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Aurora Cannabis Inc. (NYSE:ACB)
Q4 2019 Earnings Call
September 12, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to the Aurora Cannabis fourth quarter fiscal 2019 conference call for the three months ending June 30th, 2019. During today's call, Aurora will be referring to an earnings presentation, which listeners are encouraged to download from the financial reports section of the company's investor website, investor.auroramga.com.

Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR databases. I'd like to remind everyone that this call is being recorded today, Thursday, September 12th, 2019.

I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley.

Cam Battley -- Chief Corporate Officer 

Thanks very much, Operator. Good morning, everyone. Thank you for joining today's call. With me today are our Chief Executive Officer, Terry Booth, our Chief Financial Officer Glen Ibbott, and our Executive Chairman, Michael Singer. For today's call, I'll start by discussing some of our operational highlights and then Glen will discuss our financial results. I'll then briefly return to present our outlook for the rest of the year and beyond and then we'll take your questions.

As we do every quarter, we'll start with a few initial framing comments before shifting into the formal comments. As mentioned by the Operator, I'd like to draw everyone's attention to the dashboard of key performance indicators that we provided, once again viewable on our investor website at investor.aurormj.com.

This is a really useful tool, one of our innovations, essentially a green light, yellow light, and red light tool to help track the company's performance. As you'll see, most of the KPIs are in the green. We've highlighted two that we've identified as yellow. We'll speak to each of these in more detail, but for now, I'd like to focus on the big picture for Aurora in our fiscal Q4, the quarter ending this past June 2019.

It was yet another strong quarter for ACB. Among the highlights included continued growth across all our distribution channels, Canadian medical, Canadian consumer, and international medical, a massive increase in kilograms produced, increasing 86% quarter-over-quarter, a further 20% decrease in our cash cost to produce, now reaching $1.14 per gram. I should note that our flagship highly automated Aurora Sky facility at Edmonton International Airport, we're producing at about $1.00 a gram with further improvement anticipated.

In addition, our gross margin improved by a further 3%, reaching 58%. The two KPIs that we've designated as yellow are average net selling price per gram and our SG&A. We wanted to call them out as a matter of transparency. The reasons for this are as follows -- our average net selling price per gram, which we'll get into more detail a little bit later, came down as a result of actually increased sales in the consumer market as well as some bulk wholesale sales that we actually managed to achieve an attractive margin on, higher than our overall gross margin.

Then our SG&A, obviously, is increasing a little bit at 9%. It's higher than it was in the last quarter at 1% growth. But I think that's explainable in large part because we are heading into essentially cannabis 2.0 with the new product forms coming onboard toward the end of this year.

I also want to acknowledge that we slightly missed our guidance on our overall net revenue. We projected $100 million to $107 million in overall net revenue. We came in 1% below that at approximately $99 million. That shouldn't have happened. The reason why it happened we will discuss a little bit more.

It's essentially these things -- one, these were not our core cannabis revenues. On our core cannabis revenues, we came in right at the top of our guidance at $95 million -- by the way, the largest revenue figure in a quarter that any cannabis company has ever recorded for cannabis revenues. On the overall net revenue, we missed slightly based on our ancillary or non-cannabis revenue.

A couple of reasons for that -- one, those are more variable than our cannabis revenues. We also have a little bit less visibility into the performance of our non-cannabis units that are independent that have a separate governance structure. And then finally, we actually required a lot of some of our ancillary companies and operations, specifically with respect to our analytical testing and our patient counseling. And we can't record revenue internally for inter-company transfers.

Now, the big picture, the most important takeaways here before we get into the formal comments -- I'd emphasize the fact that we've established at Aurora leadership in this sector with respect to not just production, but also revenues on a global basis in terms of innovation and this is the biggest quarter, the biggest revenue, that any company in this sector has ever recorded. So, we're very pleased at the progress that we've made. Now, we'll shift into the formal comments.

Now, the past year has been transformational for the cannabis industry overall. It's rapidly maturing into an established operating industry. At Aurora, we've prudently built a business that is efficient, scalable, and highly adaptable. We are a leader in markets around the world. We're committed to defining the future of cannabis globally and that commitment underpins everything we do.

In the quarter, Aurora continued to be a strong performer in the Canadian consumer market with leading market share and brand awareness. We achieved 52% growth in consolidated revenue compared to Q3, driven by a strong increase in production, particularly at Aurora Sky. While retail distribution in key provinces has been a constraint in fiscal 2019, we will see retail infrastructure expand in 2020 through the launch of new brick and mortar stores across Canada. With more stores, we expect to see further consumer engagement.

Providing safe and reliable access to medical cannabis remains at the core of Aurora's business and our revenues from this market increased 10% compared to Q3. Domestically, our patient roster increased by 10% to over 84,000 patients. Driving this growth are continued referrals from our cannabis Rx clinics and a network of over 60 clinic partners.

Internationally, Aurora continues to be the leader in working closely with government regulators and policymakers to implement medical cannabis programs and open new markets. In Italy, we were selected as the only winner of a public tender to supply that market with medical cannabis for a period of two years. While the initial quantities are small, this is an important opportunity to build our connection with patients, doctors, and pharmacies who have come to know and appreciate our products over the past two years.

This also underscores our ability to open new global markets by engaging with local governments and acting as a trusted partner as we continue to work to ensure patients have access to the high-quality medicine they need.

As well, in addition to the two EUGMP -- that's European Union Good Manufacturing Practices -- certified facilities we currently operate, we are in the final stages of certification for our Aurora River and Aurora V facilities, one in Ontario and one in Quebec. This will bring our EUGMP-certified facilities count to four, making us the license producer with the most EUGMP certifications, something that's rapidly becoming a global standard and ensuring our growing access to international markets where this certification is simply a requirement.

We recently announced our first major partnership in the United States market, our science-driven partnership with the UFC, the mixed martial arts organization, to study the effectiveness of CBD, cannabidiol, as a treatment for pain and recovery in high-performance athletes. This groundbreaking research will generate the data required to establish CBD as an accepted therapeutic ingredient.

The intellectual property from this research will lead to the creation of science-backed, hemp-derived CBD products that will combat the rapidly growing market of untested CBD treatments. We're excited about the opportunities ahead for us in the US market and we'll continue to take a measured but strategic approach to how we enter this space.

Furthering our scientific leadership, we also announced we began cultivating cannabis outdoors. The new sites at Aurora O in Quebec and Aurora Valley in British Columbia will be used for cultivation research to develop new technologies, genetics, and intellectual property to gain further efficiencies in our indoor growth facilities and advance learnings about cannabis cultivation. This is important work that needs to be done to ensure sustainable cannabis agricultural practices that are developed to safeguard both our environment and global consumers.

The first harvest of our outdoor growth cannabis is expected to occur later next week at Aurora O in Quebec. This cannabis will be sent for extraction and further testing and we look forward to applying the learnings from these test sites to next year's crops. We're committed to defining the future of cannabis on a global basis and we're well on our way. While we may still be our early innings of the cannabis industry, the work we've accomplished to date has created a company that is uniquely positioned to lead.

That concludes my opening remarks. I'd like to turn the call over to Glen now, who will discuss the financial highlights of the quarter.

Glen Ibbott -- Chief Financial Officer

Thanks, Cam and good morning, everyone. My comments here today reflect the success that Aurora has achieved as we continue our focus on the execution of our business plan. The figures I'll be going over can be found in our financial statements and MD&A and all are in Canadian dollars.

As Cam mentioned, our fourth quarter fiscal 2019 results showcase the drivers of our continued strong quarter-over-quarter growth. We reported total net revenue of $99 million, a 52% increase over the $65 million in the third quarter. Our cannabis net revenue was $95 million, representing 61% sequential growth. This growth was predominately fueled by additional production capacity and available supply from our Aurora Sky and Aurora River, formerly MedReleaf Bradford, facilities which drove a $15 million increase in consumer cannabis net revenues as well as an $18 million increase in wholesale bulk cannabis trim sales.

For the full 2019 fiscal year ending June 30th, net revenue was $248 million. Of this, $226 million was cannabis net revenue, an increase of over 427% compared to the prior year.

Our fourth quarter 2019 Canadian medical cannabis sales increased 9% to $25 million, driven by our continued success and growing our patient base, which currently stands just shy of 90,000 clients. International medical cannabis revenue for the quarter was $4.5 million, up 12% over the prior quarter. For the year ended June 30th, 2019, overall medical cannabis net revenue increased by 150% to $107 million. This increase was primarily due to the addition of revenue from MedReleaf and CannaMed acquisitions, increased European sales, as well as a ramp up in production across our production facilities.

During the fourth quarter, our growth in the consumer cannabis market continued, with net revenue of $45 million, an increase of 52% over the prior quarter. We finished the full fiscal year with $97 million in consumer cannabis revenue.

As you'll note, our fiscal Q4 included approximately $20 million in wholesale bulk cannabis revenue. We sold cannabis trim for an average price of $3.51 and a margin of 61%. In the future, we expect to sell into the wholesale channel opportunistically and when pricing and terms are appropriate. I would caution against expecting bulk sales of the magnitude we achieved in Q4 2019 to be consistent or repeatable. However, we do maintain a focus on the bulk sales market and we do believe there will be further opportunities there in the future.

Given our patient first commitment and belief that medical cannabis should not be subject to excise tax, we continue to absorb the cost of these excise taxes on behalf of our medical cannabis patients. As a result, excise taxes negatively impacted our Canadian medical cannabis net revenue and gross margin by $3.3 million and 4% respectively.

Let me address our reported revenue as compared to our updated outlook in August in a bit more detail. We reported that the top end of the range for our cannabis revenue at $95 million. This is our core business and we are proud to have delivered such a strong quarter. However, revenues from our auxiliary businesses, particularly those that are purposefully managed independently at arm's length were lower than expected. We had expected relative consistency from quarter to quarter, but when they reported into us, we needed to eliminate significantly more revenue than expected for inter-company work.

While we do not have day to day visibility into these businesses, we do need to improve our ability to forecast these businesses. However, because of the lumpiness of these revenues and their relative financial immateriality, we will not be including them in future guidance. Now, continuing further down the P&L, our gross margin on cannabis net revenue increased to 58% in Q4 2019 compared to 55% in the prior quarter. The increase in gross margin is primarily due to ongoing improvement in our production cash costs per gram.

As Cam mentioned, our cash costs to produce per gram of dry cannabis decreased to $1.14 per gram, down by $0.28 or 20% during the quarter as compared to the last quarter. This is primarily attributable to the positive impact of the greater economies of scale and manufacturing efficiencies achieved from the increase in production in the period, particularly at our Aurora Sky facility.

On a stand-alone basis, our Sky facility is now in around $1.00 per gram and we expect further improvements in the coming quarters with the resulting increases to overall gross margin. We are strength in highly efficient production and the resulting industry-leading gross margins as core to our future success. It allows us the opportunity to continue to invest heavily in the future growth of our business at the same time as progressing toward positive EBITDA.

During Q4 2019, Aurora produced just over 29,000 kilograms of dry cannabis compared to 15,590 kilograms in Q3. The production from our higher volume facilities increasing through the quarter, we expect to see a further increase in production in Q1 2020. We've also ramped up our internal extraction capacity and now have enough to meet our current and future needs.

In Q4, we continue to invest in the corporate infrastructure and talent required for expansion and growth of market share globally. The increase in SG&A expense compared to prior periods was primarily attributable to increased shipping and fulfillment costs related to higher revenues in preparation for the launch of new products including product development and branding development, which includes our UFC research initiative. Reflecting the year end audit adjustments that Cam mentioned earlier, our Q4 SG&A would have been about $88 million, an increase of approximately $20 million over the prior quarter.

We have built a diversified and vertically integrated company currently capitalizing on the tremendous opportunity of the global cannabis markets. In Q4, our reported adjusted EBITDA loss decreased to $11.7 million as compared to $36.6 million in the prior quarter. Considering the impact of year end audit adjustments, we estimate our delivered EBITDA loss to be approximately $25 million, an improvement of over 32% from the previous quarter.

I'm extremely happy with the underlying achievements we've made in the last nine months and driving toward our EBITDA target. We have more work to do, but I'd highlight that nearly all of our KPIs are showing sequential improvements. We've solved previously identified production bottlenecks and we're seeing strong sell through on our products at the retail level.

There are remaining constraints to the pace of growth in the Canadian market that we would like to see resolved, including the timing of currently approved and future retail stores. The resolution of these constraints will impact the timing of our EBTIDA-positive target, but we do expect these constraints to become less of an issue over the next several quarters.

As we continue to execute on our strategy, the company expects adjusted EBTIDA to improve in the future due to higher sales, improved gross margins, and prudent SG&A growth. As of June 30th, 2019, we had $218 million in cash and cash equivalents compared to $89 million last year. In August, we announced the upsizing of our secured term debt facility to $360 million with a coordinating feature for an additional $40 million of capacity.

Further, as I'm sure many of you have seen on September 3rd, we announced the disposition of our remaining equity investment in the Green Organic Dutchman, generating approximately $86 million in gross proceeds.

With these two transactions now closed, we believe we have more than adequate financial resources in the near-term to execute our growth plans. I should also note that we continue to evaluate our global capacity expansion. We have identified opportunities to defer certain capex as we rebalance the growth of demand with our increasing supply. We are continuing to build out our full production facility pipeline but in concert with the total global cannabis market.

As I conclude my remarks, I would like to note that I am proud to be a part of the best-performing LP in the Canadian industry. Aurora delivered strong revenues and patient numbers, improved on already robust margins, produced a consistent and meaningful supply of high quality cannabis, and is well-positioned to continue to keep the gas pedal down for growth while also moving to EBITDA positive in the short-term, not the long-term. This makes Aurora unique in the Canadian industry.

I am very pleased with how the Aurora team is focused on solid execution and operational improvements this past year. We are in a good financial position and we have numerous options at our disposal to execute on a growth strategy.

I'll now pass the call back to Cam.

Cam Battley -- Chief Corporate Officer 

Thanks, Glen. As you've heard today, we have built a solid platform for growth that's generating continued positive results. Before I open the call for questions, I wanted to provide an update for our outlook for fiscal 2020. The opportunity in the global cannabis and hemp markets is tremendous. Aurora will continue to make the necessary investments today to build long-term value for shareholders. However, Aurora will take a balanced approach to these investments with a focus on operating a sustainable and profitable business.

As part of the US market strategy, the company is considering its shareholders and how various state and federal regulations will affect its business prospects. A number of alternatives to grow its presence in the US market are under evaluation right now and the company is committed to only engage in activities which are permissible under both state and federal laws.

There are market opportunities that are legal at both state and federal levels that can add operating cash flows and be critical pillars of Aurora's strategy and long-term success. The introduction of new product formats to the Canadian consumer market this fall represent a significant opportunity for the company.

We're very excited to introduce a line of new high-quality products across the country in a variety of product categories. We have invested the time to study consumer habits in legal US markets, which have driven the development of products that consumers will desire and that are compliant with Health Canada's regulations here in Canada.

As we previously discussed, our initial focus in the derivative product market will initially be on vapes and edibles. To support these new product formats, we've invested significant capital to staff up and scale our operations in terms of both our cultivation and extraction capacity and in developing new production hubs to ensure that sufficient product is on store shelves for December 17th.

On that front, both of our Aurora Air and Polaris facilities are progressing very well and I can say that as of today, we are in commercial production of vape pens, mints, gummies, and chocolates, and in the late-stage development in other product categories.

As I said off the top of the call, while many in the industry are trying to decide how they will build their cannabis business, we already have built a solid growing business, integrated across all value chains. In fact, the global leader.

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

Questions and Answers:

Operator

If you would like to ask a question at this time, please press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Please limit yourself to one question and one follow-up question, after which, you can return the queue.

Your first question comes from Tammy Chen with BMO Capital Markets.

Tammy Chen -- BMO Capital Markets -- Analyst

Thanks. Glen, can you talk about in the EBITDA reconciliation you've got from net income to adjusted EBITDA, there was a note there about some change in accounting where it reduced the operating expenses in the quarter by about $15 million. Can you just talk about what was the accounting change there?

Glen Ibbott -- Chief Financial Officer

Hi, Tammy. It wasn't a change. It was our year end audit adjustment. As we went through our year end scrubbed our financials, we identified some adjustments from prior periods that we needed to correct in order to satisfy our audit and get our full year financial statements in good shape. Effectively, what happened there is we did record some adjustments in Q4 that possibly should have occurred in previous quarters. Our previous quarter, the results should have looked slightly better. We reported those through Q4.

Overall, nonmaterial adjustments but part of the audit cleanup. They fall into a couple of different buckets, mainly driven by the level of acquisitions and integrations we did as we scrubbed through some of those acquisitions to find some costs that had been recorded. We also identified some costs that should have been capitalized earlier in the year. We made those corrections part of our audit.

Tammy Chen -- BMO Capital Markets -- Analyst

My follow-up, I just wanted to understand the capex spend in the quarter. I think it increased quite a bit sequentially. How should we think about that? What was the capital deployed into during the quarter? Is this the go forward rate? Commentary about that would be helpful.

Glen Ibbott -- Chief Financial Officer

Sure. I can start on that. Tammy, you know a couple of the major facilities that are under construction -- Sun and Nordic and we've mentioned a couple of others. You're also aware that we've got Polaris and air and an innovation center in Comox for our research. There is a lot of work going on in Aurora right now as we scale up not only for international, but within Canada to make sure we're efficient distributors. So, distribution centers across the country and manufacturing for the new products, things like authority.

The capex, I'd say Q4 and spilling into Q1 a little bit would be peak capex. We're over $100 million in Aurora Sun build. It's progressing quite nicely. As we indicated earlier in our comments, we are looking at the timing of capex and matching our supply to the demand. As you saw when we launched Sky, we were able to get certain bays licensed in operation before the entire facility was built in a phased approach. We're taking that approach to the larger production facility.

We've just got an awful lot going on. As you know, we're heavily into technology, automation, things like that. So, these are long-term investments that have paid off in our reduced operating costs, reduced production costs. That's where we're at right now. Tammy, I think you would expect in Q1 to still see a significant capex spend and it will start to reduce over future quarters, particularly most of these facilities are nearing completion and then we'll just have a couple of larger productions.

Operator

Next question comes from Matt Bottomley with Canaccord Genuity.

Matt Bottomley -- Canaccord Genuity -- Analyst

Thanks for taking the questions. Two items, one on some of the commentary on potential volatility going forward and then again on the EBITDA commentary as well -- on the volatility side, given that you had a good wholesale bump in the quarter and then within your recreational consumer revenues, there could be some speed bumps there depending on how retail is rolled out.

What's the best way for analysts to look at this considering the wholesale may not be repeatable and the recreational revenues could still see potential headwinds? Just trying to anticipate the potential magnitude of the lumpiness going forward.

Cam Battley -- Chief Corporate Officer 

I'll take the first crack at this and then hand off to Glen. First, the demand is actually there for wholesale product. You'll note that we got an extremely attractive price for trim, $3.61 a gram. The margins were even better than overall gross margin. So, if we have opportunities, and it's likely we will, we will proceed with additional bulk wholesale.

The bigger question you're asking is with respect to volatility. I think what we're signaling here is just to be aware. As a lot of observers have suggested, there's anticipating that there may be a bit if a plateau between now and the advent of the cannabis legalization 2.0 products anticipated somewhere around the end of the year. I think that's really what we're anticipating. There's likely to be across the sector a little bit of a plateau between now and then.

Glen, did you want to add to that?

Glen Ibbott -- Chief Financial Officer

Yeah, Matt, what we're signaling there -- you know Aurora and you know how consistently our revenue has continued to ramp quarter to quarter to quarter, the revenue curve is a nice, smooth, continuously increasing curve. I just want to call out the fact that there are constraints on the consumer system right now.

The provinces are starting to show that as well. I've seen in July and August where they're trying to work through some of the inventories they have and have slowed their buying and we expect it to continue to pick up through the next quarter. We did want to signal that our continued quarter-over-quarter growth may take a bit of a pause due to industry dynamics. That being said, we still expect to see a growth in the core businesses. As Cam said, the bulk opportunities may be there but if the pricing is right, we'll execute on those as well.

As I look forward, from the provinces, we are number one in the country in sell through rates. We're delivering the rigth products, right quality consumers are preferring. As long as we continue to sell through at healthy rates, then the bumps work themselves out and the retail stores roll out then we'll benefit disproportionately from that increased market size.

Terry Booth -- Chief Executive Officer

I just want to reiterate on what Glen was talking about on retail. A good example would be Alberta. Alberta lifted the moratorium on retail stores, stocked up on a considerable amount of cannabis. Those stores have been granted licenses but are not yet open. They're doing their buildouts. All we're providing right now are tinctures, joints, bud, and gel caps. We have another cannabis 2.0 coming into Canada, which we think will significant drive revenues for value add.

Matt Bottomley -- Canaccord Genuity -- Analyst

Maybe tying that to some of the comments you made on EBITDA -- in prior quarters and discussions, you've kind of been hoping to reach that inflection point in calendar Q4 this year. Now, the wording is sounding like short-term, which sounds like similar points in time. Is the reason for that slight change given that plateau until the December cannabis 2.0 comes on and then it's a reset with respect to that inflection point toward EBITDA positive?

Cam Battley -- Chief Corporate Officer 

Glen, maybe I can frame this and then hand off to you for the details. We put out guidance at the beginning of the year that we were targeting positive EBITDA. That created a sea change in our behavior and I think people have noticed. We went from a period of very rapid M&A to shifting gears to a period of really focused and disciplined execution. That's been reflected in our results.

Would we have liked to have been at positive EBITDA at this point? Sure. Part of the reason we're still working toward that -- we would have liked to have seen greater retail infrastructure in Canada. More stores, obviously, is better to the whole sector and disproportionately beneficial to us as the leaders in the consumer market. We still are focusing on that.

I think it distinguishes us a little bit from our peers, some of whom have not emphasized that pathway to profitability as we have. This is something where we have listened to what institutions have told us about the importance of having a credible pathway to profitability and we're sticking to that. Glen?

Glen Ibbott -- Chief Financial Officer

I think Cam's done a great job describing that. in terms of our language, we are still at the mercy of the timing of the retail footprint rollout. We're excited Ontario has licensed a number of new stores but they should be licensing hundreds of new stores. The timing of that will dictate how large the market grows over what period of time.

Certainly, we don't yet know when the provinces will start loading in for the new products for consumer 2.0. Will they start buying in advance for December or will they wait until the end of the year? There's some timing there quarter to quarter that we're a little uncomfortable with. We'll have to wait and see how that rolls out specifically.

Operator

The next question is from Vivien Azer with Cowen and Company.

Steve Schneiderman -- Cowen and Company -- Analyst

Hi, this is Steve Schneiderman pinch-hitting for Vivien today. So, in reference to some of the performance in oils, some of the commentary we've heard from some of the other LPs have been that there's been a little bit of destocking across the board. How much has that impacted you and are you seeing a similar trend in your oil and extract sales?

Glen Ibbott -- Chief Financial Officer

So, Steve, for sure, the consumer market -- let me start with medical. Our medical market is still running at roughly the two-thirds dry flour, one-third extract-based that it has for a number of quarters now. We had a small increase, 37% in Q4 in terms of extract-based products. The consumer market seems to be a heavy preference right now with the products they have to choose from for dry cannabis. They prefer to smoke the cannabis right now until they get new product forms launched 2.0.

Our quarter Q4 was over 90% dried flour. I think we've seen a few of our peers that floated in on extract-based products and have recognized some returns in the recent past. We don't have that issue. We haven't had that issue. For sure, the consumer market right now is heavily dominated by dried flour, not a lot of extract-based sales.

Steve Schneiderman -- Cowen and Company -- Analyst

Just a follow-up to your earlier point about what we're seeing in the channel, how do we reconcile that with the narrative that the market has been grossly undersupplied in the past? Are there other factors that are weighing in on that?

Glen Ibbott -- Chief Financial Officer

I can take that initially. When we've talked in the past, Steve -- certainly, we've been fairly consistent -- we expect that this is such a new market. We're truly at the launch of a new market. We haven't launched most of the products that should be in this market. There is going to be month to month and quarter to quarter, there will be a continuing mismatch of demand and supply.

Certainly, I think what we're seeing is that several months ago, there wasn't enough supply in the market and the provinces would buy whenever they could. Now, in certain SKUs, they've overloaded. As I said earlier, our strong sell through is important to us, an indicator that our products are moving, but they have overshot in terms of inventory build on some SKUs and they're going to have to work that our as we wait for retail.

Terry Booth -- Chief Executive Officer

If you look at the statistics on retail sales of adult usage, again, we're limited in the number of products that we supply that, but Alberta outpaced Ontario and British Columbia. That is not statistically, historically correct. British Columbia and Ontario have a lot more cannabis people and I think it's a reflection of a number of retail stores that are open in those two provinces.

They both are on a little bit of a slow role but they both had government changes on the rollout on October 17th. They're a little bit behind the eight ball in getting retail rolling. But we're starting to see a significant uptick in British Columbia and certainly we expect the same in Ontario. If they start selling as much cannabis per capita as Alberta, you're going to see quite a bump there. We know it's going to happen in the next six months, but it may not be next week.

Cam Battley -- Chief Corporate Officer 

Let me add to that. Further to Glen's comments, we are seeing some interesting developments beyond straight supply and demand for product in the Canadian consumer market. That is discrimination by consumers toward higher quality products. We're seeing in the results of that. If you think about how some companies in the sector have had to deal with significant returns in the quarter, that's not an issue that we're facing.

So, there is some increase in discrimination where consumers are voting with their dollars as to which products they want and we anticipate that that will continue on a go forward basis. Once again, we think that militates toward Aurora because we have this reputation for producing particularly high-quality cannabis products.

Steve Schneiderman -- Cowen and Company -- Analyst

The next question comes from Doug Miehm with RBC Capital Markets.

Doug Miehm -- RBC Capital Markets -- Analyst

Thank you. This question is for Terry and Michael and it has to do more with strategy. I know you've slowed down the acquisition pace, but I was wondering if you could elaborate a little bit further on what you were thinking -- I know everything is going to be approached fully legally at a state level, but what you're thinking about in the US, if you could give us more information about your approach and perhaps timing, that would be great.

Terry Booth -- Chief Executive Officer

You wouldn't think that our M&A activity has slowed with the amount of work that we're doing and amount of opportunities we have in the United States. We started in the United States with their little brother, Australis Capital, which we have some backing rights. They've done nine deals themselves, smaller deals, but they've set a footprint and activity teed up some good people to help us with the different regulatory issues in the various provinces.

We've gone on a significant MSO review tour of the states. I think that's common knowledge out there in the markets and we are laser-focused on CBD derived from hemp and the various opportunities that exist from that. When USA passed the Farm Act, they leapfrogged over the rest of the world in CBD derived from hemp. Some call it a CBD frenzy, but I don't believe it is because we know it works. Having it be scheduled in the US is a tremendous boon to the CBD industry.

Our strategic partners are helping us talk to some of the top companies in the world with respect to that in itself. There are a couple more hurdles in the CBD industry including the FDA ruling on indigestible. We have a good idea of how that's going to go. To say we slowed our M&A activity, I'm very busy in that regard, probably 90% of my time is dealt on new opportunities.

Michael Singer -- Executive Chairman

It's Michael. I'll just add that we see the US market as a tremendous opportunity. I can tell you that this is now a key objective for us in fiscal 2020. Based on what Terry just described, we expect to have a significant footprint in coming quarters. UFC is an example of a great first step in that direction. We're encouraged with the progress we're making. Stay tuned because we're excited about our opportunities.

Doug Miehm -- RBC Capital Markets -- Analyst

Just a follow-up. You mentioned having an idea of how FDA might regulate ingestibles. I wonder if you can elaborate.

Terry Booth -- Chief Executive Officer

Sure. I think I said before what keeps me up at night is the supply of cannabis, but that's no longer an issue with Aurora now that Sky is almost at full production. What keeps me up at night now is the FDA decision, not the decision they'll make to the negative, but which way they'll go with respect to isolates versus broad spectrum. We are anticipating that the isolate will be the first step from the FDA as an ingestible mainly because the other 112 or 113 cannabinoids in cannabis and in hemp have not been tested by the World Health Organization.

The WHO has come out and said that CBD is safe as an ingestible but they've put brackets around that sentence that this is only for pure CBD. I think the phrase is commonly misused of broad spectrum CBD. It's broad spectrum cannabinoids minus the THC derived from hemp and/or cannabis.

We're hoping the broad spectrum is something that is approved for ingestibles as we feel it's more effective, but the first step in those ingestible may be an isolate. So, we're making sure both of those bases are covered in our review of companies that participate in that industry in the United States.

Operator

Your next question is from Brett Hundley with Seaport Global.

Brett Hundley -- Seaport Global Securities -- Analyst

I just wanted to go back to the capex question, if I can. Glen, what might be helpful at least for me personally is can you share with us an assumption on where longer-term capex might be able to shake out so that some of us on the street can kind of do the math on using Q4 on the top and then working down toward that target?

Glen Ibbott -- Chief Financial Officer

I hope I can help with that a little bit. As I said, we're kind of at peak capex spend right now with the major facilities under way. A lot of the construction going on right now will be complete over the next quarter or two on the manufacturing and distribution facilities across Canada. So, what we're then starting to look at is the timing of the capex on our major production facilities, Nordic and Sun.

So, as it stands right now, our current plans are to bring those in and phase them in as demand requires. You can consider that to be over the next year or two. Hopefully and ideally in my world, we need to phase them in earlier because the demand is there. But those are really the drivers.

Now, I need to caution you that as we stand right now, that's our capex plans should we decide part of our move into the US requires more capex, then we'll reset and recalibrate at that point. That's really how I've kind of characterized the capex over the next eight quarters is continued spend in this quarter and you start to see it trailing off then over the next couple of quarters and then you're really just looking at the timing in Nordic.

Brett Hundley -- Seaport Global Securities -- Analyst

My follow-up question is coming back to a previous one around vapes. I appreciate your answering that question as taking a wait and see and having the value of time here. But for all of us that need to look forward and try and make guesses about the forward market, can you give us a sense of what your overall capital investment in 2.0 products has been to this point and what percentage might be vapes?

I guess what I'm trying to tie into this discussion too is do you have any concern that the Canadian government might overreact in the interim and put a pause on vapes while things get figured out in the United States? Thank you.

Cam Battley -- Chief Corporate Officer 

I'm not sure we actually want to break down percentage-wise how much of our investment is in each of our priority products that we intend to launch with cannabis legalization 2.0. But we have consistently indicated that we are looking at vapes. We're looking at certain edibles including mints and chocolates and other forms. We do intend to proceed with each of those.

Now, your next question as to what the Canadian government might do. That's pure speculation. We try not to engage in that business. I will add -- thus far, according to the best information we have today, these illnesses have not popped up in Canada. We have to abide by what regulators say. We're going to watch these developments. We'll be responsible about the whole thing, but I want to be careful not to speculate.

Terry Booth -- Chief Executive Officer

Just to add to that, when someone says the word vapes, that's got a lot of information in it. What the US government are pulling off the shelves right now are flavored e-cigarettes. We don't intend to sell flavored e-cigarettes, as far as I know. The cutting agent of those flavored e-cigarettes and flavored vapes is largely expected to be the cause of these issues. I'm not going to make a prediction, but that's what we're hearing.

The chemical that's been largely accused of being involved in that is something called vitamin E acetate. We would never consider using something like that for a cutting agent in Canada or anywhere unless it's been tested. I think vapes are getting lumped into one big basket and it's really a focused set of vapes coming through the black market that cutting agents are being used to add more robust flavor and a bigger plume, if you will.

Operator

Next question comes from Michael Lavery with Piper Jaffray.

Michael Lavery -- Piper Jaffray -- Analyst

Can you give us a sense for your outlook for industry capacity, which obviously has projections to rise pretty rapidly and how that compares to demand and how that evolves over the next, say, 12-18 months?

Cam Battley -- Chief Corporate Officer 

In Canada alone?

Michael Lavery -- Piper Jaffray -- Analyst

Exactly.

Cam Battley -- Chief Corporate Officer 

So, we don't have official figures for the industry. But here's what I can tell you. We do see capacity increasing, but once again, as we mentioned earlier, there's discrimination based on quality. Some producers will be seen as higher quality producers than others. As we discussed on previous occasions, one of the things that we've done to make sure that we're winners in whatever scenario emerges is to be a low-cost producer.

With our further improvements in our program cost to produce on a cash basis, that puts us, I think, further in the lead as the mass producer able to produce cannabis consistently at the lowest cost. So, that's the Canadian situation. We don't know exactly when there's going to be sufficient supply to meet all demand. Also, that calculation changes significantly with the advent of the cannabis legalization 2.0 products coming toward the end of the year.

On a global basis, it's a very different story. Because of the very small number of licensed regulated producers of cannabis in the whole world, we see a long-term, like multi-year situation where there will be a massive excess of demand over supply for legal regulated cannabis. So, that's one of the reasons why we have put so much effort into being first or second mover into international markets and establishing the biggest global footprint of any cannabis company and we're now operating in 25 countries.

Terry Booth -- Chief Executive Officer

I'd like to add to that. I mentioned earlier the cannabis per capita. Analysts have to look at the fact that the Alberta numbers are higher than anywhere else mainly because of retail availability. As to other provinces, Quebec as well, more retail, you will see an increase in supply and probably do some math on that. I'd like to make an example of Australia, which will be an export market for some time from Canada until they get their production under way. It's gone to over 12,000 patients. Month over month it's growing by 30%, Cam?

Cam Battley -- Chief Corporate Officer 

Yeah.

Terry Booth -- Chief Executive Officer

Very similar to what happened in Canada under the MMPR. So, we're seeing countries that put Canadian-type regulations in place have significant uptick in demand. Australia, until a couple of rules and a couple of pieces of red tape were cut were very slow grown. They then cut the restriction on doctors and improved the application process and now, it's growing at a rapid pace and we see other countries taking that same sort of approach.

The German market, you'll see that we didn't have a big increase, a decent increase in European sales or outside sales, but we didn't have the capacity to supply it up until now. We're seeing the boots on the ground in Germany now educate physicians and demand for cannabis will go up as the number of physicians are prescribing. So, it's all a matter of math. It's still a medical entry into countries outside of Canada and the US and there's no better medical cannabis company in the world than Aurora.

Cam Battley -- Chief Corporate Officer 

To add to what Terry said, everybody knows we identify ourselves primarily as a medical cannabis company. That's on a global basis, albeit a medical cannabis company that happens to be killing it in the Canadian consumer market. I want to emphasize that everywhere we go in the world, our reputation proceeds us, our reputation as a serious pharmaceutical grade, medically oriented research investing company precedes us.

That's really important to us. It opens doors to us with policymakers and regulators and allows us to have important conversations with respect to how new medical cannabis systems should evolve and to be able to speak to the need for well-regulated systems that actually have real access and proper access for patients. That reputation of ours, our positioning has been incredibly valuable. It's been an asset for the company.

Operator

Next question comes from Glenn Matson with Ladenburg Thalmann.

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Hi, appreciate you guys taking the call. I wanted to touch on wholesale one more time. You guys talked about tapping the wholesale market opportunistically. I just wondered what are the parameters around what's going to make you decide when to tap it or not and is there a range you can give us? Is there maybe a couple hundred basis points of gross margin range of when you'll tap that market? Being that we're well into the first quarter here, are the conditions currently in line with the conditions you would want to see when you tap the wholesale market?

Glen Ibbott -- Chief Financial Officer

Hi, Glenn. We're just trying to be cautious here. We do see a need for that type of sale in the Canadian market. There is demand. As I said in my comments, there are a number of LPs that are looking for product as well. The trend that we saw with a couple of the major extraction companies in Canada looking for input products of high quality and there are other LPs looking for product as well.

But because this isn't an ongoing relationship right now, I'm not gonna count on those revenues until we have a signature and a contract and cash in the bank. We're being a little cautious looking forward here. The current market dynamics do lead you to believe there will be opportunities, but we don't want you to build that into a forecast until we start to see how sustainable and regular that business is.

We do have teams internally that are working on this and also looking at other opportunities to take advantage of our capacity for production and extraction and bottling and all the manufacturing aspects. There's potential to create more business for those in the industry that aren't necessarily interested in producing or, in fact, can't produce at the quality and the levels they'd like.

So, I expect more business to come out of that segment. It's just right now, it's early and a little less predictable than I would like before we put a stake in the ground on that.

Operator

The next question comes from Graeme Kreindler with Eight Capital.

Graeme Kreindler -- Eight Capital -- Analyst

I just wanted to get a quick follow-up with respect to the comments on the US market, particularly on the CBD side of things. There's been some commentary about the FDA giving some more clarity on regulations, really being a catalyst to unlock a lot of value in that market and make the operating environment really de-risk that. Is the entrance into that market in terms of an opportunity that will have a big commercial impact, is that something where you are going to be awaiting more clarity from the FDA or can you be potentially be advancing ahead of that on a state by state basis?

Terry Booth -- Chief Executive Officer

I expect we'll advance ahead of that.

Graeme Kreindler -- Eight Capital -- Analyst

Are there any particular states you've highlighted that you think are making strides faster than others?

Terry Booth -- Chief Executive Officer

I've got to be very careful. I narrow the pipe tremendously when I name the states. So, I'll leave that one alone. It's obviously the states where this is allowed at a high scale.

Operator

The next question comes from Andrew Carter with Stifel.

Andrew Carter -- Stifel Nicolaus -- Analyst

Good morning. Thanks for the question. I guess I wanted to ask about your Canadian medical business. You're the leader in Canada right now. It's a pretty significant portion of your revenue. The sales did flatten out this quarter. I guess what I wanted to understand is your outlook for that business, given your visibility and your patient base. How sustainable is that number right now? What are the opportunities for a truly differentiated Canadian medical offering as you see it?

Cam Battley -- Chief Corporate Officer 

So, we actually saw double-digit growth. We had over 10% growth in that market and then subsequent to the quarter, we reached almost 90,000 registered patients, which makes us by far the leader in Canadian medical. We are obviously seeing continued demand differentiated from the consumer system for medical cannabis. There are a couple of good reasons for that. Currently in Canada, medical patients can write off the cost of medical cannabis as a prescription product on their federal taxes and we're also seeing an increase in insurance coverage.

So, more and more people in the country who have prescriptions for medical cannabis are able to gain insurance reimbursement for it. So, there's some good reasons to do that. Let me add to that -- we always emphasize to patients that if you're using medical cannabis, it should be under the care of a physician, just like any other prescription product. We do anticipate that that medical market will continue. Certainly, we are seeing patients come over to us from some of the other licensed producers. We expect that that will remain a health portion of the business for us and frankly, one of our defining features.

Andrew Carter -- Stifel Nicolaus -- Analyst

Then separately on that topic, nice growth in export this quarter, but just over $4 million Canadian of your total sales. Do you have an outlook of where the pace of commercial opportunities will evolve for you to where that's a real significant portion of your business, developing a real critical mask. Then separately, kind of an outlook on when some of your lower cost cultivations are going to be available to you so you can be even more cost-competitive versus shipping from Canada.

Cam Battley -- Chief Corporate Officer 

The first thing I want to remind you of is what we're talking about right now is the June quarter. We're kind of looking back in time. Think about the fact that as we mentioned before, our production ramped up back end loaded in that quarter, right in June, probably in the last six weeks of the quarter. That's when we had a massive increase in production that allowed us to ship additional product over to Europe.

Obviously, what we want to do, we want to ship more product to Europe. Why not? We get a premium price, not just for our flour, but for our derivative products. We now have the ability to continue to do so. In addition, we also, as mentioned earlier, we have two additional facilities in Canada, one in Ontario, in one in Quebec that we anticipate achieving EUGMP certification. Once again, that will make it easier for us to ship more product to Europe. What was the second part of your question? I think the operator cut him off. Does anybody remember the second part?

Terry Booth -- Chief Executive Officer

We'll get back to him on that.

Operator

Our last question comes from John Chu with Desjardins Capital.

John Chu -- Desjardins Capital Markets -- Analyst

Just a couple quick questions -- so, just on the path to positive EBITDA, obviously, with 2.0 coming online, that will be a higher margin business, but I have to assume that in the early days, it's going to be a drag on margins. So, if it goes according to how you think it's going to go in terms of the rollout, how quickly do you think that business 2.0 can become positive EBITDA. Tied into that, you're increasing your extraction capacity. So, I'm just curious -- how much of a boost can that be to the path toward positive EBITDA?

Glen Ibbott -- Chief Financial Officer

I'll start with that. I guess I dispute your proposition that this would be a drag. Right out of the gate, we're manufacturing commercial scale all of our products right now. Our pricing is set. We believe in sustainable pricing at levels that will produce margins that are higher than our current products. I see no reason why that would be a drag on earnings.

Of course, it's going to be highly dependent on how much the provinces load in and at what point in time they load in. So, in terms of timing, we'll wait and see on that. We've made the investments necessary and have the operating and manufacturing facilities already efficient and relatively optimized so that we are delivering efficiently produced products. So, no, I don't see that as a particular issue for us.

In terms of extraction, we have been ramping up our internal extraction capacity. And we're now at a point where we can extract every bit of material that we need. So, when we look forward, it's not necessarily -- what we've done is removed a constraint we had previously, but it doesn't necessarily inflect our future revenues. It's just part of the puzzle for introducing this new generation of products. That's part of the manufacturing process that exists for us and isn't a constraint anymore. I understand your question, but I think it's part of the generation 2.0 products that are coming out and we're well prepared for those.

Operator

At this time, we have no further question. I will turn the call over to the presenters.

Cam Battley -- Chief Corporate Officer 

All right. Well, listen, thank you for everybody who joined this call. Once again, we are very proud of the quarter we delivered. I also want to emphasize one more thing. In addition to the positives we've achieved, it's also fairly significant what didn't happen at Aurora. I'm speaking about some of the tumultuous developments that have occurred in the sector.

At Aurora, we've had no crises, no scandals, no regulatory problems, no changes in senior management, no production problems, and no crop loss. We're going to continue executing with that same discipline that we've demonstrated throughout calendar 2019 and we're going to carry that over into our 2020 fiscal year. Thanks again to everybody.

Terry Booth -- Chief Executive Officer

One final note to everybody -- I'm very, very proud of the team at Aurora. We've crossed over 3,000 employees now across the globe and all of those positives that Cam mentioned is attributable to key teams and team members. Becoming the partner of choice and employer of choice is a very powerful position to be in and I thank all the team for an excellent quarter.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 75 minutes

Call participants:

Cam Battley -- Chief Corporate Officer 

Terry Booth -- Chief Executive Officer

Glen Ibbott -- Chief Financial Officer

Michael Singer -- Executive Chairman

Tammy Chen -- BMO Capital Markets -- Analyst

Matt Bottomley -- Canaccord Genuity -- Analyst

Steve Schneiderman -- Cowen and Company -- Analyst

Doug Miehm -- RBC Capital Markets -- Analyst

Brett Hundley -- Seaport Global Securities -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Glenn Mattson -- Ladenburg Thalmann -- Analyst

Graeme Kreindler -- Eight Capital -- Analyst

Andrew Carter -- Stifel Nicolaus -- Analyst

John Chu -- Desjardins Capital Markets -- Analyst

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