Aurora Cannabis Inc

TSX:ACB

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, and welcome to Aurora Cannabis Second Quarter 2022 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Ananth Krishnan, Vice President of Strategic Finance. Thank you. You may begin.

[Ananth Krishnan]

Thank you, Diego. And we appreciate you all joining us this afternoon. With me today are CEO Miguel Martin and CFO Glen Ibbott.After the market close, Aurora issued a news release announcing our financial results for the second quarter of our fiscal 2022. The release and accompanying financial statements and MD&A are available on our IR website and via SEDAR and EDGAR. In addition, you can find the supplemental information deck on our IR website.Listeners are reminded that certain matters discussed on today's conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our annual information form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR.Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session. For retail investors, we have compiled questions submitted to us prior to the call. For Street analysts, we will ask you to limit yourselves to 1 question and then get back in the queue.With that, I will turn over the call to Miguel. Please go ahead, Miguel.

[Miguel Martin, CEO & Director]

Thank you, Ananth. We're very pleased with our transformation plan, and we're tracking adjusted EBITDA profitability in the first half of fiscal 2023, and that's less than a year away. Here's why, first, we remain the #1 Canadian LP in global medical cannabis, with strong sequential sales growth and margins exceeding 60%, roughly twice that of our competition. We continue to see growth in a number of countries, including the U.K., Israel, Australia and Poland, and our experience and process-driven approach gives Aurora leg up to profit and a significant opportunity.Second, and this is great news, we continue to rationalize our expenses to the current environment and manage the company with far greater efficiency. Through Q2, we achieved annualized run rate savings of $60 million that is nearly double the $33 million we referenced back in November. And I'm pleased to report that we now believe that we will achieve the higher end of our targeted $60 million to $80 million savings annually by the first half of fiscal '23. Importantly, none of these cost savings will impact planned growth investments.Third, our balance sheet remains one of the strongest in the industry, and we continue to be smart in allocating capital. Moreover, our capital structure supports both organic growth and provides us with the resources to evaluate strategic M&A. Fourth, we recently launched our science and innovation business, known as Occo, which we intend to use to deliver a continuous stream of innovation to the market. This business already has one of the largest catalogs of high-quality and high-potency genetics and IP and biosynthesis available for licensing. We have already commercialized several cultivars with other LPs as well as long as 3 under our own San Raf brand. We currently have more than 30 high-quality cultivars, not available anywhere else in the market that are ready for a media trial and exclusive licensing. Bottom line, this is a capital-light long-term revenue growth opportunity we're really excited about.Let's now discuss our medical business, which is #1 by revenue internationally and in Canada. I'm proud of the team for continuing to find ways to profitably grow the medical cannabis market globally. What sets us apart from the competition in international medical is our regulatory expertise supported by our compliance protocols, testing and science that are recognized and highly regarded worldwide. These attributes put us in the pole position for success when these markets open recreationally. During Q2, we demonstrated exceptional growth of 24% in international medical revenue compared to Q1, with success stories in the EU, Israel and Australia.In Poland, we delivered a total of 290 kilograms in the quarter, which included the largest shipment of any LP into the country. To date, according to the Chief Pharmaceutical Inspectorate, we expect for this success to continue as we look to launch new cultivars there in Q3, accompanied by a marketing push.In Australia, our revenues have doubled year-over-year. Through our exclusive supply agreement with MedReleaf Australia, we offer medical patients in EU GMP certified range of products, including dry flower, oils, soft gels and plan to shortly expand our offering to include vapes and gummies. 2021 was an excellent year for the Australian market, driven by more mainstream acceptance from patients and doctors and ongoing growth in authorized prescribers. We anticipate continued growth in 2022 as Australia's strength at import requirements, which Aurora already qualifies for and continues to ease patient access regulations.In the U.K., we continue to surpass expectations with our revenues increasing more than fivefold compared to Q2 last year, with the growth driven by a rapid increase in patient numbers. We've already built a leading position in the flower segment and continue to see growth in patient numbers with no erosion in pricing. While the U.K., Australia and Poland are still in the earlier stages of development, we would expect all of these countries to bear more significant profit drivers for us in the future.In Germany, we have the #1 and #2 best-selling products in dry flower for all of the last calendar year and a growing share of its oil market following the recent launch of our balanced extract. While we did experience some softness in Q2 due to some competitive pressures and slower-than-expected market size growth, Germany remains the largest market in the EU with 83 million citizens, and we are extremely bullish on our future there, given the new coalitions plans to legalize adult rec cannabis and improve medical patient accessibility. While the time lines and regulatory framework are yet to be announced, our leadership position in medical puts us in a very strong position when that milestone occurs.In France, we are preparing our third shipment for the pilot program, where we are the exclusive supplier of dry flower, having secured all 3 of the available dry flower tenders in the French medical cannabis pilot program.In the Netherlands, we invest in growery, 1 of 10 license holders involved in selling only legally produced cannabis in approximately 80 out of 600 coffee shops in the country. We expect to recognize revenue beginning in calendar 2023. And over time, this is predicted to be a $2.8 billion market.We continued our success in Israel by shipping over $10 million of cannabis to our partners there in Q2. As of today, we do not expect to recognize revenue from Israel in Q3, but we remain committed to the Israeli market and our partners there as they grow their business in the coming quarters.In these developing markets, predictability of revenue can be affected by regulatory complexities, such as timing of government approvals and import permits. However, our reach in the multiple jurisdictions hedges us against this. I want to be clear here, we believe the growth story of the next several years in cannabis will be that of international medical and recreational, and we expect a domino-like effect as acceptance grows. Where there is money to be made in a federally regulated structure, Aurora will be there, and we will win because of our agility and unique set of capabilities, which I mentioned earlier. Some estimates put the cannabis market in the EU alone at $5 billion by 2025, and we expect to grab a sizable piece of this. This will ultimately help drive us to sustain profitability and generate shareholder values as markets develop.Turning now to the Canadian medical market, which we see as a competitive advantage for Aurora and is our most profitable business segment. Our overall revenue was flat in Q2 compared to Q1, although our market share expanded to 23.4%, up from 19.8% in the same period last year. Most importantly, our insured patients made up 72.7% of our domestic medical sales, up from 70.6% in Q1. We are excited to see some opportunities for growth in attracting medium groups, employer insurance programs as well as opportunities to pick up market share with our best-in-class patient experience. We have also launched a number of products and innovations that we believe will appeal to patients.Regarding Canadian adult rec, our Q2 revenue decline reflects the ongoing macro challenges. There's a lot of excess inventory and increased pressure on older SKUs, which together has resulted in price compression. This irrational market is unsustainable in our view, and we're not going to chase unprofitable market share at any cost. Our focus is on how to maximize profitability by leveraging our low-cost production facilities and selectively entering categories that have higher margins. We have the scale and resources to outlast the current environment. And once the market consolidates, we will be in a strong position.In Q3, our innovation pipeline consists of 25 new SKUs, which benefit both rec and medical channels. Highlights include 3 new cultivars from our breeding program launched under our refreshed Drift brand, our first offering of infused pre-rolls in hash and a bevy of new vape edible and concentrate flavors, which we expect to hit the market in March. Our full year 2022 innovation calendar includes over 80 new and high potency SKUs, which would be our most significant and successful innovation push since legalization.I would now like to turn the call over to Glen, so he can provide his financial review.

[Glen Ibbott, Chief Financial Officer]

Thanks, Miguel. Good afternoon, everyone. We'll now review our fiscal Q2 2022 financials. These results clearly demonstrate the inherent strengths of our business model and how well we are executing our transformation program, which is ahead of schedule.So let's begin with a few key highlights. We have one of the strongest balance sheets among Canadian LPs, including approximately $445 million in cash as of yesterday, no term debt and access to a USD 1 billion shelf prospectus. This prospectus includes a USD 300 million ATM, from which we have recently drawn down nearly USD 90 million, meant to position us to take advantage of strategic M&A opportunities in the future.Our cash flow continues to improve with $20.3 million used in operations of working capital in Q2 compared to $67.3 million in the same period of last year. And we continue to progress towards our EBITDA-positive milestone, reducing our loss this quarter by over 20% from last quarter to $9 million, as we begin to see the cost savings from our business transformation plan flowing through the P&L. In short, we have more than sufficient cash on hand to fund operations, and we are moving closer to profitability.Q2 net cannabis revenue was $60.6 million, a slight increase from last quarter. Net revenue would have been 4% higher, but was reduced for a $2.4 million provision, reflecting past and current international shipments that had batches that were outside of targeted potency range. This provision is not expected to recur regularly. Our leadership in medical cannabis continued to deliver robust overall growth, along with consistently strong margins above 60%. This enviable margin profile has held steady over the past few quarters and is the key gross profit driver for our business that both distinguishes us from our competitors and is critical for us in reaching positive EBITDA during the first half of fiscal 2023.SG&A and R&D also remained well controlled, down 10% quarter-over-quarter as we continue rightsizing costs. These expenditures are already a fraction of what they were in years past and will be reduced further as we proceed through the implementation of our business transformation plan. Clearly, our overall Q2 results benefited from Aurora's broad diversification across the international medical, Canadian medical and adult rec segments.So now let me address each of our core businesses in a bit more detail. Our leading medical businesses in Canada and Europe continued to perform exceptionally well, generating $45.7 million in sales and a gross margin of 62%. Medical represented about 75% of our Q2 revenue and about 89% of our gross profit. Canadian medical revenue was $26 million in Q2, up slightly but really reflecting a consistent performance compared to Q1 even as the consumer retail market continues to roll out.As we have said previously, our Canadian medical patients can be segmented into 2 groups: those with cost reimbursement coverage and those without a reimbursement program. Our success in Canadian medical cannabis is really driven by our insured patient groups, whose reimbursement makes them consistent and high-volume buyers. While we have seen some migration of price-sensitive non-reimbursement patients from the medical channel to be our direct channel, we have been able to attract more insured patients, resulting in a steady sequential revenue and an overall market share increase.Our international medical revenue was $19.8 million and reflected 67% growth versus the prior year and 24% sequentially. Q2 revenue included slightly over $10 million in sales to Israel, and what is believed to be the largest export of medical cannabis into the Israeli market. Excluding the onetime $2.4 million provision, international medical revenue was up 87% year-over-year. Sales to Israel do not recur every quarter, but to give you a sense of the underlying international business, excluding the impact of Israel sales in Q1 and Q2, international revenue was up 41% sequentially. Recall that BDS Analytics estimated a market size of about $3.2 billion by 2025 for just the medical markets in Germany, Poland, U.K., France and Israel. So clearly, Aurora's leadership internationally is an important driver of long-term shareholder value creation.Our Q2 consumer revenue was $14.8 million, which reflected a 22% decline compared to last quarter. Consumer cannabis represented about 24% of our Q2 revenue and about 11% of our gross profit. The revenue decline is primarily attributed to price adjustments in our core and premium products, intended to improve sales velocity by reflecting the continuing price compression in the market. The average selling price decrease was partially offset by a 5% positive shift in the company's brand mix from Daily Special to San Rafael '71 as Aurora continues to pivot towards premium offerings. In fact, San Raf pre-roll and flower revenue is up 18% over the last 2 quarters, driven mainly by the new cultivars launched in our Q1. While we saw an increase in mix towards our premium brands, our consumer gross margins declined to 24% in Q2 from 32% last quarter. This was driven by downward pricing pressure of 6%, partially offset by 2% improvement from the shift toward premium. Also negatively impacting margin this quarter were opportunistic bulk sales, which depressed margins in the quarter by 4%.Turning now to SG&A, which includes R&D. It remains well controlled coming in at $44.6 million in Q2, which included approximately $3.7 million in restructuring and other onetime costs. So SG&A is $40.9 million excluding those costs. We have already made progress in driving down SG&A, but are certainly not done. In fact, we expect our quarterly run rate will be well below $40 million by the time we exit this fiscal year.In Q2, we also recorded a $31.6 million inventory provision as a result of facility consolidation and clearing out of obsolete inventory balances. This provision included a noncash net realizable value adjustment of $11.5 million, driven by price compression in the market. So pulling all of this together, we generated an adjusted EBITDA loss in Q2 2022 of $9 million. The $2.5 million improvement in adjusted EBITDA loss is compared to last quarter was primarily driven by the $3.1 million decrease in SG&A, while revenue and gross -- adjusted gross margins remained relatively steady on a consolidated basis.Let's review our path to adjusted EBITDA profitability. Approximately 60% of cash savings under the business transformation program, now estimated to be close to $80 million, will be reflected within our cost of goods as inventory has drawn down following the implementation of our lower production cost structure. We would expect to see those savings in our gross margins and logistics costs beginning late fiscal 2022 and into next year. The remaining 40% of cash savings will show up in SG&A as they're executed, and we see that now beginning in Q2. Overall, we executed Q2 having executed plans -- we exited Q2 having executed plans that result in annualized run rate cash cost savings of $60 million. So we're well on our way.This concludes my remarks. There are 3 key takeaways from this financial review. First, our balance sheet remains strong, supported by a healthy cash balance and improved working capital and cash flow. Second, our medical business is in Canada and internationally. So clearly differentiating us from our competitors are a critical part of Aurora's target of sustainable profitability, having delivered 89% of gross profit this quarter. And finally, we're ahead of schedule with the transformation plan and now expect to be at the high end of our $60 million to $80 million total annual cost savings range. This reinforces our already clear path to adjusting positive adjusted EBITDA in the first half of fiscal 2023 and through actions that are within our control.Now I'll turn the call back to Miguel.

[Miguel Martin, CEO & Director]

Thanks, Glen. Before Q&A, let me share some final takeaways. Aurora is laser-focused on EBITDA profitability and long-term growth, and we're making significant progress on both. First, we're getting to the high end of our cost reductions, which is great news. And our medical cannabis revenue growth globally shows tremendous promise given our regulatory expertise and the trend of medical converting to rec. In Canada, the rec market will eventually correct, likely with fewer players, which will provide us with added opportunity, and our Science and Innovation program adds another capital-light opportunity to our portfolio.Lastly, our balance sheet is in the best place it has ever been, which positions us for a continued organic growth and strategic M&A, and the transformation plan is firmly on track. We appreciate your interest and time today before we take questions from the analysts that cover our stock. I'll turn the call over to Ananth, so he can ask a few questions from our retail shareholders who were invited to submit questions at of today's call. Ananth, please go ahead.

[Ananth Krishnan]

Thanks, Miguel. Our first question is regarding the stock price. What are your plans to improve the stock price and perhaps reassure shareholders?

[Miguel Martin, CEO & Director]

Well, obviously, it's a question we get a lot. I think, first and foremost, you got to go back a little bit in time and understand that there was incredible exuberance about the growth of the global cannabis business. That starts with the U.S. We've been saying for a year that the U.S. is ways off. We also believe and strongly, and I spent my entire career working in the U.S. with regulated agencies that it's going to be a medical focus, with the FDA regulating the product with decriminalization and then we'll see a pathway towards rec. That's what we're seeing in other markets, and we'll see it there.Canada and the challenges in Canada around the rec business, I know many people are incredibly focused on the rec business as opposed to the medical business, which I'll talk about in a second. But the rec business in Canada is only 3 years old. We've got roughly half of our business is still in the legacy market, and you've got international marketplaces we've spoken about. There's 250 LPs today that's twice as many as they were a year ago. You've got excess inventories and people having negative gross margins on key products. That's not sustainable, and that's going to turn around. We, quicker than almost anybody else, rightsized that rec business so that we could be in a situation to not have that overstepped incredible success that we've had in medical. So I think first and foremost, for investors is really focusing on the long term versus the short term.And the long term for cannabis is incredibly right. If you look at key markets such as Germany and France and the U.K. and Israel and on and on, those are big markets where you're seeing medical cannabis grow in a significant place. Also, you're seeing the same companies win time after time after time. Secondly, we've done the things we said we were going to do. We are focused on shareholder value. We're focused on being profitable, and this was another good quarter of making progress.The EBITDA progress was a 22% improvement over last quarter, and we are reaffirming the guidance to be EBITDA positive by the second half of our fiscal 2023. And things that we've done are setting up for shareholder value in the future. We've talked about the balance sheet. We've talked about the cash position, and we are properly allocating the capital to high-growth, high-margin opportunities.And lastly, when you think about long-term benefits, Aurora has significant assets that haven't been monetized yet. IP, biosynthetics, genetics, all of which play a significant role in agriculture products all around the world. So I understand the question, and I understand the history, but I think if you look forward and take a longer view, you see that there are a lot of things traditionally that you look at most companies that Aurora has.

[Ananth Krishnan]

Our next and last question pertains to our path to profitability, Miguel. What gives us -- what gives you confidence that we're on track to meet our stated EBITDA time lines?

[Miguel Martin, CEO & Director]

Well, I think, John, you're looking at a company and seeing can you believe what they're saying it's what have they done? And if you look at our history of announcing additional $60 million to $80 million in cost efficiencies, we're already at $60 million, and we're really commenting today that we're going to be a high side of that. Secondly, is there progress being made so far. EBITDA does not -- positive EBITDA doesn't happen overnight. And we've made progress once again this quarter.When you look at aspects of what would be a drag on that projection, we quickly moved out of those less than profitable areas such as key components of the adult rec business in Canada, markets that we may have participated in that didn't have upside and yet still found the cash and the investment to do innovative deals such as the growery in Netherlands, where even though legally, we can have a majority position, we can consolidate and recognize the revenue as early as 2023. So we're on track. We've demonstrated that what we say we're going to do, we do, do. And I think we're always keeping the shareholder in mind as we make key decisions.

[Ananth Krishnan]

That's great, Miguel. Thanks. Operator, that concludes the retail Q&A session. We can turn it over to you to open up to the phone lines.

[Operator]

[Operator Instructions] Our first question comes from Vivien Azer with Cowen.

[Vivien Nicole Azer, MD & Senior Research Analyst]

So I wanted to focus on medical, no surprise there, very strong results. But in particular, your Canadian medical business, Miguel, the call outs during the prepared remarks, around the benefit of insurance coverage were really interesting to me, and I would love for you and Glen to expand on that. So 1 question, 2 parts. First, you just level set on the scope of insurance reimbursement as it stands today? And then part 2, what the opportunity is to expand patient coverage from a reimbursement standpoint?

[Miguel Martin, CEO & Director]

Got it. So first, I'm going to talk more of sort of a macro level, and I'll address your point on opportunity. I'll let Glen walk you through the reimbursement numbers, the percentages and sort of the key stats, and we can obviously follow up for all about key components and that. In medical business in Canada is a really good business. And again, remind people, I know it's a bit older than the rec business, but it really is starting to develop a sophistication. It really is a DTC business. It's the direct-to-consumer, and we've done a lot of things that I think most people would expect out of the customary DTC business, but it's harder to do in a medical cannabis. And all of these things and really been focused on not only increasing the basket size, but also acquiring new patients. And while our overall revenue was flat, as we mentioned, we grew market share. We have almost a 23.5% market share today of the medical business, up from 19%, next closest is half of that. And after that, it gets pretty dilutive.First and foremost, we've added significantly to the portfolio of products and premium products, and we have found that our patients are particularly interested in premium cannabis products. I think most people would understand our medication, but it's coming a little bit later into the overall cannabis business. Secondly, the service for not only the patients, but the clinicians and the physicians has consistently improved. And so when you look at that, there are a lot of reasons to think that we will continue to grow share in that critical category.The other 2 points I'll make on that is that the infrastructure to service the medical patient both acquire, retain and move through that process is incredibly expensive, requires an incredible amount of effort, which is why you see so few competitors doing well. The other part is, it is completely portable. A lot of that same infrastructure and knowledge and experience with patients in the Canadian market is directly applicable in why we are dominating in other key markets such as U.K. and Germany and France.The other point is the regulators have a common set of understanding. So Health Canada has an out weighted impact on the regulations in Western Europe as well as in Israel and other markets. So again, muscle memory, expertise, portability, all play in to grow the overall medical business, not only in Canada but internationally.Now in terms of growing the pie, I would mention a couple of things. You're just starting to see clinical trials, peer-reviewed science and many of the customary metrics that you would see in medications and prescriptions that expand the pie for medical cannabis companies. Clearly, like with other medications and the prescriptions, products that have been on the market for a longer period of time, and have a longer, what we call advocacy ladder would be advantages -- advantage in that type of situation, so we think there's upside to that. We talked a little bit about our genetics and science business, which clearly is of interest not only to our own patients, but those of other LPs that get there so we can grow the pie that way.And then lastly, you're seeing a growth in insurers and union groups and the overall portfolio of companies that are considering cannabis for those patients. Right now, it's 1% of the adult population in Canada participates in that system, that's quite low. And Germany just from the perspective is 0.1%. So there's upside to grow the pie well begin internationally. Glen, maybe you can touch on some of the key metrics to answer this question.

[Glen Ibbott, Chief Financial Officer]

Yes, it's a great question. Like first of all, I'd say a minority of our patients do the majority of the ordering and deliver the majority of the gross profit, and they're the reimbursed patients. Now there's a significant portion of our patients. I think we've got the highest number of veterans and first responders in the country in their critical group. Obviously, this is a really important medical treatment for them if you give the PTSD, whether it's -- you've been in a war zone, you've been on the front lines of health care or in front lines of policing. This is a really important treatment for you.Through some of the coverage programs that some of these folks qualify for, they are reimbursed. And what we're working on that is direct reimbursement. They are reimbursed for up to high single digits per gram on cannabis. And so they become a little less price-sensitive and much more choosy in getting the right medicine which is a really critical component of this. So I think they're a great group. They -- it's an important treatment for them, but it's strictly financially they really drive repeat orders at a high average dollar per gram.For the growth that Miguel was alluding to, we've told you in the past that we've invested in technology to support our medical business. This is a key part of it as employee or employer benefit programs and some of the insurance providers that run those programs offer up medical cannabis as an option than you do under host spending accounts. We've got the infrastructure now to connect directly into their system. So a patient can order medical cannabis and not have to go out of pocket on it and be directly covered through the insurance program through their work.So if you add $500 a year through a health spending account or alternative treatments account, we've become positioned as, I'd say, a supplier of choice. So that's an opportunity for us to continue to work on the reimbursed or the insured patient group, which we think probably provides the best stickiest highest-value patients and also, quite frankly, near and dear to our hearts, and that we actually are making a difference in their lives.

[Operator]

And our next question comes from Michael Lavery with Piper Sandler.

[Michael Scott Lavery, Director & Senior Research Analyst]

You've touched before on how medical and international medical is attractive in part because of the high margins and price points. Can you just help me reconcile -- you talked about international sales were up 24% sequentially in the quarter, but then your company-wide average selling price was down 10% sequentially. Was any of that pressure from international? Or what are some of the pricing dynamics there? How should we understand what that looks like?

[Miguel Martin, CEO & Director]

Yes. I mean, Michael, the pressure was not international. It was domestic. We -- I'll let Glen walk you through the numbers, but we had pressure from some opportunistic wholesale selling, which as opposed to destroying product, we sold it at a very low point. We also had some pressure in the rec business, and some of that was offset by mix. But the international margins are really haven't moved at all and they're incredibly strong. And so that's not there.I mean, the reason why -- and I'm always surprised there's not more interest in it. Medical cannabis is the fastest-growing segment of cannabis internationally. And you're seeing huge markets really being put on the path of thoughtful legislative process to bring cannabis forward, and we don't need to list of all the countries. We're in 12 countries and some big ones. And the margin set up because it's really medications and runs through a federal construct does not have the same market pressures and clearly is a much more of a challenge to get into the business.So I mentioned that a year ago, in Canada, there were 125 LPs. Today, there's 250. There's only a handful of cannabis companies that can meet the incredibly strict requirements internationally. I mean Germany, as an example, you have to be within 10% of spec for both potency and turf levels. And people will say, "Well, gees, that's pretty broad spec," but it's not when you have like a balanced product, it only has a 10% THC number, a 1% variance on agricultural products on a core item is really hard. So international is where the growth is. International is really hard to do well. Same companies are winning time after time. The margins are great. They're not moving and you're seeing steady progression and a consistency in how the countries look at it. I mean, Glen, anything I missed on the margin?

[Glen Ibbott, Chief Financial Officer]

No, great talking about the margins or insight into the margins. Mike, specifically about average selling price, yes, there is a little bit of pressure in the consumer market. Our average price in our Canadian medical market came down as we sort of proactively adjusted a couple of key products down to that reimbursement level I talked about, just to make sure that there is no impediments to these first responders and veterans ordering. So we had actually picked up the velocity even though the ASP was down slightly overall.Internationally, listen, we had some very high ASP markets come on this quarter. But the Israeli sales are bulk sales. And so the way they show up in our average selling prices, they may actually look like they're decreasing ASP, but the margins are extremely high because we're just shipping a big bail of cannabis, where there's no post-harvest handling, there's no bottling that kind of stuff. So margin is great, even though the average selling price per gram, if you will, is down. And I think for -- it's a great question because I think in the future, we'll have to peel that out a little bit for you to give you the transparency on the impact of large international bulk sales in our ASP because quite frankly, if we pull that out, you'll see our ASP going up.

[Operator]

Our next question comes from Pablo Zuanic with Cantor Fitzgerald.

[Pablo Ernesto Zuanic, Research Analyst]

Congratulations on the quarter. Look, it's just along the same lines in terms of international markets. Can you talk more about the stickiness that you're talking about, right? Because when I hear bulk shipments to Israel, I wonder that buyer there could switch to another supplier next quarter, right? I'm sure they cannot buy from Colombia yet due to regulatory issues, but -- so I want to understand the control that you have of the supply chain there, whether are they selling your brand? Do you have your own salespeople on the ground? Or you're pretty much your shipping from Canada and then they take control of the value chain because that means that it will not be so sticky.And then the second point, when you talk about this unique ability to navigate complex regulatory environment, I am quoting from press release, that sounds great. But it's -- in Germany, when only 0.1% of population are patients, I wonder how unique is that really? I mean, I suppose other companies as domestic patients grow in Germany could also have that skill set. If you can expand on those 2 points.

[Miguel Martin, CEO & Director]

Sure, I'd be happy to. Israel is unique, and I've spent a lot of time with that situation. So what you have today in Israel is you've got roughly 100 local growers, including growers that are on the kibbutz and they hold really an outsized political influence. And the situation in Israel right now of a country of 9 million people and a tremendous hub of all things, cannabis right now is that locally, they've not been able to grow the quality of cannabis that they need in that market. And it's a very high-margin market. I mean, a 10-gram increment is going for about 360 shekels.So Pablo, what you're referencing is the least sticky of all the markets. And why is that? Because right now, Canadian LPs and others that can meet the spec. Now the spec is incredibly hard to meet. CUM CS, the IMCA, which is the regulatory agency in Israel, a very thoughtful agency, led by a wonderful man named Yuval Landschaft, has created what may be one of the strictest of not the strictest barriers to get into pesticide testing that no one else sees. But if you can meet that standard, you can get your product in and import permits goes through of hot and cold. And because cannabis is so hot right now, there's not a lot of brands, what I would call equity. With the possible exception of a local grower such as maybe InterCure, I'll let you benefit something like that.But there's not that much stickiness for the Canadian LPs because the brands haven't developed themselves. If you can meet the standard, you can get your product in and because there's such demand, you can get there. I think over time, Israel will get stickier. I also think over time, the local growers who really are wonderful and are getting better each and every quarter will have a larger percentage, if not the majority of the sales in Israel, which is why we talk a lot about to be successful internationally, you have to diversify your business. In the early days, you're going to see quarters like we had this quarter where we shipped the largest shipment ever in Israel. We held the other record, too. And we're saying that in the quarter we're currently in, we're not going to have a shipment. So it's going to go hot and cold.Now stickiness outside of Israel is absolutely sticky. Getting into Germany is a year-plus challenge, and it requires a significant investment in filings, in packaging and product production and naming conventions, and those clinicians are pretty steady with what they've picked. Australia is another one. If you have a new SKU in Australia, it takes 6 to 8 months even to get it registered. That's not the case in Israel. France is going to be a very sort of thoughtful process. So Israel is unique. The other markets are absolutely sticky. People cannot get in. And I think if you look at the concentration of those companies that are successful, it's the same companies, France, U.K., Germany, on and on and on, and they all have the same common elements.History in medical, strong product portfolio, exceptional regulatory excellence and a commitment to a significant amount of investment that takes a couple of years to return. And that's not unlike other regulated markets and other categories. So I think Israel is a bit of a one-off, but all the other markets are there. You also don't see the margin degradation as we talked about in these medical markets because there is really no incentive to do it.

[Operator]

And our next question comes from Andrew Carter with Stifel.

[William Andrew Carter, Vice President]

I wanted to ask, so you said -- so I guess, instead, I want to ask about the Canadian consumer business. You've reiterated the positive EBITDA. What does that consumer business have to do? Does it have to stabilize, or conversely, could you just go with a 100% medical focus? And would you be able to -- with some incremental savings and be profitable?

[Miguel Martin, CEO & Director]

Great question. So right now, as we mentioned, the Canadian rec business is completely irrational. You're seeing core SKUs that are selling a significant negative gross margin, you're seeing exceptional amount of over inventory and you're seeing a situation like with Quebec right now with the vaccine mandate where you're seeing 16% to 20% drop in sales. So it's a weird market. I talked about the 250 LPs that are there.And so then the question becomes, why stay in it. And I believe, and we were one of the first companies who recognize that overall market share was not the arbiter of success in the Canadian rec business. It's the share of the profit pool, which is something I was always trained. The issue in exiting the rec is that there are other ancillary benefits that we opt out. So I want to stay in the rec business, albeit at a proper size for a couple of reasons. First, it's going to get there. It might take 9 or 12 months, but it's not sustainable. And when that happens, it's going to be for a smaller group of companies, and we're going to be in a really strong position.Secondly, that experience in the largest federally regulated rec market is invaluable in other places, i.e., in the Netherlands where we're going to be going into a rec market there and at some point in the U.S. And there are a lot of learnings that you only get by staying there. It's only 4 years old. We've talked about that. And also when you think about the market potential, there is going to be a slowing of that legacy market. Right now, the legal market represents 53% of sales and the legacy market is 47%, that continues to move.And I think with all of that, there are still some places where you can find some profitability, premium flower, concentrates, extracts and all those make sense. The other point is we got efficiencies from being able to share products, share facilities, share regulatory, share genetics and some of that overall fixed overhead for our medical business by having at least some of the rec business. Now right now, we have roughly a 4 share of the rec business. It's about right. I think share of profit pool is more important. So those are all the reasons why you just don't get out of it, but you don't chase unprofitable share, and you don't rent unprofitable share, and you use your resources to spend against growth areas which for us is Canadian medical and, more importantly, international medical.

[Operator]

Our next question comes from Frederico Gomes with ATV Capital Markets.

[Frederico Yokota Choucair Gomes, VP & Analyst]

I just had a question on your ATM. So you guys finished the quarter with over $200 million in cash. You have one of the strongest balance sheets in the sector. So could you just provide some more color on the rationale for raising that much money after quarter end? Do you have any specific use in mind for those proceeds? Is it M&A, or was it more about building that war chest further?

[Miguel Martin, CEO & Director]

Sure. Frederico, essentially great question. So just a couple of things. I want to tack a point on to your question. First, I also want to highlight that we also bought back about $20 million, $20.5 million of convertible debt. That was, I think, important for us, and we're going to continue to be opportunistic when we can do that, we bought it below par and we'll continue to monitor the convertible market. Why is that important as you mentioned, the balance sheet.And as I talked historically, just to go back in time, when I first got in the seat, I thought it was critically important that the company had a proper cash position to really be there and sort of weather the storm of this whole situation. And clearly, we did that. You mentioned the specifics of us raising it to over $440 million, and what we've said previously on the restate, so it's going to be a bit of an unsatisfying answer for you, Frederico, but I think it will get to it. We consider the ATM to be utilized for strategic purposes. We're always looking for deals that are accretive on EBITDA basis. Everything that I'm focused on is the sustainability and the focus on this being a profitable and sustainably profitable company. And so that EBITDA is always important. And so the cash is also looking at significant strategic or operational upside. This is an important line, and I know people always want to hear it, but I think it's important for people to hear it from me constantly. We do not expect to use any of the cash from our ATM program to pay for the day-to-day operational expenses of the business.We're in a strong position today to consider strategic M&A. But I think our restraint, particularly as it pertains to the U.S. should give shareholders a good indication. I mean the valuation of assets that people have purchased in the U.S. are a fraction of what they were a year ago. So we're cautious into that, and we're going to continue to be sensitive to purchase price valuation and always making sure that there's a strong strategic rationale in any potential target. But things are moving fast. We want to be able to be opportunistic, and that's really why the cash position currently.

[Operator]

Our next question comes from John Zamparo with CIBC.

[John Zamparo, Associate]

I wanted to ask about the new science program and your ability to license genetics and IP to others. And specifically, have you started monetizing this to date? And if not, when do you anticipate that might happen? And could you give us a sense of how material that might be for the business?

[Miguel Martin, CEO & Director]

Sure. So John, it's a great question. We have started to monetize it, albeit in a small way, and we expect that to accelerate. So let me give you some specifics around that. First, you saw the announcement about our biosynthetic assets and the partnership with Cronos. We're thrilled about that. We believe that we have the most efficient pathway as it pertains to biosynthetics. Those IP assets pertain both in the plant and outside the plant. So there were -- there was compensation connected to that.Secondly, we have had some small deals with some smaller craft companies. We announced North 40, which is an extremely well-known high-quality craft grower, which we sold genetics under the cultivar named Farm Gas. We utilized that both as a sale as well as a marketing tool, and we're now selling Farm Gas into the San Raf. So we'll continue to announce the sale of genetics. We believe we have the -- one of the largest, if not the largest genetics library and many, many people are looking for high-quality, high-potency genetics, and so we'll continue to do that in a variety of different ways, and I think you'll see that. We also have the ability through our facilities to grow for others and economic scale, and so we'll continue to do that.So the short answer is we've had a couple of deals. If you look at other folks and you look at the people that we brought on to staff up Occo, they come from other categories where it's clearly a relevant and material piece of their overall financial profile. And clearly, the margins are -- will be significant given that we've already made all those investments. So that's where we are today, a lot more to evolve. We'll continue to announce deals, both large and small as they come out. But genetics will be a big piece.The only thing the other piece I'll add to that, John, is there is a misconception, let me say, amongst growers and LPs, both domestically and internationally, that you cannot protect or own the genetics around, in particular, cultivar. That's completely untrue. And so we are licensing unique genetic markers of these cultivars that we develop, and we are able to identify those that are infringing upon that. And clearly, the law is very clear on this issue, and we'll have a very strong case. You'll start to see litigation around that as well as those that we believe have infringed on some of our biosynthetic assets, and that's also an additional revenue stream for the company.

[Operator]

Our next question comes from Tamy Chen with BMO Capital Markets.

[Tamy Chen, Analyst]

I was just wondering, I'll start with one question on the consumer business. Your volumes, I think the press release said was down 18% sequentially. And I'm just thinking back, I think the last 2, maybe 3 quarters, your consumer business was holding in decently. So I was just wondering if you could elaborate on what drove the 18% sequential decline in volume?

[Miguel Martin, CEO & Director]

So Tamy, I think the simple answer is we're not going to chase. You're seeing acceleration of irrational pricing, particularly on discount flower, and we've made the determination that we're going to get out of certain categories that don't make sense and lose money, and we're also not going to chase. So if you look at the ASP, and I know you follow all that, and you can see with your buddy data or headset data, the average pricing, you've seen that dramatic decline across some key categories, particularly in the value segment. And so again, overall market share is not as much of a focus for us.So we're going to really spend most of our time in looking at those categories that are problem where there's margin, but where we see certain categories where it's single digit or in certain provinces like Ontario where you see negative margins, you're not going to get there. And because that accelerated in the quarter, and we didn't chase that's why you'll continue to see that.Listen, if people want us to sell a lot of cannabis and lose more, I think we're the wrong company. I'm not saying that's what others are doing, but it is going to take a bit longer for these inventories to right size, and in that place, I think you see a lot of folks willing to sell stuff at a significant loss as opposed to just tossing it out or giving it away.

[Glen Ibbott, Chief Financial Officer]

Tamy, I'll just add -- just second to that. I said in my prepared remarks at San Raf, I mean in using it as an example of investing in the right places. San Raf is quite profitable for us. And we saw an 18% increase in pre-rolls and flower over the last 2 quarters because we launched some nice new cultivars into that. And as Miguel stated in his remarks, we've got a lot of innovation coming, a number of new cultivars under a bunch of different brands and then profitable category. So we're focused there where the profit pools are. If that means market share going away, fine, but gross profit is what's going to drive us to profitability overall, and that's our focus.So I think we're trying to get away from that, what's the market share and what's happening on the revenue side and really focusing on driving in the areas -- winning in the areas that allow us to be profitable in the Canadian consumer market and add that to the existing really strong portfolio we've got in the medical market and create quite a company here.

[Operator]

Our next question comes from Glenn Mattson with Ladenburg Thalmann.

[Glenn George Mattson, Vice President of Equity Research]

So just building on some of that stuff on consumers. So you talked about why you want to be there for a variety of reasons or for when you move into new markets where the market turns around. But more maybe to the one of the second parts of Andrew's question was like, can you give us some sense of like how you see that market just kind of shaping up over the medium term? I know it's maybe irrational now, but your lay out kind of the idea for profitability in fiscal '23, first half in your forecast that you have internally, do you have that segment kind of growing or still shrinking, or what's your general sense for how long that this continues?

[Miguel Martin, CEO & Director]

Sure. So Glenn, I think first and foremost, let me highlight the critical province for Canadians is Quebec. They have a vaccine mandate in order to go in either an alcohol store or cannabis store and sales in Quebec are down 16% to 20%. Now the province is indicated by the end of the month, some of that stuff will be listed. So the current market is continue to be impacted by COVID. And obviously, the LPs also have impacts because of labor.Short term is defined by the next 3 to 6 months, you're seeing an acceleration of pricing downward. You're seeing that in discount flower, you're seeing that in vapor, you're seeing that in a lot of the core segments. Now as Glen mentioned, there are bright spots, premium flower is holding up and concentrates and resins and rosins and things like that, there is still decent margin to be made as defined by, I don't know, 35%, 45%. And I think this market given we just went through the harvest and a variety of different things, I think you're going to probably see this go on for the next 6 to 9 months. And it will only be with the absence of capital, which we're starting to see for some of the midsized to smaller LPs and with some repricing. But again, 250 LPs, 125 a year ago, that's a bit of a challenge. There's really no barriers to entry.Now I would also mention that the provinces are making some subs and changes. We've been encouraged by what we've heard out of the interim CEO of the OCS, David Lobo, is a good guy about where Ontario is starting to go. We are seeing some acknowledgment about some different aspects on the retail side that will create a bit of a healthy environment. But until pricing gets normalized, and you're not seeing big brands that have 100 basis points or 200 basis points of sale being sold at a negative margin, I think you're going to be in this irrational sort of situation. So our methodology, and I've been really pleased to hear some of our competitors echo this that people are going to start to focus on profitability and thoughtfulness.Now why do I hope that any of this is going to turn around because it's not dissimilar to what you saw in California and Colorado in the early days. And by all indicators, they seem to be 18 months ahead of us. You're seeing brands articulate, brand equity scores go up in those markets, you're seeing premium market shares be much more relevant, you're seeing manufacturers make money, and I know the economics are different in the U.S. But I think the Canadian rec business is going to get there. It's just too big a business, it's growing too much to not get there. I just think through all of those things plus a greater focus on the legacy market, and you're going to see a probability. The point is timing.And I think chasing right now doesn't make any sense. You're seeing market shares move 100 and 200 basis points in a week. I'm used to seeing that move in a quarter. And so in that market, you don't need to be first, you can wait a little bit. And so we're rightsizing our effort. We're focusing on those things that we can bring to both the patient and a rec consumer as well as internationally, and we're going to have our spots. And when we come out of it, there'll be a much smaller subset of LPs. There'll be much better operators, and there'll be a really large market where people can make money. It's just going to take a bit longer than I think some would hope.

[Operator]

And that's all the time we have for questions today. I'll turn the floor back to Miguel Martin for closing remarks.

[Miguel Martin, CEO & Director]

Well, first and foremost, let me thank everybody for taking the time and the coverage that you provide to our stock. We really appreciate it. We're really pleased with the quarter. Once again, we've put a plan out. Our transformation plan has 3 key components, which is growth in the markets where we can make money, particularly in medical. We've done that. Focused our cost structure on the opportunities as they present itself, and we've done that, raising our guidance on the $60 million to $80 million. And three, everything we're doing focused on being sustainably EBITDA positive, and you've seen that progress with the 22% aggression from last quarter to this quarter. So we really appreciate it. I hope everyone is safe and well, and I look forward to seeing people in person in the near future. All the best.

[Operator]

Thank you. This concludes today's conference. All parties may disconnect. Have a good evening.