Aurora Cannabis Inc

TSX:ACB

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, everyone. Welcome to the Aurora Cannabis Second Quarter Fiscal 2019 Conference Call for the 3 months ending December 31, 2018.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 at SEDAR's database or on sedar.com.I'd like to remind everyone that this call is being recorded today, Monday, February 11, 2019.I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley.

[Cameron Battley, Chief Corporate Officer]

Thank you, Josh. Good morning -- or rather good afternoon, everyone, and thank you for joining today's call. With me today are Terry Booth, our Chief Executive Officer; Glen Ibbott, our Chief Financial Officer; and our Chairman, Michael Singer.Today after markets, we posted yet another strong quarter with $54.2 million of net revenue, demonstrating continued rapid growth based on the consistent execution of our consumer and medical strategies. Delivering strong quarters is getting to be a habit at Aurora. Revenue growth was 83% quarter-over-quarter, and that comes after an average of 44% growth quarter-over-quarter over the previous 6 quarters.In the consumer market, which launched on October 17, 2018, we posted a strong performance with $21.6 million in net revenues. However, this is only the beginning, and we anticipate strong continued growth as more product comes available to the market.We also continued to grow our medical business. While we allocated a significant percentage of our product available for sale to the consumer market, we are committed to and have continued to grow our patient base since our last update by nearly 10% to over 73,000 patients across Canada.We are a medical company at heart. We support our patients not only with high-quality product but also with advocacy, education and scientific research. We have completed, are involved in and are commencing some 40 clinical trials and medical case studies in addition to 7 preclinical studies. The scientific and clinical data we generate support the case for the medical benefits of cannabis and resonating strongly with the medical community. Having such a broad scientific program establishes Aurora as one of the clear leaders in the medical space and provides us with the credentials to engage with prescribing physicians and other medical professionals, building strong relationships and customer allegiance. It also increases our profile as a highly credible medical operator in the international marketplace, allowing us to engage with and become a preferred partner to a growing number of governments worldwide. All of this positions us exceptionally well to capture a larger part of the medical market, both at home in Canada and, currently, 22 additional countries abroad, as we scale up output and have more product available for sale.Ensuring patients receive their required supply of medicine remains a core priority. And last quarter, we provided 2,446 kilograms of dried cannabis and 746 kilogram equivalents of cannabis extract to this segment, an increase of over 20% from the previous quarter.On the inception of the legal consumer cannabis market in Canada, the federal government brought in a 10% excise tax on cannabis sales. Unlike any other prescription medication sold in Canada, medical cannabis patients are taxed for access to their treatment. Aurora disagrees with this practice, and we are not collecting tax from our medical patients but rather are absorbing the cost despite the slight negative effect on our revenues.The Canadian consumer market provide an extremely good opportunity for us. Consumer response to the legalization of cannabis has been strong. Overall, based on the statistics provided by Health Canada for the period October 17 to December 31, 2018, we achieved over 20% market share. Approximately 1 in 5 grams of product sold to Canadian consumers comes from one of the Aurora brands, and we continue to have top-ranking strains in our markets across the country. While the start of consumer sales did encounter its challenges which is to be expected with any brand-new and extremely complex new system, we responded and we delivered solid execution.In the consumer market, we predominantly sell to our partners, the provinces, but we're also participating in this new market by investing in retail organizations. In addition to our investment in Alcanna, who operate North America's largest chain of nongovernment-owned liquor stores and are targeting a large number of retail outlets across the country, we strategically invested in Choom Holdings and High Tide, 2 emerging leaders in the Canadian retail space.To address the continued strong market demand from the Canadian and international medical market and the Canadian consumer market, we are ramping up production rapidly. Currently, based on planted rooms approved by Health Canada, we are running at an annual production rate of about 120,000 kilograms or 120 million grams per year, and we expect to reach over 150,000 kilos of annual production by the end of next month based on planted and approved rooms.On the sales side, we expect to see a further increase in product available for sale for fiscal Q3, and we'll continue to accelerate production. We anticipate having approximately 25,000 kilograms available for sale in our Q4. That's the quarter ending in June of 2019.The cornerstone of our production ramp-up is our Aurora Sky facility in Edmonton, which is now fully compete -- complete and 2/3 of the facility is now planted, with the remaining rooms to be systematically planted by the end of this month subject to Health Canada licensing. Recent harvests at Sky show that we have dialed in the facility extremely well. We are achieving harvests above our target yields. With the technology in Sky tried and tested, we are very comfortable in our anticipation that, at full capacity, Sky will produce more than 100,000 kilograms per year of high-quality cannabis.In the quarter, we also achieved other production milestones that will help us increase our production of high-margin products. In October, our Aurora Vie facility in Quebec received its sales license from Health Canada for softgel production. Softgels are an increasingly popular alternative way of consuming cannabis, and Aurora Vie is now producing about 1.4 million softgels per week.This production will be aided by our extraction partner, Radient Technologies, which recently received its processor license and will now be able to operate its high-throughput cannabis oil extraction process commercially. Radient's facility in Edmonton is currently capable of processing 200 kilograms per day of cannabis into oil. Radient is expanding its facility to enable the processing of 1,000 kilos per day of medical cannabis and more than 10,000 kilos per day of industrial hemp.Industrial hemp production is important for the creation of CBD products. These nonintoxicating cannabis products are becoming increasingly popular for their numerous therapeutic and wellness effects. Leveraging the high-throughput capabilities of Radient, our leading R&D capabilities and cultivation capacity, we intend to launch a broad line of CBD-based wellness products in the near future, a market that is gaining considerable traction globally and which represents an incredible opportunity for early leaders such as Aurora to establish a solid market footprint, both at home and internationally. Our ability to execute on this objective is strengthened by our substantial hemp assets gained through our ownership of Agropro, Europe's largest organic hemp producer, as well as through Hempco in Canada and ICC in South America. Product development capabilities with a team that has proven time and again its ability to innovate and to work with regulators to introduce innovations in jurisdictions with restrictive, new and evolving regulations position us well to operate in this high-growth segment of the market.Advancing our global footprint continues to be a priority, and we've made great progress in fiscal Q2. Aurora's presence now spans 22 countries on 5 continents. I'll look into 2 regions -- Europe and Latin America -- with a combined population in excess of 1 billion people.In Europe, we continue to capitalize on the strong central presence we established in Germany. In early October, we became the first private company to be granted an import permit for medical cannabis into Poland. Later in the quarter, our distribution subsidiary, Aurora Deutschland, shipped our products to a pain treatment center and hospital in Warsaw.Similarly, we completed our first shipment of medical cannabis to the Czech Republic. We're working with Czech Medical Herbs, a pharmaceutical wholesaler of cannabis products, to provide cannabis to meet the growing market demand there.In November, Aurora became the first medical cannabis producer to be selected by the Luxembourg Health Ministry to supply medical cannabis flower, making it the seventh European Union member country where we have exported plants or products. While the Luxembourg market is not particularly large, our position as the sole supplier is a good indication of the quality of our regulatory teams, our ability to execute and the strong reputation we have built with medical regulators around the globe as a highly trusted partner in the medical cannabis sector. Going forward, we intend to further expand within Europe and to capitalize on our substantial early mover advantage.As mentioned in our last call, we established a leadership position in Latin America with the acquisition of ICC Labs, a leading cannabis company with over 70% market share in Uruguay and medical cannabis licenses in Colombia. We are in the process of integrating ICC, and we look forward to reporting on the exciting progress they have made. One item to highlight is the opening of ICC's laboratory and processing facility in Uruguay. We were honored to count the President of Uruguay as our guest of honor at this event. The facility has the annual capacity to extract cannabinoids from approximately 150,000 kilograms of raw hemp biomass, which we will feed into our international distribution channels.In December, we further expanded initiatives in Latin America when we entered into a Letter of Intent to acquire Farmacias Magistrales, a Mexican pharmaceutical manufacturer and distributor. Farmacias is Mexico's first and only federally licensed importer of raw materials containing more than 1% of THC. Once completed, this will provide us with first-mover advantage in one of the world's most populous countries where more than 130 million people will have federally legal access to a range of Aurora's nonflower medical cannabis products containing THC.As you've heard, Q2 was yet another quarter where Aurora aggressively moved to capitalize on the opportunities available to us on all fronts. We're very proud of our progress and congratulate all of our employees and team members that have contributed to this success.I'll now ask Glen to discuss the financials for the quarter. Glen?

[Glen Ibbott, Chief Financial Officer]

Thanks, Cam. Good evening, everybody.Aurora's financial performance in our fiscal second quarter 2019 reflected the company's continued execution across all market segments as Cam just described. Again, we had very strong quarter-over-quarter revenue growth with the first full ship -- quarter of shipments to provincial consumer use outlets contributing to an 83% increase in sequential net revenues and a 363% increase year-over-year. Overall, net revenue increased to $54.2 million for the quarter compared to $29.7 million in the first quarter of fiscal 2019 and $11.7 million in Q2 of last year. Q2 revenue included $21.6 million of revenue from the Canadian consumer market and $26 million from Canadian and international medical markets.Revenue growth was negatively impacted, however, by the introduction of the excise tax on cannabis by the federal government. As Cam mentioned, Aurora made the decision to absorb this cost rather than pass it on to medical patients. In Q2, we paid close to $3 million in excise tax related to medical cannabis sales.It's important to understand that our financial statements also contain gross revenues, as an IFRS requirement, reflecting the amount we actually charge to our customers. However, we believe the best measure of our operating performance is net revenues and, as such, we will continue to focus on and communicate about net revenues. Should the combined efforts of ourselves and a number of medical patient advocates convince the Canadian government to remove the unfair excise tax of medical cannabis, then our net revenues would increase to include the revenue that we are currently deducting to the excise tax reinforced.In Q2, extracts represented about 22% of cannabis revenue compared to 31% last quarter. This decline was a result of temporary oil extraction capacity constraints at our existing facilities as we moved through a rapid scale-up. This has largely been alleviated and will significantly improve with the recent licensing of Radient Technologies facilities. And going forward, we expect revenues from derivative products to increase as a percentage of our sales based on the demand for our softgel products, new extract-based products in development and upcoming shipments of oil-based products to Europe.The average net selling price of dry cannabis and cannabis extracts decreased to $6.23 and $10 per gram, respectively, as a result of lower wholesale price in the Canadian consumer market and the introduction of the excise tax. In the future, we expect the average selling price to begin to increase again as the larger percentage of our products are sold in the international markets, the temporary oil extraction constraint we faced is removed, and as we start the shipment of oil-based products to Europe, also as new product forms are launched and if the government removes the excise tax on medical cannabis.Our cannabis production in the quarter increased by 57% to 7,822 kilograms. This increase in production can be attributed to capacity added by both Aurora Sky and MedReleaf's Markham and Bradford facilities.As noted by Cam, we expect to achieve annual production capacity of at least 150,000 kilograms by the end of next month based on Health Canada-approved and planted rooms. Product available for sale will continue to grow as our production hits full stride.As Cam noted in our fiscal Q4, that's April to June 2019, we expect to have approximately 25,000 kilograms of product available for sale. For context, in the first 5 weeks of calendar 2019, we have harvested more volume than our entire annual production capacity was a year ago. This puts us in a strong position to strategically allocate product to various higher-margin markets, specifically the Canadian and international markets.Our cash cost to produce increased to $1.92 per gram and gram equivalent. That's up $0.47 from last quarter. This was a result of temporary inefficiencies during the scale of production at Aurora Sky as well as increased labor and inventory management costs in preparation for consumer legalization in October.For our successful launch into the Canadian consumer market at Aurora, it was all hands on deck. As we have seen throughout the industry, there were a lot of start-up challenges, but we powered through this phase and have now moved on to optimizing production and distribution processes. We expect future production costs to go down as Aurora Sky is producing at its full capacity. As we have discussed before, we expect cash cost to produce will fall to well below $1 per gram in the Sky Class facilities.During the second quarter, we continued to make targeted investments to secure talent and enhance infrastructure to maintain our leadership within the Canadian and international medical cannabis market and the Canadian consumer space. We have now grown to over 2,000 employees across Canada, Europe and South America, all of whom are working hard, and focused on realizing this incredible opportunity to maintain our leadership globally and to open and lead new international markets in growth initiatives.Overall, as we indicated in early January, SG&A costs were relatively flat quarter-over-quarter, growing by 2%. Within that, G&A costs for the quarter were $43.6 million, a $7.7 million increase over the last quarter. Most of this increase, over $4 million, is due to milestones paid related to acquisitions made in prior quarters and for expenses related to our U.S. listing costs. We also absorbed a full quarter of the G&A cost of MedReleaf and other Q1 acquisitions that contributed $1.3 million to this increase. Looking ahead, we will prudently control our G&A costs, but we do expect them to increase as our global expansion demands ongoing addition of talented staff and operating capacity.Marketing expenses decreased by 30% to $22.7 million over the prior quarter. As we have discussed previously, marketing costs related to efforts in Q1 2019 and early Q2 for awareness and brand building in advance of consumer legalization dropped off significantly after the implementation of the Cannabis Act. In Q2, we did pick up a full quarter of sales and marketing costs from Q1 acquisitions, and this represented an increase of $2.6 million over the previous quarter. Going forward, we expect our sales and marketing expenses to increase as we build out medical, sales and marketing capabilities into our -- in our international markets and continue to support the rollout to the Canadian consumer market.R&D expenses decreased slightly compared to Q1 2019. Despite expected quarterly variations in R&D throughout fiscal 2019, we, along with our industry-leading science team, are committed to innovating high-margin targeted medical and consumer products for the global cannabis industry. Under IFRS, we are required to estimate the fair value of investments and derivatives that we hold, including warrants in the Green Organic Dutchman and CTT Pharma. With the broad stock market and cannabis stocks in particular hitting a low in late December, we recorded several noncash-related fair value adjustments on our P&L, which negatively impacted net earnings. As we have noted in prior quarters when we have seen noncash gains, we expect this volatility in fair value measurements will continue to produce swings in noncash gains and losses on our P&L in the future.As at December 31, we had $46.8 million in cash and equivalents. Subsequent to the quarter, we closed a U.S. $345 million convertible note offering with a number of high-quality U.S., European and Canadian institutional investors. The terms of the notes provide us with the optionality to potentially settle the balance, which has a maturity of 5 years, in cash, shares or any combination thereof. With maturity following in the time frame within which we believe we will be strongly cash flow positive, it provides us with the option and flexibility to limit future share issuances. Proceeds of the placement are earmarked predominantly to fuel corporate growth domestically and internationally.With the rapid scale-up of our production and the related increase in product availability, the continued very strong demand for our products, our planned expansion of a derivative product portfolio of these higher-margin products and continued discipline in our operating cost, we are very comfortable in reiterating our earlier guidance of achieving positive EBITDA in our fiscal Q4, that's April to June 2019, with positive operational cash flow following shortly thereafter. We are executing well as reflected in these results and in our expectations going forward, and we are exceptionally well positioned as one of the clear leaders in the global cannabis industry.I'll now pass the call back to Cam.

[Cameron Battley, Chief Corporate Officer]

Thank you, Glen. To summarize. We're obviously very pleased with this past quarter. The growth we achieved in revenue, the progress we achieved in production capacity, the continued expansion of our global footprint and the early and first-mover advantage in a growing number of markets, along with the continued product innovation, medical and plant science. All of these things validate our vision that we formed when we started on this journey to create the preeminent global cannabis company.Looking at the rest of the year, you can expect to see our operating costs trending down as our Sky Class facilities come online and we continue to reduce operating costs. We'll leverage our leadership in international markets to accelerate further growth. We'll launch new product innovations and continue to innovate along the value chain. We have reached an inflection point, and we anticipate that we will be entering a period of sustained adjusted EBITDA profitability, fueling further growth of the organization on a global scale.And a last couple of pieces of news. You may have seen our news release out this morning indicating that we've achieved our first commercial export to the United Kingdom. I want to speak to that a little bit because, although this is a small-scale import, it just shows the capabilities of our regulatory and business development teams in understating new markets worldwide and getting in fast.Many of you will have been at or will have heard of the Cannabis Europa conference that took place last week. When I was there, we were talking very intensively with people from both the U.K. and from France. And it's my belief that the U.K. will turn out to be a very substantial market for medical cannabis with France looking good perhaps 10 or 12 months behind.Institutions are also coming into the Aurora story as well. One of the benefits of the recent convertible note was that it brought in these high-quality, long-term investors. And in addition to that, we do have some more catalysts coming in this quarter, one of which will be the first sale of derivative products in Germany. In Germany, we will receive a premium on our derivative products, just the same as we do with our dried flower.And with that, I'd like to hand this back to Josh, the operator, and open the call to questions.

[Operator]

Your first question comes from the line of Tamy Chen with BMO Capital Markets.

[Tamy Chen, Equity Research Associate]

My first question is, Cam, could you elaborate a bit more on the initial supply chain issues that we saw coming out of the gate of rec launch and what Aurora's experience has been? And are we largely past those issues now?

[Cameron Battley, Chief Corporate Officer]

Yes. I mean, look, anybody that would tell you they know how the consumer market is going to play out and how much it's going to be -- how much product is going to be available in the middle of the year and the end of the year, I think they're pulling your leg. It's a very, very easy story. What I can tell you is that from Aurora's perspective, we were very pleased with our logistics and operations out of the gate, and that's why we think we had a very quick and smooth start compared to some of our peers in the consumer market. It is, obviously, the -- it's going to take some time to iron out all the bugs. We are going to have to see a better retail infrastructure in provinces across the country in order to see the kind -- the level of sales that I think everybody is anticipating, but it's going to take just a couple more quarters, I think, than some people who are most optimistic thought at the beginning.

[Tamy Chen, Equity Research Associate]

Okay. And in terms of the value-add products that are expected to come later this year, could you just talk a bit about what you're doing in terms of both the product development side for these products as well as just thinking about laying the necessary parts of the supply chain for these products as well?

[Cameron Battley, Chief Corporate Officer]

Yes. I'll start and then maybe Terry might want to weigh in and provide some color as well. So obviously, we're doing a few things. One, we have an excellent new product development capability under Dr. Shane Morris. He and his team are responsible for, among other things, getting our softgels rolled out and also our Aurora Cloud, the first vape cartridge permitted in the medical cannabis market in Canada. And so they're working very hard on making sure that we're prepared for all of the additional segments that will become available once the new regulations are enforced. And we anticipate that to happen somewhere around the middle of the year. Now, bear in mind a couple of things. One, we are going to emphasize -- although, we're going to enter virtually every segment of the market, we're going to emphasize as the product forms and the segments of the market where we think we can generate the highest margins. And then the second thing to bear in mind as well is that we continue to see ourselves and to find ourselves primarily as a medical company. So we are not going to be dumping all of the additional production that we generate through Aurora Sky and our Bradford facility being at full capacity into that consumer market. We're going make very careful decisions with respect to product allocation across each of our distribution channels, remembering that some are a priority, starting with the Canadian medical segment and then moving on to the European medical segment. Now I'm going to ask Terry to chime in as well.

[Terry Booth, Founder, CEO & Director]

Thanks, Cam, and good afternoon, everybody. With respect to product development, as Cam mentioned, Dr. Shane Morris is an expert. He's worked both sides of that fence at Health Canada and now with -- in a private license producer. We brought a couple of products to market that weren't there before. We expect to be first mover on other products in this space, and those products will be the ones that are the most profitable products. And in the consumer use market, we're allowed to be doing that, we expect, in the next 6 months, from your edibles and your beverages and whatnot. So we don't want to give the tip of the hat to exactly what we will be putting into the market, but know that we're on top of it and know that our product development team is world class.

[Cameron Battley, Chief Corporate Officer]

Does that answer your question, Tamy?

[Tamy Chen, Equity Research Associate]

Yes. And I just had last -- one last one, if I may. In terms of international, how are you thinking about -- on the hemp and CBD opportunity with respect to the U.S. and also the EU -- and obviously, regulatory frameworks are quite different. How are you positioning the company for these markets? And how are you anticipating regulations in these areas to develop that would allow you to enter?

[Cameron Battley, Chief Corporate Officer]

So I want to speak to the EU and then maybe Terry can weigh in on the U.S. So one of the things that we're doing, Tamy, in Europe is making a very clear argument that Europe should move forward in harmonization country-to-country so as not to disturb the common market, and that would be consistent with appropriate behavior within the European Union. That would apply, the way we see it, both to cannabis and to hemp products. And it's very, very important. In a single market like that, if you want it to operate as a single market, you have to have a harmonized set of regulations. So we're working on that very hard right now. Terry, if you want to speak a little bit, too.

[Terry Booth, Founder, CEO & Director]

Sure.

[Cameron Battley, Chief Corporate Officer]

I mean, we don't want to give way too much of our strategy just yet in the U.S. but...

[Terry Booth, Founder, CEO & Director]

Yes. The FDA -- or rather the Farm Act that was put in place that allowed for the hemp production and distribution in U.S.A. didn't really touch properly upon the CBD distribution. The same states in the U.S. seizing CBD products has been developed and have been on the shelves for some time. So it is a bit of legal confusion in the States. New York City aimed today, put out a note so any seized products in the CBD industry. So you have to have both sets of those regulations working, the act or the law with the regulations to pull under it. We're on top of that market. We've got -- obviously, we're first mover in the hemp space out of any other of our competitors. Certainly, Hempco, RTI, Agropro, [indiscernible] and ICC are all very well-versed in the hemp industry. And we'll enter when it's proper to enter and when it's legal to enter into the United States market.

[Operator]

Your next question comes from Matt Bottomley with Canaccord Genuity.

[Matt Bottomley, Analyst]

So I just wanted touch more on the sort of supply-demand dynamics, more with respect to where you see pricing going. So when I look at the data, it seems like the bottleneck might be more on the infrastructure side when it comes to the government being able to facilitate sales to all potential Canadians, and I think product form will add a lot to that as well, but how much visibility do you have on average in all the provinces you're in with respect to pricing? And where is your sort of downside scenario as of -- maybe as a percentage of where it might go by the end of the year, considering more and more product availability coming online with an increasing number of LPs?

[Cameron Battley, Chief Corporate Officer]

I think it's going too far to assume downside on prices in 2019. We just don't know how quickly other companies are going to be able to ramp up and how much product they're going to be able to get into the system. So I think that I would stop that assumption that there's going to be pricing pressure. At the moment, we believe that Aurora is getting a higher average price for our products, both dried flower and our derivative products than selected other companies in the sector. And one of the things that we actually may see -- one thing that we may see if there continues to be significant excess of demand over supply, is more flexibility from the provinces with respect to pricing of certain premium products. Would you agree with that, Terry?

[Terry Booth, Founder, CEO & Director]

Absolutely, Matt. I agree with Cam. And if I lose sleep over anything, I lose sleep over our ability to supply this global cannabis market. It is -- it's coming in. It's very fast. You're seeing -- with respect to adult usage, the addition of Whistler Pharmaceutical. Their average price to province is at $11 per gram that they managed to sign contracts. So a premium brand of value-added products that are coming online with the changes to the act will certainly increase our price per gram. I do not see it going down anytime soon. I see this world expansion as the cannabis-based [ study ] being close to being set properly. And it's at least 5 years before we have an oversupply situation for companies that can export under EU GMP-compliant facility.

[Cameron Battley, Chief Corporate Officer]

Terry is absolutely right. If you take a look around the world, and some of you have heard me say this before, that there's no shortage of cannabis in the world, but there is a massive shortage of legal regulated cannabis, particularly cannabis that can achieve -- cannabis products that can achieve EU GMP certification. And just think about it this way, Europe is a market of between 450 million and 500 million people, depending on whether you count the U.K. at the moment. And there is precisely 1 EU GMP production facility in Europe. There are a total of 8 EU GMP-certified production facilities in the world, and we have 2 of them, plus we have our EU GMP-certified distributor, Aurora Deutschland. The future for us is a question of how much supply can we get out there? And like we've indicated, we're going to be focusing primarily on the higher-margin medical markets and also on the higher-margin products within those segments.

[Matt Bottomley, Analyst]

Great. That's good to know, and I appreciate that. I just wanted to confirm that I understood, though. So the domestic sale price just in Canada alone, are you expecting that pricing to stay in line or potentially increase in 2019 specifically outside of all the international upside?

[Terry Booth, Founder, CEO & Director]

I say, Matt, that the high-quality cannabis pricing will go up, without a doubt. Right now, they're -- it's [ AB Duck to Moët ] that the provinces aren't distinguishing the differences in high-quality cannabis from not-so-high-quality cannabis. Consumers that have chosen their products will demand those products, and that will give us an opportunity to go back to the provinces, and say, hey, you know what? We have an awesome demand for these particular products. We are going to be increasing our prices. We're not going to continue to sell our cannabis at the same price that our competitors sell it at if it's not as much in demand. So it's all about high-quality products will drive this market and the provinces, I believe, will be paying out for that before too long.

[Cameron Battley, Chief Corporate Officer]

And the pricing that we're able to achieve is a really important consideration to where we allocate products. So we put together a very sophisticated demand planning and product allocation protocol, and that is guiding us on a rational basis as we move forward to figure how out much of our product we want to sell in each of our distribution channels.

[Matt Bottomley, Analyst]

Great. I appreciate that. Just in the interest of time -- I know there's a lot in queue -- just some housekeeping questions. I'll just do them back-to-back quickly. One is just the percentage of oil contribution or revenue from oil, should we expect the adult use side of that to remain relatively flat, just considering we're not going to have derivative products till Health Canada puts them into the regulations? So I think you did about 10% of your rec sales were oil, and apologies if that's wrong. And the second thing is just how us as analysts should be factoring in the potential growth profile in your international markets because there's been a lot of great positive news flow from yourselves and a lot of other licensed producers, where there are these initial shipments, and it seems like almost a dozen or 2 markets now, how do you think the international export growth is going to outpace your Canadian medical growth in the next year or so. Obviously, it's going to outpace it, but I'm just curious if you can give any more variables or any other inputs to help us model that out. And I'll leave it there.

[Terry Booth, Founder, CEO & Director]

Do you want to start, Glen?

[Glen Ibbott, Chief Financial Officer]

Yes, sure. Matt, so oil into the Canadian consumer market are derivative. We were constrained by our ability to extract and produce in the launch of the market. We really had to focus on getting product out the door to meet our commitments to the provinces. Going forward, you've seen us launch recently softgels, and certainly, the oil, the drops and stuff that we've produced and sell in the provinces sell well; and they sell, to your earlier question, well above those minimum prices you were talking about, where you can get sort of in the $5.50 net range for dried cannabis, but you're talking over $9 for our derivative products on a per-gram basis. So they're -- good pricing but certainly good uptake as we're able to supply those markets. So we see even in the adult market or in the consumer market that there is nowhere to go but up, I think, on the derivative products side. But the international export, I think this is a really interesting year for us, calendar 2019. Now that our facilities have really ramped up in terms of production, we have Sky humming along, we've been able to make those, as Cam talked about earlier, those strategic allocation decisions about where to put that next gram of cannabis. So we're now directing a significant supply over to Europe, and as Cam said, we'll also be -- we'll have within this quarter, first oil sales in Europe or in Germany for us. So I'm very excited to see how quickly we can accelerate that market. Our colleagues in Europe are building out their sales force. They're doing -- continuing medical education with physicians. They're doing lots of awareness campaigns. Truly a pharmaceutical model over there. What's been lacking is supply from EU GMP-compliant facilities. So we've got that now, and we're able to direct significant stream of supply over there. So we'll see how that plays out over the next few quarters. I think it's a little premature to try to put a percentage on that yet, but it's going to be as high as we can possibly make it because it's our top market in terms of return.

[Operator]

Your next question comes from Jason Zandberg with PI Financial.

[Jason Zandberg, Special Situations Analyst]

I wanted to touch on some specifics on the key retail landscape and your capacity. So can we talk first about prerolls? What's -- what was your capacity in this -- in the Q3 time period? And sort of where -- I know you're ramping up with the Wagner Dimas investment. When do you -- where do you plan to be by the end of the year in terms of preroll capacity?

[Cameron Battley, Chief Corporate Officer]

In terms of specific capacity of prerolls. Okay, give us a second. I'll see if we can pull this up. I'm not sure if we have those data available right now. What I can tell you is, obviously, we like those products because they sell for 50% more than dried flower, and we also very much like the Wagner Dimas technology. That's actually a really interesting case, because we're -- whereas we have the Canadian license rights to that technology exclusively, our U.S. spinoff, Australis Capital, also owns 15% of Wagner Dimas. So it's an example of how what we're doing through Aurora and Australis can dovetail very nicely. Glen, did you have any clarity -- I mean, that's pretty specific but...

[Glen Ibbott, Chief Financial Officer]

Well, yes. So you asked a question whether capacity was different than the sales we actually made. So the capacity is ramping up really rapidly. They're introducing automation and just the process. Prerolls are probably in the nature of just under 20% of our sales in the consumer -- out of the dry cannabis sales in the consumer market, but that doesn't speak to capacity. And we have significant capacity, to be honest.

[Terry Booth, Founder, CEO & Director]

We've now taken delivery of 3 Wagner Dimas machines. The capacity that has been reported to us is 500,000 prerolls per day. And it's, in my opinion -- and we see many of them, the very best preroll machine in the industry. Without a doubt. It's got an excellent couple of young fellows in California working on it. Now we've introduced our automation team to those fellows, and we're improving it even further. So we'll have the ability to feed the need for the capacity. I do see the hemp cigarettes are getting a lot of traction now in Europe. So those are going to be these familiar machines, and we're going to get into that market segment as well, I hope. We'll see how it goes, but Wagner Dimas, a great company with great machines that will meet our demand.

[Jason Zandberg, Special Situations Analyst]

Okay. Okay, can we talk extraction? You had mentioned that the extraction was a bit of a bottleneck in your Q3. You also mentioned that -- you added some color in terms of your partner, Radient, what their capacity is going to look like now that they've received their processing license. Is there any way to quantify what your internal capacity was like in Q3 and where you expect that to go once Radient's at full capacity?

[Cameron Battley, Chief Corporate Officer]

Well, it's going to remove the constraints. So I would expect that you would see our percentage of revenues coming from extracted products increase now that we do have that capacity over Radient. If you want me to quantify it, Glen, do you have any numbers to give?

[Glen Ibbott, Chief Financial Officer]

No, we've got our MedReleaf extraction capabilities coming on. We've got Radient, and plus we've kind of optimized our processes. Jason, the only thing that's important to understand is our launch into the consumer market. If you'll recall, we got our license for sale at the Sky facility in October '17, the day the adult -- or the consumer use was legalized. And we -- that really -- the usual Health Canada licensing, it's a little bit of a change to the way we process things. We essentially moved a whole bunch of our staff down to Cremona to work out of our Mountain facility, changed around processes at the Mountain facility. It really was all hands on deck to get this out and to have a very successful launch. But it did impact our ability to produce all of the products that we wanted out of all the facilities. It was a very complex time with the products moving between different facilities and where we had sales licenses and where we were producing. So that's all being optimized right now. So I think the best way to look at it, as Cam said, is there is no constraints going forward as we're able to use our own internal capabilities and the capabilities of Radient. We'll be able to produce whatever the market can absorb. And we'll be able to produce things like softgels at extremely high volumes. So...

[Cameron Battley, Chief Corporate Officer]

And we do love the softgels. They sell for $1.50 per capsule, and there's lovely margin on those. So we want to sell as many of those as we possibly can.

[Terry Booth, Founder, CEO & Director]

But what Glen was speaking to -- logistics around moving all of our equipment and our labeling and our palletizing down to a facility that wasn't anticipated to be used for our logistics was quite a challenge. We met it. It was a massive effort by the Mountain facility and the Sky management. And hats off to those guys for coming out of the gate probably the best in the space.

[Cameron Battley, Chief Corporate Officer]

And the other thing to keep your eye on is derivative sales in Europe. Obviously, getting those cannabis oils and subsequently different form factors into Germany is going to be a very big deal for us. My anticipation is that a lot of the European markets, at least initially, will be extremely keen on nonflower forms of cannabis products. So that'll be a contributor to our overall sales from derivatives as well.

[Jason Zandberg, Special Situations Analyst]

Okay. Great. And my last question, you've mentioned in your MD&A that your current annualized capacity is 120,000 kilograms per annum, and you mentioned by the end of March, it'll be at 150,000. So that delta of 30,000, is that coming from Sky being at full capacity? Or is other capacity coming online?

[Cameron Battley, Chief Corporate Officer]

Primarily, Sky and also Bradford -- the Bradford MedReleaf facility in Ontario.

[Terry Booth, Founder, CEO & Director]

A pinch from Whistler.

[Cameron Battley, Chief Corporate Officer]

Yes, it's got a little bit from Whistler, Terry says.

[Jason Zandberg, Special Situations Analyst]

Whistler is included in that as well? Okay.

[Operator]

Your next question comes from Michael Lavery with Piper Jaffray.

[Michael Scott Lavery, Principal & Senior Research Analyst]

Just was wondering when you talk about the pricing improving and the mix benefits, could you give any sense of how much to quantify that and order of magnitude?

[Cameron Battley, Chief Corporate Officer]

As to what we think will happen to pricing?

[Michael Scott Lavery, Principal & Senior Research Analyst]

Exactly.

[Cameron Battley, Chief Corporate Officer]

In the consumer market, I think you're talking about?

[Michael Scott Lavery, Principal & Senior Research Analyst]

Right, yes.

[Cameron Battley, Chief Corporate Officer]

Like I say, that's kind of a [ mud ] scheme. It's really, really hard to project. I would see it, I think, probably coming up. I think you would agree, Glen? But as to how much and over what period of time, I'm not sure that anybody has that kind of level of insight into this market. What do you think? We're getting headshaking around the whole room.

[Michael Scott Lavery, Principal & Senior Research Analyst]

Well, and I guess I'm just curious when you reference some of the benefits that mix should add and everything else, how much visibility do you have on the next, say, 2, 3 quarters for what -- how much capacity drives that? Is it a more gradual pretty modest improvement? Or is that something we should expect to see...

[Terry Booth, Founder, CEO & Director]

Yes, I think there's going to be a significant improvement because we're meeting the mandate. And the mandate is to provide the products to the consumer market the same as the gray market is producing. And the reduction of the gray market is only going to come with the production of our market's products. And once that is established, you're going to see significant improvements in profit. And certainly -- the derivative market we all know is a more value-added market. It's a more popular market. It's about 50% of the market in the United States. And in some states, it's now past that 50% mark; it's at 55%. I see that's where this is going. And certainly, our European countries are going to see flower I think being reduced to deal with Mexico. It's purely a derivative deal, which is great for us, and we don't have to grow it down there. They're not going to have any growing of it down there. We're just going to ship our raw derivative full-spectrum down to the -- our partners. So it's -- I can't see any turnaround in the average pricing per gram going down. I really can't. And remember, we're a low-cost producer. So if it does. If it does go down, we'll be there to compete on a very high level, and you may see some casualties out there.

[Cameron Battley, Chief Corporate Officer]

Yes, I mean, we've [indiscernible] that actual scenario that Terry just mentioned. If in fact there is a lot of supply in the Canadian consumer market at any point, whether it's next year or the year after that, that's a scenario that we planned for. And as a low-cost producer, we're going to continue to thrive in that market. Glen has modeled out what our margins will be at each of the different wholesale price points, and it continues to look extremely healthy for us, well below points at which other companies would have to stop competing because they simply can't produce that at that low cost. And they won't be able to compete.

[Michael Scott Lavery, Principal & Senior Research Analyst]

Just one more on the cost side, a similar question. You saw the sequential increase in cash cost per gram, but obviously, you've got some capacity improvements and scale building. Where does that go? How much of your higher costs in this past quarter were transition related and sort of the growing pains of adjusting to the new rec market? And by order of magnitude, when you talk about the costs improving, any rough sense of how to think about that?

[Glen Ibbott, Chief Financial Officer]

Yes, Michael, there's a couple of things to think about there. You would've seen our trend previously. We were -- last quarter, we were at about $1.45 per gram produced, and that was without the impact of a high-capacity Sky facility and without Bradford coming on, and again, a very high-volume facility. So we're definitely working and trending in the right direction. Now this is driven by a couple of things. The continuous improvement mindset and a lot of automation, it's also improving yields as well. So Cam alluded to earlier that we're -- now at Sky, we're sort of proving out the ability to produce, and then, in fact, are hitting well above our -- I'll say, above our [indiscernible] yields for each of the rooms. So that again [indiscernible] costs because we don't add more people. We don't add more nutrients. We don't add more. We just get more out of the plants when we dial in all the environmental variables to increase yield. So what we see coming then is this anomaly we had in the quarter. Andre described a little bit of it where we were moving folks all over the place. We moved -- physically moved people down for a month to work at another facility just simply to get all the products out the door before we got ourselves licensed. So some from Canada to certain facilities. It's a similar story across the organization where we just have those onetime "launch into the consumer market" costs that are now going away. Sky, being into production but the automation being dialed in over the last couple of months, we had more people. We had more labor in Sky. Now that's reducing as well. So we really see the $1.45 the last quarter is more representative of our costs across most of our facilities. And then what we stated publicly at the large scale, the Sky Class facilities, will be well below $1 a gram to produce there. And again, if you look forward a couple of quarters, that's where most of our volume will be coming from. So you should see our overall cost per gram to produce to trend down to the $1 range or below $1 across the company.

[Operator]

Your next question comes from the line of Martin Landry with GMP Securities.

[Martin Landry, Director and Equity Research Analyst]

Just wanted to dial down a little bit in your production costs as well quickly. Wondering if you're able to break down packaging and depreciation on a per-gram basis in your COGS because you did mention that your packaging costs went up, and I just want to understand a little bit better that aspect.

[Glen Ibbott, Chief Financial Officer]

Packaging costs went up in the consumer market, yes. There's more requirements, as you know, Martin, under the Cannabis Act. On a per-gram basis, that we're still -- we're not at the volumes yet. I don't want to get into per gram that will -- you'll build into a forecast because, the volumes we saw in Q4, while they're a great start, they're nothing near what's coming up. So we'll gain the efficiencies of scale and some of the investments and some of the automation over the next few quarters. So I feel uncomfortable right now kind of predicting where that per gram on packaging goes.

[Terry Booth, Founder, CEO & Director]

Martin, it's Terry here. Another key factor was our packaging machines that weren't all set up yet. We now have 2 and maybe 3 across the country, fully automated packaging machines. And we're trying to get 1 commissioned because of the late date from Health Canada. So those are now all running, and there's a lot less people working on them, and they're filling a lot more packages, reading a lot more labels on. So I expect that price to go down. But as Glen says, on a cost-per-gram basis, almost impossible to nail that.

[Cameron Battley, Chief Corporate Officer]

And it's also a moving target because it keeps changing as we bring new technology into the game, so...

[Martin Landry, Director and Equity Research Analyst]

Okay. That's fair enough. And then you do talk about your yields being higher than you expected at the Sky facility. Can you share with us what are those yields?

[Cameron Battley, Chief Corporate Officer]

I don't think we want to be too precise until we have even more harvest under our belt. But we can say, we now have enough harvest that we have -- we can say with confidence that we're getting more than we need out of each harvest in order to achieve that target of more than 100,000 kilograms a year at the facility at Sky.

[Martin Landry, Director and Equity Research Analyst]

Okay. And the last one from me. You talk a lot about international exports, and right now, I think these are going to come from Markham and Mountain, but wondering is there an intention to get your EU GMP certification for the Sky facility?

[Cameron Battley, Chief Corporate Officer]

Yes. Terry, do you...

[Terry Booth, Founder, CEO & Director]

Absolutely. We're -- that process has started. You need to be in full production before you even apply for the initial audit from the people that do EU GMP certification. So our internal team from the EU have been through Sky; they have some recommendations for us, and we expect to be ready once we get into full production and once we have the corrections that they may recommend. And then we'll, of course, have the audit. So timing on that, it is really sort of a Health Canada thing. Once we get fully licensed, then we get fully planted, then we at least have 1 -- all 17 rooms at least go through 1 cycle, then that process will begin. So not too far out, but it is our intention.

[Cameron Battley, Chief Corporate Officer]

And we feel like we're going to be successful in this. We have the expertise within the company to do this. We have the guidance from our European colleagues. And you've been in the facility, I think, Martin, and we're essentially already operating to that level of standard of GACP and GMP.

[Operator]

Your next question comes from Graeme Kreindler with Eight Capital.

[Graeme Kreindler, Research Analyst]

I wanted to ask about the market share figure that you had there about 20% in the consumer market. I was wondering if there was any indication of how that's trended now that we're roughly 1.5 months into the next quarter.

[Cameron Battley, Chief Corporate Officer]

Sorry, I missed the last part of that?

[Graeme Kreindler, Research Analyst]

I was wondering how...

[Cameron Battley, Chief Corporate Officer]

Are you asking how we came up with that number?

[Glen Ibbott, Chief Financial Officer]

No. He's asking how we did in January and early February. Yes, we haven't seen -- listen, we have a lot of our own insights. We have analytics teams that are deep into this. But we haven't seen anything that we could share publicly. So there is data feeds just -- and you may be aware of this, certain provinces do give us data feeds on either our own sales or the competitive sales as well. So we know exactly where we are, for instance, in Ontario. But we are also under contract not allowed to use that publicly and disclose that. So I can't give you more on that. But we certainly haven't slowed down at all in terms of our production and shipment. This will play out. I'm not sure how the other fellows are doing in this industry in terms of what they're delivering.

[Cameron Battley, Chief Corporate Officer]

It's a little murky. We don't have the kind of data gathering and analytics companies that you do with the pharmaceutical industry. So the clarity is less than optimal, let's say.

[Terry Booth, Founder, CEO & Director]

And I'd just add, we have to understand that some of these provinces did underestimate the demand, and we're not that ready to give them more than what our contract requires when we're getting double in other locations. So we're going to meet our contractual commitments in the adult usage market the best we can, and we hope to increase the SKUs in those adult usage markets. But it is not something that we have top of the priority list and providing cannabis for a lesser price. We don't have to.

[Graeme Kreindler, Research Analyst]

Okay. Is there a figure you target internally in terms of what you would want for target market share in the consumer market in Canada?

[Terry Booth, Founder, CEO & Director]

You mean, globally? For global, we have some big targets but not...

[Cameron Battley, Chief Corporate Officer]

Yes -- no, he's talking about in the Canadian consumer market.

[Glen Ibbott, Chief Financial Officer]

No, it gets us back to the discussions we've had in the past about our allocation. We've got a very strong team that's deep into a lot of analysis and a lot of recommendations have come up to the executive for strategic allocation decisions. So we meet our minimum commitments. But even within the allocation of provinces, we look province by province where it makes sense to supply either our commitment or more than our commitment. But in terms of allocation, they're medical markets first, international and Canadian. Terry talked about earlier the opportunity to ship extract-based products to Mexico where we're shipping to Germany this quarter. There's a lot of allocations that we can now make that we've got the supply, and we've got the global footprint. So our percentage that we sell into the Canadian consumer market will be whatever is left after we've fully allocated all the other higher-value markets.

[Terry Booth, Founder, CEO & Director]

I think it's a fair way to put it.

[Graeme Kreindler, Research Analyst]

Okay. The other question I had here is, looking at the inventory balance at the end of the quarter, and if my math is correct, I get about 15% of that inventory balance is finished goods. But I was wondering if you can provide a bit of color on the process of moving from work-in-process to finished goods and just tying that through with the 25,000 kilos of available for sale by the target you set out?

[Glen Ibbott, Chief Financial Officer]

So I'm not sure I'll answer your question exactly, but here's what we've tried to do with being more precise and prescriptive with the way we describe our production and our available for sale. So yes, I mean, there is the biological assets that are currently growing, and then there's -- it doesn't sit in our inventory for very long, right. Like we've got lots of markets to allocate this to. But what we've done with the guidance we gave in early January and then reaffirmed here today is trying to turn production into available for sale. So as you know, there are plants in rooms right now at Sky that are growing. But they're on an 8-week cultivation cycle, and then there's harvest and dry and sometimes, there's -- certainly, there's packaging. Sometimes there's further manufacturing, whether we're going to extract out stuff. So we've got a full usually 3 months from the time we put a plant in a room to the time it's available for the market. So we're trying to be more precise with that when we put out the 25,000 kilograms figure for Q4. And we're saying that that's the amount we'll have available for sale in that quarter, which means it's growing right now. If it's growing right now, it'll be available for sale in Q4. It's a finished product at that point. I hope that answers your question well enough because it's generally, I think, fairly fuzzy in the industry right now in trying to see through the LPs in terms of where they're actually at in terms of production and what they're going to be able to deliver to the markets on a quarter-by-quarter basis.

[Graeme Kreindler, Research Analyst]

Yes, that helps. And just one last follow-up there. I mean, we've heard talk of a lot of different bottlenecks at different points in the value chain. Has the acquisition of Anandia and the work they do on analytical testing, has that helped Aurora at all in terms of getting product from the work-in-process stage to the finished goods stage?

[Cameron Battley, Chief Corporate Officer]

No, I don't think that that's had any direct impact. I mean, the acquisition of Anandia has had lots of positive impacts, but I wouldn't name that as one of them.

[Operator]

There are no further questions at this time. I'll turn the call back to the presenters.

[Cameron Battley, Chief Corporate Officer]

All right. Well, listen, I want to thank everybody again for joining us for this conference call. And we look forward to doing it all over again in another quarter from now. Thank you.

[Operator]

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