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Aurora Cannabis Inc.
Q3 2019 Earnings Call
May 15, 2019, 10:30 a.m. ET
Good morning, everyone. Welcome to the Aurora
Cannabis third quarter fiscal 2019 conference call for the three
months ending March 31st, 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.aurormj.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 the risks and uncertainties relating to Aurora's
future financial or business performance. Actual results could
differ materially from those anticipated in these forward-looking
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 would like to remind
everyone that this call is being recorded today, Wednesday, May
I would now like to introduce Mr. Cam Battley,
Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr.
Cam Battley -- Chief
Thank you, Chris. Good morning, everyone and
thank you for joining today's conference call. It's a beautiful
sunny day in New York. With me are Terry Booth, our Chief Executive
officer, Glen Ibbott, our Chief Financial Officer, and our
Executive Chairman Michael Singer.
For today's call, I'll start by discussing some
of our operational highlights of the past quarter and then Glen
will discuss the financials. I'll then briefly return to discuss
our outlook for the rest of the year and beyond and then we'll take
your questions. As we do each quarter, I'm going to start with a
few ad hoc observations to frame the conversation and then proceed
to the formal comments.
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Now, our operator Chris mentioned that a short
earnings call presentation is now available in the financials
section of our investor website, investor.aurormj.com, and I'd like
to draw your attention to something new we've developed on slide
three. It's a dashboard of key performance indicators. They really
tell the story of our solid performance during the quarter, but
more importantly, they make it very clear where we're headed,
including our path to profitability.
So, for those of you who can see it and even for
those who don't, I'm just going to run through very quickly nine of
these key performance indicators that we brought together to
simplify and clarify the snapshot of where we are. They include
some very important results for us in the quarter, including growth
across all distribution channels. So, our consumer cannabis revenue
in Canada, up 37%, our medical cannabis revenue in Canada, up 8%,
and our international medical cannabis revenue, up 38%. That all
averaged out to 20% quarter over quarter growth.
On the next line, you'll see our cash cost to
produce per gram came down significantly from $1.92 to $1.42. So,
that's down 26%. We knew this was coming. We knew that would result
from the scale, efficiency, and technology of Aurora Sky, but it's
very gratifying to see.
The next point you'll see is that our average net
selling price per gram is actually a little bit down. It's the only
one of these key performance indicators that we've marked as yellow
rather than green. So, our average net selling price per gram came
down about 6% over the quarter. The reason for that -- we'll go
into more detail later -- is essentially that we haven't had the
time to scale up or at least we didn't early in the quarter -- we
haven't had time to scale up our derivatives production. The reason
it's yellow rather than red is because we've already got indicators
that that will be turning around in this quarter.
Our gross margin is up a small amount, 1%, but
our gross margin on cannabis revenue is up and we're very, very
proud of that. We have always emphasized our gross margins. We will
continue to do so. Then our active registered patients is quite
notable because that was up 5% in the quarter to 77,000. It's up
another 7% or 8% since then. That's significant because some
companies in the sector have been indicating that they've seen
softening demand on the medical side. We have not seen that. In
fact, we've been managing it very, very carefully so that we don't
add too many patients. Now, we've got the production. We can
continue to increase that.
Then the last two key performance indicators I
want you to focus on are kilograms produced and SG&A because
they really tell the story of our pathway to profitability. We
doubled our production. It's up 99% quarter over quarter to over
15,000 kilograms. The other critical key performance indicator is
our SG&A, up only 1%. This is further to the commitment that we
made in January that we were shifting gears and focusing on
disciplined execution and cost management to ensure that that
pathway to profitability comes to reality.
So, I'm happy to say that we are still tracking
for positive EBITDA in this quarter. So, the snapshot here before
we move on to the formal comments is industry-leading production
and production efficiency, industry-leading gross margins,
industry-leading product quality, yield, and no crop loss,
industry-leading global footprint and unparalleled technology. In
this phase of the sector's development, I would absolutely that the
number one critical success factor is the ability to produce and
sell an enormous volume of cannabis and we have got that in
Now, on to the formal comments. Looking back at
the first three quarters of our financial year, we're very pleased
at the progress we've made. We've consistently executed on our
growth and expansion strategy, resulting in continued revenue
growth, while improving efficiencies and scale to drive margin
improvement. We're proud of this progress and very pleased that
while many in this sector are still trying to decide how to build
their cannabis business, we have already successfully built a
strong and thriving business with solid fundamentals positioned as
a global leader.
Let's look at our achievements in the third
quarter. Our net revenue was $65.1 million, a 20% increase over
$54.2 million in the second quarter. We produced almost 16,000
kilos of cannabis, double the volume compared to the previous
quarter. With Aurora Sky ramping up very successfully, our cash
cost to produce per gram fell by 26% while SG&A costs were
relatively flat over the same period due to disciplined cost
In the quarter, Aurora continued to be a solid
performer in the Canadian consumer market with leading market share
and high brand awareness. Our consumer revenue has continued to
exceed our expectations. We achieved 37% growth compared to Q2.
While increased production was a fundamental
driver of growth, I think it's important to understand how well our
products perform in terms of brand resonance. An analysis of over
6,000 reviews on lift.com conducted by a covering analyst showed
how well the Aurora brands perform in this respect. Two of the tip
three most highly regarded brands were ours, with all our brands in
the top 11. While in an undersupplied market, the ability to
produce remains key. Longer term, we know the brand strength will
play a key role in capturing and keeping market share. Going by
these numbers, we're very well-positioned in the consumer
We are also looking forward to an improved retail
infrastructure across Canada, which will further increase consumer
engagement. There are still many consumers that have yet to
purchase their cannabis legally. Furthermore, people who do not
transact in the illegal market but are interested in cannabis
appear not to be engaged because the reported shortages and the
underdeveloped physical retail infrastructure.
The launch of brick and mortar stores in Ontario
is a great step forward in this regard and with increasing supply,
we will see a growing network of retail stores. In this respect,
I'd like to mention our partner, Alcanna, who recently opened
another of its beautiful Nova Cannabis dispensaries at 499 Queen
Street West in Toronto -- sorry for the advertisement, not really.
In general, in line with what has happened in other consumer
jurisdictions, a well-developed physical retail network should
result in strong growth.
While we perform very well in the consumer
market, medical cannabis remains a cornerstone of Aurora's
identity. In the last quarter, we undertook many initiatives to
strengthen our leadership position in this segment, both nationally
and internationally. Some have suggested that legalization of
consumer cannabis in Canada would result in a drop-off in the
number of patients buying in the medical system, as people who head
to stores to self-medicate.
In our experience, nothing is further from the
truth. Every day, the number of global physicians prescribing
cannabis to address real medical issues, from PTSD to palliative
care, is growing. Many of these patients would only seek treatment
through traditional channels, such as their trusted family doctor
or clinic, rather than seeking advice in a dispensary.
In addition, through the medical channel,
patients can seek reimbursement for their expenses through tax
reduction and increasing number of companies, including medical
cannabis, in their benefits policies. So, despite the introduction
of consumer legalization, we continue to experience growth in our
patient numbers, up 5% this quarter to over 77,000. As of
yesterday, our patient numbers in Canada have increased even
further to 82,745, in line with our production acceleration toward
the end of the quarter and into Q4.
Additionally, three of our brands were included
in the Shoppers Drug Mart online marketplace for medical cannabis,
which opened this past January. In the quarter, we also introduced
product identification numbers or PINs to 78 of our medical
cannabis products to make it easier for patients to apply for
reimbursement under health insurance plans.
We are recognized as the leader in medical
cannabis. This is not just due to the high and consistent quality
of our products provided by our three medical brands, but also
because as an organization, we are integrated throughout the value
chain to advance medical knowledge, to support physicians and other
health practitioners, and to service our patients with excellent
products, customer care, and information.
To our knowledge, we have the broadest medical
research program in the industry, with over 40 clinical trials and
medical case studies under way and completed. This creates
incredible brand strength with physicians worldwide who are still
the key drivers of growth for the medical sectors.
We own Cannabis-Rx, which provides critical
services to both patients and physicians looking to understand
medical cannabis and its uses, we engaged with health authorities
internationally, with physician networks, and with pharmacies. It
is this rigor in our medical cannabis program that has enabled us
to grow our presence in the medical cannabis markets, both
domestically and globally.
Currently, we are present in 24 countries on five
continents. This past February, we added to our European presence
with the purchase of a 51% ownership interested in Gaia Pharma.
Renamed Aurora Portugal, this new division has received permission
from the Portuguese Health Ministry to construct an EUGMP, European
Union Good Manufacturing Practices-compliant cannabis cultivation
The first phase of the facility is expected to be
complete in Q3 2020 and will have a capacity of 2,000 kilograms per
year with a further 2,000 kilos coming on when the second phase is
Another significant advancement in Europe was our
win in the recent public tender competition in Germany to cultivate
and distribute medical cannabis. Aurora was one of the three
winners in the competition, which was judged based on the design,
quality, security, and logistics of the growing facility.
On the 79 applicants, we received the highest
ranking and won the maximum number of lots in the tender. The lots
will allow us to provide a minimum supply of 4,000 kilograms of
medical cannabis over a four-year period. We will start
constructing this month and expect to ship cannabis from the
facility starting October 2020.
We are very pleased with this win, which
solidifies our leadership position in Germany and reflects our
industry-leading facility design. This was an important scale that
we developed early on with our acquisition of the facility design
business Larssen in 2017.
While the quantities of the tender are very much
smaller than what we anticipate the size of the German medical
cannabis will grow to, it is a critical win that will strengthen
our brand in the local market as well as throughout the rest of
Europe. Another development strengthening our brand in Germany is
the introduction of full spectrum extracts. Hereto, we've
established early mover advantage and are developing the
As an aside, using the Canadian medical market as
a proxy for how other international markets will develop, this
provides a good indication of the scale of the opportunity we're
pursuing. In Canada, we already have over 1% of the population
registered in the medical system. Translating this to the
international markets in which we have very strong first and early
mover advantage, it's clear to see that very substantial additional
capacity is needed. Hence, our upscaling of Aurora Sun in Medicine
Hat, and the construction of Aurora Nordic in Denmark.
With scientific studies increasingly augmenting
word of mouth and anecdotal evidence, we think it's fair to assume
that destigmatization of cannabis and adoption by physicians will
follow an accelerated curve in comparison to Canada. Work is to be
done to develop these markets obviously. For now, they remain
supply restricted, but the opportunity is there and we are
executing extremely well in this regard.
In terms of our production facilities, in the
third quarter, both MedReleaf Bradford and Aurora Sky in Edmonton
were fully licensed by Health Canada. Bradford is now fully planted
and provides a production capacity of 28,000 kilos of premium
hang-dry and hand-manicured cannabis. Aurora Sky is, we believe,
the single most advanced cannabis cultivation facility in the
world. The 800,000-square foot facility has a production capacity
in excess of 100,000 kilos annually.
Sky, a massive closed system indoor facility with
a glass roof deploys state of the art technology that produces
cannabis of high and consistent quality while benefiting from a
high degree of automation to increase efficiency. This means target
production costs of less than $1.00 per gram. Sky is now fully
planted and successfully ramping up to maximum capacity. The
increase in production seen in Q3 over Q2 will continue with
increased product availability for sale in Q4.
At Aurora Sun in Medicine Hat, our newest and
most evolved Sky class facility, construction is progressing very
well, with the erection of the metal structure and glass
installation almost completed. The design of Aurora Sun includes a
number of technology advances as compared even to Aurora Sky and
will further improve our economic efficiencies. As I mentioned, we
announced an upscaling of Aurora Sun in the quarter. The facility
will now measure 1.6 million square feet and with Sky class
efficiencies is targeted to produce over 230,000 kilograms per
Sun also represents an advance in our production
process, with the facility focused solely on high efficient
production, with the dry cannabis shipped to other facilities for
further processing. In February, we announced a new facility,
Aurora Polaris, that will focus on post-harvest processing.
Strategically located adjacent to Aurora Sky in Edmonton, Polaris
will be EUGMP compliant and serve as our center of excellent for
the production of high-margin value added product such as
Our product development team in collaboration
with our market development specialist and internal market
forecasters have identified those products that we anticipate will
sell best and have the best margins. These projects include
edibles, such as hard baked goods, chocolates, mints, as well as
vape products, cosmetics, and soft gels that we will produce at
Polaris. Products such as infused beverages are also under
development. Considering the anticipated relatively low market
share of these products, we're not rushing this, as we'd rather get
it right than get there fast, launching a product with limited
Leveraging its proximity to the Edmonton
International Airport, Polaris will also serve as a domestic and
international logistics and warehousing hub. Polaris is expected to
be completed by the end of thus year. In the interim, in
anticipation of new regulations permitting these new products, we
are installing production lines at our other license facilities to
ensure that we will exceed market demand with a broad complement of
products and not have the level of shortages that the industry
experienced on October 17th of last year.
Polaris demonstrates the scale that we've
achieved in our operations. We're not a cottage industry, but
rather a pharmaceutical level industrialized operation that
requires complex systems to drive operational efficiencies,
consistent, high-quality output, and product innovation.
You've heard today the advances that we've
achieved in the consumer and medical business both domestically and
internationally. Polaris will help us institutionalize our
innovation and our innovation culture and maintain our global
Now, Glen will discuss the financial highlights
of the third quarter. I'll hand it over to you, Glen.
Glen Ibbott -- Chief
Thanks, Cam and good morning, everyone. Aurora's
financial performance in the third quarter of fiscal 2019 reflected
our continued robust execution across all market segments, as Cam
just described. Our net revenue increased to $65.1 million for the
quarter compared to $54.2 million in the second quarter of fiscal
2019 and just $16.1 million in the comparative period last
Of this, cannabis revenue was $58.7 million, 23%
sequential growth across all three market segments, driven largely
by a 37% increase in consumer market cannabis sales. Underlying
this growth was the increased production that Cam discussed from
Aurora Sky and our Bradford facility.
Medical cannabis sales in Canada grew by 8% or
$1.9 million as a result of continued growth of our patient base.
As Cam indicated, we continued to support the growth of the
Canadian medical market and in line with our patient first culture,
have increased availability of the medication that patients
We continued to take the position that medical
cannabis, like all prescription drugs, should not be subject to
excise tax. For that reason, we continue to absorb the cost of the
tax for our patients. This negatively affected our revenue in the
quarter by $3 million or 5%. Extracts represented about 18% of
cannabis revenue in Q3 compared to 22% last quarter. Our oil
extraction facilities have been operating at a maximum capacity for
the past two quarters and as a consequence, the relative
contribution from extracts fell slightly as our total revenues
During the quarter, we installed additional
extraction capacity at some of our facilities and that capacity is
now online. Furthermore, our extraction partner, Radiant
Technologies, has now entered commercial operations, which we
anticipate will start making a noticeable contribution from the end
of Q4 onward.
Finally, installation of EnWave's rapid
low-temperature drying technology at our Aurora Sky and Sun
facilities will increase speed of extraction in future quarters,
taking it from a matter of weeks down to a day.
The average net selling price of cannabis
decreased to $6.40 in Q3. This was partially a result of product
mix as recorded a 48% increase of dried cannabis sales in the
consumer market which has a lower wholesale pricing structure. The
ASP was also impacted by the first full quarter of excise taxes on
medical cannabis, which Aurora absorbs. And finally, and most
importantly, the relative decrease in contribution to revenues from
extracts impacted the average selling price as well.
Going forward with significant additional
extraction capacity coming online internally as well as from
Radiant, we anticipate the relative contribution from higher
selling price products to increase toward the end of the current
A significant improvement in our cash cost to
produce cannabis more than offset the decrease in average selling
price. As Cam noted, it's a key driver of our financial performance
and the cost to produce was down $0.50 from last quarter, 26%, to
$1.42 per gram in Q3. The result of increased production coming out
of Sky and Bradford creating significant economies of scale was
also a result of a reduction in the temporary labor that we had
employed to prepare for the commencement of consumer sales in
We expect production costs to continue to go down
as Aurora Sky produces at full capacity in Q4 2019 and Q1 2020 and
reiterate our expectation that production cost will be well below
$1.00 per gram.
So, tying all of this together, in Q3, our
consolidated gross margin was 56%, up slightly from Q2 of this
year. This reflected the improvement in our cash costs, offset by a
lower percentage of extract sales and the increase in the consumer
market sales. We expect gross margins will continue to improve as
we introduce new product lines, expand our extraction capacity, and
increase international sales. All of that combined with our
continued improvement in production efficiency.
Cannabis production in the quarter increased by
almost 100% to 15,590 kilograms, driven mainly by the ramp up in
production at Sky and Bradford. Much of this production increase
came toward the end of the quarter. At March 31st, we had WHIP
inventory exceeding $45 million in fair value, which reflects the
significant harvests during March.
A few more words on our ramp up at Sky -- in
order to reach the 100,000-kilogram production capacity, two
parameters are critical, the frequency of harvest and the yield per
harvest. I'm pleased to note the frequency is nearing our target
rate. Sky is reaching a real cadence in production.
This means that we will comfortably reach the
stated capacity of more than 100,000 kilograms per anum harvest
rate in the first quarter of the new fiscal year. I should also
note that the yield per harvest has actually been substantially
above target. The average of the last ten harvests there has been
more than 20% above our targeted yields.
With the successful ramp-up of Bradford and
increasing production yields across our other facilities, we
anticipate harvesting at a rate in excess of 150,000 kilograms per
anum by the first quarter of our fiscal 2020. On a planted rooms
basis, our capacity already exceeds 150,000 kilograms per anum.
For Q4, we expect to have over 25,000 kilograms
of cannabis harvested and dried. With the implementation of new
regulations permitting the sale of a broader portfolio of
derivative products later this year, we are planning to allocate a
sizable fraction of this production to inventory for further
processing to ensure we'll have a broad portfolio of new products
in sufficient quantities available for sale when the higher margin
products will be permissible in Canada.
Over the past several quarters, we have invested
significantly in building out the talent and the infrastructure to
lead the Canadian in the international cannabis industry. Now, much
of that infrastructure is in place and ready to support our growth.
In Q3, SG&A costs grew by 1% compared to Q2 of this year.
Within SG&A, sales and marketing actually decreased 28% as the
reduction in pre-cannabis spending was partially offset by higher
shipping costs, which are related to our increased sales volumes,
and an increase in sales representative headcount.
For G&A, while we saw 16% increase, greater
than 6% of this was due to a new Health Canada cost recovery fee,
which was calculated at 2.3% of sales. Q3 2019 G&A also
reflected the first full quarter of ICC integration and a partial
quarter of Whistler costs. Going forward, we anticipate SG&A to
show increases in line with the growth of the organization, but
certainly at a rate significantly lower than our anticipated
In Q3, 2019, our adjusted EBITDA loss decreased
by 20% in the quarter to $36.6 million from the $45.5 million in
Q2. I should note that we have defined adjusted EBITDA in our Q3
Through the combination of substantial revenue
growth, a decline in unit cost of production, increased
availability of higher margin derivative products, increased
shipments to the EU, and ongoing disciplined operating cost
management, Aurora continues to track toward achieving positive
EBITDA beginning in this current fiscal Q4 2019.
Our financial position remains solid. At March
31st, we had almost $350 million in accessible cash and over $70
million in accounts receivable. This compares to both $75 million
in cash and $15 million of AR at June 30th, 2018. The increases are
largely due to draws on the BMO-led credit facility, the issuance
of senior secured notes in January 2019, and the increased level of
sales in our business.
In addition, we recently completed the filing of
a base shelf prospectus, an ATM supplement, a long-term strategic
measure that provides the flexibility to access growth capital if
or when required to provide the gas to continue executing on our
global expansion and partnering strategy. We implemented this base
shelf prospectus and ATM supplement as part of a prudent, maturing
capital structure, a normal part of housecleaning as we filed our
In conclusion, I'm very proud of the team at
Aurora. Kudos to all for delivering yet another strong quarter. We
continue to boast stronger fundamentals each quarter, expect
significant growth, and our financially healthy. We are executing
our growth strategy and consequently, I believe we are very well
positioned to further strengthen our position as a clear leader in
the global cannabis industry. I'll now pass the call back to
Thank you, Glen. As you've heard today, we've
built an extremely strong platform for growth that's generating
continued solid results. We have several initiatives in place that
will drive further growth and further secure our leadership
globally. Let's look at a few.
One exciting development has been the
appointment of Nelson Peltz as our strategic advisor. Nelson has a
decades-long track record of building businesses and generating
exceptional shareholder value and has deep experience in the
consumer products business. We are working with him on multiple
initiatives, including our partnership strategy. As we communicated
at the time, our partnership strategy is differentiated. We do not
believe that a change of control transaction at this point with so
much growth still to come is in the best interest of our
shareholders. Rather, we are well-positioned to explore the
benefits of multiple partnerships across a variety of industry
Nelson's experience and his connections in these
areas will prove, we believe, very value in this respect. We are
excited about the opportunities in the cannabis and also the hemp
space globally and we continue to explore multiple opportunities
with Nelson. We don't want to put a timeline on things right now,
but I want to stress that we are approaching this very
strategically, methodically, and thoroughly.
One important area of attention is the US, which
appears to be moving toward a more open legalization, particularly
in the areas of industrial hemp and CBD. We are assessing where in
the value chain we'll be able to generate the most value. We're
well-positioned to pursue multiple angles through our deep research
and product development capabilities, our regulatory expertise, as
well as our extensive global hemp infrastructure, which we intend
to expand through acquiring the shares in Hempco not already owned
CBD for both medical and wellness applications
has incredible potential and we intend to fully leverage our
capabilities, our infrastructure, and our partnership potential to
maximize shareholder value creation.
You can also look to us to continue to build on
our leadership in Europe. In addition to our entry into Portugal
and our recent tender wins in Germany, we recently have been
selected as the exclusive supplier to the Luxembourg Health
Ministry for medical cannabis. While this is admittedly a small
country, Luxembourg has demonstrated that it is an innovator in
cannabis legislation within Europe.
For example, it's the first country in the
European Union to propose legislation that would allow the consumer
use of cannabis. Our association with the Ministry of Health will
help us be on the forefront of opportunities with them that could
translate into further growth in other European countries as the
As I said off the top of the call, while many in
the industry are still evaluating how best to build their cannabis
business, we have built a solid and rapidly growing business that
is exceptional well-positioned to capitalize on the enormous global
opportunities in cannabis. In fact, we've built a global leader.
Our fundamentals are improving rapidly and we have the know-how,
the scale, the credibility, and the reach to execute.
That concludes our prepared remarks and now, I'd
like to ask our operator Chris to open the call for questions.
Certainly. At this time, in order to ask a
question, press * followed by the number 1 on your telephone
keypad. Again, that's *1. I'll pause for just a moment to compile
the Q&A roster.
Your first comes from Vivien Azer with Cowen and
Company. Your line is open.
Viven Azer -- Cowen and
Company -- Managing Director
Hi, good morning. So, as we think about the
capacity ramp and the expansion on Sun, Cam, I think it might be
helpful just to revisit the rationale for laying down so much
capacity, certainly in the near-term. The market is clearly very
tight. One of your competitors extended their view of the supply
and demand imbalance last night, saying 18 to 24 months. So, a
two-part question -- number one, the longer-term rationale around
building out all this capacity when ultimately we will go into an
oversupply situation and number two, if you can comment on your
expectation on the switch to oversupply from a broader market
Sure. I'll start this off and then maybe hand
off to Terry and Glen. Looking at our view for the need for
capacity, the first thing is that you're right. The market is
undersupplied in Canada. We see continued strong demand. We also
were not necessarily in line with some people's expectations as to
what max capacity will be, particularly given the advent of new
products as per the new regulations that will be coming out this
year. So, there's that.
The second thing is -- and we've said this
before -- the central fact of the global cannabis sector is a
massive excess of demand over supply. We know that we're going to
have to supply a lot of international markets with product that
we've cultivated in Canada. So, that's why we're doing this.
Also, we have a massive cost advantage here.
There are a lot of companies that are promising to have x-capacity
available in 12 or 18 or 24 months. We're delivering it now, but
we're also delivering it incredibly economically. So, we're going
to have massive capacity to supply the Canadian market, supply
international markets. We don't see any shortage any time soon.
Terry or Glen, did you want to weigh in and add to that?
Terry Booth -- Chief
Sure. Thanks, Cam. I think I said last quarter
that if there's one thing I lose sleep about, it's our ability to
supply the global demand for cannabis. I now lose a little bit more
sleep because my 2-week old baby, but it is definitely something
that is at the top of our agenda, increasing our capacity to feed
the globe's need.
It took Canada five years to meet its demand
with a population of 33 million. If you put that into perspective
with the EU, Australia, Mexico and other countries coming online,
it would take 50 years to meet that demand, but we're not going to
take that long because of the scale we're now able to build upon.
The market is moving at a very fast pace. You're seeing what's
happening in the United States with the Bank Safe Act, the Farm
Act, the number of states that are now stepping over to medical and
also taking on adult usage.
There is no doubt in my mind that the US will be
legalized completely over the next three to five years, albeit at a
state level. Those types of demand are there. The East Coast of the
USA does not have the growth capacity at this point that the West
Coast has. Add them all up. The demand will be significant for the
product for many, many years to come.
That's helpful. To follow-up -- any view on when
the Canadian marketplace might be able to produce enough supply to
I'll answer that. That's a bit of a mugs game is
putting those investments out there. Anybody who tells you they
know when the market will be properly supplied is probably pulling
your leg. We've seen a lot of predictions not be correct. From our
perspective, all we need to do is keep executing the way we are and
that's the way we look at it.
Your next question is from Chris Carey with Bank
of America Merrill Lynch. Your line is open.
Christopher Carey -- Bank
of America Merrill Lynch -- Analyst
Hi, thanks very much. I just wanted to start off
-- I have a near-term question and then a more longer-term
philosophical question. On the near-term, I think you said you
would anticipate the 25,000 kilos that you would have available for
sale would go for value-added product forms potentially later in
the year. Would you anticipate growing sequentially from a kilogram
sold standpoint in fiscal Q4 relative to fiscal Q3?
The answer is yes. I'm going to let Glen go into
more detail on this.
Yeah. I think what we said -- we said that we
would allocate a portion of that for the value add products. What
we're trying to do is learn from the challenges of the industry
last year and the initial launch of consumer legalization and we
absolutely have to have a sufficient inventory to launch these
products properly. That means taking a little bit of revenue out of
Q4 and putting it into inventory in new products, that's what we'll
The other part of this, Chris, is we have today
and in the past, we are tracking EBITDA positive in Q4. There has
to be a significant increase in our sales and volumes from Q3 to
Q4. So, we're going to trade those off and make sure we're making
the right decisions for the long-term future and the long-term
value of the company. So, you would expect to see continued
significant growth on the revenue and volume sold by Q4.
Okay. Makes sense. And then longer-term and
somewhat connected to the prior question -- based on what you've
put out there, you're going to get to roughly 400,000 kilos
capacity in Canada over the next few years, potentially 40%
plus-minus of the total market, but when you think about that
400,000 kilos capacity, how do you think about the evolution of the
ability to use international exports as a lever if you can't find a
home for that much supply in Canada? Said another way, how quickly
will some of these markets open like Europe? Even this quarter,
kilos sold to Europe are still very small. How do you see that
evolution over time?
The first thing to remember is that Germany, for
example, where most of our international medical cannabis sales
have gone thus far, that market has been constrained by supply.
We're just at the point now, we're ramping up at the point where
we'll have a lot more to sell into Europe. How quickly will these
That's an interesting question. We're actually
actively involved in sharing best practices with governments around
the world so that we see truly accessible systems for patients and
help them accelerate development. I think it will happen very fast,
some markets more than others. If you look at Germany, for example,
that's a really exciting market. We talked about Canada having more
than 1% of the population with a script for medical cannabis.
If we assume that's going to happen in Europe
and probably faster because most patients are getting insurance
reimbursement, you're talking about very short-term to like 850,000
patients in that one country alone. These markets are opening up so
fast. I'll recall what Terry said. Our biggest nightmare is we just
want to produce more cannabis and be able to supply these
Remember, we emphasized we'll have about 400,000
kilograms of production in Canada. We don't see any constraints for
years and years on the ability to export. A lot of those export
markets are premium-priced. Europe, for example, we get the
benefits of the currency differences.
Just to add to that, Cam -- the German market is
one thing. We know that's going to start to take traction as we are
able to send pharmaceutical reps around physicians and having
seminars. But countries like Australia, where Cam did a great job
in working with the government in cutting some red tape. It
literally went from less than 500 patients last year at this time
to well over 5,000 now. So, that's a country that will be importing
for some time.
They have no production facilities. Canada has
had production facilities for over 15 years. So, as these countries
scale up -- we know the medicine is true. We believe in the
medicine 100% in different product forms and different means of
administration. That's all coming online as this industry matures.
This wave of cannabis required globally for medical purposes is
significant and getting into these countries as first mover
medically will set us up excellent for any adult usage planned with
any other countries.
Something that's really important about Aurora
is from the very beginning, we've taken an approach of emphasizing
purpose-built, highly economical facilities. There are a lot of
companies that are producing or trying to produce cannabis in
Canada. Not everybody is able to do so economically. We're doing so
more and more so economically. So, low-cost and premium quality is
a very neat trick to pull off. We're doing that. I like where that
positions us in the Canadian market as well on a go-forward
Got it. Thank you very much.
Your next question is from Tammy Chen with BMO
Capital. Your line is open.
Tammy Chen -- BMO Capital
Markets -- Analyst
Thanks. Hi, everyone. My first question is on
this new potential accounting change, the IFRS 16, I'm just
wondering -- do you have a view that will have a material impact on
the way you recognize your operating leases and the way that can
effect the potential change in how you would report your EBITDA
Yeah, Tammy. Of course, I'm not sure if
everybody on the call is aware, but under IFRS, there is a new
standard coming out for us in the next fiscal year, Q1 2020, that
will require essentially most leases to be capitalized and then
amortized or depreciated over time. That will effectively move some
operating costs off the P&L and into depreciation. Tammy, we
own pretty much all our facilities.
We do have some lease costs for some land at the
Edmonton International Airport and we do have office leases and
those are likely to end up as capital assets. There will be some
sort of impact to EBITDA. I don't think it's as significant for us
as it might be for some others that are leasing a lot of their
facilities. We'll see. That analysis is ongoing. It's a big
project, as you might expect.
Okay. So, that would happen in your new fiscal
year. It wouldn't happen next quarter?
And my second question -- I wanted to touch on
the more near-term revenue outlook in the Canadian market. From
what you're seeing there, is there the ability to sell materially
into the current distribution channels in Canada as long as you've
got the supply or would you need to see a material ramp of new
retail store openings across the country to absorb the level that
you're speaking to in the fiscal Q4 quarter?
The current infrastructure everybody knows is
too small. But in addition to that, there hasn't been consistent
supply. What we've heard from some stores is in different parts of
the country is that regular consumers know the day that new
inventory is delivered and they all descend on those stores at that
time with great big lineups. As a result, the most in-demand
products sometimes sell out in an hour or two. What that shows is
even within the current infrastructure, there is not the
consistency of supply of the most desired products yet.
We also know that provinces are allowing for
ramp-up of brick and mortar stores. That's great. We also know that
the regulations will be in place this year to allow for the new
product forms. You put that all together and we're very confident
that we'll continue to perform exceedingly well in the consumer
system and we think the consumer system will start to pick up speed
and accelerate its growth.
Then also, let's not forget the medical side. We
anticipate continued demand in Canada for Aurora products and
MedReleaf and CanniMed products in the medical system. The picture
all together, I think, for us is very favorable.
Okay. Got it. On that consistent supply point,
what sort of products are you seeing that are most in demand? How
is Aurora's product offering in comparison to that?
You heard earlier in the call that our products
are exceedingly highly ranked, all of them in the top 11. It's
everything from certain kinds of dried flour -- connoisseurs really
like certain flowers -- to oils. It's also across not just high
THC, but also CBD products are very much in demand. It's a pretty
consistent picture across the board. We anticipate we'll see the
same thing for concentrates and edibles as well.
Your next question is from Brett Hundley with
Seaport Global. Your line is open.
Luke Perda -- Seaport
Global Securities -- Analyst
Hi, this is Luke Perda on for Brett Hundley.
First question -- as we approach the legalization of value-added
products inside Canada later this year, there seems to be an
overwhelming focus on the beverage side of the market as you've
noted, in part given the strategic partners that are in place for a
number of the Canadian LPs. It's interesting because if you look at
certain parts of the US market, beverages have lagged behind
considerably relative to vapes.
Part of this is because the American beverage
products don't have the R&D and marketing support that we
presume Canadian beverage products will have, but we're also
wondering if common consumer desires are being overlooked here and
whether or not the Canadian LPs and their partners are trying to
force a square peg into a round hole. Can you talk a bit about your
own views on how the value-added product market might develop
inside Canada and what kind of opportunity you see on the vape
Yes. I'll start and then I'd like to hear from
Terry on this as well. I don't want to be too much of a negative on
beverages. It's just that we've made what we think is a pretty
rational decision to focus our priorities in terms of the new
product forms in areas where we know that there's strong demand, in
part based on the model that we've seen in the US consumer legal
state and where we believe that we can deliver something that's
highly differentiated and good for consumers and also where we
think that we can generate the highest margins.
Now, we said before with respect to beverages,
that may turn out to be a great market segment. It's not yet in the
US consumer legal states. As you point out, it's something like 2%
or under of the market. There are some good products out there that
are well-formulated. It's just that perhaps it's going to take a
little bit of time and some marketing and some experience to change
consumer tastes, whereas as you noted, vapes, vape pens are
exceedingly popular and have rapid and high uptake.
We think that's going to be a terrific market
segment that doesn't need a lot of market development that will be
pretty much ready-made. They're so discreet. You can stick them in
your pocket, your purse. They don't create smell, just a little bit
of vapor. I think that will be very attractive to new consumers who
just want to try it out. What's all the fuss about? Let me try one
of these vapes.
So, we're focusing on what we think will be the
best sectors or market segments for us but with the highest margin
and where the demand is already clear.
The proven market is certainly not in beverage.
There are some players in the United States. Heineken, for example,
did have some brands in California. It's a very different effect
when you drink an intoxicating cannabis beverage. It's not like
alcohol. It doesn't lead to another and another. It's actually the
more you have, the less you want in a very short amount of time
once it starts taking effect. It also has the potential if it
doesn't have the rapid onset to have adverse effects over time.
There are not going to be any cannabis bars like
there are alcohol bars anytime soon. You mentioned marketing in
Canada. That's still not allowed and it won't be allowed for
beverages either. The gummies and the vapes, they're the best
sellers. They're the best margins in the states. If we're leaning
toward any beverage, it would be on the wellness side, which we
think there's tremendous market potential there.
On the intoxication side of the fence with
respect to cannabis drinks, the market is just not there and it's
not proven to be a popular item anywhere. It's not able to market
like typical beer companies or booze companies are allowed to
market. So, it's a small step for us. Certainly, we're going to be
focused on what we feel sells best and provides the best
Thank you. Just one more for me -- you've gone
out and purchased Whistler. You also have an investment in TGOD. It
seems that you really believe in the forward market opportunity for
organic cannabis. Do you see Aurora becoming a big player on this
side of the market and can you talk about the forward market
opportunity overall in your view?
I'll start and then pass this to Terry. We see
it obviously as a part of the picture. So, yes, there's going to be
a segment of the market of consumers and patients who prefer an
organic product. It's not necessarily the be all and end all.
Organic has advantages and disadvantages. It's just another piece
of the market to us. Terry?
Yeah. The organic market in cannabis is a
popular one, as is the organic market in hemp. We have the largest
organic producer of hemp under our wing now in Lithuania, Agropro
and Borela. So, we know that there continues to be a move toward
organic products in the cannabis space and Whistler has the very
best for sure in the Canadian license producer space. We'll wait
and see how TGOD executes on growing organic at scale. It is a
difficult thing to do. We wish them the best of luck. We do still
have a right to 20% of their production supply.
Where you run into some problems with organic is
microbial. You have to watch the dirt very close. It's a growing
and living breeding minimum that if it gets out of control even a
little bit you can have crop loss. Whistler has been doing it for
five years. They've eliminated crop loss over the years completely
and know what they're doing with respect to organic.
It also demands the highest price. They've done
a tremendous job with the provinces and maintaining they're not
going to drop the prices of their cannabis and if you don't want
it, you don't have to take it, but it flies off the shelf before
everything else. That will continue to increase organic supply if
indeed organics are the way to go.
On the food and beverage side, on the edibles, I
think that may be even a bigger picture for organic cannabis making
organic edibles, sugar-free edibles. I think the organic supply of
cannabis is an important piece of the puzzle and it's just a matter
of if we can grow it at scale, much like the organic vegetable
You've heard me say before that on important
strategic questions, we like to measure twice and cut once. As
Terry indicated, if we find there's an increasing appetite for
organic cannabis products, we'll be there. But we don't want to
over-commit to that until we see the demand is there. We think it's
a prudent way to operate.
Your next question is from Michael Lavery with
Piper Jaffray. Your line is open.
Michael Lavery -- Piper
Jaffray -- Analyst
I just wanted to touch on the US. You expect
legalization federally in a few years like roughly everybody. Can
you give us a sense of how you envision entering the market and
would I be hearing you right that some of the capacity you already
have planned would be available for export to the US and if that's
the case, what would be needed from a regulatory perspective to
allow for that?
The first thing I want to do here is emphasize
that we are not making any news on that point today. Then I want to
reiterate what we said before -- we obviously will be in the US and
we'll be in the US in a big way at some point in the future. It
will always be in a way that is consistent with US federal law. We
will enter when it is permissible on a federal level in the US.
There are some ways to enter earlier. We'll also do this in a way
that is consistent with the requirements of our exchanges. But
Terry I know wants to speak to this.
Sure. The US is an interesting country, to say
the least, with respect to cannabis. The states all have much
different regulation, varying regulation from state to state. I
feel Nevada is probably the best state for Canadian companies to
enter into. The regulatory changes that are forthcoming, we don't
know what they'll look like. If they don't erase the state to state
line in the cannabis space, once legalized, then it's a very
difficult market to operate at scale in.
Right now, they have multiple state operators,
multi-state operators that have small facilities in their various
states. That's not really the Aurora way of doing things. If we do
go to the states, we'll be focusing on large populations that are
not fully established that we're able to operate with profit.
If they erase the state lines, that changes. If
you're able to cross the state lines, then it becomes a massive
cannabis market. As far as the export into the states, again, we
don't know when that will happen. We're allowed to export to a
number of countries now. I don't know why we wouldn't be allowed to
export to the United States. The demand will certainly be there if
indeed we're allowed to export. We look forward to getting that
going sooner rather than later.
The hemp industry in the United States, the Farm
Act, allows for CBD derived from hemp with 0.00 THC. That's a
limited market at this point, as it only includes topicals, if you
really want to go to the letter of the law of federal legislation.
The FDA is looking at ingestible CBDs. Yes, I know, many states
already sell it. They're selling it is federally illegal as the
states that have legal cannabis selling statewide are selling
federally legal. It is something we have to figure very, very
You have to understand Aurora is not being blind
to what's going on in the United States. [Inaudible] is doing well
for a start-up company. It's done four or five deals. It's our
little brother. We have back end rights and more to come on that
later. It's something we feel very confident as do most that it
will be legalized. It's how it's legalized is the question. Is it
going to be legalized medically state to state or adult usage state
to state all at once? Nobody knows. I don't think the government
knows. That's a ways away. One step at a time and we are taking the
steps necessarily to do that in an organized fashion. As Cam said,
measure twice, cut once.
Just to follow-up on the flip side of the
question -- to what extent do you have any of your capacity plans
even sort of vaguely earmarked for the US and have the opportunity
to export there, would you have to rethink a little bit how that
gets put to use?
Again, we don't know. That's not in our capacity
plans at this point. We have a strategy of entering into the US.
That strategy is obviously confidential. I would expect if we have
an over-capacity in Canada and the rest of the world, we would love
to ship to the US, but I don't think we'll have that capacity
depending upon the timing. Even if they announced they're going to
have a legal system, it would take years to get the regulations in
place and proper capacity in place.
Valuing these MSOs based on their retail doors
is, in my opinion, a mistake because states can always open the
door to more retail. We're seeing that in Canada. We're seeing the
value of the retail stores that had gotten lottery wins drop
significantly. We're quite happy we didn't jump into that fray.
Does that answer your question? We don't have any plans to export
anything into the United States. It's not our future yet.
I think that's the key point. If I understood
you correctly, you asked if we're counting on supplying the US from
Canada. Absolutely not -- we have not built that into our plans.
The other thing to emphasize is once the opportunity exists to
build production in the US for us, we build the best cannabis
production facilities in the world.
I think we've demonstrated that with the highest
efficiency, use of automation and technology that nobody else has
been able to touch and the result of it is premium product at a
real economical cost. So, once the opportunity exists, you can
expect that we're going to be looking at using our technology lead
to build that capacity ourselves in countries around the world.
Your next question is from Jason Zandberg with
PI Financial. Your line is open.
Jason Zandberg -- PI
Financial -- Analyst
Hey, guys. I wanted to drill down a little bit
on your medical cannabis sales. As an industry, we're starting to
see medical sales decline and that's typical in other regions that
have adopted an adult use program that medical sales tended to
trail off a little bit. You guys have seen a growth in your medical
-- not a huge number, but growth. What do you attribute that to? Is
it your coverage of the excise tax? Is it providing product
identification numbers? Can you give your opinion as to why you're
bucking that trend?
It starts with the fact that we make great
medical cannabis and everyone knows it. It only increased about 5%
in terms of patient count in the last quarter, 8% increase in
Canadian medical cannabis revenue sequentially. But let me
emphasize -- that was our choosing. We wanted to make sure we had
exactly the right product allocation for each of our distribution
channels, Canadian medical, Canadian consumer, and international
medical. So, we actually could have turned on the taps and brought
in more patients.
I'm not kidding when I say we produce great
medical cannabis product. We also have an extremely good reputation
across all of our brands, Aurora, MedReleaf, and CanniMed among
physicians. So, our credibility, supported by our clinical program,
in the medical community is outstanding.
Let's get to where medical can go in Canada.
Obviously, for us, we see increased demand and increased patient
counts and increased Canadian medical cannabis sales, which is
great because medical cannabis patients tend to be sticky.
Consumers, you never know, but with a medical patient, they're
likely to stay with you as long as you keep them happy.
The other thing that would be a wild card to
keep your eyes on would be the possibility that the excise tax,
which, as you point out, we've been absorbing for our patients,
could be eliminated. I'll remind everybody that we had a press
conference not that long ago in Ottawa along with a patient
advocacy group called Canadians for Fair Access to Medical
Marijuana. Also, on the stage with us were members of parliament
from the conservatives, the liberals, and the New Democratic Party
and there is strong support in all three caucuses to start to treat
medical cannabis the same as other prescription medicines.
If we get that excise tax and ultimately the GSD
and HSD removed from medical cannabis, it will be, first of all,
justice, but it will also be an appropriate reason for patients to
stay in the medical system. Before we stop on this point, I want to
emphasize that patients who are using medical cannabis to manage
the symptoms of a chronic health condition should be getting their
medication by prescription and consulting with their physician.
Physicians and pharmacists should know about all of the medications
that patients are consuming. There are good reasons for patients to
patient and certainly good reasons for patients to come to
That's a great answer. Looking forward in
upcoming quarters, would you expect to see that trend continue in
terms of continued growth on your medical cannabis? Obviously, the
rec market will continue to grow, but do you expect that to happen
continually with your medical sales?
I don't want to predict the whole market,
although I think it will be good. On an Aurora basis, we expect our
patient count and Canadian medical cannabis revenue to continue to
Was your question global or a Canadian question?
The other 22 countries we're operating in do not have [inaudible]
systems and those medical systems are just starting out.
Yeah, I was referring to the Canadian market.
I understand the question because we've seen
differential results across different companies in the sector. But
we've always emphasized medical cannabis. We supported that with a
great clinical program. We are really, really good to our patients
as customers and so yes, we do anticipate continued growth on the
Canadian medical side.
Your next question is from John Chu with
Desjardins Capital Markets. Your line is open.
John Chu -- Desjardins
Capital Markets -- Analyst
Good morning. Maybe just a quick question on
Europe and how you plan to allocate your increased production
between Europe and the value-added market. How would you try to
prioritize the two and maybe just talk about the margins you get?
Which ones are higher?
Sure. Let me start and I know Terry will want to
weigh in on this. Let me start by telling you how much we love
Europe. Europe is a market where there is very little competition.
There's only one producer in Europe right now and it actually is
one of eight that are EU GMP-certified. Of the remaining EU
GMP-certified facilities, we've got two, two out of seven. We're
undergoing audits right now to add additional facilities, so very
limited competition. It's a supply constrained market and we are
really ramping up now to be able to supply that market.
The bigger picture here is a question of product
allocation. We've developed a very sophisticated product allocation
protocol and team that we're very proud of that works on demand
planning so we know where the demand is going to be and helps us
calculate where we're going to generate the highest margin.
It's no secret the Canadian consumer system is a
lower margin distribution channel for us than Canadian medical and
international medical. The margins in Germany, for example, are
extremely good, in part because of currency differences, but not
completely. You will see us allocating more of our product to
Europe and other jurisdictions around the world as those markets
open up. We're going to be a big part of that by removing supply
constraints. We make a constant series of decisions with respect to
The product allocation team, I've felt sorry for
them for the last year because we didn't have the products to
allocate. We're starting to have that product allocate. In the
Canadian consumer usage market, it is lower. The provinces
underestimated the demand. We underestimated the demand and it
continues to go up. We don't know what the demand is until it's
The European market -- we have boots on the
ground now in Italy, Germany, Malta, Portugal, the UK, Netherlands.
These are not small contracts or pieces of companies. We distribute
cannabis ourselves. Getting that contract, only three LPs of the 79
applicants were awarded that contract. The demand in that contract
is going to go up. The first movers that successfully execute will
have first crack at the expansion of facilities. That's when the
dirt will hit the road. The fall of 2020 -- I lose sleep over being
able to supply this global market.
The European market is going to go nowhere but
up. We'll start shipping in bulk to Europe before too long. We're
the first to sell high-value derivatives in Germany, which are now
starting to get some traction with the doctors. We are going to
educate the entire EU the best we can with our team of physicians
and PhDs and thought leaders in the cannabis space. It's waiting to
be cracked. It's not scratched the surface in Europe. They still
will take whatever we can give them.
We have to take care of our medical patients in
Canada and we have to have a presence in the adult usage market in
Canada. We're Canadians. It's Canadian medical patients first,
European patients second, and it's the adult usage market third.
But we will dominate in the adult usage market as well because of
the quality of cannabis that we grow, the cost per gram of cannabis
that we have, and because the increased capacity we continue to
Everybody remember, we are building a Sky class
facility in Denmark as we speak. We are growing cannabis in Denmark
quite well in our phase one of Aurora Nordic. Once we can start
supplying Europe from there, it will help with our international
In terms of helping you understand another
reason we love Europe so much, that's a population including the UK
of 500 million. It's larger than the US. But in the US, with its
patchwork regulatory system, there are thousands of producers, in
Europe, there's one and us and a handful of other Canadian
companies with high barriers to entry because they believe in tight
regulation. We'll be in the US, obviously, as soon as that's
permissible. We're also prepared to operate in two very different
markets. The US and Europe appear to be very, very different. So,
we want to be set up to succeed and win in Europe. We're already
building the infrastructure for that right now. We're very pleased
with the direction Europe is going.
Maybe just a quick update on EnWave -- when do
you think that's going to get integrated and make a meaningful
impact. Finally, on the Radient -- you received your first
shipment, are you happy with what you got? When can we see a more
Glen, we haven't heard from you in a bit. Do you
want to address that one?
So, Radient has just been recently licensed and
we've received our first commercial batch back from them, still
relatively small volumes. We expect to see that actually impacting
our ability to produce derivative products toward the end of this
quarter. So, we're in the last six weeks now. So, June, we'll start
to see some of our product making it into our production chain.
Most of that extraction goes into products that take time to show
up on the shelf toward the end of the quarter. EnWave will shorten
the drying time, allow us to speed of extraction, which does
accelerate our capacity still being implemented. We won't see that
The other point I'll add with EnWave is they
also reduce the risk of crop failure or production failure with a
very short timeframe. There is risk in drying systems where molds
can come in and more people are around it. When you shorten that
time, it de-risks the process of the production of cannabis.
We haven't had that problem, but we know it
exists. What we've just talked about here -- you've got two great
examples, RTI and EnWave -- those are really consistent with our
overall business strategy, which is to reduce all risks as much as
possible and also to accelerate the entire process from cultivation
through to production, getting it to market. That is consistently
across the board our strategy. So, you picked two really good ones
to focus on. They are entirely in line with our global
Your next question is from Doug Miehm with RBC
Capital Markets. Your line is open.
Doug Miehm -- RBC Capital
Markets -- Analyst
Good morning. With respect to how we're thinking
about the Q4, I know you've indicated you're going to show some
positive EBITDA, how important is it you do that? Is it more
important you have enough product for the value-add launch or is
what you're going to do for producing that EBITDA in Q4 the most
important thing? Then with respect to the recent acquisitions,
Whistler, HempCo, and Chemi, are they contributing to you guys
having positive EBITDA in Q4?
So, actually, I would say one of the most
important things we did when we put out that guidance in January
that we were targeting positive EBITDA in the June quarter was we
signaled our discipline. If you look at our revenue growth compared
to SG&A growth, it's showing we've been focusing on that
disciplined execution. Setting that target on its own has been
remarkably beneficial to us. We've been getting that feedback from
institutions as well.
It is important to differentiate by showing a
clear path to profitability. It's something that we've made a
commitment to that differentiates us from a lot of peers. So, it is
very important to us. The nice thing is with where our production
has gone, we can kind of have our cake and eat it too. We can
continue to attract toward positive EBTIDA in this current quarter
and have sufficient product supply to have the inventory to produce
those new higher value-added products that will be allowed by
regulation. It's a great, great situation to be in and it's happing
at exactly the right time for us.
The second question you had was with respect to
the recent acquisitions and whether they're expected to contribute
to achieving positive EBITDA. I'll defer to Glen on that but not
substantially. We were tracking that way before these. Glen?
The first part of your question -- they're not
running negative. They're running positive. They'll contribute but
not substantially, as Cam said. We based our EBTIDA positive
forecast on our core cannabis business. We do have this quarter
about $6.5 million of revenue from other business lines that are
non-core cannabis and they do contribute at least a 50% or greater
margin on average. That will help, but we're really trying to drive
the discipline and the growth in the core cannabis piece of
The allocation decision, there are some really
healthy debates internally, but as you would expect, a lot of this
is dependent on when Health Canada is going to allow the
introduction of these new products into the market. You see various
signals at times from the regulators as to when LPs will actually
be able to start shipping products.
So, should that happen toward the end of the
year, should we get clarity that those sales won't start toward the
end of the calendar year, we may have more product to allocate into
revenue in Q4 and Q1. Should it be available earlier, then we'll
have some decisions to make. How much of that goes into inventory
as opposed to revenue? As Cam said, at least we've got the
production coming to make those decisions.
The EBITDA piece is very important to us, not
only because of the commitments we've made to the markets but also
as internal guidance to our priorities. We still have a focus on
the long-term value we're creating and it's very important to
launch properly into those product segments we want to capture
toward the end of the year.
Then just my follow-up question -- Cam, with
respect to the capabilities you're putting in place outside of
Aurora Polaris in anticipation of the launch of the value-add
product, could you give us a little bit more detail? As I think
about this marketplace and the problems that we observed in Q4 of
2018, I just want to make sure you guys are following the proper
steps to ensure you're going to have products.
So, you asked for a little bit more detail. We
can give you a little bit, not a lot. What I can tell you is that
all of the capabilities for the market segments that we prioritize,
it's all in place. As Glen indicated in his comments, we wanted to
make sure that from an Aurora perspective, we won't be seeing some
of the challenges that the entire industry faced not being ready
for consumer legalization in October of last year.
We have across multiple facilities, we've got
the capabilities in place to produce those products. Polaris is
going to be amazing. It will be world class and there will be
nothing like it once it's opened up. We do not need to wait for it
to be online for us to deliver those product forms.
Your next question comes from Rob Wertheimer
with Melius Research. Your line is open.
Rob Wertheimer -- Melius
Research -- Analyst
Hi, everybody. Your production ramp has been
impressive so far with no real material hiccups and stumbles and so
forth. The question is a little bit, if you can give us anymore
background on how you do it, but other people in the industry have
had crop failures and the product hasn't grown as well as yours.
How to evaluate the risk of that? Do you see little issues pop up
and quickly mitigate them and fix them so there's no risk of a
larger issue? I wonder if you can just expand on that a bit.
I really want to speak to this. I'm going to
start by making Terry blush. The first and greatest credit for this
is Terry's vision. Terry went in a different direction from every
other founder and CEO in this sector when he decided that cannabis
production should be purpose-built. North of Calgary, our mountain
facility, that's the first purpose-built cannabis production
facility in the world, to our knowledge.
What that does is give you GMP standard,
everything from the cultivation rooms to the airflow inside and the
ability to manage all of the environmental variables -- the
lighting, temperature, humidity, CO2, nutrients. Every other peer
of ours that is producing at mass scale has done something
different as we've all scaled up. Whereas we've gone with these
massive indoor facilities with a glass roof, all of our peers
producing at mass scale are doing it in retrofitted
You can argue there are advantages and
disadvantages to each approach. We like our approach because as you
heard me say earlier, at this phase in the sector's development,
the number one critical success factor is the ability to
consistently produce and move and sell a large amount of cannabis.
Our entire business strategy is set up to do exactly that. You
control the environment, that reduces the risk of pathogens and
pests and therefore crop loss. Touch wood, we've never had a crop
loss and I hope we never do.
You nailed it on the head. To most respects,
environmental control -- CO2, micro mold, humidity temperature, all
of those factors in and you have to stay within a certain band or
you will lose control of your facility. One thing affects the
other. With a typical greenhouse, you have environmental risks,
with the roofs opening to cool them down. You have risks with the
variable temperatures, raining or snowing or hot and sunny. So,
environmental control is a very, very difficult thing to do
Secondly, you mentioned automation and you
nailed it on the head a bit there because automation takes the
human out of the picture with direct contact to the plants. That is
one of your highest risks of disease are the human beings. The last
one is GMP. GMP is the direction of the product flow. You never go
backwards. You never go from a dirty room to a clean room. It's a
pharmaceutical process. It's highly repetitive and recognized in
the pharma industry. Those three factors along with the top QH team
in the world and some very experienced horticulturists and growers
equate to no crop loss.
By the way, before we wrap up, we truly believe
we've invented 21st Century cannabis cultivation and we also
believe -- this is central to our business strategy -- that you
have to do that if you want to build a global enterprise. You've
got to add that consistency. You've got to mitigate risk. You've
got to do it economically. It's got to be scalable and replicable
on a global basis. That's what we set out to do from the beginning.
Now, at Aurora Sky, we think we've validated that Sky class concept
to do exactly what we've planned to do from the beginning.
This concludes the Q&A portion of today's
call. I will now turn things back to Cam Battley for closing
I want to thank everybody for joining us for the
call. Obviously, we're really looking forward to the next one as
well for our year end. Take care and everybody have a great rest of
This concludes today's conference call. You may
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