Q1 2021 Aurora Cannabis Inc Earnings Call

Our adjusted EBITDA loss, the $10.5 million. This marked the third consecutive quarter of adjusted EBITDA trending towards breakeven.

As you know as part of our business transformation plan, we've made some very tough decisions and done a lot of hard work over the past year with respect to Rightsizing. Our cost structure. This includes taking the largest cut to DNA of any Canadian LP for contacts we cut quarterly EPS Jumei from 100 million to approximately 43 million per quarter and so.

Sharply reduced our Capex under my leadership, we will continue our focus on fiscal prudence.

I can say without hesitation that our entire company is in a different mindset now than we were previously and I've been powered all levels of the company to look for opportunities for profitable growth and further cost efficiencies.

For example, we have demonstrated the capacity to make difficult financial decisions such as in June where we were one of the first cannabis companies to take the step to write down our inventory and re cost our trim.

I also think we have a real opportunity to better align production cost of sales and ship costs from fixed to variable in doing so we will manage our working capital investment more effectively so that we can get to cash flow positive generation more quickly.

This longer term cash flow objective goes beyond simply reaching positive adjusted EBITDA our goal for the second quarter, our expectation for the second quarter and demonstrates our leadership in differentiating Aurora and setting the standard for building a value, creating global cannabis company.

Back in June we announced the closure of five cultivation facilities across our network and I can confirm that a few of those facilities are now shuttered, but.

But aligning production cost for sales encompasses more than that specifically are roaring Nordic one facility, which is a new IPU GMP certified production facility located in Denmark.

Will allow us to more efficiently distribute products in Europe and around the world and better allocate production here in Canada.

Before I discuss the performance of our business segments and in particular, our Canadian consumer segment, Let me briefly address our recent capital raised under the ATM the.

The 280 million that we raise recently and through our previous ATM was responsible decision in today's challenging environment. The cash will ensure that we have the runway needed to complete the remaining elements of our transformation plan execute our tactical plans to regain market share and the Canadian consumer business and the position for the rapidly changing global cannabinoid market we.

Appreciate the cannabis companies are being evaluated with respect to their business performance and their liquidity and we wanted to ensure that we are addressing both sides of this equation without any perceived concerns with respect to liquidity.

We now have a much stronger balance sheet that makes it possible for us to act Opportunistically and allows investors to focus on our business execution.

In fact, as I said earlier, we're squarely focused on generating operating cash flow as quickly as possible and of course as a matter of good governance. We have also filed a new shelf prospectus. This is a common step for most large companies to have available if needed.

Now, let's discuss our business itself, beginning with the Canadian consumer market, where we have much work to do to gain share, but also a strong sense of urgency to continue executing our well thought out tactical plans. As you know there are two things to consider that are working in our favor and in doing so providing us with considerable tailwinds first the category is growing.

With Statscan data showing 11% month over month growth in July and another 5% in August and more stores continue to open, particularly in the province of Ontario, which is very encouraging news in fact from the national data that we have seen the current store count is approximately 1200 and can reach 1300 by December.

And second the consumer has demonstrated very dynamic tendencies with market share moving very quickly between brands, Unlike and more stable CPG categories. This provides us with a grand opening for our pivot to premium brands.

These factors suggest to us that with the right accountability and focus the right products, the right sales execution, including product availability visibility packaging and better engagement with the provinces. We can gain share in key growth categories quickly all while achieving profitability.

The data from Canada, and other mature markets indicate that premium and superpremium brands have been and will continue to be successful in all formats. Therefore, Aurora as a real opportunity for Mar articulated and balanced portfolio offering with a greater focus on higher margin and sustainable premium assets, such as Vapours pre rolls and premium.

Our offerings across multiple price tiers.

For example, gummies is a format we have a number one position and we are allocating additional resources. So that we can enhance and grow that format. We're also working to expand our leading concentrates and to refocus our dried flower business toward higher gross profit dollar pools of course premium segments must also be supported with classic CPG sales marketing.

Trade marketing and consumer engagement methodologies to build awareness foster affinity and generate outsized returns. The key of course is to ensure that in doing so we're delivering more dollars to the gross profit line versus simply just delivering low margin revenue.

We are therefore, much more interested in our market share within premium and Super premium categories, along with our market share of categories, such as vapor pre rolls and concentrates that are margin accretive compared to our market share in the deep discount flower business.

While it's still early days I'm happy to say that we're starting to see some green shoots from these initiatives and suggest the keep tabs on the headset data and other market data. So that you can gauge our ongoing performance.

For example, we're very encouraged by the Great response in the phase one of our Vips launch that recently hit the market. We're also seeing strong demand from our Ace is pre roll and are currently working through some supply constraints, but hope that those issues resolved. Soon so that we can have broader distribution in that key product category. Let me also say that within basin pre rolls there is a lot of opportunity to bring.

Classic CPG elements in packaging and alignment that traditional flower does not lend itself to.

We have accelerated our focus on our premium brands Aurora in San Ralph as well as a super premium brand Whistler. These.

These are tremendous assets the balance out the total offerings for our consumers.

Our intention is to build an ecosystem around each of them through various formats, the foster greater brand visibility and provide greater choices to the consumer where they can work up the value chain. As an example, we are working to extend these brands to include San RAF pre rolls and a higher quality Whistler vape through.

Through all these initiatives our intention is to generate not just revenue, but quality revenue that will deliver a healthy gross profit dollars as opposed to essentially just a gross margin percentage.

Well. So for example example, currently flavors 10 times the gross profit dollars per Gram of the discount brand mine. So our path forward and putting more dollars to the bottom line is based on the notion that not all revenue dollars are created equal.

On a related note, while we continue to support our daily Special brand. We think the value segment may be an opportunity to shift production and manufacturing cost are more variable model and we're exploring that opportunity. This wherever model could also allow us to better control inventory build in my 20, plus years of working their products and dynamic categories I've seen many exam.

Sales of there being an advantage to having more flexibility with a variable cost model.

Now, let me turn your attention to our domestic and international medical businesses, which are operating well and delivered a 4% revenue increase over the last quarter, while our Canadian medical revenue declined slightly over the prior quarter. This segment is an evolving landscape and we're extremely happy with our ability to manage that business. We have moved our patient intake and experience online and can now.

Offer substantially more choices to our patients and veterans as a result.

While the medical channel over time, they see some migration to the consumer channel, we see opportunities to retain and grow key patient groups like veterans to its continued to grow the medical market.

Our international Medical segment has been a consistent performer and reported a 41% increase in Q1, we are already one of the leading providers of flower in Germany, and we continue to see opportunities in the oil market. We also just cleared in important regulatory milestones within a roaring Nordic one production facility in Denmark, which just achieved GMP certification and its sales.

Its license for flower and oil this.

This facility is now able to ship from Denmark to Germany, as well as the rest of the EU and other parts of the world.

There is certainly a great lesson here from our success to date in the global medical market that has positive implications for our other opportunities, namely that it takes a lot of investment a lot of compliance expertise and a lot of thought to be successful with the high standards that these international markets require but once those capabilities are built out they become very portable we are bullish on the.

Long term international market opportunity and believe that Aurora with our demonstrated expertise and medical market leadership is very well positioned to continue to generate enduring shareholder value from international business as these markets develop.

Lastly, our Nielsen top ranked us CBD brand reliever remains an enviable strategic platform. Despite the temporary slow growth due to cobot our platform already provides us with a critical distribution and regulatory expertise and relationships both advantages as the us market continues to evolve we.

Really the focus is on brick and mortar stores and is an exclusive CVT supplier for some of the largest retailers and wholesalers nationally and our products are in over 23000 stores. This may be seen as an unusual approach in uncoated environment, given the general consumer shift online sales, but our trade partners have taken a really dim view to those that have pivoted online sales amid.

Pandemic, and we decided to stick with them for the long term given its variable cost model reliever is EBITDA positive and as an asset light model that does not require any capex. Looking ahead, we're very bullish on what we've heard that the FDA and anticipate positive action. So when the FDA was for those companies with a history of compliance and experience in brick and mortar will.

When we therefore think relieve us a wonderful asset and will continue to be a significant EBITDA contributor.

It will be a significant EBITDA contributor.

According to the most conservative estimates CBD represents about $2 billion and retail revenue. So when we talk about global cannabinoids and leveraging of our science and innovation the non THC parts of our portfolio could potentially be bigger than the THC parts of our portfolio, particularly with positive FDIC and news I'll now turn it over to Glenn to walk through the financial debt.

Sales.

Thanks, Gary Good morning, everyone. Thanks for joining us in today's call.

And we'll take a few minutes to review our first quarter 2021 results. Please note that the figures I'll be going over today can become press release, we issued this morning.

And they're all in Canadian dollars and plans otherwise stated it.

You should also note that in accordance with IRS standards. The comparative revenue figures for Q4 2020 has been reduced slightly to reflect the removal of discontinued operations results from or in summary revenues.

Our first quarter fiscal 2021 to three from July 1st to September Thirtyth 2020, our net rent all of that from cannabis businesses came in at $67.8 million to be higher than the $60 million to $65 million range. We previously provided.

Sales mix remains evenly split with the consumer cannabis segment delivering $34.3 million net revenue.

Medical cannabis segment, delivering $33.5 million net revenue.

So let me dig into revenue a bit sort of it.

In the first quarter, our medical revenue was up slightly underlying this was a temporary decrease in Canada of about $600000 as we transitioned all of our patients Tuniu integrated sales platform. When they have access now to all of our brands, including major relief counting man in Aurora.

Winslet.

Our continues to have a significant advantage in Canadian medical market share.

But more than offsetting a temporary decline with the stellar performance from our international medical business.

Which continue to show the strength of our expertise and brands with 41% increase quarter over quarter to almost $6.5 million of revenue.

I should remind you that our leadership in the Canadian International Medical market is very important to our bottom line and long term value creation, bringing sustainable growth expectations in a very solid gross margin profile, averaging in the high 60% range in both Canada and internationally.

Our Q1 consumer revenue declined 3% over Q core this despite a growing overall market.

Well as outlined both the challenges and the opportunity per loan Canadian consumer marketing, we see Q1 consumer revenue as reflecting that period of transition for us. Despite.

Despite the challenging Theres certainly some bright spots.

Permanence, including $2.5 million increase in terms of product sales.

$1.1 million increase in use CBD revenues.

We also recently launched our new specialty offering quickly capturing consumers' attention on the number three spot in Ontario of course. This is just the first eight launch plans called brand portfolio of offerings in the near term.

Turning now to our margins.

Adjusted gross margin before fair value adjustments on overall cannabis net revenue remained strong at 48% in Q1 and this compares to 50% in the prior quarter.

But excluding the $2.6 million of ramp up costs, and our Lord burn Nordics facility in Denmark. Our overall Q1, adjusted gross margin was actually 52%.

Medical margins continued to deliver important levels of profit at 67% overall, excluding Arctic ramp up costs.

In consumer margins improved to 38% due mainly to product mix with a heavier weighting on 2.0 products in the quarter.

While inventory levels increased about $27 million overall from the previous quarter, we are making progress in reducing this growth.

Gal has noted in his remarks between the facility closure is currently being executed in opportunities to align current demand and production needs that are ongoing facilities, we expect to bring this into balance during the fiscal year.

Canada sales the long lead time agricultural crop with the challenging demand schedules forecasts alignment it does take a bit of time.

It's niggles remarks regarding shifting more fixed cost to variable overtime are also very important to their plans to drive to sustainable positive cash flow in the near future.

Looking now at Genie, including R&D.

Hey, successfully reduced EPS genie costs, which we define as including R&D spending as well.

Our announced target of the low $40 million range, taking it from over $100 million in Q2, 2020 down to $43 million in Q1 2021. This excludes approximately $4 million at termination costs related to the business recent.

As an important driver of our profitability and positive cash flow I'm encouraged to tell you that we're continuing to operate or targeted currently EPS genia run rate in Q2 and have the entire company incented to find incremental opportunities to hold even reduce this important metric.

We do believe this level of EPS GE spend is quite sustainable and capable of supporting a much higher revenue line.

So putting all this together adjusted EBITDA in Q1, 2021, with a loss of $57.5 million, but that included a number of previously communicated restructuring costs, including employee and contract terminations adjust.

Adjusting for these costs and in accordance with our bank Covenant definition adjusted EBITDA for Q1 is $10.5 million. This is the third consecutive quarter of improvement as we continue to work towards positive EBITDA and cash flow.

I'll just make a couple of comments regarding our cash position cash flows down.

So as of November six our consolidated cash position was $250 million and that compares to $162 million at June Thirtyth.

The balance reflects the improvements in our recurring cash flows, which I'll describe in a moment as well as cash raised through our ATM program in the last couple of months.

It also reflects payments in October for our major annual costs and insurance and employee bonuses.

The balance on our term debt stands at 100 $101 million in November six and we remain in compliance with all debt covenants under this agreement we are very happy with the continued excellent relationship an ongoing dialogue, we have with our very supportive banking partners.

The cash flow the amount of cash we used in Q1 was similar to that in the prior quarter.

However, the mix within cashews showed significant positive progress.

We used $25.2 million in cash to fund operations, excluding working capital investments and used $47.4 million from contracting employee termination costs.

Costs included the previously announced termination and UFCF payment.

We also paid $15 million for capital expenditures in Q1 down materially and meaning long lead projects are now complete.

Increases in net working capital use $37 million in the quarter, driven by a $14 million increase in accounts receivable and a $25 million increase in inventory.

As both Miguel and I have described earlier, we continue to execute plans to more closely align production levels with demand.

Finally in the quarter, we also used $18.2 million in cash reduce our term debt and lease obligations.

So cash used in operations and for capital expenditures are crucial metrics in our drive towards generating sustainable positive free cash flow and both have improved significantly and consistently over the past several quarters.

As an example in our Q2 2020 fiscal quarter not the last quarter before we announced our business transformation plan.

We used $86 million cash in operations, not counting working capital mill and $128 million for capital expenditures. So total outflow of $214 million for just these two items.

This compares to our just reported Q1 total of $40 million for these same two items.

We made the decision to reposition our company to be a leader in our industry and driving the positive EBITDA and cash flow. The actions we have taken of improved cash outflow on these recurring items by over 80% within three quarters.

Even with a solid balance sheet and rapidly improving cash flows we still believe that access to capital is a paramount importance.

Particularly in an environment of rapid change in value driving opportunities.

So you will have noted that we recently filed a new shelf prospectus that has tended to protect the company and our shareholders as we navigate through an uncertain environment.

But we are firmly convinced that are focused on getting to cash flow positive as quickly as possible. We'll both demonstrate the excellent long term value creation possible in this industry and will alleviate the need for additional equity capital as far as possible.

As we've shown with our progress on the business transformation, we will continue to prudently manage our liquidity as we drive to positive EBITDA and cash flow.

So to conclude.

As I mentioned in our last report to you I'm incredibly excited for the vision and tactical plan and the goals laid out here.

I am seeing the recovering or Canadian consumer business showing signs of traction.

And when you add that to the leading position we have in medical candidates globally yeah.

Excellent gross margins, we continue to deliver a.

Vastly improved EPS chain and cost structure.

Important platform for us growth and a much improved balance sheet.

You may be able to understand why or why we are quite bullish for our future and for our shareholders.

Well, thanks for taking the time with us in a very busy reporting day before we take questions I'd like to now turn the call back to go for a few wrap up remarks, we go.

Thanks, Glenn I want to close by highlighting the steps of the plan, we're executing out the Canadian consumer market first we're focused on driving sales of premium brands and flower Whistler sand wrap in Aurora second we are focused on winning share in key growth formats vapor pre rolls edible.

Sales in concentrates and third evaluating and executing on opportunities to align our production and manufacturing cost to sales and shift our model away from fixed to variable costs I am very confident in the early execution of these tactical plans.

We know what we need to do to be successful across our main markets and are already seeing early signs that run the right path as CEO. It is my responsibility to ensure that the entire team is executing accordingly to their respective responsibilities. This entails continuously looking for more effective ways to capture topline opportunities that are margin accretive.

And extract even more efficiencies from operations.

When we are successful in not only strengthen our financial condition, but over time build a sustainable and growing level of adjusted EBITDA and the base of positive free cash flow that can be used to invest globally over a multiyear horizon in both the THC and non THC cannabinoids, we look forward to sharing our progress with respect to our plans.

And in reaching these goals over the coming quarters. Thank you.

Operator, you can please open it up for questions.

Thank you we will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow up if you have additional questions. You may recall, you and those questions will be addressed time permitting.

If you would like to ask a question. Please press star one on your telephone keypad well confirmation tone will indicate your line is in the question queue. You May Press Star Q, If you would like to remove your questions on the queue.

This is Vince using speaker equipment, it may be necessary to pick up your handset before I present as tacky one moment. Please while we poll for questions.

Thank you. Our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.

Hi, good morning, Mark.

Morning.

No I understand I know this is a transitional quarter like maybe you're taking a little bit more near term obviously a lot of volatility in the markets elections are incredibly topical.

In the United States, So Miguel perhaps in the great opportunity for you to level set everyone on what you view as the tangible and is likely regulatory pathway is on for am one notable entry into the U.S. beyond CBD.

Well good morning, Vivien and it's a great question I think you know like.

Like most things would may by background really colors, my opinion, and having spent 20 to 25 years of the tobacco business you saw a lot of uncertainty and there are a lot of corollaries here. So first and foremost while everyone is hyper focused on potential federal action I would really draw your attention to what's happening with the states when.

You talk about controlled substances, we talk about regulated products state level actions in many ways have more applicability in the short term than federal actions you see that in CBD today in the us and the cannabinoid business and you clearly see it in the THC bearing candidates, we had four really important stage past comprehensive.

Candidates legislation and so that starts to move the ball forward in terms of when do you get to this tipping point now on the federal side, you know with the Biden Harris' position is clear and I think it's.

It's going to have to be a little more articulated on what the timing is but depending on what happens with the runoff election in Georgia. The other Republicans control of the Senate has a key impact so all in all if you boil it all down and I guess I would say the following sort of three things first and foremost very positive news at the state level, we see.

Both in the U.S. and globally.

And increasing sort of openness towards TSC bearing cannabinoids in that bodes well for a company like Aurora Secondly.

There is work to be done to see what a federal construct looks like.

And third and I think this is the most important piece by far.

Is if and when you see countries, including the us past federal regulations and legislation the experiences that the Canadians Lps have had in Canada as the largest federal construct on manufacturing packaging production sales and marketing all of those things instantly become.

Is really valuable by the same token the rigors getting into a Germany or Poland or Israel that is muscle memory that you can't just replicate really quickly. So we continue to learn we continue to see those.

You know pieces as being portable and at a time in which you know there is an opening for us new as we think that will have a ton of resources in a ton of interest because of all those experiences and so that's.

How I would couch it and its you know I'm not here to give a particular timeline because I think thats you know as you know that's falling for trying to predict legislation like this.

At a federal level.

Absolutely and I appreciate that perspective, the gallons I guess, we're going to follow that sure as it relates to the Senate election to the extent that the Democrats do not take a stand that you want to offer a view on what that turns the talent and catalyst. Thanks.

Yeah, I mean, I don't mean that it's easy to say that you know if Sarah Mcconnell and the Republicans take control of the Senate that that sort of that I mean, as we've learned with states like Illinois the economics.

Benefits of you know legalization of medical or our rack.

He has become a bit of a bipartisan issue and so I think we'll have to see unfortunately with the pandemic of co that you're seeing a lot of budget shortfalls and a lot of people are looking towards yellow responsible regulated version of candidates in order to fill that so I think maybe we'll accuracy, but you know I understand that historical positions with.

Be that Democrats are always going to support it in the Republicans always while that's not the case, we have not seen that in CBD. As an example, when you look at Republican Governors.

Particularly in say, Texas, or Florida, seeing the benefits of a regulated thoughtful approach on non Tc bearing categories and I don't think it's a foregone conclusion is that the Republicans.

Given their focus on fiscal Prudence wouldn't also other similar opinion under the right construct and again you know those companies that have acted responsibly in the compliance.

Driven manner in Canada, clearly are going to have an advantage when that construct presents itself.

Understood, Thanks and again.

Thank you very much.

Our next question comes from the line of Pablo is likely Cantor Fitzgerald. Please proceed with your question.

Thank you good morning good.

Morning problem.

I guess so the first question would be just following up on the last one when you see a kind of bigger deals licensing Tokyo's mogan Tweed into acreage.

Building awareness for their brands and you hear it off for you talk about the strategic relevance of the sweet water dealing kefir to be really ones for their brands do you think you need to do something similar to what we should just started building awareness for your rents in the U.S. audience, yes, too early in the study enough time to get behind that thanks.

Well. Thank you for the thoughtful questions, Bob I mean listen I'm not here to be critical on anyone else's approach, particularly as it builds awareness I think the two examples you gave are a bit different.

One is about leveraging infrastructure and expertise in the second to your point. It is about awareness. My opinion is that when you have high quality brands.

That can operate in a variety of different markets.

As we do you know I think there's opportunity there the biggest thing, though Pablo to me as all of your capabilities to be able to execute a time in which it makes sense. Obviously there are challenges structural challenges for publicly traded companies to operate today in the us that doesn't mean, though that you can't build infrastructure and.

Capabilities for a time in which it is federally regulated and that's really what we're focused on so we will be opportunistic I clearly expect that a lot of folks.

We'll be deeply interested in what we've been able to do around the world from a regulated standpoint I would also tell you that the science in genetics and genomics.

And experience with the plant maybe.

One of the most portable sort of aspects of both our business and other pieces of business. So it doesn't give me any pause.

That our friends that cannot be have done what they've done and that the folks of after you have done what they've done.

With the craft brewery in Atlanta, we feel very confident with our position we feel very confident that the resources that we have will be attractive and at a time in which it makes sense.

You'll see us be there.

Okay. Then just a quick follow up on the Canadian market I don't think there's much in the press release about outlook or comments on the quarter, but.

Obviously, you beat in the in the September quarter, right 16 million versus 60 to 64, maybe you know what drove that biggest guidance was given late in the September quarter, but more importantly, where are we what what comments can you get into some guidance and outlook for the December quarter in Greg with the I guess, we thislife concern on my side that when I look at them.

Good data, particularly high fire I see evidence of this success would be what ended the reviews on their premium brands, but they seem to be flat.

In sales so your value for our business right, which is still relevant to your total revenues. So I wonder what that means to you have to the rig sales into December the fourth and so some just some color there and does a beat on it and so when we entered into in December quarter, and thanks, All right I'll take the second half and then I'll turn it over to Glenn to sort of talk about the first job. So I was just mentioned.

These are big you know ships to sort of move clearly I've been unabashed in my focus on premium.

Premium flower derivatives vapor, which obviously have a long history and given that was running logic and so what I would say is as there is a lot of folks that are pumping out low cost flower at the low end and that's had an impact and you're going to see disruption as us and others rightsize production.

To consumer demand and so that is what it is and you can sort of get there I think as you look at the percentage of the profit pool and you look at the margins associated.

And as I mentioned as you know Whistler is 10 X. program as a discount flower you're going to start to see us move pretty strongly into the areas I've talked about we've seen it on vapor you'll see it on pre rolls, you'll see it on concentrates and so I'm not worried about the contribution of our profitability on being reliant upon low cost wise.

Our and the Commoditization of that particular aspect of flower I think is not a great place to be and so we're confident with our with our plan and I think having being blast with such premium assets is really going to be important and for everyone that has this sort of believe and I know you don't but that you know this whole thing's excuse me.

Commoditized I would draw your attention to what we're seeing in California, and Colorado and over a 50 to 100 years of regulated products. There's clearly a place for premium products in the regulated space is clearly a place as being demonstrating for premium products in.

The canvas business and as you know the margins of those derivative products are 2.0 as some may call. It away are you know are stronger. So glad you what would you. Please take paboase first part of his question.

Yeah, Thanks morning problem, yes.

Yes listen.

We gave a range and as we are kind of in closing our books.

It's like we're getting towards the upper end of the range and potentially a little bit over I wasn't comfortable giving you guys any sort of additional guidance beyond that range are shifting until we got through all of this the review to close on a closing the books and the review with our auditors and for instance, you'll see in our Mdna, where we disclose more.

Pursuing or revenues in particular.

Revenue provision is about a million dollars lower than it would have in previous quarter and that all takes time to work through.

So you know the outcome we numerous.

At the top or maybe slightly over.

Act as we looked at it you know.

As they say fine lines in the book and recording all the proper provisions and things like that we ended up coming in slightly above that.

That range that's about it [noise] that's good thanks. Thanks.

Thing problem.

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

Thank you good morning, Larry.

Morning, Michael.

So can you even if the timing of any entry into THC in the US is certainly unknown how much thought have you didnt given to your strategic approach or how you would plan to go to market and specifically curious how you view Interstate commerce I do see that as an inevitability and if so.

Would you wait for that to come into place before trying to make an investment or injury or would you go ahead and began on a state by state approach how do you think about that.

Well first as you look at the things that we have to do to be successful say in Germany or in Israel or in Poland. There are a lot of similarities to what you'd have to do in the U.S. If you look at everything we've had to do in Canada.

You know there are a lot of similarities to what you what I believe you'll have to do in the U.S. So so much of the you know I know, it's fun to talk about brands and marketing and devices and formats, but the real heavy lifting is going to be on the backend. So IP genetics janell mix trademarks.

Science compliance manufacture.

Manufacturing protocols GMP ISO certification.

Packaging compliance testing protocols sales and marketing and that you know and so if I was to ask you know by one they want to focus on who are the companies that are going to win long term look at the companies that do that yes, clearly, having some brand awareness and the excellence in terms of consumer awareness will be critical but.

The new regulated category, it's going to be all of the other stuff that I just mentioned that's going to clearly make a difference and we're working on that every day all day, not only in Canada, but around the world and that benefits us greatly in the U.S. now Michael as you know the you know the legal restrictions or the sort of different aspects of what.

A publicly traded company has to do in order to be compliant will require some form of a federal construct now as I mentioned earlier, there are a lot of different pathways to get there.

That are not just sort of a red blue issue that can be around economics in a variety different things and clearly you know I think for the U.S. and for the states to truly unlock.

The greatest amount of economic potential inner trick now Interstate trade and shipment will have to be there I mean, if you look at somewhat of a corollary. The farm bill on CBD. It would be incredibly challenging if you continue to ring fence the stage and have to produce register license grow in cell.

All within a state and that really no creates I think limitations on how you the true economics now some I'd say well, but that's always going to exist because the states are going to want.

Their piece of the pie.

The economics of how that's grown we don't see that in tobacco, we don't see that alcohol, we don't see that in spirits, we don't see that in pharma. So I think as this proceeds really to unlock those economics and whether it's compliance or all these other aspects that would be there you would have interstate and then at that point, you're starting to get into a federal contract.

And at that point, you know things open up I do and that's why I think we have a leading position I do think the expertise that the Canadians Lps have we'll be in high demand for all the reasons that I mentioned there is nothing currently globally like Canada, and wild U.S. FDIC and media.

Other regulatory agencies don't always follow international protocols. There's no question, it's going to influence it because you know strong neighbor already a lot of different interactions and so I think there is a big advantage for those Lps that have successfully navigated.

Okay. Thanks for that and just a follow up you've you've mentioned genetics and genomics a couple of times can you give us maybe a little more color on how you see Aurora differentiated or standing out there and then when and how that translates the marketplace execution, either with the consumer or.

No one else.

So you know a roar over its lifespan has acquired a significant amount of companies and resources and with a lot of those companies has become has become a very significant library of genetics in jail mix and so like any other agricultural company genetics have a lot to do with yield.

I have a lot to do with durability of the player a lot to do with the output and clearly given the variances in how we see people use cannabis and the articulation of all those core metrics, whether its intensity or onset or offset genetic engine elements are really important in this category like they would in you know in most of these regulated.

Types of categories. So as you think about that expertise and the value of that and being able to leverage that in.

In a market the size of the U.S. it becomes incredibly important and again, it's the it's the lifecycle of it. It's the fact that these you know assets and these outputs have been tried and tested in over multiple crop cycles in multiple markets in different sort of environments and so all of those things are valuable as you get.

Into a market the size of the U.S., where you really can't be as Nichey and there will be under a potential federal Cogs drug value for large scale agriculture like that you're seeing in Canada today, and so again that all plays a role in how quickly and how effectively and how thoughtfully and go to market with the size of the U.S.

Okay. That's great. Thank you very much.

You are very welcome Michael.

Our next question comes from the line of Tami Chan with BMO. Please proceed with your question.

Thanks, Good morning, everyone.

Personally and wanting to understand better the the shelter that that 500 million U.S. in Canada, and we have quite significant amount. So how should we and investors think about that I have you taken that on so you can ride out you know the cap environment, Canada or is it also.

Or how you're thinking about the last you mentioned opportunistic a couple of times I just want to understand that given it's a pretty sizable amount.

Glenn what they're doing I wonder yeah I'll.

I'll get started on that Tammy Hi, George.

Just to correct something you said, it's not an ATM this shelf prospectus and that just prequalify shares for issuance, so or any securities for issuance and pretty broad and allow us to issue debt given our scale shares certainly.

Should we see an opportunity to do so, but it's not an ATM nuclear to use an ATM they'd have to file a supplement to to be able to do that you see that.

Should we do that at some point. So this is really as Michael mentioned in his remarks, just the hallmark of uranium mature companies have you shelf prospectus.

Qualified and available Opportunistically, but that's the way to think about it it's not to.

Yes.

With its not an ATM is doesn't allowing us to sell shares tomorrow under an ATM unless we follow supplement.

[noise], Yeah, I guess can we have the only thing I'd add to it you know we mentioned this a bit earlier. If you look at you know cash burn or the cash component, which has become such an important metric.

For a lot of good reasons on cost and cash use we've got about 60 million in cash expenses morass GA in three quarters, we should get really reduced our capex over that time and now really at a run rate really focused around maintenance capex going forward. So I think overall the focus on cash is headed in the right direction, we look at the industry.

We will look at our peers you know.

They were clearly well capitalized, but I think the big thing also is obviously the market's appreciating boat business execution and rock solid liquidity and when we proved to investors. We've actually on the plan, we put forward, where I really don't want that success to be overshadowed by proceed liquidity issues and sales we move forward in the tactical plan I'm gaining by.

Back market share and growth of that was premium segments in Canada really wanting to have those financial resources available to be opportunistic, which you've mentioned so I just would add that color about the importance of having both sides of it its really I think allow people to uniquely focus on execution, particularly in the rack Canadian business.

Got it Okay. That's helpful. Thank you and I guess my follow up is on if you could just elaborate a bit more on what you are talking about shifting more production cost sixtyl variable I mean, not consider even more facility closures and more leveraging third party.

The pride.

Lastly on what you meant by that thank you sure Shelby average too I mean, the basic premise I mean, if you go back all these facilities the amount of production in Canada and a lot of ways was built to service global opportunities.

And to service a market that just is bigger than it is currently there and so you know I've got a long history of using variable versus fixed and I will tell you. The one thing I can predict in those categories that things are moving very quickly and so the hard wire yourselves to these massive fixed costs not knowing exactly what the outcome is I think is.

Not you know it doesn't best Silverado secondly, as we all know there was plenty of great high quality product available.

Particularly in Canada. So.

So while we'll have to have the new GMP facility over in Denmark, which is a tremendous asset dabir clearly you know there's plenty of work for that there's not much in Canada, particularly with these large scale facility. So we've announced the no downturn of five of them. A couple of them has already closed and yes. We are looking at some external sources.

To give us greater flexibility so that we don't have to carry all those costs and also it will be in a good position this would be both and flower and as well as a couple of other items. You know if you look at you know other businesses I've been a part of that some might argue have been quite successful you don't hardwire huge fixed cost you give yourself maximum flexibility.

City and then once a category really is on firm footing and you can determine exactly where it's going I think you can make more educated decisions. So I'm very confident that you're going to find us to be in a strong position, regardless of which way the category moves, particularly in between formats.

Our next question comes from the line of David Campbell is Eightv capital markets. Please proceed with your question.

Hi, good morning, guys.

Morning, David Congrats.

Congrats on the quarter I want to just go down into your international medical cannabis opportunity a little bit more in detail. That's okay. So just to note one of your competitors also announcer who also announced results. This morning. After the international medical cannabis component. They you know sales were actually down quarter over quarter.

Adversities Aurora you sales are up so my question is given just how important. This this channel is for overall as Glenn you mentioned gross margin in particular.

See this trend continuing with with upward sales for on the international channel, specifically and I'll. Just note you know to give that color question. Some color I mean, one of the comments made by the competitor was that it's a very crowded space. So just any color you can offer with not only market potential there, but how is aurora kind of navigating the complexities associated with.

Medical cannabis on an international scale. Thanks.

Yeah, I mean, so first and foremost you know I think we're bullish as I mentioned before if you think about the permissive nature or the movement of legal cannabis across the globe.

The opportunities are more prevalent and are going to happen more frequently than the opposite so I. Just you know would throw that out there as a general tailwind secondly, I will tell you that compliance regulatory having facilities in Europe, and you know the navigation of specific aspects about.

Infrastructure that is focused on science technology and regulation are differentiators as markets internationally are becoming.

More I would guess professionalize and more sophisticated you know I think companies like Aurora will be advantage. If they can produce you know the quality cannabis in a certain manner with a certain level of infrastructure and so listen we're in early days here and I'm not you know here to dismiss or or be critical.

Have any of our competitors because I have great respect for him, we like where we're at we liked the possibilities that the EU facility in Denmark provides for us and we like the conversations that we're having.

With external partners based on our history of compliance and science based production and I think as long as those Tailwinds continue of cannabis you know being permitted and being opened internationally I think what we bring to the table and continue to invest in I will be a compelling argument.

[noise] well just have to get it done that.

And sorry, just you have seen or ambient anywhere we pull apart the international business you can see the revenues mainly generated a flower and there is a developing marketing journey actually quite healthy one for.

Saxon oils and things so.

It's important to note that the licensing that we got at our lower Nordic sales in Denmark includes oil.

Oil so its flower and oil and we intend to use that facility to supply the European markets in international markets impact, whether it's Europe, Israel or whatever and free up you know the Canadian facilities, but the oil licensing of Nordic is important because that's an opportunity for us to grow.

In Europe.

In a part of the market, we haven't actually been participating in very strongly.

Got it okay. That's helpful. So certainly it sounds like there's a lot of room for growth there.

Follow up question is on just shifting gears altogether to beverages I know Aurora currently does not have a presence on in the beverage category, maybe that's because in the U.S. they've been kind of a flop on but with all the technology that that Aurora and others have had we're seeing an up tick up beverages, specifically in Canada. So I'm just wondering do you have a.

Preference either way moving forward is beverages category that you're looking to get into thank you.

Well, we do have a beverage in Canada that we ever shot which has done quite well I mean my opinion on beverages. I guess is it is a couple fold first is in these categories. I would argue that there is not a significant advantage in being first mover you know we've seen that in a variety of other corollary category.

As around I'm very respectful of what our competitors done I think what's more important is having a strong innovation system can you bring high quality products to market that meet consumer needs out of proper price point and I believe as far as developing those capabilities and you've seen it was April.

And secondly, if and when there was going to be an opportunity in beverage I'm clearly we have all of the other pieces put together and all of a plant you they'll makes it everything we would need in order to play in that category. What I do believe though is that this category is moving so quickly that to make outsized bats and.

Pre suppose exactly where the consumer is going is a mistake. So we are going to continue to offer a variety of consumer options, particularly in emerging categories and I could argue that concentrates vapor and pre roll today.

We have much more actionable opportunities from an economic standpoint, and if and when beverage or any other category like that emerges will be there I will also say that we see in California, and Colorado, but those are really bellwether states and operate about you know about a year 10 months to a year from a consumer standpoint ahead.

Where Canada is that and if we start to see inclinations that beverage or something else is really taking off in those markets or any other sort of bellwether market that we get consumer data. We can quickly pivot. So I respect others, making that push on we don't see it as an opportunity today, but if and when it was there we'd be there and like I said at the beginning.

These categories are not wide, where first mover status matters.

Our next question comes from the line of John Empire always see RBC. Please proceed with your question.

Thanks, Good morning, and good.

Good morning, I'd. The factors. Good morning. The fact that you listed as being success indicators like IP, <unk> science and testing and packaging I guess, how you monetize that does it assume a federal pathway to operate in the U.S. and of course, the one executing that or as you think about it it's selling that expertise to local state level providers or is there.

An assumption of additional equity investor partnering with the Laura I know, there's a great deal of unknown, there, but just would like to get a sense of how you think about monetizing the factors, where you meet you Baxter international competitors.

Well. This is a great question I think there's the the good news is there is a ton of different ways to do it I mean, if you look at companies like Monsanto or you look at other companies that are branded companies. There's a variety of different ways to get there I think the main thing to understand is you know at the time in which the U.S. Legalizes you know cannabis either at the medical sales.

Side or on the RAC side.

I believe the Canadian companies are going to have a passive head start in terms of understanding what that type of construct means so listen whether that means we're opportunistic through M&A, whether there's a licensing whether there's you know intellect IP all types of things what I do know is that our continued focus and effort.

Being compliant and being thoughtful around the globe outside of the U.S. puts us in a position where others are not and I listen I have tremendous respect for the emmis shows in the U.S. and what they've done but the fact of the matter is they have not operated in the federal contracts they have not operated.

All of these different markets and that is a different animal and so whether that's a partnership whether that's a go it alone whether that's the right things I'm not going to stand here and sort of presuppose what that is but what I can say is all the hard work that we're doing around the globe to be successful is portable can be plugged in played into the U.S. and so there's.

No disconnect that we don't have to take resources away from what we are doing to be more attractive to the U.S.. We don't have to focus on that so we continue to be in a good position of optionality.

And like I said, it's the Canadian Lps are going to have a significant set of resources that upon federal legalization of either side will be you know I would argue uniquely valuable.

Okay. That's helpful I'll pass it on thank you. Thank.

Thank you.

Our next question comes from the line of Matt Mcginley with Needham. Please proceed with your question.

Thank you. This is on a cash register started the second quarter with 133 million in cash and let the equity raise you did.

And with the cash balance that you had I think on November six you had $10 million to $50 million in places that I think had around $50 million in cash losses are the other GPU cash losses still on the operating side and that the revenue isn't covering that cost or is this more related to working capital and capex.

Yeah, Thanks for that.

I think I mentioned in my remarks, and you just touched over fairly quickly that we did have a couple of the you know the merger angle costs in October, including our insurance, which is coming in.

In excess of $10 million Paydown in October and also learned plenty bonuses, which is in the same sort of neighborhood. So we take those out of the cash burn in terms you turn a focus on operations is delivering.

Okay and the European facility I know you noted the increase in production costs related to that the ramp of the the Nordic one facility in Denmark, when would we expect to see that fully operational and.

I guess when when could that impact the medical segment revenue and getting gross margin rates are already pretty high in that segment would that had a positive impact on EPS gross margin rates or is it sort of net initially because the.

Make us more efficient larger Canadian operations would be offset by this small European operation at the gate.

Yeah. So its operational now planning that's racing ramp up costs and to build inventories through simply waiting for the all the licensing all the licensing in place we believe field.

You will see we.

We expect to see sales from that facility in this quarter into euro into Germany and other places.

Simply just the import export permit.

The typical process now and can you take a week or two for them. So.

A facility that was built with a lot of similarities to our existing facilities in Canada.

The same we built we retrofitting existing office.

Facility there so its you very efficient producer and operating income.

Good morning, Matt Peterson, whose third generation agricultural grower in the Netherlands, and I believe is.

And then Mark is one of the largest communal exporters in in the area as well so a lot of history. There a great operator any facility that built in similar method to the way we built the candidates we expect it to be a high yield during very efficient operator.

[music].

And I guess the only other the only other point I'd make there is that you know you GMP is going to be an important designation for the all the other markets as well and so while its more expensive in order.

There's value there plus also navigating that again builds capabilities for us in other markets sorry, operator.

Our next question comes from the line of Owen Bennett with Jefferies. Please proceed with your question.

Morning, guys have all out on your morning Alan.

Just one question from me on on Dr. flower say sequential decline driven by banning specials logically in line with what can you shop between putting less focus there, but the balance being plot would also suggest share loss continues you need all the more premium brands, which is not in line with that we can.

Your strategy ideally, we'd like to see this meeting, which can you maybe speak a bit more today than when we can expect to see share on the premium brands and flawless start to pickup with the options that you are taking from Keith.

Sure up well listen I've, just gotten in the C. and so some of these things take a little bit longer what I can tell you is that you're going to see a significant focus on premium flower and then we have some tremendous brands as you know Whistler San wrap in Aurora The company had.

Gone through a lot of transition as you know in the first half of the year and there was quite a bit of interest in.

In getting to that transition and then to be honest that daily special launch that happened in February and March was so you know I think it's like everyone by surprise. So there's a couple of things going on first and foremost it takes a bit to get those premium brands. We settled secondly, we've had very substantive and good conversations with our trade partners about that.

And third we have to look at in some ways looking into better articulation on format and packaging and those things take a little bit longer than just flipping a switch and saying we care about Chen wrapped Whistler and Aurora. So I don't want to give you timing I think listen I'm impatient with all things I think you know as you look at the head.

Setting body data retail takeaway data you will see it what I can tell you is that you're not going to see competing priorities from us you're not going to see us try to do both things exceedingly well. So I don't think you can so our focus will be on the premium flour.

Not on the deep Commoditization, that's happening on the low cost flour and what has not been mentioned today is that you've got 1300 stores, which is an amazingly small amount of stores and you can muscle 1300 stores through marketing and trade marketing.

And sales execution, all of which have been a long history with and I can tell you that our focus of those resources will be on premium products and premium accretive margins such as vapor and pre roll. So I know that's not the exact answer from a timing standpoint, you want but you know better than anyone and have access to that data, you'll see how they're doing and I will be will be.

Happy to answer it as we go along.

Okay. Thanks, very much very helpful. Thank you own.

We have reached the end of the question and answer session Mr. Martin I would now like to turn the floor back over to you for closing comments.

Well, thank you and I want to thank everybody for your questions. You know we really appreciate your interest in Aurora and while it's early days under my tenure I'm very excited about where we're going and I really appreciate that all these like the time here today, and lastly, and probably most importantly from all of US. We hope all of you are safe and healthy and we look forward to seeing you soon in Peru.

Listen in the future all the best.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.