Aurora Cannabis Inc. (NYSE: ACB) Q1 2021 earnings call dated Nov. 09, 2020
Corporate Participants:
Miguel Martin — Chief Executive Officer
Glen Ibbott — Chief Financial Officer
Analysts:
Vivien Azer — Cowen And Company — Analyst
Pablo Zuanic — Cantor Fitzgerald — Analyst
Michael S. Lavery — Piper Sandler — Analyst
Tamy Chen — BMO Capital Markets — Analyst
David Kideckel — ATB Markets — Analyst
John Zamparo — CIBC Capital Markets — Analyst
Matt McGinley — Needham — Analyst
Owen Bennett — Jefferies International — Analyst
Presentation:
Operator
Good morning, everyone. And welcome to the Aurora Cannabis First Quarter Fiscal 2021 Conference Call for the three months ending September 30, 2020. [Operator Instructions]
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 related — relating to Aurora’s future financial or business performance. Actual results could differ materially from those anticipated in the forward-looking statements. The risk factors that may affect results are detailed in Aurora’s annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR and EDGAR databases.
Since we are conducting today’s call from our respective remote locations, there may be brief delays, cross talk or other minor technical issues during this call. We thank you in advance for your patience and understanding.
I would now like to introduce Mr. Miguel Martin, Chief Executive Officer for Aurora Cannabis. Please go ahead, Mr. Martin.
Miguel Martin — Chief Executive Officer
Thank you, operator, and good morning, everyone, and thank you for your interest in Aurora. Since being appointed CEO in late September, I have established the tactical plans to succeed, and I’ve been working with our team on executing these plans. We intend to demonstrate that Aurora can be a profitable growth-oriented leader in the global cannabinoid market. I would therefore like to spend our time today discussing the execution steps we’re making in our business as well as our go-forward strategy. But first, let me comment briefly on the recent quarter.
Q1 can best be characterized as a transitional period. While there remains a significant opportunity available to Aurora in the Canadian consumer segment, the other legs of our business are performing well. We remain the leader in the high margin Canadian medical market and our international medical business saw 41% net revenue growth this quarter. Our CBD brand, Reliva, is the number one ranked brand by Nielsen in U.S. CBD sector. And most importantly, our platform provides us with significant optionality in the CBD market as I’ll explain later.
As you can see from our earnings release, our quarterly results were generally in line with our previous expectations with cannabis net revenues of CAD67.8 million and an adjusted gross margin of 52%, excluding ramp up cost at Nordic. SG&A, excluding restructuring items, was CAD43 million, which was consistent with our run rate target of the low CAD40 million range.
Finally, as it relates to Q1, we demonstrated progress with respect to narrowing our adjusted EBITDA loss, the CAD10.5 million. This marked the third consecutive quarter of adjusted EBITDA trending towards breakeven.
As you know, as part of our business transformation plan, we have made some very tough decisions and done a lot of hard work over the past year with respect to rightsizing our cost structure. This includes taking the largest cut to G&A of any Canadian LP. For context, we cut quarterly SG&A from CAD100 million to approximately CAD43 million per quarter and sharply reduced our capex. Under my leadership, we will continue our focus on fiscal prudence.
I can say without hesitation that our entire company is in a different mindset now than we were previously. And I’ve empowered all levels of the company to look for opportunities for profitable growth and further cost efficiencies. For example, we have demonstrated the capacity to make difficult financial decisions, such as in June, where we were one of the first cannabis companies to take the step to write-down our inventory and re-cost our trim. I also think we have a real opportunity to better align production cost of sales and shift cost from fixed to variable. In doing so, we will manage our working capital investment more effectively so that we can get to cash flow positive generation more quickly. This longer term cash flow objective goes beyond simply reaching positive adjusted EBITDA; our goal for the second quarter, our expectation for the second quarter and demonstrates our leadership in differentiating Aurora and setting the standard for building a value-creating global cannabis company.
Back in June, we announced the closure of five cultivation facilities across our network, and I can confirm that a few of those facilities are now shuttered. But aligning production cost of sales encompasses more than that. Specifically, our Aurora Nordic 1 facility, which is a new EU GMP certified production facility located in Denmark, will allow us to more efficiently distribute products in Europe and around the world and better allocate production here in Canada.
Before I discuss the performance of our business segments, and in particular our Canadian consumer segment, let me briefly address our recent capital raise under the ATM. The CAD280 million that we raised recently through our previous ATM was a responsible decision in today’s challenging environment. The cash will ensure that we have the runway needed to complete the remaining elements of our transformation plan, execute our tactical plans to regain market share in the Canadian consumer business, and be positioned for the rapidly-changing global cannabinoid market.
We appreciate that cannabis companies are being evaluated with respect to their business performance and their liquidity. And we wanted to ensure that we are addressing both sides of this equation without any perceived concerns with respect to liquidity. We now have a much stronger balance sheet that makes it possible for us to act opportunistically and allows investors to focus on our business execution. In fact, as I said earlier, we are squarely focused on generating operating cash flow as quickly as possible. And of course, as a matter of good governance, we have also filed the new shelf prospectus. This is a common step for most large companies to have available if needed.
Now let’s discuss our business itself, beginning with the Canadian consumer market where we have much work to do to gain share, but also a strong sense of urgency to continue executing our well thought out tactical plans. As you know, there are two things to consider that are working in our favor. And in doing so, providing us with considerable tailwinds. First, the category is growing with StatsCan data showing 11% month-over-month growth in July and another 5% in August, and more stores continue to open, particularly in the province of Ontario, which is very encouraging news. In fact, from the national data that we have seen, the current store count is approximately 1,200 and could reach 1,300 by December.
And second, the consumer has demonstrated very dynamic tendencies with market share moving very quickly between brands, unlike in more stable CPG categories. This provides us with a great opening for our pivot to premium brands. These factors suggest to us that with the right accountabilities and focus, the right products, the right sales execution, including product availability, visibility, packaging and better engagement with the provinces, we can gain share in key growth categories quickly, all while achieving profitability.
The data from Canada and other mature markets indicate that premium and super-premium brands have been and will continue to be successful in all formats. Therefore, Aurora has a real opportunity for more articulated and balanced portfolio offering with a greater focus on higher margin and sustainable premium assets, such as vapes, pre-rolls and premium flower offerings across multiple price tiers. For example, gummies is a format we have a number one position, and we are allocating additional resources so that we can enhance and grow that format. We are also working to expand our lead in concentrates and to refocus our dried flower business toward higher gross profit dollar pools.
Of course, premium segments must also be supported with classic CPG sales, marketing, trade marketing and consumer engagement methodologies to build awareness, foster affinity and generate outsized returns. The key of course is to ensure that in doing so we’re delivering more dollars to the gross profit line versus simply just delivering low margin revenue. We are therefore much more interested in our market share within premium and super-premium categories, along with our market share of categories such as vapor, pre-rolls and concentrates that are margin accretive compared to our market share in the deep discount flower business.
While it’s still early days, I’m happy to say that we’re starting to see some green shoots from these initiatives and suggest to keep tabs on the Headset data and other market data so that you can gauge our ongoing performance. For example, we’re very encouraged by the great response from the Phase 1 of our vapes launch that recently hit the market. We’re also seeing strong demand from our Aces Pre-Roll and are currently working through some supply constraints, but hope to have those issues resolved soon so that we can have broader distribution in that key product category.
Let me also say that within vapes and pre-rolls there’s a lot of opportunity to bring classic CPG elements in packaging and alignment, the traditional flower does not land itself to. We’ve accelerated our focus on our premium brands, Aurora and San Raf as well as our super-premium brand, Whistler. These are tremendous assets that balance out the total offering to our consumers.
Our intention is to build an ecosystem around each of them through various formats that foster greater brand visibility and provide greater choices to the consumer where they can work up the value chain. As an example, we are working to extend these brands to include San Raf pre-rolls and a higher quality Whistler vape. Through all these initiatives, our intention is to generate not just revenue, but quality revenue that will deliver a healthy gross profit dollar as opposed to essentially just a gross margin percentage. Whistler, for example, currently delivers 10 times the gross profit dollars per gram that the discount brand might. So our path forward in putting more dollars to the bottom line is based on the notion that not all revenue dollars are created equal.
On a related note, while we continue to support our Daily Special brand, we think the value segment may provide an opportunity to shift production and manufacturing cost to a more variable model, and we are exploring that opportunity. This brand remodel could also allow us to better control inventory build. In my 20 plus years of working with products and dynamic categories, I’ve seen many examples of there being an advantage to having more flexibility with a variable cost model.
Now let me turn your attention to our domestic and international medical businesses, which are operating well and delivered a 4% revenue increase over the last quarter. While our Canadian medical revenue declined slightly over the prior quarter, this segment is an evolving landscape and we’re extremely happy with our ability to manage that business. We have moved our patient intake an experience online and can now offer substantially more choices to our patients and veterans as a result. While the medical channel over time may see some migration of the consumer channel, we see opportunities to retain and grow key patient groups, like veterans, to continue to grow the medical market.
Our international medical segment has been a consistent performer and reported a 41% increase in Q1. We are already one of the leading providers of flower in Germany, and we continue to see opportunities in the oil market. We also just cleared an important regulatory milestones within Aurora Nordic 1 production facility in Denmark, which just achieved GMP certification and its sales license for flower and oil. This facility is now able to ship from Denmark to Germany as well as the rest of the EU and other parts of the world.
There is certainly a great lesson here from our success to date in the global medical market that has positive implications for our other opportunities; namely, that it takes a lot of investment, a lot of compliance expertise and a lot of thought to be successful with the high standards that these international markets require. But once those capabilities are built out, they become very portable. We are bullish on the long-term international market opportunity and believe that Aurora with our demonstrated expertise and medical market leadership is very well positioned to continue to generate enduring shareholder value from our international business as these markets develop.
Lastly, our Nielsen top-ranked U.S. CBD brand, Reliva, remains an enviable strategic platform despite the temporary slow growth due to COVID. Our platform already provides us with a critical distribution and regulatory expertise and relationships, both advantages as the U.S. market continues to evolve. Reliva focuses on brick and mortar stores and is an exclusive CBD supplier for some of the largest retailers and wholesalers nationally, and our products are in over 23,000 stores. This may be seen as an unusual approach in a COVID environment given the general consumer shift to online sales, but our trade partners have taken a really dim view to those that have pivoted to online sales amid the pandemic, and we decided to stick with them for the long-term.
Given its variable cost model, Reliva is EBITDA positive and is an asset-light model that does not require any capex. Looking ahead, we’re very bullish on what we’ve heard out of the FDA and anticipate positive action. So when the FDA moves forward, those companies with the history of compliance and experience in brick and mortar will win. We therefore think Reliva is a wonderful asset and will continue to be a significant EBITDA contributor and it will be a significant EBITDA contributor.
According to the most conservative estimate, CBD represents about $2 billion in retail revenue. So when we talk about global cannabinoids and leveraging Aurora science and innovation, the non-THC parts of our portfolio could potentially be bigger than the THC parts of our portfolio, particularly with positive FDA action in the U.S.
I’ll now turn it over to Glen to walk through the financial details.
Glen Ibbott — Chief Financial Officer
Thanks, Miguel. Good morning, everyone, and thank you for joining us in today’s call. I will take a few minutes to review our first quarter 2021 results. Please note that the figures I’ll be going over today can be found in the press release we issued this morning and they’re all in Canadian dollars unless otherwise stated. I should also note that in accordance with IFRS standards, the comparative revenue figures for Q4 2020 have been reduced slightly to reflect the removal of discontinued operations results from our ancillary revenues.
In our first quarter fiscal 2021, the period from July 1 to September 30, 2020, our net revenue, all of it from cannabis businesses, came in at CAD67.8 million, a bit higher than the CAD60 million to CAD65 million range we previously provided. Our sales mix remains evenly split with the consumer cannabis segment delivering CAD34.3 million in net revenue and our medical cannabis segment delivering CAD33.5 million in net revenue.
So let me dig into revenue a bit further. In the first quarter, our medical revenue was up slightly. Underlying this was a temporary decrease in Canada of about CAD600,000 as we’ve transitioned all of our patients to a new integrated sales platform where they have access now to all of our medical brands, including MedReleaf, CanniMed in Aurora and soon Whistler. Aurora continues to have a significant advantage in Canadian medical market share. But more than offsetting that temporary decline was the stellar performance from our international medical business, which continue to show the strength of our expertise in brands with 41% increase quarter-over-quarter to almost CAD6.5 million of revenue. I should remind you that our leadership in the Canadian international medical market is very important to our bottom line and long-term value creation, bringing sustainable growth expectations and a very solid gross margin profile averaging in the high 60% range in both Canada and internationally.
Our Q1 consumer revenue declined 3% over Q4, this despite a growing overall market. Now Miguel has outlined, both the challenges and the opportunity for Aurora in the Canadian consumer market, and we see Q1 consumer revenue as reflecting that period of transition for us. Despite the challenges, there were certainly some bright spots [Technical Issue] including CAD2.5 million increase in derivative product sales and CAD1.1 million increase in U.S. CBD revenues. We also recently launched our Daily Special vape offering, quickly capturing consumer attention and the number three spot in Ontario. Of course, this is just the first vape launch in a planned full brand portfolio of vape offerings in the near-term.
Turning now to our margins. Adjusted gross margin before fair value adjustments on overall cannabis net revenue remained strong at 48% in Q1, and this compares to 50% in the prior quarter. But excluding the CAD2.6 million of ramp-up cost at our Aurora Nordic facility in Denmark, our overall Q1 adjusted gross margin was actually 52%. Medical margins continued to deliver important levels of profit at 67% overall excluding Nordic ramp-up cost and consumer margins improved to 38%, due mainly to product mix with a heavier weighting on 2.0 products in the quarter.
While our inventory levels increased about CAD27 million overall from the previous quarter, we are making progress in reducing this growth. And as Miguel has noted in his remarks, between the facility closures currently being executed and opportunities to align current demand and production needs at are ongoing facilities, we expect to bring this into balance during the fiscal year. Cannabis is the long lead time agricultural crop with the challenging demand schedule forecast, so alignment does take a bit of time. Hence, Miguel’s remarks regarding shifting more fixed cost to variable over time are also very important to our plans to drive to sustainable positive cash flow in the near future.
Looking now at SG&A, including R&D. We have successfully reduced SG&A cost, which we define as including R&D spending as well for our announced target of the low CAD40 million range, taking it from over CAD100 million in Q2 2020, down to CAD43 million in Q1 2021. This excludes approximately CAD4 million of termination costs related to the business reset. As an important driver of our profitability and positive cash flow, I am encouraged to tell you that we’re continuing to operate our targeted quarterly SG&A run rate in Q2 and have the entire company incented to find incremental opportunities to hold, even reduce this important metric. We do believe this level of SG&A spend is quite sustainable and capable of supporting a much higher revenue line.
So putting all of this together, adjusted EBITDA in Q1 2021 was the loss of CAD57.5 million, but that included a number of previously communicated restructuring costs, including employee and contract terminations. Adjusting for these costs and in accordance with our bank covenant definition, adjusted EBITDA for Q1 is CAD10.5 million. This is the third consecutive quarter of improvement as we continue to work towards positive EBITDA and cash flow.
I’ll just make a couple of comments regarding our cash position and cash flows now. As of November 6, our consolidated cash position was CAD250 million and that compares to CAD162 million as at June 30. This balance reflects the improvements in our recurring cash flows, which I’ll describe in a moment as well as cash raised through our ATM program in the last couple of months. It also reflects payments in October for our major annual cost of insurance and employee bonuses. The balance on our term debt stands at CAD101 million at November 6 and we remain in compliance with all the debt covenants under this agreement. We are very happy with the continued excellent relationship and ongoing dialog we have with our very supportive banking partners.
For cash flow, the amount of cash we used in Q1 was similar to that in the prior quarters. However, the mix within cash used showed significant positive progress. We used CAD25.2 million in cash to fund operations, excluding working capital investments and used CAD47.4 million for contract and employee termination costs. These costs included the previously announced termination of the UFC agreement. We also paid CAD15 million for capital expenditures in Q1, down materially as many long lead projects are now complete. Increases in net working capital use CAD37 million in the quarter, driven by a CAD14 million increase in accounts receivable and a CAD25 million increase in inventory. As both Miguel and I have described earlier, we continue to execute plans to more closely align production levels with demand.
Finally, in the quarter, we also used CAD18.2 million in cash to reduce our term debt and lease obligations. So cash used in operations and for capital expenditures are crucial metrics in our drive towards generating sustainable positive free cash flow and both have improved significantly and consistently over the past several quarters. As an example, in our Q2 2020 fiscal quarter, that’s the last quarter before we announced our business transformation plan, we used CAD86 million cash in operations, not counting working capital build, and CAD128 million for capital expenditures. So total outflow of CAD214 million for just these items. This compares to I just reported Q1 total of about CAD40 million for these same two items.
We made the decision to reposition our company to be a leader in our industry in driving the positive EBITDA and cash flow. The actions we have taken have improved cash outflow on these recurring items by over 80% within three quarters. Even with the solid balance sheet and rapidly improving cash flows, we still believe that access to capital is of paramount importance, particularly in an environment of rapid change and value-driving opportunities.
So you all have noted that we recently filed a new shelf prospectus that is intended to protect the company and our shareholders as we navigate through an uncertain environment. But we are firmly convinced that our focus on getting to cash flow positive as quickly as possible will both demonstrate the excellent long-term value creation possible in this industry and will alleviate the need for additional equity capital as far as possible. As we have shown with our progress on the business transformation, we will continue to prudently manage our liquidity as we drive to positive EBITDA and cash flow.
So to conclude, and as I mentioned on our last report to you, I am incredibly excited for the vision and tactical plan that Miguel has laid out here. I am seeing the recovery in our Canadian consumer business showing signs of traction. And when you add that to the leading position we have in medical cannabis globally, the excellent gross margins will continue to deliver, a vastly improved SG&A cost structure and an important platform for U.S. growth and a much improved balance sheet, you may be able to understand why we are quite bullish for Aurora’s future and for our shareholders.
So thanks for taking the time with us in a very busy reporting day. Before we take questions, I’d like to now turn the call back to Miguel for a few wrap-up remarks. Miguel?
Miguel Martin — Chief Executive Officer
Thanks, Glen. I want to close by highlighting the steps of the plan we are executing now for the Canadian consumer market. First, we’re focused on driving sales of premium brands and flower; Whistler, San Raf and Aurora. Second, we are focused on winning share in key growth formats; vapor, pre-rolls, edibles and concentrates. And third, evaluating and executing on opportunities to align our production and manufacturing cost of sales and shift our model away from fixed to variable costs. I’m very confident in the early execution of these tactical plans.
We know what we need to do to be successful across our main markets, and are already seeing early signs to run the right path. As CEO, it is my responsibility to ensure that the entire team is executing accordingly to their respective responsibilities. This entails continuously working from our effective ways to capture top-line opportunities that are margin accretive and extract even more efficiencies from operations. When we are successful, we will only strengthen our financial condition, but over time build a sustainable and growing level of adjusted EBITDA and the base of positive free cash flow that can be used to invest globally over a multi-year horizon in both the THC and non-THC cannabinoids. We look forward to sharing our progress with respect to our plans and in reaching these goals over the coming quarters. Thank you.
Operator, could you please open it up for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.
Vivien Azer — Cowen And Company — Analyst
Hi, good morning.
Miguel Martin — Chief Executive Officer
Good morning, Viv.
Vivien Azer — Cowen And Company — Analyst
So understanding this is a transitional quarter, like maybe let’s take it a little bit more near-term, obviously a lot of volatility in the markets, elections are incredibly topical in the United States. So Miguel, perhaps the great opportunity for you to level set everyone on what you view as the tangible and likely regulatory pathways for a more notable entry into the U.S. beyond CBD?
Miguel Martin — Chief Executive Officer
Well, good morning, Vivien, and it’s a great question. I think like most things with me, my background really colors my opinion. Having spent 20 to 25 years in the tobacco business, you saw a lot of uncertainty and there are a lot of corollaries here. So first and foremost, while everyone is hyper-focused on potential federal action, I would really draw your attention to what’s happening in the states. When you talk about controlled substances and you talk about regulated products, state level actions in many ways, have more applicable in the short-term than federal actions. You see that in CBD today in the U.S. In the cannabinoid business, we clearly see it in the THC banned cannabinoids. We had four really important states passed comprehensive cannabis legislation. And so that starts to move the ball forward in terms of when do you get to this tipping point.
Now on the federal side with the Biden-Harris position is clear, and I think it’s going to have to be a little more articulated on what the timing is. But depending on what happens with the run-off election in Georgia, the republicans control of the senate has a key impact. So all in all, if you boil that all down, I guess I would say the following sort of three things. First and foremost, very positive news at the state level. We see both in the U.S. and globally, an increasing sort of openness towards THC-bearing cannabinoids and that bodes well for a company like Aurora. Secondly, there is work to be done to see what a federal construct looks like. And third, and I think this is the most important piece by far is, if and when you see countries, including the U.S. pass federal regulations and legislation, the experiences that the Canadian LPs have had in Canada as the largest federal construct on manufacturing, packaging, production, sales and marketing, all of those things instantly becomes really valuable. By the same token, the rigors getting into a Germany or Poland or in Israel that is muscle memory that you can’t just replicate really quickly.
So we continue to learn. We continue to see those pieces as being portable. And at the time in which there is an opening for us in the U.S., we think that we’ll have a ton of resources and a ton of interest because of all of those experience. And so that’s how I would couch it, and it’s — I’m not here to give a particular timeline because I think that’s — as you know, that’s falling trying to predict legislation like this at a federal level.
Vivien Azer — Cowen And Company — Analyst
Absolutely, and I appreciate that perspective. Miguel, If I can squeeze in a follow-up then…
Miguel Martin — Chief Executive Officer
Sure.
Vivien Azer — Cowen And Company — Analyst
As it relates to the senate election, to the extent that the democrats do not take the senate, do you want to offer a view on what that means in terms of pathways and catalyst? Thanks.
Miguel Martin — Chief Executive Officer
Yeah. I mean, I don’t — I mean, it’s easy to say that if Sarah McConnell and the republicans keep control of the senate then that’s sort of it. I mean, as we’ve learned with states like Illinois, the economic benefits of legalization of medical or RAC has become a bit of a bipartisan issue. And so I think we’ll have to see. Unfortunately with the pandemic of COVID you’re seeing a lot of budget shortfalls and a lot of people are looking towards a responsible regulated version of cannabis in order to fill that.
So I think, Vivien, we’ll have to see, but I understand that historical positions would be that the democrats are always going to support it and the republicans always won’t. That’s not the case. We have not seen that in CBD. As an example, when we look at republican governors, particularly in say Texas or Florida seeing the benefits of a regulated thoughtful approach on non-THC-bearing cannabinoids, and I don’t think it’s a fore-drawn conclusions that the republicans given their focus on fiscal prudence wouldn’t also have a similar opinion under the right construct. And again, those companies that have acted responsibly in a compliance-driven manner in Canada, clearly are going to have an advantage when that construct presents itself.
Vivien Azer — Cowen And Company — Analyst
Understood. Thanks for the time.
Miguel Martin — Chief Executive Officer
Thank you very much.
Operator
Our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Please proceed with your question.
Pablo Zuanic — Cantor Fitzgerald — Analyst
Thank you. Good morning.
Miguel Martin — Chief Executive Officer
Good morning, Pablo.
Pablo Zuanic — Cantor Fitzgerald — Analyst
So I guess the first question would be just following up on the last one. When you see Canopy growth, licensing Tokyo Smoke and Tweed to Acreage building awareness for their brands and you hear Aphria talking strategic relevance of their SweetWater deal in craft beer to build relevance for their brands. Do you think you need to do something similar to push or to start building awareness for your brands in the U.S. or it’s just too early and there still enough time to get behind that? Thanks.
Miguel Martin — Chief Executive Officer
Well, thank you for the thoughtful question, Pablo. I mean, listen, I’m not here to be critical on anyone else’s approach, particularly as it builds awareness. I think the two examples you gave are a bit different. One is about leveraging infrastructure and expertise. And the second, to your point, is about awareness. My opinion is that when you have high quality brands that can operate in a variety of different markets as we do, I think there is opportunity.
The biggest thing though, Pablo to me is, all of your capabilities to be able to execute at a time in which it makes sense. Obviously, there are challenges, structural challenges for publicly-traded companies operate today in the U.S. That doesn’t mean though that you can’t build infrastructure and capabilities for a time and watch if it’s federally regulated, and that’s really what we’re focused on.
So we will be opportunistic. I clearly expect that a lot of folks will be deeply interested in what we’ve been able to do around the world from a regulated standpoint. I would also tell you that the science and genetics and genomics and experience with the plant may be one of the most portable sort of aspects of both our business and other piece of the business. So it doesn’t give me any pause that our friends at Canopy have done what they’ve done and that the folks of Aphria have done what they’ve done with the craft brewery in Atlanta. We feel very confident with our position. We feel very confident that the resources that we have will be attractive. And at the time in which it makes sense, you’ll see us be there.
Pablo Zuanic — Cantor Fitzgerald — Analyst
Good. And just a quick follow-up on the Canadian market. I don’t think there’s much in the press release about the outlook or comments on the quarter, but obviously, you beat in the September quarter, right, CAD68 million versus CAD60 million to CAD64 million, maybe what drove that because guidance was given late in the September quarter? But more important, where are we? What comments can you give in terms of guidance or outlook for the December quarter in rack? With I guess with the slight concern on my side, when I look at the market data, particularly high fire, I see evidence of the successful pivot in the derivatives on the premium brands, but I see a weak pullout [Phonetic] in sales for your value flower business, right, which is still relevant to your total revenue. So I wonder what that means to your rack sales in the December quarter? So just some color there in terms of the beat and in terms of where we are in the December quarter in rack? Thanks.
Miguel Martin — Chief Executive Officer
All right. I’ll take the second half and then I’ll turn it over to Glen to sort of talk about the first half. So it is mentioned these are big ships to sort of move. Clearly, I’ve been unabashed in my focus on premium flower, derivatives, vapor, which obviously have a long history and given I was just running logic. And so what I would say is this, there is a lot of folks that are pumping out low cost flower at the low end, and that’s had an impact. And you’re going to see disruption as us and others rightsize production to consumer demand. And so that is what it is and can sort of get there.
I think as you look at the percentage of the profit pool and you look at the margins associated, and as I mentioned, Whistler is 10 times per gram as the discount flower, you’re going to start to see us move pretty strongly into the areas I’ve talked about. You’ve seen it on vapor, you’ll see it on pre-rolls, you’ll see it on concentrates. And so I’m not worried about the contribution of our profitability. Being reliant upon low cost flower and the commoditization of that particular aspect of flower I think is not a great place to be. And so we’re confident with our plan. And I think having being blessed with such premium assets is really going to be important.
And for everyone that has sort of believe, and I know you don’t, but this whole thing gets me commoditized. I would draw your attention to what we’re seeing in California and Colorado and over a 50 to 100 years of regulated products, there is clearly a place where premium products in the regulated space and clearly in place that’s been demonstrated for premium products in the cannabis business, and as you know, the margins of those derivative products are 2.0 Some they call it way or stronger.
So Glen, do you want — would you please take Pablo’s first part of his question?
Glen Ibbott — Chief Financial Officer
Yeah. Yeah, thanks. Good morning, Pablo. Yeah, listen, we have a range, and as we are kind of closing our books, it looks like we’re getting towards the upper end of the range and potentially a little bit over. I wasn’t comfortable in giving you guys any sort of additional guidance beyond that range or shifting until we got through all of this, the reviewing, the closing, the final closing of the book, the review with our auditors. And for instance you’ll see in our MD&A where we disclose more, we purse in our revenues, in particular our revenue provision is about CAD1 million lower than it would have been the previous quarter, and that all takes time to work through. So the outcome we knew at the top or maybe slightly over. In fact, as we looked at, as I say, finalizing the book and recording all the proper provisions and things like that, we ended up coming in slightly above the range, but that’s about it.
Pablo Zuanic — Cantor Fitzgerald — Analyst
That’s good. Thank you. Thank you to both.
Miguel Martin — Chief Executive Officer
Thank you, Pablo.
Operator
Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.
Michael S. Lavery — Piper Sandler — Analyst
Thank you. Good morning.
Miguel Martin — Chief Executive Officer
Good morning, Michael.
Michael S. Lavery — Piper Sandler — Analyst
So can you — even if the timing of any entries of THC in the U.S. is certainly unknown, how much thought have you given to your strategic approach or how you would plan to go to market? And specifically curious how you view interstate commerce? Do you see that as an inevitability? And if so, would you wait for that to come into place before trying to make an investment or entry or would you go ahead and begin on a state-by-state approach? How do you think about that?
Miguel Martin — Chief Executive Officer
Well, first, as you look at the things that we have to do to be successful, say, in Germany or in Israel or in Poland, there are a lot of similarities to what you’d have to do in the U.S. If you look at everything we’ve had to do in Canada, there are lot of similarities to what I believe you will have to do in the U.S. So much of the — I know it’s fun to talk about brands and marketing and devices and formats, but the real heavy lifting is going to be on the back end. So IP, genetics, genomics, trademarks, science, compliance, manufacturing protocols, GMP, ISO certification, packaging compliance, testing protocols, sales and marketing. And so if I was to ask — if I wanted anyone to focus on who are the companies that are going to win long-term, look at the companies that do that. Yes, clearly having some brand awareness and excellence in terms of consumer awareness will be critical. But in a new regulated category, it’s going to be all of the other stuff that I just mentioned that’s going to clearly make a difference. And we are working on that every day, all day, not only in Canada, but around the world and that benefits us greatly in the U.S.
Now Michael, as you know, the legal restrictions or the sort of different aspects of what a publicly-traded company has to do in order to be compliant will require some form of a federal construct. Now, as I mentioned earlier, there are lot of different pathways to get there that are not just sort of a red blue issue, that can be around economics and a variety different things. And clearly, I think for the U.S. and for the states to truly unlock the greatest amount of economic potential, interstate trade and shipment will have to be there. I mean, if you look at, it’s somewhat of a corollary of the farm bill on CBD. It would be incredibly challenging if you continue to ring fence these states and have to produce register license grow and sell all within a state. And that really creates I think limitations on how you — the true economics.
Now some might say well, but that’s always going to exist because the states are going to want their piece of the pie of the economics of how that’s grown. We don’t see that in tobacco, we don’t see that in alcohol, we don’t see that in spirits, we don’t see that in pharma. So I think as this proceeds really to unlock those economics and whether it’s compliance are all these other aspects that would be there, you would have interstate and then at that point, you’re starting to get into a federal construct and at that point things open up.
I do — well, I think we have a leading position. I do think the expertise that the Canadians LPs have will be in high demand for all the reasons that I mentioned. There is nothing currently globally like Canada. And while U.S. FDA and DA and other regulatory agencies don’t always follow international protocols, there is no question it’s going to influence it because strong neighbor, already a lot of different interactions. And so I think there is a big advantage for those LPs that have successfully navigated.
Michael S. Lavery — Piper Sandler — Analyst
Okay. Thanks for that. And just a follow-up. You’ve mentioned genetics and genomics a couple of times, can you give us maybe a little more color on how you see Aurora differentiated or standing out there? And then how that translates marketplace execution either with the consumer or anyone else?
Miguel Martin — Chief Executive Officer
So Aurora over its lifespan has acquired significant amount of companies and resources. And with a lot of those companies has become — has come a very significant library of genetics and genomics. And so like any other agricultural company, genetics have a lot to do with yields, lot to do with durability of the player, a lot to do with the output. And clearly given the variances in how we see people use cannabis in the articulation of all those core metrics, whether it’s intensity or onset or offset, genetic and genomics are really important in this category, like they would in most of these regulated types of categories.
So as you think about that expertise and the value of that and being able to leverage that in a market, the size of the U.S., it becomes incredibly important. And again, it’s the life cycle of it. It’s the fact that these assets and these outputs have been tried and tested in over multiple crop cycles in multiple markets and different sort of environments. And so all of those things are valuable as you get into a market, the size of the U.S. where you really can’t be as nichy, and there will be under a potential federal construct value for large scale agriculture like you’re seeing in Canada today. And so again, that all plays a role in how quickly and how effectively and how thoughtfully you can go to a market with the size of the U.S.
Michael S. Lavery — Piper Sandler — Analyst
Okay, that’s great. Thank you very much.
Miguel Martin — Chief Executive Officer
You’re very welcome, Michael.
Operator
Our next question comes from the line of Tamy Chen with BMO. Please proceed with your question.
Tamy Chen — BMO Capital Markets — Analyst
Thanks. Good morning, everyone. First question is, wanted to understand better the shelf with the CAD500 million U.S. ATM. I mean, it’s quite significant amount. So I mean how should we and investors think about that? Have you taken that on so you can ride out the challenging environment in Canada or is it also for how you’re thinking about the U.S., you mentioned opportunistic a couple of times? So I just wanted to understand that given it’s a pretty sizable amount.
Miguel Martin — Chief Executive Officer
Glen, you want to take that one?
Glen Ibbott — Chief Financial Officer
Yeah. I’ll get started on that, Tamy. Just to correct something you said, it’s not an ATM, it’s the shelf prospectus and that just pre-qualify shares for issuance or any securities for issuance and pretty broad, it allow us to issue debt, it allow us issue shares certainly should we see an opportunity to do so, but it’s not an ATM. If we are to use an ATM, we would file a supplement to be able to do that, and you would see that should we do that at some point.
So this is really, as Miguel mentioned in his remarks, just the hallmark of any mature companies having a shelf prospectus qualified and available opportunistically. So that’s the way to think about it. It’s not an ATM. It doesn’t allow us to sell shares tomorrow under an ATM unless we file a supplement.
Miguel Martin — Chief Executive Officer
Yeah. I guess, Tamy, the only thing I’d add to it, we mentioned this a bit earlier, if you look at cash burn or the cash component, which has become such an important metric for a lot of good reasons. On cost and cash use, we’ve cut about CAD60 million in cash expenses from our SG&A in three quarters. We have significantly reduced our capex over that time. And now really at a run rate really focused around maintenance capex going forward. So I think overall the focus on cash is headed in the right direction.
If we look at the industry, if we look at our peers, say, we’re clearly well capitalized. But I think the big thing also is understanding the market is appreciating both business execution and rock solid liquidity. And when we proved to investors we’ve actually on the plan we put forward, I really don’t want that success to be overshadowed by perceived liquidity issues. And so as we move forward in the tactical plan, gaining back market share and growth of those premium segments in Canada, really want to have those financial resources available to be opportunistic, which you’ve mentioned. So I just would add that color about the importance of having both sides of it. It should really I think allow people to uniquely focus on execution, particularly in the rack committee in business.
Tamy Chen — BMO Capital Markets — Analyst
Got it. Okay, that’s helpful. Thank you. And I guess my follow-up is, if you could just elaborate a bit more on what you were talking about in shifting more production cost from fixed to variable? I mean, does that consider even more facility closures and more leverage of third-party supply? Just can you elaborate on what you meant by that? Thank you.
Miguel Martin — Chief Executive Officer
Sure. Sure, I’d be happy to. I mean, the base premise — I mean, if you go back, all — these facilities, the amount of production in Canada that in a lot of ways was built to service global opportunities and to service a market that just is bigger than currently there. And so I’ve got a long history of using variable versus fixed. And I will tell you the one thing I can’t predict in those categories that things are moving very quickly. And so to hardwire yourself to these massive fixed costs, not knowing exactly what the outcome is, I think is not — doesn’t best server.
Secondly, as we’ve all know there is plenty of great high quality product available, particularly in Canada. So while we’ll have to have the EU GMP facility over in Denmark, which is a tremendous asset to have and clearly there is plenty of work for that, there is an opportunity in Canada particularly with these large scale facilities. So we’ve announced to downturn of five of them, a couple of them is already closed. And yes, we are looking at some external sources to give us greater flexibility so that we don’t have to carry all those costs and also be in a good position. This would be both in flower and as well as a couple of other items.
If you look at other businesses I’ve been a part of, that some might argue, have been quite successful, you don’t hardwire huge fixed costs, you give yourself maximum flexibility. And then once a category really is on firm footing and you can determine exactly where it’s going, I think you can make more educated decisions. So I’m very confident that you’re going to find us to be in a strong position regardless of which way the category moves, particularly in between the formats.
Operator
Our next question comes from the line of David Kideckel with ATB Capital Markets. Please proceed with your question.
David Kideckel — ATB Markets — Analyst
Hi. Good morning guys.
Miguel Martin — Chief Executive Officer
Good morning, David.
David Kideckel — ATB Markets — Analyst
Congrats on the quarter. I want to just go down into your international medical cannabis opportunity a little bit more in detail, if that’s okay. So just to note, one of your competitors also announced [Indecipherable] announced results this morning. For the international medical cannabis component date, sales were actually down quarter-over-quarter versus Aurora, you and sales are up. So my question is given just how important this channel is for overall, as Glen, you mentioned gross margin in particular, do you see this trend continuing with upward sales on the international channel specifically?
And I’ll just note to give that question some color, I mean one of the comments made by the competitor was that it’s a very crowded space. So just any color you can offer with not only market potential there, but how is Aurora kind of navigating the complexities associated with medical cannabis on an international scale? Thanks.
Miguel Martin — Chief Executive Officer
Yeah. I mean — so first and foremost, I think we’re bullish. As I mentioned before, if you think about the permissive nature or the movement of legal cannabis across the globe, opportunities are more prevalent and are going to happen more frequently than the opposite. So I just would throw that out there as a general tailwind.
Secondly, I will tell you that compliance, regulatory, having facilities in Europe and the navigation of specific aspects about infrastructure that’s focused on science, technology and regulation are differentiators. As markets internationally are becoming more, I would guess, professionalized and more sophisticated, I think companies like Aurora will be advantaged if they can produce the quality cannabis in a certain manner with a certain level of infrastructure.
And so listen, we’re in early days here and I’m not here to dismiss or be critical of any of our competitors, because I have great respect for them. We like where we’re at. We like the possibilities that the EU facility in Denmark provides for us. And we like the conversations that we’re having with external partners based on our history of compliance and science-based production. And I think as long as those tailwinds continue of cannabis being permitted and being opened internationally, I think what we bring to the table and continue to invest in will be a compelling argument.
Glen Ibbott — Chief Financial Officer
Just to add a little bit to that. Sorry. Just — you will see in our MD&A where we pull apart the international business, you can see the revenue is mainly generated at a flower and there is a developing market in Germany, actually quite healthy one for extracting oil and things. So it’s important to note that the licensing that we got at our Aurora Nordic facility in Denmark includes oil, so it’s flower and oil. And we intend to use that facility to supply the European markets and the international markets, in fact, whether it’s Europe, Israel or whatever and free up the Canadian facilities. But the oil licensing out of Nordic is important because that’s an opportunity for us to grow in Europe, in a part of the market we haven’t actually been participating in very strongly.
David Kideckel — ATB Markets — Analyst
Got it. Okay, that’s helpful. So certainly, it sounds like there’s a lot of room for growth there. My follow-up question is on just shifting gears altogether to beverages. I know Aurora currently does not have a presence in the beverage category, maybe that’s because in the U.S. they have been kind of a swap. But with all the technology that Aurora and others have had, we’re seeing an uptick of beverages, specifically in cannabis. I’m just wondering, do you have a preference either way moving forward is beverage is a category that you’re looking to get into? Thank you.
Miguel Martin — Chief Executive Officer
Well, we do have a beverage in Canada. We have a shot which has done quite well. I mean, my opinion on beverages I guess is a couple fold. First is, in these categories, I would argue that there is not a significant advantage in being first mover. We’ve seen that in a variety of other corollary categories around. I’m very respectful for what our competitor has done. I think what’s more important is having a strong innovation system. Can you bring high quality products to market that meet consumer needs at a proper price point? And I believe Aurora is developing those capabilities, and you’ve seen it with vapor.
Secondly, if and when there was going to be an opportunity in beverage, clearly we have all of the other pieces put together and all of our plant genomics and everything we would need in order to play in that category. What I do believe though is that this category is moving so quickly that to make outsized bets and presuppose exactly where the consumer is going is a mistake. So we are going to continue to offer a variety of consumer options, particularly in emerging categories. And I could argue that concentrates, vapor and pre-roll today have much more actionable opportunities from an economic standpoint. And if and when beverage or any other category like that emerges, we’ll be there.
I will also say that we see in California and Colorado those are really bellwethers states and operate about a year, 10 months to a year from a consumer standpoint ahead of where Canada is at. And if we start to see inclinations that beverage or something else is really taking off in those markets or any other sort of bellwether market that we get consumer data on, we can quickly pivot. So I respect others making that push. We don’t see it as an opportunity today, but if and when it was there, we’d be there. And like I said at the beginning, these categories are not one where first mover status matters.
Operator
Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.
John Zamparo — CIBC Capital Markets — Analyst
Thanks. Good morning.
Miguel Martin — Chief Executive Officer
Good morning, John.
John Zamparo — CIBC Capital Markets — Analyst
The factors — good morning. The factors you listed as being success indicators like IP, science and testing and packaging, I’m trying to assess how you monetize that? Does it assume a federal pathway to operate in the U.S. and Aurora is the one executing that or is — do you think about selling that expertise to local, state level providers or is there an assumption of an additional equity investor partnering with Aurora? I know there’s a great deal of unknowns there, but just would like to get a sense of how you think about monetizing the factors where you lead U.S. or international competitors?
Miguel Martin — Chief Executive Officer
Well, it’s a great question. I think there is — the good news is, there is a ton of different ways to do it. I mean if you look at companies like Monsanto or you look at other companies that are branded companies, there is a variety of different ways to get there. I think the main thing to understand is at the time in which the U.S. legalizes cannabis either at the medical side or on the rack side, clearly the Canadian companies are going to have a massive head start in terms of understanding what that type of construct means.
So listen, whether that means we’re opportunistic through M&A, whether there is licensing, whether there is inherent IP, all types of things. What I do know is that our continued focus and effort in being compliant and being thoughtful around the globe, outside of the U.S. puts us in a position where others are not. And I have — listen, I have tremendous respect for the MSOs in the U.S. and what they’ve done. But the fact of the matter is, they have not operated in the federal construct. They’ve not operated in all of these different markets, and that is a different animal. And so whether that’s a partnership, whether that’s a go it alone, whether that’s a bright things, I’m not going to stand here and sort of presuppose what that is. But what I can say is all the hard work that we’re doing around the globe to be successful is portable, can be plugged and played into the U.S. And so there is no disconnect there. We don’t have to take resources away from what we’re doing to be more attractive in the U.S. We don’t have to focus on that.
So we continue to be in a good position of optionality. And like I said, the Canadian LPs are going to have a significant set of resources that upon federal legalization of either side will be, I would argue uniquely valuable.
John Zamparo — CIBC Capital Markets — Analyst
Okay, that’s helpful. I’ll pass it on. Thank you.
Miguel Martin — Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Matt McGinley with Needham. Please proceed with your question.
Matt McGinley — Needham — Analyst
Thank you. My question is on the cash bridge. You started the second quarter with CAD133 million in cash and with the equity raise you did and with the cash balances that you had, I think by November 6, you had CAD250 million, it implies to, I think had around CAD50 million in cash losses. Are the 2Q cash losses still on the operating side and that the revenue isn’t covering the cost or is this more related to working capital and capex?
Glen Ibbott — Chief Financial Officer
Yeah. Thanks for that. I think I mentioned in my remarks and you just passed over fairly quickly that we did have a couple of the larger annual costs in October, including our insurance, which is in excess of CAD10 million paid out in October and also our employee bonuses, which is in the same sort of neighborhood. So we take those out of the cash burn in terms of turn our focus on operations is delivering right now.
Matt McGinley — Needham — Analyst
Okay. In your European facility, I know you noted increase in production costs related to the ramp of the Nordic 1 facility in Denmark, when would we expect to see that fully operational? And I guess when could that impact the medical segment revenue? And given gross margin rates are already pretty high in that segment, would that have a positive impact on those gross margin rates or is it sort of net initially because that I guess more efficient larger Canadian operations would be offset by this smaller European operation out of the gate?
Glen Ibbott — Chief Financial Officer
Yeah. So it’s operational now, I mean that’s why you’re seeing the ramp up costs as they build inventory. We were simply waiting for all the licensing and all the licensing is in place, I believe you will see — we expect to see sales from that facility in this quarter into Europe into Germany and other places simply just the import-export permit that is the typical process now and may take a week or two for those. So it’s a facility that was built with a lot of similarities to our existing facilities in Canada. But by the same — we retrofitted in existing facility there. So it’s a very efficient producer and operated following Matt Peterson, who is third generation agricultural grower in Netherlands and I believe Denmark is one of the largest tomato exporters in the area as well. So lot of history there, a great operator and a facility that’s built in a similar method to the way we built Canada. So we expect it to be both high yield and very efficient operator.
Operator
Our next question…
Miguel Martin — Chief Executive Officer
Yeah. I guess the only other point I’d make there is that, EU GMP is going to be an important designation for all the other markets as well. And so while it’s more expensive and harder, there’s value there plus also navigating that again builds capabilities for us in other markets. Sorry, operator.
Operator
Our next question comes from the line of Owen Bennett with Jefferies. Please proceed with your question.
Owen Bennett — Jefferies International — Analyst
Good morning, guys. Hope you’re well?
Glen Ibbott — Chief Financial Officer
Good morning, Owen.
Miguel Martin — Chief Executive Officer
Good morning, Owen.
Owen Bennett — Jefferies International — Analyst
Just the one question from me on dry flower. So sequential decline driven by Daily Special, so arguably in line with the new strategy and playing less focused there, but the balance being flat would also suggest share loss continues in the over more premium brands, which is not in line with the new strategy. Ideally, we’d like to see this moving upwards. Can you maybe speak a bit more to this? And when would you expect to see share on the premium brands in flower start to pick up with the actions that you are taking? Thank you.
Miguel Martin — Chief Executive Officer
Sure. Well, listen, I’ve just gotten in the seat. And so some of these things take a little bit longer. What I can tell you is that you’re going to see a significant focus on our premium flower and then we have some tremendous brands, as you know, Whistler, San Raf and Aurora. The company had gone through a lot of transition, as you know, in the first half of the year, and there was quite a bit of interest in getting to that transition. And then, to be honest, that Daily Special launch that happened in February and March was so — I think took everyone by surprise.
So there is a couple of things going on. First and foremost, it takes a little bit to get those premium brands we settled. Secondly, we’ve had very substantive and good conversations with our trade partners about that. And third, we have to look at in some ways, looking into better articulation on format and packaging, and those things take a little bit longer than just flipping a switch and saying we care about San Raf, Whistler and Aurora.
So I don’t want to give you timing, I think, listen, I’m impatient with all things. I think as you look at the Headset data, retail takeaway data, you will see it. What I can tell you is that you’re not going to see competing priorities from us. You’re not going to see us trying to do both things exceedingly well. So I don’t think you can. So our focus will be on the premium flower and not on the deep commoditization that’s happening on the low-cost flower. And what has not been mentioned today is that you’ve got 1,300 stores, which is an amazingly small amount of stores and you can muscle 1,300 stores through marketing, trade marketing and sales execution, all of which I’ve got a long history with. And I can tell you that our focus of those resources will be on premium products and premium accretive margins such as vapor and pre-roll.
So I know it’s not the exact answer from a timing standpoint you want, but you know better than anyone and have access to that data you’ll see how they’re doing, and I’ll be — we’ll be happy to answer it as we go along.
Owen Bennett — Jefferies International — Analyst
Okay. Thanks very much. Very helpful.
Miguel Martin — Chief Executive Officer
Thank you, Owen.
Operator
We have reached the end of the question-and-answer session. Mr. Martin. I would now like to turn the floor back over to you for closing comments.
Miguel Martin — Chief Executive Officer
Well, thank you. And I want to thank everybody for your questions. We really appreciate your interest in Aurora. While it’s early days, under my tenure, I am very excited about where we’re going and I really appreciate that all of you took the time here today. And lastly and probably most importantly, from all of us, we hope all of you are safe and healthy, and we look forward to seeing you soon in person in the future. All the best.
Operator
[Operator Closing Remarks]