Categories Consumer, Earnings Call Transcripts

Aurora Cannabis Inc (ACB) Q2 2023 Earnings Call Transcript

ACB Earnings Call - Final Transcript

Aurora Cannabis Inc (NYSE: ACB) Q2 2023 earnings call dated Feb. 09, 2023

Corporate Participants:

Ananth Krishnan — Vice President, Corporate Development and Investor Relations

Miguel Martin — Chief Executive Officer

Glen Ibbott — Chief Financial Officer

Analysts:

Vivien Azer — Cowen and Company — Analyst

Michael Lavery — Piper Sandler — Analyst

Andrew Carter — Stifel — Analyst

Frederico Gomes — AGB Capital — Analyst

John Zamparo — CIBC — Analyst

Matt Bottomley — Canaccord Genuity — Analyst

Presentation:

Operator

Greetings, and welcome to the Aurora Cannabis Inc Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Ananth Krishnan, Vice President, Corporate Development and Investor Relations. Thank you, Ananth, you may begin.

Ananth Krishnan — Vice President, Corporate Development and Investor Relations

Thank you, John, and good afternoon, everyone. We appreciate you joining us today. With me are CEO, Miguel Martin; and CFO, Glen Ibbott. After the market closed, Aurora issued a news release announcing our fiscal 2023 second-quarter financial results. This news release accompanying financial statements and MD&A are available on our IR website and it can also be accessed via SEDAR and EDGAR. In addition, you will find the supplemental information deck on our IR website.

Listeners are reminded that certain matters discussed on today’s conference call, could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our annual information form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR. Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our analysts. We ask you to limit yourself to one question and then get back in the queue for follow-up. With that, I will turn the call over to Miguel. Miguel, please go ahead.

Miguel Martin — Chief Executive Officer

Thank you, Ananth. First and foremost, we are very proud drug we’ve achieved what we set out to do several quarters ago, namely reaching our objective of positive adjusted EBITDA by the end of the 2022 calendar year. We are confident that we can deliver positive adjusted EBITDA on an annualized basis going-forward, although there may be some quarter-to-quarter variability due to the dynamic nature of the cannabis industry and the seasonality we previously talked about at our business. Importantly, as part of our business transformation, we also completed the structural changes we had intended to make as part of our cost rationalization. These will certainly yield benefits for Aurora in both the near and long-term. Annualized savings now total approximately $340 million since February 2020 and included substantial progress in cutting quarterly SG&A to well below $30 million.

Our next financial milestone to be achieving positive operating cash-flow as part of our plan to build long-term shareholder value. We expect this to be a multi-quarter initiative and we will update the market on our progress to this new milestone. Looking forward, our enthusiasm for the future is anchored by our number-one position in global medical cannabis among Canadian LPs, and the growth we’ve been able to sustain despite some quarter-to-quarter variability with loyal patients and existing markets and more developing countries poised to open, we think the topline growth trend should continue. As a reminder, medical cannabis is a business we want to invest behind, not only because of its growth characteristics, but because of its defensive nature in volatile times. It also enjoys enviable adjusted gross margins that consistently exceed 60%, twice that of consumer cannabis.

Aurora is also ideally positioned because of our robust balance sheet and net cash position, which puts us in select company among our industry peers. This has allowed us to repurchase approximately $302 million in convertible debt in the last 12 months, resulting in about $17 million in cash interest savings on an annual basis. Finally, our investments in science breeding and genetics have resulted in proprietary cultivars and driven meaningful improvements to yields and potency that have benefited all of our product lines. We also remain committed to furthering medical cannabis clinical research in Canada, which should position us for innovation, so would be a key factors of success going forward. So with those key strengths as a backdrop, let’s take. deeper dive into our global medical cannabis business.

As we had expected, International Medical revenue rose sequentially compared to Q1, which can be attributed to our strength in the Australian market, as well as continued success in Europe. Our European business continues to demonstrate stability and growth on a year-over-year basis. Anchored by the German Medical market, we remain number two in flower. Based on recent comments from the Health Minister, we expect further clarity around recreational legalization in Germany sometime this spring, with a potential start to the market there as early as 2025. We continue to believe Aurora’s position as one of only three companies with the medical domestic production license will give us a significant advantage as the regulatory framework is developed.

We’re also bullish on the opportunities that lie ahead in our other key European markets, which include Poland, UK, Czech Republic and France. While markets such as Australia and Israel continue to develop, our presence across nearly a dozen countries outside of Canada affords us relative insulation to invisible economic and regulatory climates.

Turning to the high-margin Canadian medical market, most of the sequential growth in revenue was driven by a one-time benefit in Q1. However, even after normalizing for this adjustment, we still experienced 2% growth in revenues. We are extremely happy with this when coupled with recent cost reductions which drove meaningful improvements in profitability. Over the past several months [Indecipherable] our patients have been given access to the largest-ever selection of products and formats on Aurora Medical, with over 75 SKUs launched in the medical channel between Q1 and Q2. These include products from our full portfolio of adult-use cannabis brands such as Being QuickStrips, Greybeard premium flower, and new pre-rolls concentrates and minor cannabinoids. Notably, our Canadian medical business benefits from strong patient retention with insured patients comprising about 80% of all medical sales as part of a concentrated market with significant barriers-to-entry. Our industry-leading market share also remains at about 25%, roughly double that of our closest competitor.

To sum-up, we remain very optimistic for this segment as we are not only increasing the number of patients in the insured category, but have also experienced year-over-year increases in basket size and participation rates. Note that only about 1% of the Canadian adult population is involved in medical cannabis. So any sort of movement makes a massive difference with the benefits outsized to a very small subset of companies like Aurora that participate in this segment. Switching to Canadian adult rec, our Q2 revenues showed sequential growth of 7%. This increase was achieved despite some temporary industry disruption and a reduced number of shipping days over the holidays. The key driver for us here was strong sales execution, coupled with a strong pipeline of innovative new product offerings. As you may recall, one of the key reasons for our acquisition of Thrive last year was their ability to manage our Canadian Rec business and we are thrilled to see our M&A strategy paying-off.

Finally, we plan to drive significant shareholder value over the long run through our controlling interest in Bevo, which is one of the largest suppliers of propagated vegetables and ornamental plants in North-America. We are currently repurposing the Aurora Sky facility for Orchid and vegetable propagation with minimal capital investment. This will not only increase Bevo’s production capability and extend its shipping range in Canada and US, but also enable us to generate predictable incremental revenue and adjusted EBITDA. And with that, I’d now like to turn the call over to Glen for our financial review.

Glen Ibbott — Chief Financial Officer

Thank you, Miguel, and good afternoon, everyone. Before reviewing our Q2 financial performance, let me take a couple of minutes to discuss our balance sheet and cash flow. I would like to reinforce what I’ve said a number of times before, and that is we take great pride in having one of the strongest balance sheet among Canadian LPs, and are one of very few in the net cash position. Of course, we are always on the lookout for further opportunities to improve through smart and defensive capital allocation decisions.

As of yesterday, February 8, we have approximately $310 million of cash including $65 million of restricted cash, and we believe this is sufficient to fund operations into our cash-flow positive. We have only CAD149 million of principal remaining on our convertible notes due in 2024. During Q2, we repurchased $135 million in principal on our convertible notes at the total cost of $128.7 million cash, including accrued interest. The debt we repurchased during calendar 2022 has resulted in cash interest savings that now total approximately $17 million annually. We also continue to have access to significant capacity under our base shelf prospectus, including approximately $180 million remaining under our ATM program.

During Q2, we issued 39.5 million shares for net proceeds of $68.8 million. The current shelf will expire in April and we do expect to refile a new shelf and ATM program at that time. We reiterate that the proceeds from share issuance are expected to be used only for strategic purposes. Our operating cash-flow in Q2 consisted of net new [Indecipherable] $60.6 million. But that included $15.5 million for a number of one-time payments related to our business transformation, $12.4 million for once a year payments such as insurance and Health Canada fees and approximately $12 million investment in working capital. So we are pleased with the positive impact our business transformation is having for our future cash flows.

With the restructuring of our business now largely executed, we do not expect one-time payments to recur at these levels and we do expect that the combination of reduced costs and increased revenue from the same footprint will be significant levers for the company to reach positive operating cash-flow. At the same time, it is worth noting that there may be some quarter-to-quarter variability in operating cash-flow. As we saw in Q2, the company achieved significant increases to sales, the long cash conversion cycle of this industry means that investment in working capital may be required which may negatively impact operating cash-flow for that period. But does it mean. [Indecipherable] Capital expenditures were approximately $3.5 million, down 36% from the $5.5 million last quarter and more than offset by $14.7 million of cash from the sale of our Polaris facility.

Looking now to Q2 business performance. Q2 total net revenue grew 25% to $61.7 million compared to $49.3 million last quarter. We saw strength across all business segments, while also benefiting from a full-quarter contribution from Bevo. We achieved our goal of positive adjusted EBITDA generated $1.4 million. This was primarily due to growing revenue in our industry-leading Canadian and international medical cannabis operations, and from reductions in costs across our business primarily in SG&A. We have now stabilized the company at a much leaner operating structure and see a real opportunity to drive more revenue from these assets in the future.

Let me now address each of our businesses in a bit more detail. Canadian medical revenue was $25.8 million in Q2, up 10% from Q1. Much of the sequential growth in revenue was driven by a one-time revenue recognition benefit as more shipments than unusual were in transit at the end of Q1. However, normalizing for this adjustment Canadian medical still delivered a 2% increase, a performance that was important given that most of our final cost reductions were in this segment during Q2 2023. So looking forward to fiscal Q3, we expect the Canadian medical business to perform similarly to Q2 excluding that one-time revenue benefit of $800,000.

International Medical revenue was $13.8 million and reflected 69% increase versus Q1. This segment rebounded from Q1 as expected through shipments to export markets such as Australia, Poland, UK and Cayman Islands and returned to levels more consistent with Q4 2022. We expect our international business to deliver revenues in fiscal Q3 that are consistent with that of Q2. Taken together, our medical businesses in Canada and internationally generated $39.5 million of revenue, up 25% from Q1. Medical cannabis represented about 64% of our Q2 revenue, maybe [Phonetic] 7% of gross profit. Adjusted gross margin was 61%, down from 67% in the prior quarter. The decrease was primarily driven by higher sales in certain international export markets, which yielded slightly lower adjusted gross margin, which still contribute strong positive gross profit. Consumer cannabis net revenue was $14.6 million, a 7% increase compared to last quarter. The Q2 increase was driven by growth in both Aurora’s premium San Rafael brand and by our value brand Daily Special, which offers consumers a strong potency, quality and price proposition.

Looking forward into fiscal Q3, we expect the Canadian consumer market to continue to be fluid with Aurora’s topline revenue being flat sequentially. Adjusted gross margin before fair-value adjustments on consumer cannabis net revenue was 20% in Q2 compared to 25% in the prior quarter. The decrease was primarily driven by incremental sales of value branded products I just mentioned. Going forward, we of course remain committed to maximizing profitability through low-cost production and margin-accretive categories and all supported by our science leadership.

Our controlling stake in Bevo enabled us to recognize $6.6 million net revenue during Q2, up from $3.3 million in Q1. This increase is a result of a full-quarter of contributions compared to only a partial quarter in Q1. Bevo is categorized as plant propagation in our financial disclosures. As a reminder, Bevo has a seasonal cadence with two-thirds of Bevo’s annual revenue and EBITDA being realized during the period from January to June. On an annualized basis, Bevo’s business is steady, predictable and supports our ability to generate positive adjusted EBITDA. Bevo’s adjusted gross margin before fair-value adjustments was 15% in Q2 compared to 16% in Q1. The adjustment primarily related to one-time [Technical Issues] impact on fuel costs which management expects to be very transitory in nature. Due to seasonality, we would expect to improve margins in the key spring and summer sales windows.

Overall, Aurora’s adjusted gross margin before fair-value adjustments was 45% in Q2 versus 50% in Q1, still amongst the industry’s best. Excluding restructuring and non-recurring costs of $14 million in Q2, SG&A and R&D were well-controlled, down 17% sequentially to $26.6 million. Notably, we have made good on our commitment to reducing SG&A to below $30 million as part of our business transformation plan, a rate that we can sustain going forward. So pulling all of this together, we generated positive adjusted EBITDA of $1.4 million compared to a loss of $7.4 million in the previous quarter.

And finally, just a reminder that our fiscal year 2023 has only three quarters as we have changed our fiscal year end to March 31st and that’s in order to achieve certain internal costs due to staff inefficiencies. So thanks for your interest. I’ll now turn the call back to Miguel.

Miguel Martin — Chief Executive Officer

Thanks, Glen. At Aurora, our purpose is opening the world to cannabis as a global leader in this very exciting industry. In that spirit, let me share some final thoughts. First, we are very pleased to have completed our transformation plan delivering on approximately $340 million in annualized savings since February of 2020. Our entire team’s hard work resulted in positive adjusted EBITDA, while maintaining a strong balance sheet that will allow us to compete at a very-high level and take advantage of future global opportunities. Second, we’ve done this without sacrificing growth opportunities in our high-margin domestic and international medical cannabis businesses, which remain one of the best places in the industry to invest. Third, we completed our plan during a period of volatility and uncertainty around the Canadian rec market. The good news is, it continues to rationalize, which will give us added opportunity for market-share improvement. Finally, our future success will be enabled by science through continued plant genetics, improving yields and better crop quality. We believe this will drive high-margin new [Indecipherable] licensing opportunities in the future and place Aurora at the center of industry-wide innovation.

Looking-forward, we continue to focus on profitable growth opportunities across all segments, ongoing discipline in capital deployment and improving operating cash flow. Taken together, our ability to make progress in these areas will position our shareholders with significant value creation, especially in these levels. Thank you for your time and interest in Aurora. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] First question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Vivien Azer — Cowen and Company — Analyst

Hi, thank you. Good evening.

Miguel Martin — Chief Executive Officer

Good evening, Viv.

Vivien Azer — Cowen and Company — Analyst

So I wanted to dig on medical cannabis gross margins please, down a little bit year-over-year and sequentially clearly was not an impediment to you guys hitting your target for positive adjusted EBITDA, which is really really nice to see and congratulations on that. But given the call-out that the margin dilution was coming from Frontier [Phonetic] market, do you think that kind of current gross margin level for that business are appropriate run-rate. It seems like you’ve got a lot of opportunity ahead of you and your mix frontier market might kind of stay at these levels and/or climb a little bit until there is a real catalyst in Germany. Thank you.

Miguel Martin — Chief Executive Officer

Yeah, I mean, so as it pertains to medical cannabis, I think structurally we don’t see the margin compression that maybe you would see in the rec market. We’re up to about 25% of the Canadian business, and the reimbursed market which represents about 80% of our revenues in Canada is at healthy number that is part of the overall system. Some of that was mix as a — as you sort of mentioned in Canada, but structurally we don’t see anything there. When you look internationally, you also don’t sort of see those impediments. And yeah, there will be places maybe where lower-cost items gain a little bit of traction, but because the model is structured in a manner that most of the supply-chain takes their margin off of percentage of the wholesale list and because you see reimbursement in those markets, there is not a structural reason to see margin compression.

Secondarily, in the rec business in Canada you’re competing against hundreds of manufacturers, and in some cases, some that need to sell their product at a lower number, in most of the international markets, you’re really only competing against three or four other manufacturers because of the significant barriers-to-entry. So you don’t see that competitive aspect where you play on price. And lastly, you really are seeing value from clinicians and physicians and patients as they are interested in quality which comes at a cost. So overall, we see this as a steady business from a margin standpoint, and we see consistency in market-to-market, and while there was a little bit of mix change that affect the overall margins, there’s nothing there structurally that gives us pause.

Operator

And the next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Michael Lavery — Piper Sandler — Analyst

Thank you, good afternoon.

Glen Ibbott — Chief Financial Officer

Good afternoon, Michael.

Michael Lavery — Piper Sandler — Analyst

I just wanted to come back to the ATM, You mentioned, you’ve got the remaining amount to go there. And if I caught it right, I think you also said you would anticipate renewing that. Can you just give us a sense given where your balance sheet is already, what the thinking is and I guess it’s some amount of how much is enough? Is there a point at which you would feel like you’ve exhausted. What do you need other ATM or it’s something that you feel like is — got a longer runway. How are you thinking about that?

Miguel Martin — Chief Executive Officer

Yeah, I think it’s a great question because it’s so much point of interest right now which is runway, use of cash, what’s the right amount of cash. I think first and foremost, people should look at company’s actions even more so than even what they say, and we’ve been very-very conservative in our balance sheet. Right from the beginning when I got — became CEO, the company worked extremely hard to have a strong balance sheet and we saw a lot of this disruption, and clearly understand what using the ATM means and what that means to others when you look at it. But first and foremost, we believe that it was important for external stakeholders to see the company to have enough cash to be able to run the business, and obviously that goes into how much cash you’re burning. So we worked extremely hard and we’ve seen progression from — at one point the company had over $100 million a quarter in SG&A, now to below $30 million. I’m sort of beating the drum about our cost-savings, but overall, it is my belief that the company has to have a certain amount of cash, maybe more so than normal to give people the comfort that we will be here for this inevitable upside for global cannabis. I think there’s no question that at some point you’re going to see a significant amount of profitability opportunities around the globe, we believe in medical first, and the question is who is going to be there, and we think we’re going to be there. So we used to [Phonetic] the ATM. It’s used strategically. I think people who have seen, we have been good stewards of the cash, we have sold assets quickly and at good prices. We’ve taken — converged down in many cases below par. And Michael, I think we continue to do three things, first we always focus on having a strong balance sheet so that we will have the wherewithal to be there when these opportunities hit, as well as be there when potential M&A and other things happen such as Bevo, which we thought was a great play. Secondly, we will be very judicious in our use of cash. And hopefully, people have seen that here. And third, where possible, we will use it to find margin-accretive and profit opportunities. And we were really thrilled this quarter if you look at our sort of cash used where and when, that in each of our four key businesses we saw growth. And so I think you put that altogether and you can sort of see that the future will look very similar to how we’ve used cash in the past.

Operator

And the next question comes from the line of Andrew Carter with Stifel. Please proceed with your question.

Andrew Carter — Stifel — Analyst

Hey, thanks, good afternoon. So I guess what I want to know is, do you think you can achieve — like strip out Canada adult-use, do you think you could be positive EBITDA in that business considering kind of the difficult market. And just kind of a separate question, kind of how you Miguel and the Board are looking at the business. I think I’ve got right now $274 million of enterprise value. Can you think that captures what the sum of the parts potentially is on the medical business, Canada Medical annuity, Bevo, what you can do there. And then also just the genetics investment, difficult to value in the market. Is that a consideration and something you keep in mind that potentially the [Indecipherable] consider here. Thanks.

Miguel Martin — Chief Executive Officer

Welcome, Andrew, and I think they are — let me start with your last question first. I think, absolutely not. We are strong believers in global cannabis as a macro movement and strong believers that medical cannabis in a regulated reimburse compliant manner is going to be the first-mover of all of that and we are one of the leaders, if not the leaders in that globally. So clearly the valuation and where we see ourselves, we don’t think is representative of that opportunity, but we don’t have complete control over that. The medical business that was built in Canada and now is finding its way all across the globe in key markets is wonderfully portable, wonderfully defensible, and has extremely high margins as I’ve talked about. And as we see new markets coming on like Australia and Switzerland and Austria, those are tremendous opportunities that only a small subset of companies will take advantage of and how people value that — so the genetics piece and the science piece has been sort of sitting there on the side all along and we’re having what may be one of the largest cannabis genetic libraries and what may be sort of possessing some of the most important IP around bio synthetics and others, there’s going to be value in that, particularly as you get into clinical research and more value, and we’ll have to see, but I clearly think our value overall. Now, the rec piece, can you make money in rec as a stand-alone? It’s sort of a tough question because we see so many efficiencies and learnings and having both. And it would be an easy sort of answer to say, well, why don’t you just get-out of whack and focus on medical which is really a strength for us, but you’re starting to see that when you’re in a market and you have both, there are significant advantages. And we see that with product lines, we see that with innovation, we see that production, and I think really importantly, you will see that in Germany, and we’re very bullish on not only the opportunities in the progression of medical, but also in rec and having that key line and facility and others and being able to be there at the beginning of medical and then transition in rec offer significant advantages. And so again, it’s easy to sort of take the pieces of the business and compare medical and rec, but for us, and particularly the manufacturer working with science in genetics, we see significant efficiencies and advantages in being in bulk, even if we’re not going to be a market-leader in every market, say in rec where we would be in medical.

Operator

And our next question comes from the line of Pablo Zuanic with Cantor Fitzgerald. Please proceed with your question.

Unidentified Participant — — Analyst

This is Matthew Baker on for Pablo, thank you for taking our questions. I have a two-part question. Firstly, what explains the stickiness of your market-share in the Canadian medical market. And then on the other hand why is your medical market-share in Germany so much less sticky? And then as a follow-up, what are your latest thoughts of when German rec sales will begin and do you still think imports will not be allowed? Thank you.

Miguel Martin — Chief Executive Officer

Well, I’ll answer that. Joe, Canada is a hard market. They’re all sort of hard, but this is– the reason it’s so sticky is we’ve made really significant investments in this. We’ve been in a long-time and we think we’re pretty good at it. We have roughly a 25 share, the next closest competitors have had about a nine share. So this is a piece of business where you have to make a lot of investments, experience matters, particularly with clinicians and physicians and with clinics, and you have to continue to invest, call centers, innovation, support mechanisms, science, engagement with key stakeholders and veterans and others. And so it’s just a commitment we made and I think you have to hit on all cylinders. And I think without being sort of arrogant about it, I think we’re pretty good at it, been for a long-time in Canada. In other markets, some other folks got there first, and it’s not always the first-mover status matters, but I think it takes more time for the benefit of our program. So we’re pleased with where we are in Germany. We don’t have a 25 share and there are some other good competitors in there, but again it’s four or five companies, so it’s not like you’re competing against 100 or 200. And so I think we’re really pleased with that and where we sit in the German market. And as I mentioned in my prepared comments, we’re one of only three companies that have a manufacturing license in Germany, which will play a significant role we think as they rollout legalization for the rec.

Now in terms of rec, we’re really excited about the German process. I think three primary reasons. First is, they are actively engaging with the EU and the expectation is with what they come up with would be applicable in other markets, Poland, Czech Republic and others. And we’ve heard from those regulators in those markets that they are looking to what happens in Germany and the EU. So it might take a little bit longer, but there’ll be a much more [Indecipherable] a much more broad-reaching piece of legislation. We expect to hear some more from the regulator in late-spring, and we do expect enhancements to both what we’ve heard on the rec side but also on the medical side, which not a lot of people are talking about. And the current administration in Germany has a big initiative on reducing bureaucracy and only about 30% of the patients today in Germany are able to navigate through their medical qualification process for cannabis products. And if that was cleared up, you’ll see a real big change. 0.1% of the adult population in Germany is in that system and that’s in Canada 1%, so any sort of change there will have really outside benefit. So more — we’ll know a lot more late-spring. And as soon as we hear something we’ll let people know, and we do expect some version of rec sales to happen mid-2025, which is when there is a critical action and there have been some promises made about when this is going to launch. What that looks like we’ll see, but these things may take a little bit longer, but with a country like Germany it may take a bit and be a little bit more long-time period, but when it happens, it sticks. And so we’re willing to work with them on that.

Operator

And the next question comes from the line of Frederico Gomes from AGB [Phonetic] Capital. Please proceed with your question.

Frederico Gomes — AGB Capital — Analyst

Hi, thank you. Good evening. Thanks for taking my question. My question is just on other use side here in Canada. You mentioned that much of your sales increased coming from higher sales of value brands. Should we read into that that — was that more opportunistic or is there any shift in strategy there, whereby you plan to rely a little bit more on the value segment to grow volume and maybe accelerate growth on the consumer side. Thank you.

Miguel Martin — Chief Executive Officer

You’re welcome Fred. Yeah, no there is no change in strategy, but I will say one thing that people should take-away from this quarter is that Aurora almost — has the unique ability to be opportunistic. So when there is a medical opportunity globally we can take advantage of it. When there is a medical opportunity domestically in Canada, we can take advantage of it. And so most of the change in what happened, and Glen referenced this in his comments, is we found ourselves in a very interesting situation, where we grew some flower for Daily Special and when it came in at 28 or 29 potency which is absolutely a super-premium potency ban, but because it was already registered with the provinces, we really have the choice, do we want to sell it and see the benefit or do we want to hold onto it and re-list it. We didn’t want to be listed. And so the reality was that product that was in extreme high potency and great quality went out under the Daily Special brand and had a little bit of compression in our overall margin. So the Thrive team is doing an awesome job and we do see incremental opportunities to continue to do what we said we’re going to do, but where we see things hit in that rec market on the discount play because we’re focusing on operating cash-flow we’ll take those advantage we can. So no change in strategy. It was opportunistic because of the unique situation. And unless — thrilled to have that and it’s a testament integrate great genetics and good cultivation that we found ourselves in that situation and we’re thrilled to be able to have those sales.

Operator

[Operator Instructions] Our next question comes from the line of John Zamparo with CIBC. Please proceed with your question.

John Zamparo — CIBC — Analyst

Thanks, good afternoon. I wanted to ask about the Canada Health acquisition. I know this isn’t hugely material, but $20 million in cash is not meaningless in the space either. So I just would like an update on what this asset brings to the table and what the financial implications of it have been so far.

Miguel Martin — Chief Executive Officer

Sure, I’d be happy to. But Glen, do you want to talk about Canada Health and that deal.

Glen Ibbott — Chief Financial Officer

Yeah. The folks at Canada Health are very closely attached to some of the key vet influencers in that population, they’ve been extremely good at building relationships and supporting better and patients in the medical system, finding the right medicines for them, and just actually kind of almost [Indecipherable] counseling service where you thought that they are very important part of our supply-chain. And we thought since our business was so incredibly important to our profitability, we needed to make sure that we had that relationship locked up for a long term. So I think the acquisition there is really about solidifying the long-term value for our medical business, in particular the funnel of veteran patients and our ability to get very close to those patients which obviously is critically important to understand their needs. I mean it is — it has started paying-off. We actually launched a new product in our medical portfolio in the last month, a product called protocol [Indecipherable] which was the cultivars selected by veterans from our coast facility for terpene profile and various attributes. They picked the name. It launched and [Indecipherable] just be that close to really critical patient population has been important for us and [Indecipherable] the big part of that equation.

Operator

[Operator Instructions] And the next question comes from the line of Matt Bottomley with Canaccord Genuity. Please proceed with your question.

Matt Bottomley — Canaccord Genuity — Analyst

Yes, thank you. Good evening, everyone. Just wanted to touch on the adjusted gross margin again. I don’t know, Glen, you had some prepared remarks about this, but when you kind of look at the overall trend over the last three, four even five quarters. It seems like the ratio of these types of adjustments are still fairly meaningful in relation to the size of your overall revenue. So I understand the general buckets and categories and you have it in your press release here in terms of what those general categories are, but I’m wondering if you could speak to the changes of maybe what’s going-in and out of there. I know historically, it was more inventory impairment. Now, there’s more development costs, given that you’re in a variety of different growing medical markets internationally. I would expect these types of costs and these types of opportunities and challenges to continue sort of indefinitely. So I’m just wondering how you’re anticipating this adjusted line moving just given that your actual audited or reviewed statements have have pretty nominal margins from unadjusted standpoint.

Glen Ibbott — Chief Financial Officer

Yeah, thanks. So a couple of things going on in the market. There’s certainly the mix across the categories are. Market-by-market, the margins are holding up quite nicely and so we still see a strong medical margin as we’ve seen over the past several years, number of quarters in the Canadian medical. Consumer, the margin this quarter was generally mix-related as Miguel just described and opportunistic and certainly incremental, combine the extra gross profit. And then the other key thing you were referring to, there are a couple of things in there that are hitting margins. What we adjust out of our margins are fair-value adjustments of course because they’re not [Indecipherable] confusing, and depreciation, we’re trying to get to a cash margin that will allow you to understand the underlying ability of the business to generate cash. This quarter, there was an adjustment for a one-time of Bevo. I don’t know if you’ll call it natural gas prices but they spiked ten-fold in December due to some weather in California and they came right back down in January. So, it was just the first time, never seen that before, one-time transitory effect that wasn’t very reflective about true gross margin. So we will look at trying to paint a picture for you of the underlying ability of the company to generate cash flow. But the thing that we will think less adjustments through EBITDA as we go forward now that we have finished the business transformation or completed our objective there. There have been through that transformation facility shutdowns and changes in transfer manufacturing line [Indecipherable] SG&A reductions, so a fair amount of noise in our financials, but I think we’re past that now in Q3 should see the level of those sorts of adjustments coming down.

Operator

Thank you. At this time, we have reached the end of the question-and-answer session. I would like to turn the floor back over to Miguel for any closing comments.

Miguel Martin — Chief Executive Officer

Well, first and foremost let me thank everybody for your interest and time. We’re thrilled with where we are. I would say this is absolutely not the finish line. You take anything away from this call is that our strategic plan is working and we’re thrilled with what we did here. But we’re also thrilled with where we’re going forward. I appreciate everybody for your interest and look-forward to talking to you in the future. All the best. Bye.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

PG Earnings: Procter & Gamble Q3 profit climbs, beats estimates

Consumer goods behemoth The Procter & Gamble Company (NYSE: PG) announced financial results for the third quarter of 2024, reporting a double-digit growth in net profit. Sales rose modestly. Core

AXP Earnings: All you need to know about American Express’ Q1 2024 earnings results

American Express Company (NYSE: AXP) reported its first quarter 2024 earnings results today. Consolidated total revenues, net of interest expense, increased 11% year-over-year to $15.8 billion, driven mainly by higher

Netflix (NFLX) Q1 2024 profit tops expectations; adds 9.3Mln subscribers

Streaming giant Netflix, Inc. (NASDAQ: NFLX) Thursday reported a sharp increase in net profit for the first quarter of 2024. Revenues were up 15% year-over-year. Both numbers exceeded Wall Street's

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top