach is going to be to mitigate any concerns around that and that will be it for me.
Sure. Sure, I mean, the first thing to remember is we got the benefit of a little bit of time before we have to launch the vapes in Canada, the vape pens. And in that period of time obviously, we will be monitoring very closely what comes out of the FDA and the CDC, and hoping that we get a finer point as to the suspicions as to where this came from. You have seen the same media reports that I have where the suspicion is focusing on black market products. And of course, I would immediately draw your attention to the fact that everything that we produce and everything that we sell to either patients or consumers goes through very, very rigorous regulation under Health Canada. And in fact, we already have I think the only vape cartridge that's on the market right now, our CBD vape cartridge that we call Aurora Cloud. And that is very specifically, consistent with Health Canada regulations, and in fact, tested before it hits the market. So we've got the time, let's see how this plays out and if suspicions -- initial suspicions are correct that this is something that is coming out of black-market illegal vape. But we've got a very highly regulated system in Canada, and nothing is going out to either patients or consumers that hasn't passed Health Canada.
Next question comes from Chris Carey with Bank of America.
So I hear you on slowing CapEx, but it sounds like September quarter is still going to be elevated and even if I take together your credit facility raise and the TGOD's stake, it seems to me like you might need a bit more capital going into 2020 and that's especially the case, I suppose, if the U.S. is going to be a big focus in 2020. So can you just help me think about not just the September quarter but how you think about your cash needs and the potential for additional financing as you think about growth opportunities into next year.
Glen?
Yes, listen, I have read your notes and I wouldn't disagree with most of your analysis. I mean, we do have major opportunities ahead of us. We expect over a period of time like measured in shorter quarters to become cash flow positive from our operating business. But we are investing heavily in the future both on the facilities, production and distribution and manufacturing research as well as looking in some of the opportunities as Terry and Michael outlined internationally, including in the U.S. Now I have to say, lot of the ones that we're looking at are actually positive incrementally, EBITDA positive in these revenues. So I do like those opportunities, but for us to take a business like that and really accelerate it to the Aurora standard with the aggressiveness that we're known for will probably take more capital. So we'll have crossed that bridge as it becomes clearer on what the capital need is, but we have tremendous opportunity to continue to be global leaders. So if the decision to continue that leadership requires more capital, then we will access that capital at that time. As you know, we do have nondiluted sources that we have for the TGOD's sale and will continue to look at those sources going forward. I think, we are uniquely positioned to be able to look to those sources and I think that upsizing of our debt including 3 of the major Canadian banks now participating in that sort of bodes well for the future and we will look at those non-dilutive sources of financing and we will be accretive as usual.
Okay. And then just a follow-up. You mentioned having an idea of how FDA might regulate ingestibles. I wonder if you can elaborate.
Terry?
Sure, I think as I said before what keeps you up at night is the supply of cannabis and that's no longer an issue with Aurora now that Sky is almost at full production. What keeps you up at night now is the FDA decision, it is not a decision that they will make to the negative, but which way they will go with respect to isolates versus broad-spectrum. We are anticipating that the isolate will be the first step from the FDA as a indigestible mainly because the other 112 or 113 cannabinoids in cannabis and in hemp have not been tested by the World Health Organization. The WHO has come out and said that CBD is safe as an ingestible, but they have put brackets around that sentence that this is only for pure CBD. And I think that phrase is commonly misused as broad-spectrum CBD. There is no such thing as broad-spectrum cannabinoids minus the THC derived from hemp and/or cannabis. So we're hoping the broad-spectrum is something that is approved for indigestibles as we feel it is more effective, but the first step in those indigestibles may be indeed be an isolate. So we are making sure both of those bases are covered in our review of companies that participate in that industry in the United States.
Next question comes from Brett Hundley with Seaport Global.
I just wanted to go back to the CapEx question, if I can. Glen, what might be helpful at least for me personally is, can you share with us an assumption on where -- not maintenance CapEx but where longer-term CapEx might be able to shake out so that some of us on the street can kind of do the map on using Q4 and Q1 at the top and then working down towards that target?
I hope I can help you with that a little bit. They say we're kind of at peak CapEx run rate now with the major facilities underway. A lot of the construction going on right now will be complete over the next quarter or 2 on our manufacturing and distribution facilities across Canada. So what we are then starting to look at is just the timing of the CapEx on our major production facilities, Nordic and Sun. So as it stands right now our current plans are to bring those in and phase demand as demand requires and then you could consider that to be over the next year or 2 as we phase those in, hopefully, and ideally might well we need to phase them in earlier because the demand is there, but those are really the drivers. Now I need to caution you that that's our current -- as we stand right now that's our CapEx plans, should we decide -- part of our movement to the U.S. requires more CapEx then we'll reset and recalibrate at that point. So that's really how I kind of characterize the CapEx over the next 8 quarters and continue to spend this quarter and we start to see a trailing off then over the next couple of quarters and then you're really just looking at the timing of Sun and Nordic.
Okay. I appreciate that. And then just my follow-up question is actually coming back to the prior one as well surrounding vapes. I appreciate your answer to that question insofar as taking the latency and then having the value of time here. But for all of us that need to look forward and can try and make guesses about the forward market, can you give us a sense of what your overall capital investment in 2.0 products has been to this point and what percentage might be vapes? And I guess, what I'm trying to tie into this discussion too is, do you have any concern whatsoever that the Canadian government might overreact in the interim and then put a pause on these while things get figured out in the United States?
I'll take the first crack at that. I'm not sure that we actually want to break down percentage wise how much of our investment is in each of our priority products that we intend to launch with cannabis legalization 2.0. But we have consistently indicated that we're looking at vapes. We're looking at certain edibles, including mints and chocolates and other forms. So -- and we do intend to proceed with each of those. Now your next question as to what the Canadian government might do, that's pure speculation and we don't -- we try not to engage in that business. But I'll add this, thus far, according to the best information we have today, these illnesses have not popped up in Canada and that may be instructive. So we have to abide by what regulators say. We're going to watch these developments. We'll be responsible about the whole thing, but I want to be careful not to speculate.
Just to add to that, Cam. When someone says the word vapes, it's got a lot of information in it. Doesn't it? What the U.S. government are pulling off the shelves right now are flavored e-cigarettes. We don't ever tend to sell flavored cigarettes as far as I know. We're not in that business. The cutting agent of those flavored e-cigarettes and flavored single [ flipped ] thread or 5 thread vapes is largely expected to be the cause of these issues. I am not going to try and make a prediction, but that's what we're hearing and only what you hear comes through. And the chemical that's been largely accused to be involved in that is something called vitamin E acetate, okay? We would never even consider using something like that for a cutting agent in Canada or anywhere and [ odorless ] is fantastic. So I think that the vapes are getting lumped into a one big basket and it is really a focused set of vapes largely suspected coming through the black market that cutting agents are being used to add more robust flavor and a bigger plume, if you will. And that's what these kids are all about, it's the hotbox look in the car and you've seen it dragging by when someone takes a big rip, and there's a massive cloud coming off their vape, that is nothing that we would consider manufacturing.
Is that helpful?
Next question comes from Michael Lavery with Piper Jeffrey.
Can you give us a sense for your outlook for industry capacity, which obviously has projections to rise pretty rapidly? And just how that balance -- how that compares to demand and how that evolves over the next say, 12 to 18 months?
You are talking in Canada alone?
Yes, right, exactly.
Okay. So we don't have official figures for the industry. But here is what I can tell you. We do see capacity increasing, but once again as we mentioned earlier, there is discrimination based on quality, right? So some producers will be seen as higher quality producers than others. And as we discussed on previous occasions, one of the things that we've done to make sure that we're winners in whatever scenario emerges is to be a low-cost producer. And with our further improvements in our program cost to produce on a cash basis, that puts us I think further in the lead as the mass producer able to produce cannabis consistently at the lowest cost. So that's the Canadian situation. We don't know exactly when there is going to be sufficient supply to meet all demand. And also that calculation changes significantly with the advent of the cannabis legalization 2.0 product coming towards the end of the year. Now on a global basis, it's a very different story. Because of the very small number of licensed regulated producers of cannabis in the whole world, we see a long-term like multiyear situation where there will be a massive excess of demand oversupply for legal regulatory cannabis. And so that's one of the reasons why we have put so much effort into being first or second mover into international markets and establishing the biggest global footprint of any cannabis company and we're now operating in 25 countries.
I'd like to add to that a bit, Cam. I mentioned earlier, the cannabis per capita. You analysts, I believe, have to look at the fact that the Alberta numbers are higher than anywhere else mainly because of the retail availability. And as the 2 other provinces -- and in Quebec as well bring on more retail, you will see an increase in supply and you can probably do some math on that. I would like to make an example of Australia for a -- that which will be a export market for sometimes from Canada until they get their production underway has gone to over 12,000 patients. I think month-over-month is growing by 30%, Cam?
Yes.
Or 25%, very similar to what happened in Canada under the MMPR. So we're seeing countries that put Canadian-type regulations in place have significant uptick in demand. Australia until a couple of rules were cut or a couple of pieces were red tape were cut were very slow growth. They then cut the restriction on doctors and they improved the application process and now it's going at a rapid pace and we see other countries taking that same sort of approach. The German market, you will see that we didn't have a big increase -- it's decent increase in European sales or outside sales, but we didn't have the capacity to supply it up until now. So we're seeing the boots on the ground in Germany now educate physicians and the demand for cannabis will go up as the number of physicians are prescribing it. So it's all about under math. It's still a medical entry into countries outside of Canada and the U.S., and there is just no better medical cannabis company in the world than Aurora.
You know what? I just want to add to what Terry said. We -- everybody knows that we identify ourselves primarily as a medical cannabis company and that's on a global basis, albeit, a medical cannabis company that happens to be killing it in the Canadian consumer market with leading share. But I want to emphasize that everywhere we go in the world, our reputation precedes us, our reputation as a serious pharmaceutical grade, medically oriented, research investing company precedes us, and that's really important to us. It opens doors for us with policymakers and regulators and allows us to have important conversation with respect to how new medical cannabis systems should evolve and to be able to speak to the need for well-regulated systems that actually have real access and proper access for patients. So that reputation of ours or positioning has been incredibly valuable. It's been an asset for the company.
That's all very helpful. Just a follow-up, you mentioned being a low-cost provider -- is your operating assumption that there is pricing compression coming and that you are well positioned because of the cost advantage? And maybe how do you think about that in the context of your price point on the Italy tender that seems to have been lower than some of the other prices we see in your -- is that how you think about some of the competitive dynamic?
So I will take the first crack and hand this over to Glen and perhaps Terry if he wants to weigh in as well. So the predictions for a long time have been that we would see too much supply in Canada. That hasn't happened yet. And as a matter of fact with the troubles that one of the leading producers in the country taking a heck of a lot of product off the market and that's been further delayed. But as responsible operators, we felt like we needed to scenario plan for if and when that happens. And Glen, very specifically has done that. And has looked at various scenarios with various possibilities of future price compression and each of those scenarios has us generating significant margin because of the fact that we are a low-cost, high-quality producer. Now Glen, did you want to pick up from there?
All right, Cam has done a good job of describing it, I think, yes, I mean this is critically important and underpins a lot of our strategic advantage is, is our purpose to build highly efficient production facilities. As I mentioned in my comments with Sky delivering currently around $1 a gram and expect it to continue to improve on that, I think, we set ourselves up in a position where we don't think we have competition at that level. So there is a floor that prices cannot drop beyond and that's really the operating costs of our major peers. So if nobody, including the authorities, want to put the major producers out of business. So there is a minimum that prices can drop. So even when we model out where we expect just an absolute sort of nightmare scenario in terms of pricing, we still have extremely healthy margins. So that again I think there are so many advantages to being such a highly efficient low-cost producer that brings and this is yet another one, we win in whatever market conditions that are there. I hope that helps...
Yes, I want to add to that as well. I don't see price compression around the corner. I see more revenue per gram with the high-value products coming on stream. We wouldn't be extracting and making pens and cookies and bonbons for less of the margin on our bud. I know it would be crazy. So I see the revenue per gram going up in Canada. It has continued to go up by the way in the medical system. You mentioned Italy in the low price -- Italian contract was very small amount of cannabis and the thought behind Italy and certainly the tender was not based on our price, but we want to make sure we got it because the Italian Government -- army rather presently grows it. And in our opinion it's not the quality that they need for a decent medical system. So getting decent medical cannabis into Italy was very important to us, and that's what we accomplished with that task. I don't see that as being the standard for pricing in Europe, certainly that was bit of a different tender. And we keep forgetting that we also won one of 73 opportunities, or sorry, 10 opportunities in Germany to produce. And there's other tenders in Europe that are coming on board. They're not price driven, they're quality driven, they're EU GMP driven and those are the criteria that will win those tenders, not necessary the pricing.
Next question comes from Glenn Mattson with Ladenburg Thalmann.
I came late in the process here, so I'll just be quick. I wanted to touch on wholesale one more time. You guys talked about tapping the wholesale market opportunistically. And I just wonder like what are the parameters around what's going to make you decide when to tap it or not. And is there a range you can give us maybe is there maybe couple hundred basis points of gross margin range of when you'll tap that market. And then being that there is -- we're well into the first quarter here, are the conditions currently in line with the conditions you would want to be when you tap the wholesale market?
Glen?
Glenn, we're just trying to be cautious here. We do see a need for that type of sale in the Canadian market, there is demand. As I said in my comments I think or I might have said earlier, there are a number of LPs that are looking for product as well. The trend that we saw was to couple the major extraction companies in Canada are looking for input products of a high quality and there are other LPs that are looking for product as well. But I don't -- because this is an ongoing relationship right now, I'm not going to count on those revenues until we have the signature on a contract and in fact obviously the cash in the bank. So we'll be a little cautious, I think, looking forward here. The current market dynamics do lead you to believe that there will be more opportunities, but we don't want you to try to build that into our forecast until we start to see how sustainable and kind of regular that business is. We do have teams internally that are working on this, but now also looking at other opportunities to take advantage of our capacity for production and extraction, bottling, and all the manufacturing aspects. There is potential to create more business for those in the industry that are necessarily interested in producing or in fact can produce the quality and the level that they like. So I expect more business to come out of that segment, it is just right now early and a little less predictable than I would like to put a stake in the sand in that.
Next question comes from Graeme Kreindler with Eight Capital.
Just wanted to get a quick follow-up here with respect to the comments on the U.S. market, particularly on the CBD side of thing. There has been some commentary about the FDA giving some more clarity on regulations really being a catalyst to unlock a lot of value in that market and make the operating environment really derisk that. So my question is, is the entrance into that market in terms of an opportunity that will have a big commercial impact. Is that something where you are going to be awaiting more clarity from the FDA, you could potentially be advancing ahead of that on a state-by-state basis?
I expect to advance ahead of us.
Are there any particular states that you highlight or do you think are making strides faster than others that could allow that environment to take [ part ]?
I got to be very careful, I know it will impact tremendously when I name the States or the companies that we're looking at. So I'll leave that one alone, but it is obviously the States where this is allowed at a high scale.
Next question comes from Andrew Carter with Stifel.
So just wanted to quickly ask, I guess I wanted to ask about your Canadian medical business. It's -- you are leader in Canada right now and it's a pretty significant portion of your revenue. The sales did flatten out this quarter. So I guess what I wanted to understand is your outlook for that business, kind of given your visibility into your patient base. How sustainable is that number right now and what are the opportunities to these for a truly differentiated Canadian medical offering as you see it?
I'll take the first crack at that. Yes, so we actually saw double-digit growth. So we had over 10% growth in that market. And then subsequent to the quarter we reached almost 90,000 registered patients, which makes us by far the leader in Canadian medical. We are obviously seeing continued demand differentiated from the consumer system for medical cannabis and there are couple of good reasons for that. Currently in Canada, medical patients can write off the cost of medical cannabis as a prescription product on their federal taxes. And we're also seeing an increase in insurance coverage. So more and more people in the country who have prescriptions for medical cannabis are able to gain insurance reimbursement for it. So there is some good reasons to do that. And let me add to that, we always emphasize to patients that if you are using medical cannabis, it should be under the care of a physician. If you are using medical cannabis to manage the symptoms of a health care condition, it should be under the guidance and the supervision of a physician just like any other prescription product. So we do anticipate that, that medical market will continue and certainly we are seeing patients come over to us from some of the other licensed producers. So we expect that, that will remain a healthy portion of the business for us. And frankly, one of our defining features.
Sure. And then separately on that topic going kind of globally with nice growth in exports this quarter, but still only just about, I guess, CAD 4 million -- just over CAD 4 million of your total sales. Do you have an outlook for where the pace of commercial opportunities will evolve for you to where that's the more significant portion of your business, developing the real critical mass and then separately kind of an outlook for when some of your lower cost cultivation is going to be available to you so you can be even more cost competitive versus shipping from Canada?
Yes, sure. So the first thing that I want to remind you of is that what we're talking about right now is the June quarter. So we're kind of looking back in time and so I want you to think about the fact that as we've mentioned before, our production ramped up kind of back-end loaded in that quarter right in June, probably in the last 6 weeks of the quarter. And so that's when we had a massive increase in production that allowed us to ship additional product over to Europe. Can I tell you obviously what we want to do? We want to ship more product to Europe, and why not? We get a premium price, not just for our flower, but for our derivative products. And we now have the ability to continue to do so and in addition, we also as mentioned earlier, we have 2 additional facilities in Canada, one in Ontario, one in Quebec that we anticipate achieving EU GMP certification. And once again, that will make it easier for us to ship more product to Europe. Remind me, what was the second part of your question? Oh, I think the operator cut him off. Does anybody remember the second part of the question?
We'll get back to him on that.
And then your last question comes from John Chu with Desjardins Capital.
Just a couple of quick questions. So just on the path to positive EBITDA. Obviously your 2.0 coming online, that will be a higher-margin business. But I have to assume that in your early days, it is going to be a drag on margins. So if it goes according to how you think it's going to go in terms of the rollout, how quickly do you think that business 2.0 can become positive EBITDA? And then tied into that you are doing -- you are increasing your extraction capacity, so I'm just curious how much of a boost can that be to the path towards positive EBITDA?
Glen?
I'll start with that, John. I guess, I dispute your proposition that this would be a drag right out of the gate. We are manufacturer commercial scale all of our products right now. We -- our pricing is set. And we believe a sustainable pricing at levels that will produce margins that are higher than our current products. And I see no reason why that would be a drag on earnings. Of course, it's going to be highly dependent on how much the provinces load in and at what point in time they load it in. So in terms of timing, I think, we'll wait and see on that, but we don't expect. We've made the investments necessary and we have the operating and manufacturing facilities that are already efficient and relatively optimized so that we're delivering an efficient -- efficiently produced products. So, no, I don't see that as a particular issue for us. In terms of extraction, we have been ramping up our internal extraction capacity, and we're now at a point where we can extract every bit of material that we need. So that's -- when we look forward, it's not necessarily -- what we have done is we removed the constraint that we had previously, but it doesn't necessarily inflect our future revenue. It's just a part of the puzzle for producing this new generation of products. So that's just part of the manufacturing process that exists for us and isn't a constraint anymore. So I understand your question, but I think it's just part of the version or the generation 2.0 products that are coming out and we are well prepared for those.
And at this time, we have no further questions. I will turn the call over to the presenters.
All right. Well, listen, thank you for everybody who joined this call. Once again, we are very proud of the quarter that we delivered. And also I want to emphasize one more thing. In addition to the positives that we've achieved, it's also fairly significant what didn't happen at Aurora. And I'm speaking about some of the tumultuous developments that have occurred in the sector. So at Aurora, we've had no crises, no scandals, no regulatory problems, no changes in senior management, no production problems and no crop loss. We're going to continue executing with that same discipline that we demonstrated throughout calendar 2019, and we're going to carry that over into our 2020 fiscal year. Thanks, again, to everybody.
So on a final note for everybody, I'm very, very proud of the team at Aurora. We've crossed over 3,000 employees now across the globe and all of those positives that Cam had mentioned is attributable to key teams and key members becoming the partner of choice and the employer of choice is a very powerful position to be in and I thank all the team for an excellent quarter.
This concludes today's conference call. You may now disconnect.