Aurora Cannabis Inc (NYSE: ACB) Q2 2020 Earnings Call Transcript

Aurora Cannabis Inc (NYSE: ACB) Q2 2020 Earnings Conference Call

February 13, 2020

Corporate Participants:

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Glen Ibbott — Chief Financial Officer

Analysts:

Vivien Azer — Cowen — Analyst

Chris Carey — Bank of America Merrill Lynch — Analyst

Owen Bennett — Jefferies — Analyst

Michael Lavery — Piper Sandler — Analyst

Pablo Zuanic — Cantor Fitzgerald — Analyst

Matt Bottomley — Canaccord — Analyst

John Zamparo — CIBC World Markets — Analyst

Graeme Kreindler — Eight Capital — Analyst

Presentation:

Operator

Good morning, everyone. And welcome to the Aurora Cannabis’ Second Quarter Fiscal 2020 Conference Call for the three months ending December 31, 2019. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora’s future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora’s Annual Information Form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR databases. I’d like to remind everyone that this call is being recorded today, Thursday, February 13, 2020.

I would now like to introduce Mr. Michael Singer, Interim Chief Executive Officer and Executive Chairman of Aurora Cannabis. Please go ahead, Mr. Singer.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Good morning everyone and thank you for joining today’s call. With me today is Glen Ibbott, our Chief Financial Officer. Given that we just addressed the market last week with a very fulsome call on our succession plans, board expansion, business rationalization, and pre-release of certain Q2 financial information. I think this call will be a bit shorter than normal. I’ll do a quick review of the quarter including operational highlights. Then Glen will discuss our financial results in greater detail, followed by a question-and-answer session. To start things off, I’d like to address the current state of the market, which I briefly summarized on last week’s call. First, the past year has been challenging for the broader cannabis industry, with issues of retail constraints, evolving consumer demand and provincial distributor inventory management adjustments. As we said in our first quarter conference call, it’s important to remind ourselves that the Canadian consumer market is just over a year old and will take time to develop, but we remain extremely bullish on the long-term potential of the Canadian medical and consumer markets as well as established international medical markets.

We firmly believe cannabis is a secular growth story, but as is the case with all growth industries, we need to be patient as the markets evolve. With that as a backdrop and consistent with what we told you last week, our total net revenue excluding provisions totaled CAD67 million for Q2, we did not record some product return and price reduction provisions that Glen will address shortly. It’s worth highlighting that our core consumer revenue actually saw modest growth quarter-over-quarter before the impact of these returns and price reductions. We are proud of our strong cultivation capability, highlighted by over 30,000 kilograms of production in fiscal Q2. Our Q2 2020 gross margins on cannabis net revenue of 44% were impacted by the provision for returns and price reductions we took in the quarter.

I’m also proud to report that our high-tech cultivation facilities continue to deliver leading indoor cash costs to produce below CAD1 a gram and in this quarter came in at CAD0.88 per gram on the heels of CAD0.85 per gram in Q1. While we continue to leverage our coast-to-coast supply agreements to offer a broad range of premium consumer products across Canada, Aurora also remains focused on supplying medical patients with consistent premium products. In Q2 2020, the number of total active registered patients of 90,307 was relatively steady compared to Q1, which in the face of market challenges demonstrates the value of Aurora’s products and patient loyalty to the Aurora family of brands.

We are a few weeks into the second wave of legalization of Cannabis 2.0 products and I’m very proud of the Aurora team, particularly their focus and energy around the 2.0 launch at the end of 2019. We began loading-in small volumes in Q2 2020 with positive market feedback from distributors and retail customers about our product quality. Those products include vapes, concentrates, gummies, chocolates, mints and cookies and they are available in markets across the country. We have selectively partnered with a variety of organizations, prioritized our resources and built the inventory to ensure that our consumers across Canada will have access to our high-quality derivative products. Our assumption is that the 2.0 market will also develop slowly with previously discussed market constraints affecting the rollout, but the good news is we’re managing the business accordingly and feel very confident about our prospects.

I’d now like to turn the call over to Glen, who will discuss the financial highlights of the second quarter and then we’ll open up the line to questions. Glen?

Glen Ibbott — Chief Financial Officer

Thanks, Michael and good morning everyone. The figures I’ll be going over today can be found in our financial statements and in MD&A and are all in Canadian dollars. For our second quarter of fiscal 2020, the period from October 1st to December 31st, 2019, we saw our net revenue excluding provisions of CAD10.6 million [Indecipherable] CAD67 million. Our total cannabis net revenue excluding probation’s came in at CAD63 million for the quarter. A bit more specifically, our medical cannabis revenue in Canada remains steady quarter-over-quarter at CAD26 million. Our Canadian consumer cannabis delivered CAD33.5 million and our international medical dropped to CAD1.8 million. To get into a bit more detail, as I just noted during Q2 2020, our Canadian medical cannabis net revenue came in at CAD26 million. Our patient base continues to exceed 90,000 clients, which although being relatively flat quarter-over-quarter is indicative of our strong medical position as that market is also facing headwinds mainly from cannibalization into the consumer market. We continue to work at maintaining and growing our leading position, and are making certain internal operational changes that are designed to maximize the lifetime value of our key patients.

International medical sales declined for CAD5 million in Q1 to CAD1.8 million in Q2. And has a temporary sales restriction due to a permitting issue impacted our sales in Europe. As we announced early last week, that issue has now been resolved. I’m pleased to note that our products are once again available for sale as we fill back orders and return to growing European medical from the previous run rate. Similar to the Canadian market, we expect our European business, particularly our German business to grow sequentially, but in the shorter-term, slower than originally anticipated. The recent EU GMP certification of our Aurora River facility with a run rate of approximately 30,000 kilograms annually will allow us to allocate significantly more products for export markets as they develop. Consumer cannabis net revenue excluding provisions was CAD33.5 million up 11% from the prior quarter. In Q2, we recorded a provision of CAD10.6 million against revenue, which captured the impact of returns from provinces and price reductions that we’d agreed to. This included our assessment across the provincial ordering system for products still deemed at risk. The significant majority of this provision was related to products sold much earlier in calendar 2019.

In Q2, we saw a pickup in ordering of 1.0 products late in the quarter and also had a good launch into the 2.0 system with approximately CAD3 million and deliveries to provinces in late December. However, during the quarter we did see a drop-off in our market share in flower as the market shifted significantly towards value brands, which we define as retailing for less than CAD9 per gram. Last week, we launched our competitive brand in this category, Daily Special at a price point and an average potency that we think is a very compelling proposition for the consumer. In fact, we believe it will compete strongly with the gray market and help grow the overall size of the [Indecipherable] segment will clearly be monitoring our performance here closely.

During Q2 2020, the company generated CAD2.4 million in wholesale bulk revenue as compared to CAD10.3 million in the prior quarter. As we’ve said before, we are opportunistic with wholesale and do not attempt to predict quarter-to-quarter revenue levels. Our average Q2 at selling price for cannabis of CAD5.54 per gram represented a slight decrease from the CAD5.68 reporting the prior quarter. This decrease is primarily attributable to the previously mentioned returns and lower per gram selling prices for wholesale cannabis. We produced over 30,000 kilograms of cannabis in Q2 as compared to 41,000 kilograms in the prior quarter. In Q2, we took decisions at the cultivation level to prioritize planting of higher potency but slightly lower yield than cultivars at our major facilities, and we also took the opportunity to conduct some R&D, potential new high THC cultivars. In Q3 and Q4 2020 we expect our continued refinement of yield and operational efficiencies, deliver production at a quarterly rate that averages 150,000 kilogram annually.

Our cash cost to produce per gram of Dried Cannabis increased slightly to CAD0.88 per gram, up CAD0.03 when the prior quarter. We are pleased that we continue to deliver on a very important KPI for our operations, sub-CAD1 cost to produce. This is the leverage that allows us to launch such a powerful new entry to the value market, while maintaining strong, healthy and sustainable margins. Shifting now to SG&A, for Q2 2020 we reported just shy of CAD100 million for SG&A versus CAD81 million the last quarter. The increase is primarily due to an increase in salaries and benefits from targeted corporate headcount additions and annual merit increases. And investment in consumer education for the 2.0 product rollout and campaign expenses related to the launch of the Aurora Drift brand.

I want to stress that we recognize the importance of reducing our cost structure and as reported last week we have taken decisive action to make change immediately. Consequently, as we discussed last week, we expect to manage our business to an SG&A target range of CAD40 million to CAD45 million per quarter, which we plan to achieve as we exit fiscal Q4 2020. Clearly this represents a substantial decrease from today’s reported number. To achieve this we are focusing on our core operation in the Canadian consumer market, the Canadian and established international markets and in certain U.S. initiatives. An important part of this initiative is to reduce the complexity of our business and to instill a culture of financial discipline across all of our operations. As such, we believe there may be further opportunity to find additional medium term cost efficiencies.

Turning to our balance sheet, I’d like to highlight once again the amendments to our credit facility that were announced last week. These amendments include the complete removal of all EBITDA ratio covenants that is originally been set to amendments in the period ending September 30, 2020. The complete removal of the fixed charge coverage ratio constant, adjustment of the total funded debt-to-equity covenant of 0.2 to 1 commencing in our fiscal third quarter 2020, from the 0.25 to 1 that had been in place till now. Introduction of a new minimum liquidity covenant of CAD35 million and the introduction of the covenant requiring Aurora to achieve positive EBITDA threshold beginning of fiscal Q1 2021, so we believe they’re consistent with our announced changes. These thresholds are mid-single-digits for the first couple of quarters of fiscal 2021, increasing the back half of the year for a total of CAD51 million cumulative for the entire fiscal year.

We also used CAD45 million in restricted cash to pay down our debt and thereby reduce debt servicing costs. And finally, we downsize the total facility by CAD96.5 million sort of the elimination of facility fee, which had been earmarked specifically for the construction of Aurora Sun. When we reduced the scope of Aurora Sun significantly, facility being no longer available nor unnecessary. I should emphasize that we saw both actions as net positives for the company’s financial position. Staying with the balance sheet, you’ll note that we’ve finalized the goodwill and intangible and PP&E asset impairments in our Q2 financial statements, totaling CAD762 million for goodwill and CAD210 million for intangible and PP&E asset impairments; both within our previously disclosed ranges.

Turning to liquidity, as at December 31, 2019 our consolidated cash position was CAD156 million excluding the CAD45 million of restricted cash. We had used our aftermarket financing program and had raised gross proceeds of CAD325 million in the period from July to December 2019. We have roughly CAD200 million remaining under the existing ATM program. Our announced reduction in capex and SG&A costs should provide comfort to our investors that we are laser focused on the health of our income statement and balance sheet. We expect the utilization of the remaining ATM capacity should be sufficient to find operations and remain capital expenditures to the points were positive EBITDA and good cash flow are achieved. Driving Aurora to be a profitable and robust global cannabis company is extremely important to our team, as our call last week demonstrated. Our goal is to manage the business with a high degree of fiscal discipline and we look forward to sharing further developments and progress with you in the coming quarters.

I’ll now turn the call back to Michael.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

In conclusion, we continue to focus on what we can control in an evolving market, consistent execution, operational excellence, and our focus on operating a sustainable business, and in turn that short-term focus will allow Aurora to be a leader as the global cannabis trend takes hold and numerous exciting markets develop. I have no doubt that we have the right team and the right plan to execute against that opportunity and position our shareholder for value creation, especially from these levels.

I’d now like to ask the operator to open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from Vivien Azer of Cowen. Please go ahead.

Vivien Azer — Cowen — Analyst

Thank you. Good morning.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Good morning.

Glen Ibbott — Chief Financial Officer

Good morning.

Vivien Azer — Cowen — Analyst

So I just wanted to touch on your comment around the rollout of 2.0. It makes perfect sense that the provincial boards are taking a more cautious approach and are you as you collaborate with them in terms of inventory load, given some of the write downs that we’ve seen from you as well as the industry, but I think it would be helpful to understand what your current capacity run rate is because it’s pretty striking to me that edibles seem to be fairly consistently out of stock where they are in stock. It seems to be that you guys have chocolates available, but it’s kind of few and far between when we’ve been, both on the website as well as in brick and mortar. So where are you from a capacity standpoint on edible specifically from a 2.0 standpoint? And how would you anticipate that run rate evolving? Thanks.

Glen Ibbott — Chief Financial Officer

Sure. Vivien? Yes, where’s the run rate going? We haven’t found that the upper limit on the gummy demand yet, but they do have to say that it is constrained somewhat by the provincial ordering. There have been a couple of; I’ll say hiccups as we’ve gone through this. We — they, you know one fairly minor short-term extraction issue but that line is back-on. We’ve also run into a few issues, so packaging, etc, etc. Just the usual kind of a scaling up types of items.

So those are behind us. It looks like there we’re kind of full production right now, but there again, the gummies, they are selling out as soon as we can get them to the provinces are ordering in a very, let’s say prudent way I think. Their brothers stock out as supposed to and supposed to being overstocked. So it’s a little bit early to figure out exactly how — where the upper limits are there. We don’t have constraints on her lines per se, I mean at least at the anticipated levels. We do have plans for larger scale lines that are in place and our new Polaris building as needed. So we introduced that higher capacity as the market develops. And what we’re trying to do as we’ve talked about before is be more prudent with our capital. Make sure we spend it as we see the demand; I don’t see any constraints in our production capacity sort of the next number of quarters and by the time we get to that point we’ll introduced our capacity if we need it.

Vivien Azer — Cowen — Analyst

Well that’s helpful. Thank you, Glen. But maybe you could just quantify that a little bit. So in terms of like what you’re able to produce versus what you’re able to ship, are you guys like running at an eight hour shift, full utilization and you’re building inventory and then you’re only shipping 10% of what you produce? I’m just trying to get my head around that.

Glen Ibbott — Chief Financial Officer

I don’t have exact numbers for you, Vivien. I will track them down in terms of percentages that are shipping versus what we’re producing. I know, we’ve had some of the ordering is –it’s interesting to watch the week by week ordering, there’ll be weeks that are 100% above the previous week and then dropped down and getting back to 50% and very, I won’t use the word volatile, but very early stage and I think everybody’s kind of feeling well which products are moving. So we can follow-up with specific sort of utilization rates of the lines right now for me.

Operator

The next question is from Chris Carey of Bank of America Merrill Lynch. Please go ahead.

Glen Ibbott — Chief Financial Officer

Good morning, Chris.

Chris Carey — Bank of America Merrill Lynch — Analyst

Good morning. So I guess for my first question, I’m just trying to understand why CAD45 million in SG&A is the right number or more specifically how you’re thinking about the ability to flex down that cost structure if needed. And I guess underlying that question is, if gross margins stay at this current level and I understand excluding the provisions, but even then the gross margins have been coming down, which seems to be the trend if the category is increasingly going into value, which would imply that you’re going to need pretty significant acceleration in revenue to kind of hit that EBITDA positive for fiscal Q1 2021. And so just really simply put, I guess what I’m trying to get at is this concept of you might need to actually flex down that cost even more and maybe just how you’re thinking about your capacity to actually make those changes to hit that fiscal Q1 2021 EBITDA covenant if indeed you have to do something like that? And I have a follow-up.

Glen Ibbott — Chief Financial Officer

Yes, Chris, let me answer the key question, and we’ve been spending a lot of time on that. We targeted rate that we put out there in terms of coming out of Q4 and into Q1 is a point in time, we have targets for Q4 itself and further targets passed into Q1 and in fact into Q2. So there are some changes we can make to the business that we made immediately. There are some that require negotiation with other parties. We think we’re going to have in place for Q4 and then there are other actions that we can take that will impact the company’s cost structure in its fall. I don’t want to get into the specifics, but they all require — most of them require negotiation with other folks but or as they require some repositioning some of our assets.

I think the key when we look at the company is about reducing complexity and [Indecipherable] little bit. What we’re really talking about is that the fundamental drives the cash flow and the profits of this company in the future and what we’ve described again core Canadian cannabis in medical and consumer and certainly international markets that have sort of near-term potential. That’s as it stands right now with this group, but that’s what we need to focus on for various reasons, size, just in terms of building the company. The industry in developing [Indecipherable] we do have a lot of complexity in the business and lots of non-core parts of the business that we’re looking at.

How do we rationalize that? How do we streamline this business and just spend our time? Our energy and our focus on that core business that’s going to drive the cash flow and profit. So to your point, do we see further opportunity? Yes, we do. But again that’s a — it’s a matter of timing and that’s why when we worked with our syndicate of banks, we set EBITDA covenants that kicked in fiscal Q1, our EBITDA threshold and started-off modestly and move forward. The other part of your question, I think this is important, you don’t want to go one-to-one, but it’s an important part. We are being prudent with our revenue projections here and constructing the company to meet those prudent revenue projections. But listen there are upside opportunities here. We just want to make sure we’ve got a cost structure that those upside opportunities should they arrive fall to the bottom line instead of getting consumed by SG&A. So that’s what we’re doing there is continuing to drive costs.

I hope you don’t take for a moment that we don’t believe in this market and we believe that there’ll be some good news. We fast-forward a year with a lot of sort of negativeness in the industry. Even we believe there’ll be good news, whether it’s for vapes last week or just a stronger cadence of retail stores or Ontario consultation on vape lounge and things like that. That’s upside. We want to build a company where that’s upside and we’re not dependent on not showing up to be able to deposit, if it shows up. Excellent, if it’s more EBITDA is not getting consumed in corporate overhead.

Chris Carey — Bank of America Merrill Lynch — Analyst

Okay. Thanks. And then I guess for shifting gears a little bit. So over the past couple of quarters, so you’ve produced about 50,000 kilograms more than you’ve sold, right? And I guess with the expectation for cannabis revenue, excluding provisions to be flat quarter-over-quarter, the still slow store rollout in Canada, it’s progressing but slowly, I mean it seems like this dynamic of producing well above what you’re selling is going to sustain. I think that leads to an important question, not just for Aurora but for this entire industry.

And I guess that question really is when would you consider maybe shuttering capacity or at least slowing the rate of volume that’s coming off your production line? Because you’re still –if I understand your comments in your prepared remarks correctly, looking for about 38,000 kilos of quarterly production, which will continue to materially outpays what you’re selling. And I just wonder when we see the individual companies or the industry, it’s starting to take a closer look at just how much volume they’re bringing into this market relative to how much the market can actually withstand? Thanks so much for that.

Glen Ibbott — Chief Financial Officer

Yes. Absolutely critical question for us and the rest of the industry. So we’re actively there were initially — we’ve got some probably a central way to really evaluate the impact under a number of different scenarios. And also under new product launches. Don’t forget, I mean we haven’t launched all the products that we can under legislation and as those come out over the next several months or several quarters, we’re looking at consumption. There are, some of them are higher consumers of say trim and things like that. So, we will evaluate — we are evaluating but differently and we’ll lock beat you if we come to a conclusion where we need to reduce the level of production within the company.

The point Michael emphasized, there is a lot is fiscal discipline and certainly we had to deal with one point several years ago that the market would have developed to the point where we could, and certainly out of our existing assets itself, whatever we’re producing. So now it’s in the short-term that’s not necessarily true. But we’ll see as we introduced some of these new products and see what the demand for those new products are. But rest assured something we’re paying a little closely — close attention to and we’re definitely looking at everything in this company through a fiscal lens. So we won’t allow that situation to persist if it doesn’t, we don’t see our ability to consume that inventory.

Operator

The next question is from Owen Bennett of Jefferies. Please go ahead.

Owen Bennett — Jefferies — Analyst

Good morning. Some questions please. And first of all, don’t want to labor the points on SG&A, but it seems quite an aggressive target. I was just wondering, which would be helpful from our perspective, if you could put those different bookings you identified, you could quantify them in terms of how much savings you see coming from each? And then my follow-up is just around them daily special launch, what price point that’s common in our –and in your internal projections, are you assuming any cannibalization of the mid-price brands with very special and when that’s launched? Thank you.

Glen Ibbott — Chief Financial Officer

Yes, Owen, thanks. So I guess when we look at SG&A, it probably worth remembering that just several quarters ago we were running in the CAD60 million range. Now we ramped up significantly as we — as I say, as we took on a lot more activities with the company and tried in fact to accelerate the development of a number of things, whether it’s the internal IP projects or some of the marketing initiatives. So we ramped up from a rate that say Q4, Q3 of last year within the CAD60 million range. So it’s not inconceivable to get back down to that range relatively easy. And then the next steps are basically reducing complexity, which means saying no to a number of things. We’ve been a very aggressive company, so we tend to work to achieve an awful lot in a short period of time. And again, not just drives costs as opposed to, maybe prioritizing this selfish that’s focused on the core of the business and certainly deferring some projects.

So I understand from those current levels down, it is an aggressive part — it’s an important part of that and say most of the changes that we made last week get us significantly closer to our target. We’ve taken up, it may not be evidence, but if you remember last week we said we — of our corporate headcount maybe reduced it by about 25%. So there are over 100 million, we are seeing where our driving costs are there plus a number of initiatives. I don’t want to get into details on how much an IT or HR or marketing that we’ve taken out, but we definitely have taken out a lot there and have significantly reduced the burden of some of our subsidiaries as well. In terms of the daily price — daily special pricing, we’ve analyzed all the entries in the market and it’s the lowest pricing program. And it’s also when you look at an important metric; it seems to have developed and marketed at THC [Indecipherable] basically what you’re taking for high potency product. Again, it’s the best metric of the competitive product. So it depends, depending on pack size, I mean through up to currently after 15 ground packs. And it depends on the problems, exactly what the pricing means, but I’ll leave it there. So as it stands right now, I believeit’s the sharpest pricing amongst all the competitive developments.

Operator

The next question is from Michael Lavery of Piper Sandler. Please go ahead.

Michael Lavery — Piper Sandler — Analyst

Hi, this is Jeff Kratky on for Michael. Good morning.

Glen Ibbott — Chief Financial Officer

Hi, Jeff.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Good morning.

Michael Lavery — Piper Sandler — Analyst

Just one question for me. As you resume sales in Germany, have you seen any impact distribution after having sales paused?

Glen Ibbott — Chief Financial Officer

There actually was a backlog or back — instead of back orders. The — and we were continuing to ship there. So, just to be clear this way though I’m going to characterize it, although it impacted us in quarter as a relatively minor issue, we continued to ship to Germany and build up the inventory there and we were building up back orders and then we started fulfilling those as soon as we have the permit to actually ship to the pharmacies with that product. So, yes, of course there’s a little bit of catch demand here, but we don’t think that we lost much ground there or regain it fairly quickly. And quite frankly like the story with the rest of Europe, it’s not — there’s not strong competition there right now. So we should be back on track shortly as we say, fulfilling back orders and then getting back into the regular CAD ence.

Michael Lavery — Piper Sandler — Analyst

Okay. Thank you. That’s all for me. I’ll pass it on.

Glen Ibbott — Chief Financial Officer

Thank you.

Operator

The next question is from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Good morning, thank you.

Glen Ibbott — Chief Financial Officer

Good morning, Pablo.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Good morning.

Pablo Zuanic — Cantor Fitzgerald — Analyst

My first question is more like a comment. I mean, obviously you are telling us all the right thing in terms of your restructure covenants, you’re cutting costs, you’re adapting the company to any reality, but there’s no — there’s no guidance, right? So if you provided more specific guidance and almost the guidance bridge, I think it would help curtail these crisis of confidence that this do reflects, okay. You’re giving us numbers, we’re trying to put them together, but the market doesn’t buy that. So hopefully at some point you can provide that bridge because without it, I don’t know how to stop, you know stops sliding until of course you showed results. But that’s just a general comment.

I have two questions, one; from — if you can just talk about 2.0 because it is relevant to for us to think it does, how your sales will project over the next few quarters. You say that sales in the March quarter will be flat. So what does that mean in terms of 2.0? Is 2.0 like 5%. 10%, you have to have some visibility? And then how do you see our market progressing whereas other companies they are saying 2.0 would be a CAD1 billion market in a year’s time. Do you believe that? So just understand your competitive position in 2.0 so that’s the first question. Just more color in terms of how 2.0 can contribute to a company this quarter and going forward in the context from your guidance doesn’t seem to be contributing. If you can just give more color on that and then we have a follow-up? Thanks.

Glen Ibbott — Chief Financial Officer

So, okay. I’ll just state I may disagree with some of your comments. I think you laid a position out there where we think we’ve been pretty directive and provided clarity over our targets on those things within our control. And as you’ll know, the last couple of years, the challenge for anybody putting guidance out on the revenue line, if that-s [Indecipherable] taken wrong and that’s even, I’m not just talking about roll-out, I’m talking about across the industry and they’ve had to rescind guidance as the development of the market is kind of taken its pivots and turns and kind of a bit of a choppy road on the way from here to there. We are bullish on the long-term, so I’m not going to comment on analyst projections for the site, the market, but we definitely haven’t seen and read aren’t backing off or we think this market can be, but question is the road from here to there and how long will that take.

So we are aiming to being prudent with our cost structure that allow us to be profitable on the entire journey as opposed to hoping for doubling of revenues to become profit or not. We don’t want to be in that position. So listen I don’t want to get into those, we are trying to project the revenues in a brand new market in a 2.0 market, what’s happening in Q3 where we’re adding to fairly modest growth is as I mentioned in my comments, the market on the 1.0 products has taken a hard turn to the value side. It was at 2% of the market in the summer and 17% of the market in December. Meanwhile, what we characterize as premium went from mid-30% in summer down to 17% of the market in December, so hard turns. We launched our product that I just described Daily Special last week and we can check into the provinces, I think BC got their first batch yesterday, so it’s underway. But in terms of this quarter we’re suffering by not being in that market for January and the first week or two of February it’s been half a quarter there, being in the market that seems to help the most momentum.

As we look at Q3, we think that approximately 20% of our sales will come from 2.0 products but we are gaining and trying to be prudent, it’s awfully hard to extrapolate from a week-to-week projection, I’ve mentioned to Vivien when she asked a question, I look at weekly sales in 2.0 products and it will double from one week and then it will drop off the next and then pop up again, so way too early to project there. So we’re really just trying to be prudent. And make sure that if there is additional revenue coming in that drops to the bottom line. So I heard you on the lack of visibility in revenue, but I have to tell you, we’re trying to learn from the experiences of the last a year or two in this industry, but it seems a bit pretty risky to be kind of predict the market that is just in the early stages of development.

Pablo Zuanic — Cantor Fitzgerald — Analyst

Understood that, that’s very helpful, Glen, thanks. Just a very quick follow up, I know this is more medium long-term and may be not relevant today, but when I compare the Canadian market with a lot of the red markets in the U.S. obviously as we all know the Canadian market has significant restrictions that have prevented these growth or have curtailed the growth. Do you see any room to lobby the government over the next few months or even year, to be able to make some changes that will help the market, whether it’s in terms of marketing, the way that things are communicated, online retailing, distribution, I am not just talking about opening more stores, but just in terms of the restrictions, which I think, we have here in the market compared to what we see in some parts of the U.S.? Thanks.

Glen Ibbott — Chief Financial Officer

Sure. So listen we’d all love to do that, of course, right. It’s difficult if we wanted the Canadian cannabis store, it’s hard to distinguish sometimes that are between the different products and that’s why the in-store marketing and education of the budtenders and stuff is important us to make sure that they understand our products and they’re being able to talk intelligently to consumers that want to come in and find the product that meets their needs.

I have to tell you — I don’t think that we’re not in the near term cards in Canada. So they are at the beginning of the industry that they’re focused on the medical [Phonetic] called safety first side and then seeing how it plays out. There are promising indications when you see some of the problems starting to consult about things like vapes lounges and lounges to consume cannabis. That’s a nice step forward to more sort of a rational, almost a model that you see in Canada with either alcohol or something like that. So as Michael mentioned we’re only a year into legalization, passed a year into legalization and just a month passed 2.0 legalization, so I think the focus right now is getting the kind of the foundation right. And then I guess we’ll see where it go, but we’re certainly not banking on that in the near term.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

And I’ll just add that, our government relations group are working very hard with the provincial distributors and governments, because the purpose here is to try to remove as much as we can out of the black market into the regulated market. And the last numbers I’ve seen says that the black market is still a CAD5 billion annual opportunity and the regulated market is somewhere just below CAD1 billion or approximately CAD1.5 billion. So you could see the potential there and the provinces do want to sort of shift that over from — to the regulated market. So our team are working hard. There is an appetite certainly to try to administer this as quickly as possible. And we are working as quickly or as efficiently as we can with the provinces to make this happen as quickly as well.

Operator

The next question is from Matt Bottomley of Canaccord. Please go ahead.

Matt Bottomley — Canaccord — Analyst

Yes. Good morning. Thanks for taking the call.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

How are you doing?

Matt Bottomley — Canaccord — Analyst

Thanks for taking the questions I wanted to touch base, this isn’t necessarily a new phenomenon we’ve been seeing, but my guess is that we’ll start seeing the impacts in subsequent quarters for dried cannabis, so can you give any color on how you look at your current inventory balance, which I think for just the dried cannabis stock is about CAD130 million versus the surge and what we’ve been seeing in dried cannabis that’s in various wholesale channels right now. And what should the analyst community as a whole be considering right now with respect to what could occur, whether it’s commoditization of pricing versus a lot of this product going into Cannabis 2.0 production, it just seems like it’s been this lingering potential disaster for a couple of months or quarters now. And I’m just curious if you could touch on that a bit.

Glen Ibbott — Chief Financial Officer

Yes, I think it started on that. Well yes, it’s been an issue since the sort of the middle of last year, I guess people look to across inventory in the industry in particular, what are the comprised of, how much is at risk, it’s just definitely a differentiation between the quality, we’ll say that it was there that’s defined by the consumer’s experience or the levels of THC, whatever, quality cannabis and just think what is a significant amount of lower quality cannabis destined for extraction in the industry. That’s a bit of a challenge.

When we look at our inventory is extended to December 31, we definitely even under– I’d say relatively pessimistic scenarios. We will be consuming all of that over the next several quarters. So we’re not concerned about our inventory assets. There was a question earlier about a level of the productions, something that we’re watching. It will depend on how our demand plan develops, but we don’t have any particular issues in our inventory, as it stand at December, 31. So I can’t really comment on the rest of the industry, but I do take your point that it’s a developing issue if we are not able to move out or if we’re not producing the quality that the consumer’s looking for. Now it’s really clear that if you’re selling flower, so basically you are not going to extract, it’s only in the flower then its better have a high level of THC for the most part or it’s not going to move very quickly.

Matt Bottomley — Canaccord — Analyst

Understood, thanks. And if I could just dovetail that into another question just on the international side of things, so a lot of LPs have been saying certainly over the last year or so, is that any sort of excess in capacity for domestic consumption when it comes to inventory could eventually go into international channel. So outside of Germany, I’m just curious if you have any allocation of your product peg for international export and given the quantity of the goodwill write-offs that we saw on a couple of those assets. I’m just curious how much capital is going to be allocated internationally going forward if there’s some sort of range for that and what regions you think are more promising than not?

Glen Ibbott — Chief Financial Officer

Yes, let Michael address the capital allocation, but listen, with our three facilities, particularly with our River facility just being certified by EU GMP we’ve got plenty of capacity to serve international markets for the next quarter. I wouldn’t want to tell you that the international market can consume all of that capacity by any means in the short term. There are developing markets in Europe, we’re seeing some that are looking for domestic production and Dutch tenders are kind of going away. But, I think, it’s a great long-term opportunity and is developing a little slower than we might have anticipated a couple of years ago.

There are other bigger markets that are putting in systems, Brazil for instance, putting in a medical system regulations. I think, over the next month it should be clear and in place looks like it’ll mainly be a sort of a CBD type system, but if it’s possible that we may supply that from our current facility or maybe some other, but — maybe, Michael we’ll talk about capital allocation and international opportunities.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Sure. So I think part of what we announced last week and the important discipline that we’ve now sort of instilled in our business is we’re going to be very cautious about how we allocate capital. And that capital allocation has to provide us with a near-term return, that we think is going to be impactful to our business and beneficial to our investors.

So with regards to international markets, we’re obviously going to focus on key markets that generate revenue today. But, always look at opportunities and investing capital in additional markets where we see that near term value translating directly to our P&L and of course our balance sheet. So we’ll be very careful and methodical about how we allocate that capital to ensure that, we see that immediate value to our story.

Operator

The next question is from John Zamparo, CIBC World Markets. Please go ahead.

John Zamparo — CIBC World Markets — Analyst

Thanks. Good morning.

Glen Ibbott — Chief Financial Officer

Good morning, John.

John Zamparo — CIBC World Markets — Analyst

Good morning. My question is on pricing and gross margins. So even after adjusting for the provisions, gross margins are down across the board including consumer and Glen you’ve talked about the markets pivot towards value in the launch of Daily Special, but when we see average price per gram coming down, is it more a function of mix or price deflation? And I guess what I’m getting at is, are you seeing price compression even on your premium products?

Glen Ibbott — Chief Financial Officer

Okay, so quickly, no, not on the premium products. By and large, I think [Indecipherable] and a few of the others are holding up really nicely. We were impacted, although it doesn’t seem like a significant amount of revenue in the overall picture, the revenue in Europe that we didn’t pull in this quarter is pretty much all gravy, that’s actually positive, getting a product over there and not as significant as you might expect. And as you know, we get approximately, two or better times priced in Germany as we do for comparable products in Canada, so that did impact some of the average pricing. I think we break this out in our MD&A with the wholesale bulk cost down significantly results and characterize it as a lower potency product. So yes, the prices seem to be holding up actually fairly well. We did have to take some price reductions on the some of the inventory that was in the system that was lower THC, but we’re not producing those cultivars anymore and we are producing stuff that in demand in the market.

So, let me pause for sure, the pricing we are offering on the Daily Special — before extremely competitive, we are taking advantage of our ability to produce at a very low cost that will impact the average pricing. But, we would expect them to see a strong uptick in volume and we’re just being cautious. That–s what it looks like until we get to that point. But we internally are very excited to take advantage of this. There’s a reason why we put a lot of capital in facilities over the last several years, it’s, somewhat riskier for sure, but we’ve said for well over a year, that with these facilities and automation in low level, that ultra low level costs of production of the quality cannabis are delivering, the 18% plus THC cannabis, it’s going to sell at a very low cost. It was meant to allow us to try in any market conditions.

As usual in the cannabis market, as market conditions are lot quickly, I think launch of Daily Special as our first sort of value brand going to be a very important task for us so that we see are seeing extremely lot of scarcity in that market. And if you can offer and meet the consumer with the higher THC levels on a consistent basis and offer them the best price in the product. I’m sure you’ve seen that in your analysis of the markets, the entrants came in at lower prices and grab a quick material piece of the market very quickly simply based on pricing and minimum acceptable level of potency.

John Zamparo — CIBC World Markets — Analyst

Okay, that’s helpful. Thanks. And then my second question is more housekeeping. What are your expectations on working capital investments for Q3 and Q4? And is it fair to think that there are incremental investments to be made given the launch of derivative products and now presumably a ramp up in vape products in Alberta?

Glen Ibbott — Chief Financial Officer

Yes, I think that it’s true by and large. As I mentioned earlier, we do need to keep a very close eye on how demand is developing and what we’re putting into their production side of the house. So in terms of the inventory, we’re continuing to build a certain inventory types. But yes, I think to being mentioned earlier there are a number of our product lines we’re selling out fairly quickly, so that’s not done. We definitely need to continue to invest there. So there may be some incremental working capital built over the next half, we will of course be driving costs out of the SG&A. So I think overall I think it should be in pretty good shape in terms of our investment in working capital.

Operator

The next question is from Graeme Kreindler of Eight Capital. Please go ahead.

Glen Ibbott — Chief Financial Officer

Good morning, Graeme.

Graeme Kreindler — Eight Capital — Analyst

Hi, good morning. Thank you for taking my question. I wanted to ask a question regarding the search for a full time CEO. Michael, you mentioned in the prepared remarks, the difficult period that the industry as a whole has been going through and in light of that, I was wondering if there — if that gives you any concerns about finding the right type of candidates, attracting the right type of talent. Has that given anyone, any sort of pause in terms of entering the industry at this point, if its life cycle versus what the expectation is and what we’ve seen in terms of migration of talent, six months, 12 months ago. Thanks.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

Sure, Graeme. Good question. Yes, it is something that we initiated obviously, prior to the announcement last week we had very active discussions going into last week’s announcement. And we were confident that with last week’s announcement we would get additional inbound interest, which we’ve actually seen this week. So we’re encouraged about the status of those ongoing discussions. We’re not committing to anytime, these discussions do take time, but we’re very encouraged by the level of interest that we’re seeing and we’re very confident that we’re going to be able to find the right long-term permanent CEO that certainly is going to be impactful for our business going forward. And we’re, obviously we’ll update the market and our investors as we show tangible progress with regards to that search.

Graeme Kreindler — Eight Capital — Analyst

Okay. Thank you for that. And just to follow up quickly, do you have any sort of hard and fast criteria that you’re looking for? And with that — is there a separate committee, a search committee that’s been established? How’s that decision making process being held? Thanks.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

So, the answer to those two questions are yes. A number of our Independent Directors are playing a very active role in this process. And so we have a lot of hands on deck at the board level to make sure that we certainly attract and secure the right talent going forward. We’re taking a good look at our business today and where we anticipate our business to go into the future. And so what we’re looking for is a skill set and obviously an ability to lead this organization into the next generation of products. We see this moving towards more cannabinoids, CPG sort of focus. So you’re going to probably see somebody that has experience in all of those areas and be able to sort of support the business in its — as we look at it going forward.

Operator

This concludes the time allocated for the question-and-answer session. I would like to turn the call back over to Michael Singer for closing comments.

Michael Singer — Interim Chief Executive Officer and Executive Chairman

I would like to thank everyone for joining our call. We look forward, of course to speaking to you in the next quarter and providing you with more updates. Have a great day. Thank you.

Operator

[Operator Closing Remarks]