Q3 2023 Aurora Cannabis Inc Earnings Call

Greetings. Welcome to the Aurora Cannabis third quarter and full fiscal 2023 conference call.

As a reminder, fiscal 2023 is comprised of three quarters ending March 31, 2023.

All participants will be in listen-only mode and a question and answer session will follow the formal presentation.

This conference call is being recorded today, Wednesday, June 14, 2023.

I would now like to turn the conference over to your host, Anas Krishnan, Vice President, Corporate Development and Strategy. Go ahead.

Thank you, Rob. We appreciate you all joining us this morning. With me today are Aurora's CEO , Miguel Martin, and CFO , Glenn Ibbett.

Prior to market open today, Aurora issued a news release announcing our fiscal 2023 third quarter and year end financial results.

This news release accompanying financial statements and MD&A will be available on our IR website and will also be available on CDAR and EDGAR shortly after this call. In addition, you'll be able to find a supplemental information deck on our IR website.

Listeners are reminded that certain matters discussed on today's conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance.

Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements.

These documents may similarly be accessed by a CDAR and EDGAR.

Following the prepared remarks by Miguel and Glenn, we will conduct a question and answer session with our covering analysts.

We ask that you limit yourself to one question and then get back in the queue for follow-up.

With that, I will turn the call over to Miguel. Please go ahead.

Thank you Anant. Q3 marks the end of our abbreviated fiscal 2023. We're very pleased with our strategic and financial progress. First and foremost, our business transformation plan is working as we've now generated positive adjusted EBITDA for two consecutive quarters.

Part of that plan included a commitment to rationalizing expenses. We've done so over the last three fiscal years by approximately $400 million.

Today we're announcing an additional 40 million annualized savings that we believe can be achieved by March 31st, 2024, the end of our fiscal 2024 year. This incremental reduction puts us squarely on the path to reach our next financial milestone, which is positive pre-cash flow.

Glenn will provide more context on this in his remarks.

Milestones aside, the cannabis industry is still full of challenges, but we have not taken our eyes off what we view as Aurora's greatest opportunity.

solidifying our position and focusing on resources on the global medical segment will remain the number one Canadian LP. There is and will continue to be real and profitable growth opportunities in the global medical market for companies such as Aurora.

We have been able to sustain and grow our high-margin medical cannabis revenue over time and our diversified presence affords us some resilience to macroeconomic and regulatory risks. Our view is that the momentum for top-line expansion and profitability remains very strong.

And as we've said many times, Aurora's expertise in managing the complexity of multiple jurisdictions regulatory frameworks, our unwavering commitment to science, breeding and genetics sets us apart in this industry. And these are the capabilities that will position us to win new business in medical and for that matter, recreational markets as they open up.

Our ability to invest and grow is supported by our strong balance sheet, which we've worked hard to improve over the last few years. We believe we are among a very small group of LPs and MSOs that have a robust balance sheet and net cash position.

And this gives Aurora staying power and the necessary capital to be targeted and opportunistic in the midst of rapid industry rationalization.

Let's now briefly touch on the quarter before Glenn does a more complete financial review.

Our international medical revenue represents a global portfolio of profitable markets, where we remain a leading cannabis provider.

As part of our commitment to bring high quality, consistent, and innovative cannabis products to these patients.

We recently introduced two Canadian-grown high THC cultivars that are popular in Canada to German patients.

These proven products give physicians even more options to prescribe patients individually tailored treatments. For more information, visit www.ottobock.com

While the German market for REC is exciting and something the industry is eagerly awaiting, the enhancements to the current medical industry will have a more immediate impact.

In particular, the German government is currently working to deschedule cannabis in the first part of the legalization bill.

With Aurora's leadership position in the German medical cannabis industry, we are well positioned to benefit from these proposed changes.

Staying on the topic of Germany as one of only three companies with a medical domestic production license in that country, Aurora will have a significant advantage and role when the German adult use regulatory framework is developed.

Turning to the Canadian medical market, our focus remains on serving insured patient groups, which represents 82% of our Q3 Canadian medical cannabis nap revenues.

up 100 basis points from Q2 and up 500 basis points from Q3 last year.

Our industry-leading share remains at about 25%, roughly double that of our closest competitor.

Looking forward, you may have read that we launched a new program for Canadian patients designed to support and empower cannabis patients on their wellness journey.

Alongside the advice of a healthcare professional, Aurora patients can use the award-winning StrainPrint app by logging their symptoms and consumption habits to better understand which strains, THC, CBD levels, and doses best work for them.

This is technology and innovation at work, all for the sake of better patient outcomes.

Switching to Canadian Adult Rec, despite ongoing macro challenges that are impacting this industry, Aurora has been able to maintain our net revenue position compared to Q2, while also increasing our gross margins by 5%.

When comparing the Q3 of last year, we are seeing net revenue increase by $4.1 million.

We have been able to do this by leveraging our science-driven cultivation advantages, while continuing to invest in product innovation and product availability.

Finally, let's discuss Bevo, one of the largest suppliers of propagated vegetables and ornamental plants in North America.

Q3 plant propagation revenue represented a significant increase in Q2 as we entered prime seasonality as the segment delivered its highest revenues in the late winter and spring months as orders are fulfilled.

We have also completed repurposing the 800,000 square foot Aurora Skye facility for orchid and vegetable propagation. We expect to see revenues generated from the Skye facility in the final quarter of calendar 2023.

And once executed, Vavos financial contribution could be significant.

This rapid expansion serves to increase Bevo's production capability and extended shipping range in Canada and the US.

Now that we expect to see positive adjusted EBITDA on an annual basis, we see our next financial milestone as maintaining a net cash position and generating positive pre-cash flow. And with that, I would now like to turn the call over to Glenn for our financial review.

Thank you, Miguel. Good morning, everyone.

I will walk through the Q3 P&L momentarily, but first let's review our balance sheet.

Aurora already has one of the strongest talent sheets among Canadian LPs. As of Monday, June 12th, we have approximately $230 million of cash and cash equivalents.

And this should be more than sufficient to fund operations until we reach positive free cash flow, which we are working to achieve by the end of calendar year 2024.

Miguel noted our plan to capture an additional $40 million in annualized cash flow savings this fiscal year. We've already put into motion most of the actions to achieve these savings, including the closure of production at our facility in Denmark.

Further targeted reductions to externalized T&A and operations costs, and a number of other initiatives and investments.

In Q3 2023 our operations used a net $15.1 million dollars excluding changes in working capital.

The $15.1 million includes about $2.1 million in non-recurring termination costs.

So our rate of operating cash use for planning purposes is approximately $13 million per quarter.

To be a bit more prescriptive this fiscal year, we're working on.

Taking out a minimum of $5 million quarterly from operations as we eliminate less efficient operations and focus on supplying the globe from our very low cost yet high quality production facilities.

Removing a minimum of $5 million quarterly through a number of defined and targeted efficiency and cost reduction initiatives in operations and in SGMA. Combined, these will bring us down to low single-digit quarterly cash use and operations during this fiscal year.

with nine months remaining before the end of calendar 2024 to achieve the remainder. Of course, this is all before considering revenue growth.

In addition, compared to Q3, we'll also save approximately $2 million a quarter in interest as we pay off the remainder of our convertible debt. Currently standing at about $80 million Canadian. We intend to pay that off by the end of this fiscal year.

Finally quarterly capital expenditures were 3.6 million dollars in Q3 on par with the previous quarter.

For fiscal 2024, we've also pulled in capex, so that required to keep our facilities maintained and working efficiently.

We expect to hold quarterly maintenance to FX at an average of $2 million in fiscal 2024. That will save over $1 million a quarter compared to Q3.

We're seeing the benefit of alignment of production and sales volumes. But significant excess inventory is an issue we seem to have put behind us.

At the same time, we are realizing the benefit of our long-term commitment to science and quality cultivation.

And that demand for our products globally is beginning to outpace supply. So we see our upside opportunity, but our expanding capacity prudently and smartly. Revenue growth as it arrives is incremental on our path to positive cash flow. You could accelerate the timing of reaching our goal. This road to positive free cash flow while also preparing to realize incremental...

point on our journey to reach positive free cash flow by the end of calendar 2024. To make sure that we can be opportunistic during this period of industry rationalization, we will exclude any growth capex from our free cash flow target. That is discretionary, but that we might deploy to increase shareholder value even further.

We currently have approximately $80 million Canadian remaining on our convertible notes due in 2024.

Subsequent to our year-end of March 31st, we repurchased about $50.9 million US in aggregate principal amount of convertible senior nodes for total cash consideration of approximately $46 million US.

And we issued 6.4 million common shares in settlement of a further $4 million U.S. ofbits.

And we will settle the remaining convertible to venture balance by maturity next year. We do not intend to refinance the notes.

I should remind you that we continue to have access to approximately 241 million US dollars under our base shelf perspectives.

During Q3, we issued 4.7 million shares for net proceeds of $3.6 million.

and refile the new shelf in March as the previous one was expiring. Note that our intentions regarding further share issuances would only be for strategic purposes and that includes debt repayment.

Now let's review the P&L in each of our businesses.

In 2003, total net revenue grew 4% to $64 million, as compared to $61.7 million last quarter and up 27% compared to the year-ago period. For the second consecutive quarter, we achieved a modest positive adjusted EBITDA, which we attribute to both revenue growth and cost containment.

Overall, Aurora's Q3 adjusted gross margin before fair value adjustments was 48% vs. 45% in Q2, which remains among the industry's best.

Canadian medical revenue was $24.2 million in Q3, down 6% from Q2. The business is steady, but the revenue trend was impacted due to the timing of shipment at the end of Q1, which resulted in higher Q2 sales.

Again, demonstrating the value of our diversified portfolio of global medical businesses as markets developed.

International medical revenue is $13.8 million, steady compared to last quarter. With continuing growth in our export business to Australia, offsetting a slight decline in the export business, we are now at $2.5 million. In the last quarter, the export business was $2.5 million. In the last quarter, the export business was $2.5 million.

We have made the decision to close our Nordic production facility in Denmark and will supply a very important European business from a Canadian footprint where we have much lower per unit cost, higher quality and a much more reliable supply.

We believe this change, in addition to reduced costs, will allow us to compete even more effectively in the growing European market where we already have a substantial leadership position.

As usual driven by our focus and leadership in global medical markets.

Medical cannabis represents about 71% of Q3 cannabis revenue and 86% of Aurora's adjusted cannabis gross profit.

Medical adjusted gross margin was 60%, down always slightly from 61% to the prior quarter, and within our target range of 60% and above.

We expect the supply of Europe from Canada will improve European medical margins over the next fiscal year.

The stability and strength of our medical adjusted gross margins is an important gross profit driver that truly distinguishes Aurora from its major competitors.

Consumer cannabis net revenue is $14.5 million, steady compared to last quarter, which we view favorably. This demonstrates the role of agility in delivering compelling products, even with ongoing macro challenges in the consumer market.

Adjust to gross margin before fair value adjustments. On consumer cannabis net revenue is 25% in Q3, compared to 20% in the prior quarter.

The increase from Q2 was primarily driven by a shift in mix towards core segment brands as consumers responded to our product innovation.

And in the plant propagation segment, our controlling stake in BEVO enabled us to recognize $10.8 million in net revenue during Q3, up from $6.6 million in Q2.

As a reminder, BEVO has a seasonal cadence with two-thirds of BEVO's annual revenue and adjusted EBITDA being realized in the period from January to June . On an annualized basis, BEVO's business is steady and predictable and supports our ability to generate positive adjusted EBITDA and eventually positive free cash flow. Adjust the gross margin before fair value adjustments on plant propagations and

adjusted SG&A was $28.4 million, adjusted R&D just below $2 million, reflecting our ongoing commitment to keeping SG&A well controlled. This was accomplished through the successful execution of our business transformation plan that included rationalizing our operations footprint and focusing on core business essentials.

And a quick look ahead as we're closing in on the end of Q1 fiscal 2024.

We expect cannabis net revenue for fiscal Q1 2024 to be largely similar to fiscal Q3 2023. We expect cannabis net revenue for fiscal Q1 2024 to be largely similar to fiscal Q3

With the geographic mix weighted slightly more heavily towards the international medical segment. For plant propagation, we expect to see a seasonally strong quarter as we reach our pet Elyse falling from.

Furthermore, adjusted gross margins are projected to be consistent with fiscal 2023. We also expect to maintain our stated objective quarterly STMA expense run rate below $30 million.

To close and sum up, Aurora's financial metrics are healthy and strong, with a diversified global cannabis business delivering dependable revenue and leading gross profits.

and supported by a well-controlled SG&A foundation. As we outlined, management is working diligently to even further strengthen both the balance sheet and the company's free cash flow.

Thanks for your interest. I'll now turn the call back to Miguel. Thanks, Glenn. Several years ago, we embarked on a journey to bring the company to sustainable positive adjusted EBITDA. This has since been accomplished through our focus on the highest margin opportunity within cannabis, global medical.

as well as a substantial reduction in costs that have resulted in significant operating efficiencies. We have now set another ambitious target of removing a further $40 million of costs during this fiscal year to support our goal of being free cash flow positive by the end of calendar 2024. In the big picture, we believe our accomplishments today coupled with our near-term goals

becoming convertible debt-free and cash flow positive truly sets us apart from our peers. And as industry rationalization takes hold, we think it is important for our investors to appreciate that we have the necessary capital, business plan, and by extension, the staying power to not only endure but emerge stronger than these competitors.

as the global cannabis industry develops. Our growth and profitability focus is on the high-margin medical business that continues to expand globally, supported by innovation and development of quality products for loyal patient base.

We have and will continue to pull all levers at our disposal to create equity value for our shareholders. And that includes smartly allocating capital between organic growth, strategic M&A, and continuing to focus on all the details that build a world-class company.

Thank you for your time and interest in Aurora. Operator, please open the lines for questions. Thank you. We'll now be conducting the question and answer session.

If you'd like to ask a question today, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue.

You may press star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So that we may address questions from as many participants as possible, we ask that you please limit yourself to one question.

If you have additional questions, you may re-queue. One moment please while we poll for questions. Thank you. Thank you. Our first question is coming from the line of Michael Lavery with Piper Sandler. Please receive your questions.

Thank you. Good morning. Good morning, Michael. I just wanted to ask a little bit of a portfolio strategy question with a thread of capital allocation in it. Basically, you mentioned strategic M&A at the end of your prepared remarks. I want to you the idea within you as well to make sure that you have what you need so that you can supply enough effort fun, which Truth bullets these insights into potential

Also talked about paying down the convert. I guess maybe some of it is is You know it with the cash balance you have now is there any any? Any reason to not pay that down sooner than later. Do you want to keep some dry powder is that part of your thinking and

On the little bit more strategic side, how do you think about the portfolio evolution? Is there, are there things proactively on your radar? Obviously, you're focused on global medical, but obviously the Bevo acquisition as well, so clearly open to some adjacencies. How do you think about maybe what the optimal portfolio looks like, or if there's additions you're looking for, or what it would take to get there?

predominantly in the medical aspects of Canada and in Western Europe . And so we continue to make investments in those areas, which is definitely paying dividends. I mean, the margins are two acts. What we see in the RAC, it's a much more consolidated piece of business. And importantly, in Europe , we're seeing a, you know, sort of a normalization of what the regulations are.

EU GMP product that is allowed to be imported from facilities like ours in Canada. And while the regulations are really high, you get a lot of values and scale with those markets. So we're going to continue to expand there. We've seen positive movement in Switzerland and Austria most recently.

and obviously the strength that we have in places like Germany and Poland and Czech Republic and whatnot to make that an obvious piece of expansion. On the product side, what we're seeing is incredible advancements in the genetic work that we're doing in, we think, one of the strongest facilities in the world out at Vancouver Island.

in bringing high quality genetics, high potency, incredible yields to the medical channel, but also to the rec channel. And so there are great efficiencies in that from a portfolio standpoint. Beyond, you know, cannabis, as we see things that aren't obvious adjacency, like Bevo, which was a wonderful acquisition and a great team.

It allowed us to do a couple things. One is the consistency and sort of value of a great company like Bevo, but also utilize world-class facilities like we mentioned with Skye to get value out of that. So we'll continue to look at that. In terms of the balance sheet and the debt, as we stated, it is our goal to take out the rest of the converts.

in this time of consolidation, we continue to see things that are of interest. But as you know, we've been really, really patient. And I think that's paid off in not chasing some of the higher valuations you saw a couple years ago, and importantly for us not chasing on the US, which just wasn't a core setup. And I think right now poses a challenge, particularly Canadian companies.

Our next question is from the line of Federico Gomez with ATB Capital Markets.

Good morning, thank you for taking my questions. Just on your consumer cannabis segment, we have seen a positive market share trend recently or at least stabilization and some gains according to some data providers. Can you talk a little bit about that segment? Is there any chance that you could

just about a year ago with a company called Thrive that had a wonderful portfolio of products including a very, you know, super premium product line called Greybeard. And that team, which is really why we went after that asset, was wonderfully adept at navigating the rec market. And the rec market is... and that's what we FinalA

is still, you know, presents a lot of challenges. We still see price compression. We still see the growth of value flower at pricing that doesn't make sense, but we do see spots where you can, you know, perform and make some money. Concentrates, pre-rolls.

And to your point, ingestibles, which we had some considerable success in. So, you know, as we look at the landscape, you know, right now we have a little bit less than a three share, and it does not appear that, you know, if you had a larger share, you would have greater profitability. So we're being very, I think, thoughtful in how we look at the landscape.

all of our opportunities in REC and as opportunities present itself, you know, we're able to take advantage because of our low cost of production and innovation. I think we're a little bit of a ways off where there will be strong economics across all aspects of the REC portfolio, but it's definitely getting better.

And we see some glimmers of hope with provincial entities such as the OCS putting in pricing floors and we do see a little bit of the rationalization on pricing, particularly on flour, that gives us some hope that in the future you could see more profit opportunities. And with that, we'll definitely take advantage of it because of the genetics and science innovation that we have.

implemented in our medical channel, there's an easy crossover into that.

Our next question is from the line of Pablo Zonick with Zonick & Associates. Please receive your question.

Good morning. Thanks. Regarding the German market, Miguel, I think we have a question

It's a two-part question. What I'm hearing is that the sources of growth there, it's mostly coming from the online pharmacy business, right? So the reimbursable business is pretty much flat to down and even the cash business in brick-and-mortar is flat. So it's online pharmacy driving growth and that could be significant because we know that in terms of patients that's under penetrated and...

but if you can stress there's an assumption. Thank you.

Yeah, well, thanks for the question Pablo. I would say it's not just online pharmacies. And so what we're seeing is a growth in the overall prescriber base. Now, right now in Germany, it is a bit challenging because of the classification of cannabis as a narcotic for a traditional physician or clinician to prescribe cannabis. It's starting to expand.

And one of the things that's been lost in all of the noise about what's happening with the German rec business has been stated in a position of the German government to reduce bureaucracy and to open up the medical cannabis business. Right now in Germany it's about 0.1% of the adult population.

As in the cannabis system where I say in Canada, it's 1% so we are seeing some expansion outside of the online pharmacies and you know you mentioned the point about you know their catalog and How many brands are in there a couple things on that first and foremost one of the great? Challenges in the German market is the incredible rigor that they have would be testing

to have products be acceptable in the market. It has to be in roughly around 10% of the stated potency in their lab. So product quality and availability that meets that spec is one of the key competitive drivers.

in Germany as opposed to say the distribution system that you're referencing. The second thing in Germany what we're seeing is an interest in more premium quality and higher potency medications. And so therefore, you know, we've introduced two proven cultivars from Canada into Germany and the early read is that they're well received. The last thing is we saw a lot of investment as people were getting

You know excited about a possible rec solution and now without being a bit off We're going to see consolidation and so unlike the rec business in Canada where the top 10 Lps only do 30% of the business the top five LPs in the medical business And you know in Germany might do two-thirds of the overall business

So there are efficiencies there for the LPs that can navigate that high bar and that can consistently connect with patients. And that will be a benefit both in the online system as well as the brick and mortar. And lastly, we do think that with the progression of some of the regs, we will be able to get

Traditional brick and mortar through a pharmacy is going to be much more the prevailing Application as opposed to today's, you know execution that's you know somewhat skewed The next question comes from the line of Vivian Azar with TD count, please just see with your question Good morning, this is Robin Holby on for Vivian Azar. Thank you

Sure, thanks for the question. So one of the challenges with that facility, there's probably three primary challenges. The first is the regulations on what would be traditional remediation of pathogens, whether that's power remoldering or other things, in that facility. One thing I want to talk about before we even

made it a bit difficult to achieve the same yield and production that we get out of Canada. So that's one. Secondly, the size of that greenhouse facility did not really lend itself to the same sort of production efficiencies that we get out of our traditional indoor facilities that we have in Canada. And third, because there is no

difference in terms of the ability to ship that product into that market, when you're able to utilize the scale and the sophistication, and to be honest, the experience that we have with the Canadian facility into that European market is a benefit. The other thing I'll mention is that we started in the European markets with Canadian flour particularly, and in the German market and some other European markets, they value...

we think we can grow margins. Now in terms of the overall margin profile,

We don't see any added costs and because the economics run through the wholesale list price for the overall system You're not seeing the same You know pricing compression that you'd see say in the rack market in Canada and as we get greater efficiencies in our production

as well as in other aspects of the distribution and sales and marketing in those markets, we do see the opportunity to have an accretive margin situation. So we're excited about that. Our next question's from the line of Tammy Chen with BMO Capital Markets. Please proceed with your question. Hi, good morning. Thanks for the question.

I wanted to step back a bit and talk about your cost structure and I suspect you may also as a result touch on the new cost savings plan that you mentioned. But I just wanted to understand if I look at your business now, the majority is in the medical side, Canada as well as international, though Canada is the bigger part.

And with respect to the consumer or recreational segment, over the last several while, you've really narrowed down that business and your focus to be profitable. I'm just wondering at this point now, when I look at your quarterly SG&A on an adjusted basis, it's about, as you said,

around 30 million a quarter. So that's still 120 million a year of adjusted SG&A, which is a decent amount versus your total revenue figure. So I'm just wondering at this point now, why is it so significant? What are the biggest cost components there?

that you feel can still be worked down going forward. Thanks. You got it. I'll make a couple of comments and then I'll turn it over to Glenn. So, first and foremost, as you well know, Jami, and we appreciate the question, you know, we took about 400 million out over the past three years and we've announced another 40,000 people.

The 30 million you're describing in SG&A, there's still complexity and general cost to the cannabis system that looks a little different than say what I'm used to from a CPG standpoint. You know, the production, the medical, the regulations, the shipping, all of that, you know, is complex and therefore creates cost. It's something we look at a lot and I think, you know, people should have great confidence that when we say we're going to get to this 40 within the time period. So hopefully, we can start to evolve to a 50 third point. So, now we are communicating that we had getting 5 million members in 2004, we're getting

We're gonna get there, but that doesn't mean we're gonna stop there and as we see other opportunities in terms of rec you know About 14 or 15 you know million dollars a quarter in revenue there And we've made significant improvements in terms of the cost profile of that But as you mentioned the vast majority you know of our focus and where we think the real upside is on the net

Thanks Miguel, I think you covered it quite well. Tammy, you know, we're in four different businesses, all cannabis related, plus Bevo. So you know, supporting global medical in Europe and becoming quite a nice business in Australia. Thank you.

Canadian medical Canadian rank and double it's complex and so, you know, we've got to maybe heavier than you might expect for the legal regulatory framework. And certainly shipping, which we run through our SGA shipping to the provinces to Europe to Australia, et cetera, et cetera.

runs through our S and G name. This is about serving the globe. So we think we've built a good platform. We will continue to sweep costs out. It's just a kind of normal course of business, continue to look for efficiencies every year. And on top of that we do have public company costs. So we are looking and we have to find plans that are already in progress to reduce the cost.

Thank you.

Thank you. Our next question is from the line of John Zamparo with CIBC. Please receive your question.

Thank you very much. I wanted to ask about the consumer segments and in particular on edibles. You've gained considerable share in that category according to HiFire data. I wonder if you can frame how much of that has come from glitches or any other brands that offer chewable extracts.

What's your view on how that matter plays out with regulators? Yeah, John , thanks for the question. You look at the quarter and obviously the decision by Health Canada on glitches, it was considerable. It probably was a couple million dollars of revenue in the quarter associated with glitches. I think it's an interesting question.

you know, peace, we were really excited about the innovation on glitches and navigating that we obviously made our submission to Health Canada six months before we launched it and then Health Canada had a concern or questions, I guess, say, on ours and other products. I know that's an industry fight.

and we're going to be talking to help Canada about that 10 milligram limit. On glitches, and I'm not saying it's going to be the same amount of volume, but the prohibition was having more than 10 milligrams in one package. And so we're going to continue to have glitches in the market going forward, but it will just be one unit at 10 milligrams as opposed to the 10 by 10 that we had out there. This has been raised, I think, by a variety of different entities in Canada. The competition...

Bureau and a variety of other industry entities that this is a real sort of gap for the you know legal regulatory for license produces versus the illicit market where you see what I would describe as an irresponsible representation of edibles at high potencies youthful presentations and so I think over time this is one that's going to resolve itself.

other you know minor cannabidioli gummies which have done really well as well as Innovations that we've seen in flour and other core aspects that have done well So in this market, you've got to be you know, very agile as fun mentioned in his comments We've done that and I think you know what we've done You know really well that I'm really proud of is we take what's there and we don't chase

what I would call unprofitable market share. And we're still not in a place in the rack business.

we're having a 10 plus share is going to guarantee that you're going to have greater profitability. So as I mentioned before, we're about a three share. We're finding the spots that we think are sustainable and profitable. And we are seeing some positive movements, the OCS price wars and other provinces.

decisions on flour, and so we'll get there. And as we look forward in the future quarters, we'll see things like glitches that we're excited about, and I do think, as I mentioned before, that the 10 milligram cap will be addressed at some point.

The next question is from the line of Yuan Kang with Canaccord Genuity. Please just see with your question.

Hi, good morning. This is Yeowon Kang-ong from Matt Bottomley. Thanks for the question. Just wanted to touch on the adjusted gross margins for the quarter. Under the wholesale bulk cannabis business as well as the B-roll farms business, adjusted gross margins for these segments ticked up this quarter pretty significantly. So I guess could you speak to any of the drivers that caused the sequential growth?

fiscal year, but you saw in our report of Q3 in the sea agreement, our report of Q1, is just a fully utilized stuff to the rafters facility that's really cranking up a ton of plants and therefore revenue. So you're getting a...

completely utilized cost structure in those two quarters. That's why the margins are higher. Through the remainder of the year, we'd expect them to be a little bit lower, more similar to what we saw in RQ2. You know, I guess one of the beauties, I think, of what Babboy is doing with the Skye facility is that we're going to be using the Skye facility to provide the best quality of life for the people

The orchid business that's being launched at Sky is a little less seasonal, so we start to smooth some of those pumps out in our plant propagation margin. Beyond that, the bulk sale cannabis, we just have a lot less excess cannabis.

and we're finding spots to sell some of our higher potency volume and some nice margins on some of the core bulk sales. That's not a segment that we're leaning on there depending on we don't talk about it much and that's really just seen as an outlet after we've got four different channels that are all kind of fighting for cannabis right now.

If there's a little bit left at the end, we'll select through the bulk sale process. Thank you. Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Miguel Martin for closing remarks. Well listen, we're thrilled with this quarter, and more importantly, thrilled about where the company is going. We appreciate everybody's interest in this, and we look forward to sharing the story as we go forward. On behalf of the-