Aurora Cannabis - Earnings Call - Q3 2020

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to the Aurora Cannabis third quarter fiscal 2020 conference call for the three months ending March 31st, 2020. Listeners, a reminder that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora's Annual Information Form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR databases. I'd like to remind everyone that this call is being recorded today, Thursday, May 14th, 2020. I'd also like to note that we're conducting our call today from our respective remote locations.

As such, there may be brief delays, cross-talk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. I would now like to introduce Mr. Michael Singer, Interim Chief Executive Officer and Executive Chairman of Aurora Cannabis. Please go ahead, Mr. Singer.

Michael Singer (Interim CEO and Executive Chairman)

Thank you, and good afternoon, everybody, for joining me on today's call. With me today is Glen Ibbott, our Chief Financial Officer. I would like to start by extending my deepest gratitude to all of our employees who have worked incredibly hard to keep Aurora fully operational throughout the COVID-19 pandemic. More than ever, I am proud to work alongside the people who make this organization great. As we've stated, our number one priority has always been to keep our employees safe, and this continues to be the foundation of all of the decisions we make. The highest measures of safety are enforced as we continue to operate and work to serve the many people who rely on our products in these challenging and unprecedented times. I would like to first take a moment to address our response to COVID-19.

Our facilities in Canada and internationally continue to be fully operational, and we are working closely with local, national, and international authorities to ensure we are following or exceeding the stated guidelines within each region. We have taken extensive measures to maximize the safety of our employees who have been designated essential workers in Canada and to whom we are incredibly grateful. These measures include reorganizing physical layouts, adjusting schedules to improve physical distancing, implementing extra health screening measures for employees, and applying rigorous standards for personal protective equipment. We have also introduced a special bonus pay program for active facility-based staff, and we continue to maintain regular communications with government representatives, suppliers, customers, and business partners to identify and monitor any potential risks to our ongoing operations.

Turning to the quarter, while COVID-19 will likely have a greater effect on Q4, it did not materially disrupt our business in Q3. The production and sale of cannabis have been recognized as essential services across Canada and Europe, and consumer cannabis sales are primarily with government bodies, which continue to offer end customers online ordering and home delivery, and consumer market retail stores are generally permitted to remain open, subject to adhering to the required social distancing measures. With that said, we are pleased to report that our cannabis net revenue, excluding provisions, increased 15% over the prior quarter to CAD 72.6 million. We maintain a leading cannabis market share in key consumer categories, continue to lead the Canadian medical market, and we have a significant share in Germany.

Our focus is to continue to gain market share, and we remain well positioned to capture more share of the revenue growth in key categories over time. We continue to leverage our coast-to-coast supply agreements to offer a broad range of premium consumer and medical products across Canada. In the third quarter, the number of total active registered patients exceeding 86,000 was a slight decrease compared to the second quarter, which, in the face of market challenges, demonstrates the value of Aurora's products and patient loyalty to the Aurora family of brands. We are pleased with the progress we made on our business transformation plan that we announced in February. As a reminder, that plan detailed our intention to better align the business financially with the realities of the current cannabis market in Canada.

Success here will allow us to conserve resources and still position Aurora to build a sustainable growth platform longer term. As part of this reset, we committed to an SG&A run rate of $40 million-$45 million per quarter by the end of the fiscal fourth quarter of 2020, and also stated our intention to reduce capital expenditures for the second half of fiscal 2020 to below $100 million. Let me take SG&A first. For Q3, we had roughly $80 million of SG&A expense and slightly over $5 million of R&D expense. After adjusting for severance costs, this represented a material reduction of 24%, or roughly $26 million from Q2. Results would have been even better for the period, but many cost reduction initiatives were only initiated midway through the third quarter based on our transformation plan as announced on February 6th.

Therefore, the number that's more important and the one that you should all pay attention to is CAD 60 million, which is our current SG&A and R&D run rate today in Q4. This is about a 45% reduction from Q2. To achieve these savings, we targeted non-core initiatives, which Glen can speak to, with reductions also realized from certain divestitures that carried heavy SG&A burden. This progress is very encouraging, and we feel very confident reiterating our intent to manage the business to an SG&A run rate of between CAD 40 million and CAD 45 million as we exit the fourth quarter. Now turning to CapEx, which was another main pillar of our business transformation plan. We committed to reduce spending to below CAD 100 million for the second half of fiscal 2020. We are pleased to report that we are on track to achieve that goal.

This significant reduction in cash outlay really highlights the focus of our team in terms of achieving our goals and underscores the fact that we are viewing all capital spending through the filter of generating near-term revenues and preserving financial flexibility. Another important takeaway here is this: we have approved capital spending plans of less than CAD 25 million for the fourth quarter, which includes LP license amalgamations, the completion of the joint venture arrangement to co-locate treatment within our Polaris facility, and the completion of the first six rooms at Aurora Sun to produce high-demand cultivars. All of these projects are expected to be largely complete in the fourth quarter, allowing first quarter 2021 CapEx to be well below fourth quarter 2020 levels. Another key takeaway.

In summary, since announcing the business transformation plan at the beginning of February, the team at Aurora has taken a number of concrete steps to put the company firmly on track to meet or exceed our previously announced targets. These steps are designed to strengthen Aurora's balance sheet and reduce go forward costs, to fuel profitability and positive cash flow. And while revenues in this current operating environment can be difficult to predict, we believe there are cost levers at our disposal to put us on a path to be EBITDA positive in Q1. We remain optimistic about our future growth potential in Canada and international. With that overview, I'd like to now turn the call over to Glen, who will discuss our Q3 financial highlights in more detail. I will then provide a brief update on our long-term growth initiatives, then we'll open up the line to questions. Glen?

Glen Ibbott (CFO)

Thanks, Michael. Good evening, everyone. Firstly, I would like to echo Michael's comments in thanking our employees who have done a tremendous job of navigating our company through the complications of this pandemic. It is this level of commitment that demonstrates why we are all proud to be on the Aurora team. With that said, I'll now spend a few minutes reviewing our financial results for Q3 2020. Of course, the figures I'll be going over today can be found in our financial statements and MD&A, and they're all in Canadian dollars unless otherwise stated. For our third quarter, the period from January 1st to March 31st, 2020, we saw our net revenue, excluding provisions of CAD 2.9 million, come in at CAD 78.4 million. Our total cannabis net revenue, excluding provisions, came in at CAD 72.6 million for the quarter.

To get into a bit more detail, during the third quarter, our Canadian medical cannabis net revenue was $27 million, up from $25.6 million last quarter. Our patient base exceeded 86,000, which, although down slightly quarter over quarter, is indicative of our strong medical position as that market faces continued headwinds from cannibalization into the consumer market and also challenges with prescription renewals as many patient aggregators moved to an online model during the pandemic. We continue to work at maintaining and growing our market-leading position and maximizing the lifetime value of our key patients. The good news is that to date in Q4, Canadian medical revenues remain steady. Our international medical sales increased from $1.8 million in the second quarter to $4 million in Q3.

Due to the resumption of sales operations in Europe in February following an administrative permit issue in Germany, similar to the Canadian market, we expect our European business, particularly in Germany, to grow sequentially, but in the short term with modest expectations. With the EU GMP certification our company received in February at our Aurora River facility, which has a capacity of approximately 30,000 kilograms annually, we are able to allocate significantly more product to our export markets as they develop. Consumer cannabis net revenue, excluding provisions, was CAD 41.5 million, up 24% from the prior quarter. In Q3, we did record a provision of CAD 2.9 million against revenue, which captured the impact of actual unexpected returns and price adjustments for sales in prior quarters. The significant majority of this provision was related to product sold in calendar 2019.

During the previous quarter, Q2, we did see a drop off in our market share in flower as the market shifted significantly towards value brands, which we define as retailing for less than CAD 9. In February, we launched our competitive brand in this category, Daily Special, at a price point, average potency, and pack sizes that we think are a very compelling proposition for the consumer. In fact, we believe it competes well with the gray market and will help grow the overall size of the legal segment. We'll clearly be monitoring our performance here closely. Data from Ontario indicates the Daily Special was the top-selling flower brand in March and April, and that Aurora brands had the leading market share in flower and overall.

While Ontario retail sales have been impacted by the government-mandated move to curbside pickup, we are pleased with today's announcement that Ontario retail stores with outside entrances will be allowed to reopen fully as soon as next week. Our average Q3 net selling price for consumer cannabis at CAD 4.33 per gram represented a decrease from the CAD 4.76 reported the prior quarter, again primarily attributable to the impact of the lower average pricing of Daily Special in the value segment. Our medical cannabis average ASP increased a couple of percent as our German sales came back online. In the quarter, we produced over 36,000 kilograms of cannabis. This is as compared to approximately 31,000 kilograms in the prior quarter. With our facilities fully scaled up, we have focused the last several quarters on optimizing the performance of these facilities.

For instance, our top quality flower, which has strong market demand in segments like San Raf and Daily Special, now represents approximately three-quarters of Sky production, up from just over 50% several quarters ago. Our forecast for inventory drawdown showed that our top quality flower production versus sales will reach a steady cadence over the next several quarters, and our mid-quality flower trend will take slightly longer than that for steady state and drawdown. Growth in product categories like the value segment that Daily Special leads are a high-volume play that requires a scale and output of top quality flower that our facilities are now delivering. Sticking with production for a minute, we also continue to innovate operationally, both in efficiency and in cultivation.

For example, plant R&D with potential new high THC cultivars is progressing nicely, with several cultivar candidates showing both high yield and delivering consistently above 20% THC. Our cash cost to produce per gram of dry cannabis improved to CAD 0.85 per gram, down CAD 0.03 from the previous quarter. We're pleased that we continue to deliver on a very important key metric for our operations: sub-CAD 1 cash cost to produce. This is the leverage that allows us to launch such a powerful new entry into the value market while maintaining strong, healthy, and sustainable margins. In Q3, we had CAD 80.1 million of SG&A expense and CAD 5.6 million of R&D expense. As Michael noted, SG&A included CAD 5 million of one-time termination costs related to our reset.

After adjusting for these severance costs, SG&A and R&D combined declined about CAD 26 million, or 24% from the second quarter, again reflecting the partial quarter impact of decisions taken in February. But more importantly, our current run rate for SG&A is about CAD 55 million, and for R&D, it's approximately CAD 5 million. Our reset was meant to bring focus to the organization on the parts of our business that will deliver meaningful short and long-term value. As such, we reduced expenses across the board, including canceling or delaying numerous information technology projects, the elimination of projects that required significant external professional fees, renegotiation of several key marketing and research contracts, a reduction in certain marketing programs, and the elimination of headcount across all of the SG&A functions.

Expenses were also reduced as a result of the divestiture of several non-core subsidiaries that had low gross margins and carried a heavy SG&A burden. This progress demonstrates our commitment to manage Aurora to positive EBITDA for Q1 2021, including a run rate of CAD 40 million-CAD 45 million SG&A, which now includes R&D as we exit the fourth quarter of 2020. As noted earlier, this reset is particularly important in the context of the current COVID-19 environment. While the near-term growth of the consumer market is difficult to predict, we can control our production and SG&A costs. Looking forward, as an example, further reductions will come from the completion of several projects by the end of June 2020, including the amalgamation of our four separate licensed producer legal entities held by Aurora, MedReleaf, and CanniMed. We anticipate that this will provide for significant sales fulfillment and SG&A efficiencies.

Another example of cost reduction to come is the completion of our year-one Sarbanes-Oxley implementation, which has consumed significant effort and external expense in the current fiscal year. And finally, we do anticipate further SG&A reductions as we complete the profitability review of several parts of our business. CapEx. As Michael described, we committed to reducing capital investment to below CAD 100 million in the second half of fiscal 2020 and remain on track to that goal. Q4 capital expenditures are approved at less than CAD 25 million. As we stated on our February call, all capital spending is reviewed with parameters of generating near-term returns, a focus on our core businesses, and the preservation of financial resources. Turning to our balance sheet, as of March 31st, our consolidated cash position was CAD 230 million, compared to the CAD 156 million as of March 31st, 2019.

We reduced cash use in Q3 by over CAD 118 million from the prior quarter to just under CAD 155 million in Q3. We used about CAD 55 million of that cash to fund operations, CAD 84 million for capital spending. We had a lot of invoices from Q2 to pay in early Q3 and made debt and interest payments of about CAD 16 million. We were relatively neutral on working capital with a CAD 35 million increase in inventory and biological asset offset by tax receivable and tax payable changes. So given the continued healthy adjusted gross margins, the reductions in SG&A expense, and capital expenditures as described above, we expect cash use in Q4 operations and CapEx to decrease significantly from Q3. In Q3, we raised approximately CAD 206 million under our at-the-market financing program.

Subsequent to the quarter end, we filed a new prospectus supplement to enable us to raise an additional $250 million USD under this program. In this environment, we believe that access to capital is of paramount importance for the company and our shareholders. As we have demonstrated with our progress on the operational reset, we continue to prudently manage our liquidity as we remain on track for EBITDA profitability in the first quarter of fiscal 2021. The material run rate reduction in our CapEx and SG&A costs should provide comfort to our investors that we are laser-focused on the health of our income statement and balance sheet. We expect that our current cash position should be sufficient to fund operations and remaining capital expenditures to the points where positive EBITDA and free cash flow are achieved and sustainable.

The ATM capacity protects the company and our shareholders as a backstop in a very uncertain environment. I would now like to take a moment to summarize our short-term outlook. The variables associated with the COVID-19 pandemic and the still developing Canadian consumer market, including consumer buying behavior and new store rollouts, have led Aurora to focus in the near term on market share rather than revenue targets to manage the business. While we remain optimistic about the total accessible market size of Canadian consumer cannabis over time, and we are pleased with our current market share and performance in key Canadian consumer markets, the variables described above make the short-term growth of the market and our revenue expectations difficult to predict with an adequate degree of precision. As a result, we are not providing fourth-quarter revenue guidance at this time.

We are, however, reaffirming our commitment to manage the business to positive EBITDA in Q1 2021, using whatever additional cost levers we need to, and have shown that we are well on track to that goal. Finally, earlier this week, we completed our previously announced plan to consolidate all of our outstanding common shares on the basis of one common share for every 12 common shares then outstanding. I'll now turn the call back to Michael. Thank you, Glen. Driving Aurora to be a profitable and robust global cannabis company is extremely important to our team. Our goal is to manage the business with a high degree of fiscal discipline, especially in the midst of a global pandemic, and as our results suggest, we have made significant progress since February, with more progress to come.

But we also recognize that cost reduction can't be the only avenue to realizing our potential. In fact, as we execute our plan, we're still moving forward towards some larger goals. These include the development and implementation of programs that foster organizational success, a plan designed to increase revenues outside of Canada by prioritizing the most profitable international markets, and a strategy to leverage the US market targeted towards opportunities that would importantly align with our key objectives of the stated reset plan. Finally, before taking your questions, let me update you on our search for a permanent CEO. As announced back in February, the board engaged a global search firm and launched a comprehensive search process. I can confirm today that this process has advanced nicely, and we remain on track with both the selection and announcement of a new permanent CEO in the next few months.

Michael Singer (Interim CEO and Executive Chairman)

Thank you for your time. I'd now like to ask the operator to open up the call for questions.

Glen Ibbott (CFO)

Thank you.

Operator (participant)

We'll now be conducting a question-and-answer session. In the interest of time, we ask that you please ask one question and one follow-up then return to the queue. If you'd like to be placed in the question queue, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. And once again, we ask that you ask one question and one follow-up. Our first question is coming from Vivian Azer from Cowen and Company. Your line is now live.

Vivien Azer (Managing Director and Senior Research Analyst)

Hi, this is Steve Schnierman, pinch hitting for Vivian today. Thanks for taking my question. Hi. We appreciate the long-term strategic rationale for focusing on market share given the uncertainty due to COVID. Certainly, that will help ensure that your brands remain dominant and relevant to support further access of the world when it returns to normal or a new normal. That said, how do you maintain a high degree of confidence on your profitability targets without having a more clear view of revenue development to solve for operating leverage as a complement to your cost cutting efforts?

Glen Ibbott (CFO)

Right. Thanks, Steve. And just background for everybody. Michael and I are 3,000 miles apart. It's hard to read body language. So I'm going to field the questions, and I'll kick them over to Michael if it's more appropriate than it takes from. But Steve, yeah, so thanks for the question.

Listen, what we're trying to do is be realistic in this environment. We saw Ontario a few weeks back all of a sudden move to the curbside collection, and now today announcing maybe even next week they'll allow kind of access to retail stores again. So it's a very dynamic environment on the consumer side. We are confident in our medical business. We are confident in our international medical business, but we're trying to be real, I guess, conservative, if you will, on the consumer market in Canada. So as we plan forward, we're controlling. We can compete on market share. We can't compete or we can't affect the growth of the market in terms of store counts and things like that.

So, what we're trying to do is plan our business such that we have a track through to EBITDA profitability under pretty much any reasonable scenario you might envision. So, to be crystal clear, we have operating targets and SG&A targets, but if we need to, we can pull additional cost levers within the business. We have committed to being EBITDA positive in Q1. Okay. Great. Thank you very much. And on Daily Special, can you talk about how much of your volumes or revenues came from the product? And have you found this to be purely incremental, or has there been some level of cannibalization between that and the core Aurora brand? Yeah. Thanks. So listen, as we described on previous calls, we were already seeing a significant shift towards the value segment, and then the premium segment still seems to remain intact.

And if you talk to Darren, who's in charge of our marketing, he'll say that the new core segment is the value segment. There's the middle of the market. It seems to have narrowed quite significantly. So when we think about cannibalization, I'm not sure that we actually think cannibalization. I think we're just seeing a shift to value with premium still playing well. So in our brands, we see San Rafael still strong, and we see the launch of Daily Special as being mainly incremental but also necessary to compete in what's now becoming a significant part of the market. Just a little further on Daily Special, it was launched, as I said, with a strong price point, consistently high potency, and larger pack sizes. So I think what we're also starting to see, Steve, is some shift from the black market.

These prices, as far as we can tell, are very competitive with the black market, and certainly in pack sizes, which tends to see we're seeing larger demand for the 15- and 28-gram pack sizes.

Operator (participant)

Thank you. Our next question today is coming from Michael Lavery from Piper Sandler. Your line is now live.

Michael Lavery (Managing Director and Senior Research Analyst)

Thank you. Just was curious if you could dissect the quarter a little bit more. And you had mentioned last quarter you thought sales might be a little more in line, excluding allowances, and certainly saw a pickup from that. Could you just give some sense of what the key drivers were relative to your expectations and maybe how much of a part of the equation was the derivative 2.0 products?

Glen Ibbott (CFO)

Yeah. Sure. So listen, our medical market, both Canadian and international, performed well, but in line with our expectations.

The consumer market in Canada obviously was hard to predict. We did see what we think was some pantry loading in March with the pandemic and people starting to kind of stay at home and load up a little bit. But that was also then in March was also when we saw the impact of our Daily Special. And in terms of data that we can see, in March, our Daily Special in Ontario had 9% of the flower market, and that was coming from 0% two quarters ago. So we saw a couple of things kind of hitting, probably more successful than we had expected with Daily Special, and certainly hoped for, and some pantry loading in March. In April, we've seen a little bit of a reversion to the pre-pandemic sort of ordering levels. But I think that was relative to our expectations.

March, and particularly the latter part of March, outperformed our expectations.

Michael Lavery (Managing Director and Senior Research Analyst)

That's helpful. And just to follow up on Daily Special, can you give a sense? It sounds like it's both performing better than you had thought. Obviously, some pantry loading as a part of that probably. But you also mentioned at the tail end of the prepared remarks about just how focused you are on market share. How do you think about this brand going forward? Is it one you might even consider pushing harder on price, or is it positioned kind of the way you want? And when you say you're pushing, thinking willing or thinking about pushing harder on share, it's more of the same, just riding it out, well, we're really pleased, and I'll quite honestly, with. I mentioned 9% in April, it looks like it's close to 13% of the flower market in Ontario.

Glen Ibbott (CFO)

So we're pleased with the performance. We need to protect that. Our pricing seems to be pretty strong right now. There are entrants, but in March and April, we've seen increasing shares. So no immediate issues with pricing. And as I said earlier, we think it's now a product in a number of different characteristics, very competitive with the black market. So market share, let's be clear. We do have internal revenue targets there for our sales team to strive to hit. But as we plan the business over the next couple of quarters, we recognize that that's inherently difficult to predict. So we just need to be cautious. So in the short term, we need to protect that market share and then make sure that we right-size the business to get to EBITDA profitability.

Michael Lavery (Managing Director and Senior Research Analyst)

Thanks.

Operator (participant)

Thank you. Our next question today is coming from David Kideckel from AltaCorp Capital.Your line is now live.

David Kideckel (Managing Director and Senior Institutional Equity Research Analyst)

Hi. Thanks for taking my question, and congratulations on the quarter. I just want to go back for a second to your derivative products. I know, Glen, you mentioned in your prepared remarks that one of your top selling products, San Rafael, from the flower side. But how should we think of derivative products just as an overall revenue mix, given just we're thinking about margins and how derivative products represent an overall margin share as compared to flower products?

Glen Ibbott (CFO)

Yeah. So a couple of things there that I can start with, and then Michael, if he's got anything to add. 2.0 products, as you know, we launched across a broad series of categories in December, kind of first out of the gate, and hit most of the major categories with the exception of beverage in December.

And we've learned since then, and we've continued to pivot the organization to focus on those areas where we haven't yet seen we're not running into the limits of demand. So certainly on vapes, but things like gummies as well. So that's getting to be a crowded field, that 2.0. There are a lot of players. When I look at market share, say in Ontario, it's distributed. We're doing well, but it is distributed across a number of products. In terms of our portfolio right now, flower is still by far the dominant percentage of what we sell. And what we've seen in the state, more mature markets, that's going to continue to be the situation. We do expect 2.0 products to grow over time.

Certainly, as I said, we test and we're scaling up a couple of them, the internal manufacturing capabilities on those products where we think there's considerable untapped consumer demand still. We'll try to test the limits of the demand. That's something that we'll continue to be nimble on, I think, Dave, over the next number of quarters as we learn more about the consumer.

David Kideckel (Managing Director and Senior Institutional Equity Research Analyst)

Yeah. I think that speaks well as well. I mean, in your prepared remarks, you were mentioning how premium-type products like San Raf are doing well. Okay. That's helpful. My next question and last question, really shifting from Canada now to international.

With COVID going on now, I get the EU GMP certification and German distribution, but over and above Germany, and maybe Germany is included in this next question, how do you think overall medical cannabis with regulators across the world now is going? I mean, has it slowed down? Has it been an increase? What is the appetite for cannabis legalization, whether it's likely medical or even recreational, but slightly medical, just across the world now with COVID?

Glen Ibbott (CFO)

Yeah. That's an interesting question and difficult to, of course, know exactly how regulators are reacting to this. So we haven't really seen any kind of slowdown in the business in Europe. In fact, the CAD 4 million that we reported in the quarter, just remember, that's only a partial quarter for Germany. So that was actually kind of a step forward for them when they came back into business.

The only kind of real impact I've seen or that I'm aware of is just, of course, when you're dealing with governments and regulators and the people that are working from home, that the processes get slowed down. So whether it's tenders in various countries or things like that, that's kind of slowed down. But I don't think any of us believe that the long-term momentum isn't still there. It's just kind of short-term. Does it take you longer to get paperwork through regulators and things? I think that's probably true, but it hasn't impacted our revenues currently. Thank you.

Thank you. Our next question is coming from John Zamparo from CIBC. Your line is now live.

John Zamparo (Director and Senior Equity Research Analyst)

Hi, John. Great. Thanks very much. Good evening. I wanted to ask about the goal of getting to EBITDA positive by Q1, and specifically about on the Ontario store front.

I mean, new growth has slowed significantly, and existing stores are restricted. Granted, you mentioned they may open next week, but does that create incremental risk on achieving your goal? And I appreciate all the color on Ontario performance, but can you talk to your performance outside of Ontario of late, both in the quarter and subsequent?

Glen Ibbott (CFO)

Yeah. I'll start with that, and maybe Michael can add. But listen, we talk about Ontario because it's one of the places, one of the larger provinces where we actually get a complete data set that includes our competitors. We don't normally get that from other provinces. So let's say we and our peers tend to focus on data coming out of Ontario. We're doing well in the other provinces. We're quite satisfied with our performance in all the major provinces.

So, my comments around Daily Special or gummies and things like that, I think you can apply that across Canada where we believe we've got leading share in most categories and most major provinces. Sorry. Can you repeat the last part of your question?

John Zamparo (Director and Senior Equity Research Analyst)

Sure. The Ontario store closures and restrictions, do you think it adds more risk to the EBITDA goal, or is there enough levers on SG&A?

Glen Ibbott (CFO)

Yeah. So listen, as we kind of looked at Q1, we've got a plan to get the EBITDA positive. And if there's no growth, then there's a further plan. We said we'll pull more levers. We'll pull more levers if we need to get there. It's kind of one of those goals we just need to achieve. We had a pretty healthy quarter.

It was certainly a step forward and a bit of a turnaround from the last couple of quarters and getting positioned properly. We're just being cautious on the revenue line, as I said. But we do have a good solid base medical business, and I think we've got one of the top consumer performances as well. So we will monitor revenue, and if it looks like we need to do more, then we'll do more. But we certainly have a clear plan from here to Q1. Okay. Thanks. And then on the inventory side, just trying to square production versus sales, and I think this is probably true of the entire industry, but you produced about 36,000. And even with fairly material revenue growth, you sold about 13,000. I know you gave some details on sales velocity, but can you maybe elaborate on those?

And more broadly, how should we think about your production versus sales over the next few quarters? Thank you.

Yeah. So a couple of things going on there. One thing I mentioned briefly, but it's very important, is that we have really been fine-tuning our facilities. And so at Sky, producing the top quality flower, so that was potency and consistent sort of experience for the consumer, the sort of thing you're going to put in as a vitamin in a jar and deliver to the consumer. That coming out of Sky has gone from the mid-50s% up into the 70s% now, a huge shift in terms of turning out the type of product that is in high demand. It goes into Daily Special. Key to Daily Special is delivering a great experience and a high potency, but at a very compelling price.

It's been very important to have that shift. The more of that, we don't think we've seen that be anywhere near the top of that demand. It's been important to get more of. As we look forward and project with those new efficiencies in place and in terms of the type of product we're taking out of the organization, we see that we will get into that steady cadence of the volume sold versus the volume being produced on that top quality flower over the next couple of quarters and continue to draw down on that part of the inventory.

For the stuff that goes then into other products, and sometimes it may be still a smoked product like a pre-roll or things that are still quality, but they may be smaller buds or trim, that'll take a couple more quarters to draw down the inventory and get into that same cadence. A lot of that will be related to the growth of 2.0 products as well. So we're satisfied with where we're at on that. We're paying close attention to it. But again, the change to producing the top quality flower has been very important. It's giving us confidence that this is product that will move out into the market in a reasonable period of time. It's important for a play like Daily Special. It's a high volume, low price, great experience play. We need to operate at volumes to get those scale efficiencies.

It's kind of a stepwise function on costs. And so keeping that scale up keeps our costs to produce. So it's critical to get great product out of the facilities as well.

Operator (participant)

Thank you. Our next question today is coming from Pablo Zuanic from Cantor Fitzgerald. Your line is now live.

Pablo Zuanic (Senior equity research analyst)

Thank you. Hi, Pablo. Hi. Just one question. The way I try to interpret the market, when you announce your ATM in mid-April of CAD 250 million, your stock took a hit, down 30% over the last month on the assumption that you would use all of it and you would have about 30% or more dilution. Now, in the call today, in your prepared remarks, you called it a backstop.

So can you, just to clarify, and maybe I'm making you repeat what you said, if you are able to deliver in your cost-cutting targets and lower CapEx as you have, and even if sales remain at a steady state where you are right now, you will not need to tap that facility? I understand it's a rainy-day facility. There's a lot of uncertainty out there, but your share price reflected pretty much 30% dilution from that ATM facility. So just if you want to maybe repeat or clarify that context. Thank you.

Glen Ibbott (CFO)

Let me address kind of a couple of specific points, and then Michael can talk kind of big picture with the way we think about the business.

But yes, listen. I think we've got, because we've actually demonstrated to you and to the market that we have been able to reduce the cost structure of this organization significantly and the CapEx significantly, and that we'll continue to do so. We've got more confidence in our ability to get to that, even to profitability, but more importantly, a cash flow positive over the near term. So as we sit here today, we believe that the cash in hand should get us there. But in this environment, we've seen it with all the major public companies, and you've got to have access to capital. So whether we saw major companies pulling down on all their lines of credit and putting it in the bank, whatever, we believe that this is similar. So I hear you, but I think we've got more confidence with the state of our business.

As we stand here, having proven a number of things and having still a pretty, I think, solid revenue performance. So we do look at it as critical backstop in a very uncertain time. But Michael, maybe I think it's worth just some big picture comments on the state of our business.

Michael Singer (Interim CEO and Executive Chairman)

Certainly. So look, I think consistent with what we had previously announced, and this is in advance of obviously our recently just refreshing the current ATM, we had said as part of our reset that we were going to leverage the initial ATM to raise approximately CAD 200 million in order to fund the gap of getting us to EBITDA profitability. And so we still believe that to be the case today.

And you saw that from our cash position that we just announced today, CAD 230 million, we believe, as noted by Glen, that that is sufficient capital to get us to the right outcome. We put in place the new ATM in April, really as a prudent measure in this environment. It's uncertain. We don't know the length of which COVID will continue to survive. But even though we don't expect that we will need to tap into that ATM, we have it there as a measure just to protect the business and our investors in the event that this uncertain environment continues for an extended period of time. So we feel confident that we I think are positioned well today. But I think as good operators, we want to sort of protect the company for the long term.

And I think putting that additional or refreshed ATM in place just gives us the added level of protection that gives us comfort that we can really aggressively advance our business based on the reset plan. Understood. That's very helpful. Just a quick follow-up. Obviously, you are growing the Canadian rec market. You gave us numbers. On the international side, just going back there, can you frame the opportunity a year out? We're still hearing about only 60,000 patients in Germany. It seems that the main market overseas right now is Germany. All the other players are focusing there, right? Prices could compress. Just some color and context and even how to model that. I think in the Tilray call, they said that could be about 25% of our business.

So just some because you talked about very high market share, but other people seem to be making similar claims with even more sales than what you are reporting. But just some more color, please. Thanks.

Glen Ibbott (CFO)

Well, yeah, let's be clear. 25% of somebody's business, that's a small Canadian business, is not the same as us, right? So we're CAD 4 million of revenue in Europe for a partial quarter, I think, is one of the leading performances for cannabis. We're not talking about any other types of revenue. I'm talking about cannabis. So our medical cannabis business internationally is strong. We all know, and this is different than a couple of years ago, that these are slower developing markets. But there are European markets that we're. I'm not going to predict revenues, but we are exporting into countries like Poland and those sorts of things that are new markets.

Again, we're just going to be prudent to expect slow growth. And in Latin America, you just see Brazil opening up, mainly a CBD medical market. But again, as Michael said, we're prudent with our capital. But certainly, any market where we can enter the market is a significant market opportunity and delivers near-term revenues and bottom line. So no losses, please. No capital. Those markets we're looking at entering. But when you model these, definitely, I mean, I'm conservative with my international stuff, and I just expect some upsides along the way. Thank you.

Operator (participant)

Thank you. Our next question today is coming from Adam Buckham from Scotiabank. Your line is now live.

Adam Buckhman (Director in Equity Research at Scotia Capital Inc.)

Hi. Good evening.Thanks for taking my question. So I just want to dig a little deeper into the 2.0 market dynamics.

So it looks like you guys generated about CAD 5.6 million in Cannabis 2.0 revenues in the quarter. It's been pretty highly televised that LPs have had issues keeping products on the shelves. So first, could you touch on your manufacturing capacity in the Cannabis 2.0 market and maybe how it's changed since you first launched? And then maybe how much of a drag that might have been in Q1 versus where it'll be in, well, calendar Q1 versus calendar Q2.

Glen Ibbott (CFO)

Yeah, I'll start that.

So listen, much like in the launch of 1.0, scaling up manufacturing processes is not without its challenges, and we certainly have had those and continued to overcome them. What we've done, though, is we kind of did the launch, I'd say, prudently into a number and then looked for consumer reaction to the types of products we're offering and pricing, things like that.

And so what we're currently doing now is scaling up several categories, if you will, where we think there is significant consumer potential. Michael, do you have any comments on the kind of the 2.0 market and kind of where we're going with some operations?

Michael Singer (Interim CEO and Executive Chairman)

Well, certainly. So I guess what I can add is, look, as time goes on, we gain a greater level of knowledge in terms of demand and where we see the market going. And I think, as Glen noted, we continue to optimize a very innovative product pipeline. And we're really going to focus on profitable SKUs and SKUs certainly that are going to help what we believe is bridge the difference between getting the supply to meet demand.

So, I think we came out of the gate with a significant number of SKUs, just not knowing where we were going to see the consumer sort of, if you want, demand. We've learned a lot, and so we're really taking those learnings and really going to refine that to areas where we truly see an opportunity for profitable SKUs going forward.

Adam Buckhman (Director in Equity Research at Scotia Capital Inc.)

Okay. Thanks, and then secondly, just on working cap, so moving forward, I think you guys kind of indicated that you should see levels similar to this quarter. Could you maybe talk about the puts and takes from a working cap standpoint for the next couple of quarters and how you're going to keep that in sort of the neutral sort of place that it was this quarter?

Glen Ibbott (CFO)

Yeah.

So listen, I think the big driver in working capital has been the build of inventory. So as I described a little bit earlier, we do see certainly a brand like Daily Special consumes a lot more volume than, say, a San Raf brand does because, again, a much lower price point. So that's a volume play, and it's consuming more. So I think as we see the consumption or the sales volume starting to normalize with our production, we'll start to see that inventory, the investment in working capital or the investment in inventory starting to come down. So that's kind of what we expect over the next couple of quarters. The rest of it, AP and AR is kind of stabilized now. We collect from governments.

They were kind of reached a steady cadence on that, and our AP is pretty steady as well.

Adam Buckhman (Director in Equity Research at Scotia Capital Inc.)

Okay. Great. Thanks.

Operator (participant)

Thanks. Yeah. Thank you. Our next question today is coming from John Chu from Desjardins Capital Markets. Your line is now live. Hi.

John Chu (VP and Research Analyst)

Good afternoon. So I just want to kind of keep pressing on the levers that you have to reach the positive EBITDA. So if the sales become weak because of COVID and the post-COVID situation, presumably you're going to pull on those SG&A levers. But are you going to be cutting to the bare bones to the point where at some point that SG&A level is going to have to bounce back in order to draw growth going forward?

Glen Ibbott (CFO)

Yeah. So that's a challenging question, right? So I think, okay, personal opinion, we've seen quite an impact from COVID and have delivered some pretty good revenues.

As I said earlier in my remarks, medical still seems strong. We're just going to be cautious on the consumer side. I don't want to go too far on that. We will do what it takes to get the positive EBITDA. I have to tell you, I mean, I'm not expecting that we would have to cut to a point where we'd put our long-term growth at risk. That's not my expectation.

John Chu (VP and Research Analyst)

Okay. I just want to touch a little bit more on the 2.0. It sounds like you've got enough data then, or you're comfortable that you have enough data accumulated to know which SKU you need to ramp up on, and you are doing that as we speak right now? Or do you still need to collect a little bit more data to have a better understanding of that?

Glen Ibbott (CFO)

No, that's right.

For the major categories, we know where we're doing quite well and where we think there's still significant demand. We haven't been able to find anywhere near the top of that demand. So that is being ramped up right now. Some of it has been ramped up, or we've scaled up some of those operations, and there's a little bit more to come. So some of the capital in Q4 was related to that. They're modest amounts, but they're still important in terms of turning out more of those product categories. Thanks.

Thank you. Our next question today is coming from Graeme Kreindler from Eight Capital. Your line is now live.

Graeme Kreindler (Principal and Senior Equity Research Analyst)

Yeah. Hi. Thanks for taking my question. Just one question here. Michael, you mentioned towards the end of the prepared remarks about other frontiers of growth, and in particular, you mentioned the US market.

Michael Singer (Interim CEO and Executive Chairman)

So I was just wondering, I mean, we've seen a backdrop of a lot of your competitors scaling back investment in that market, particularly on the CBD side, if not sort of talking down expectations for entrance or how competitive they're looking to be in terms of the near and medium term. So I'm wondering, when you mentioned that market, what sort of time horizon are you looking at for a potential avenue for growth? And does it extend, keeping in mind that it would be something that has to be federally legal? Is it just a CBD avenue there, or is there potential other business streams where you could see growth there? Thank you.

Glen Ibbott (CFO)

Well, it's a good question. I think that's a market that is just, and we've said this before, just too big to ignore.

And so we've got our eye on that market, and we're continuing to explore opportunities that are going to be, without a doubt, have to sort of align with our reset plan and our stated objectives. We're limited in what we can do under the current environment in the U.S. So obviously, it can't touch THC, but we see CBD as a tremendous growth opportunity, and it's something that I think we are a little more focused on. And so looking for opportunities that we think would be complementary to our business certainly needs to be accretive. And given our focus on our own balance sheet, it certainly has to be something where we are confident that we're not going to have to dig into our pocket to leverage that opportunity. So I think we're excited about some of the opportunities we're identifying.

And I think, to your question about when we anticipate maybe potentially looking at an opportunity in the U.S., I would say certainly this year is certainly a window of opportunity for us, and it's something that I think we're a little more focused on than we have been historically, again, with a lens on ensuring this has to fit and align with our current reset plan.

Graeme Kreindler (Principal and Senior Equity Research Analyst)

I'll just add a little bit just in terms of your question about our competitors. Listen, unlike Canada, where most of the LPs grew up playing in the entire value chain from cultivation and seeds right through to distribution, that's not true. We don't need to do that in the U.S. And what I've seen is some people pulling back and saying, "Well, why are we in hemp? Why are we growing hemp?" Things like that.

So just to kind of put this in context, if somebody's pulling back from the market, it may just be part of the value chain that doesn't necessarily make sense as they've learned about the market. And we've certainly taken our time to understand that market thoroughly and understand where we think long-term value will be created there, and you don't need to play in the whole value chain.

Glen Ibbott (CFO)

Okay. Thanks.

Just to follow up, when you're discussing the timing of this year being a window of opportunity, do you look at that under the assumption that the regulatory environment stays as is, which I would characterize it as kind of gray at the current moment in time, or does that assume that you're going to see some incremental progress either on the regulatory environment or just in terms of various points of distribution or certain states sort of jumping ahead of that and giving you some more clarity there? Thank you.

Michael Singer (Interim CEO and Executive Chairman)

I guess I'll take that, Glen. I guess we don't anticipate any material regulatory changes. I think the opportunities we're looking at are with the idea that we don't expect those changes to occur certainly in 2020.

And I think the thinking there is we're exploring opportunities in advance of that regulatory change because the landscape is going to be and probably competition very different on an announcement of some type of regulatory change in the U.S. So we want to get out in front of that. And again, I think looking at opportunities that we think is going to fit our desired path, which is, again, with an eye on profitability and continuing to strengthen our balance sheet. And so we feel excited about opportunity south of the border, and we'll certainly pay attention to some of those opportunities in the coming months. Thank you.

Operator (participant)

Our next question today is coming from Doug Miehm from RBC Capital Markets. Your line is now live.

Doug Miehm (Managing Director and Senior Equity Analyst)

Hey, Doug. Thank you. Hi. Hey, Doug.

First question just has to do with some of the ordering patterns that you may be seeing from the provinces. We've heard from multiple parties, even yourself, that started off slow, smaller orders. Have you seen order sizes increasing in terms of size, but perhaps frequency has dropped off with the COVID-19 situation? Could you comment on that?

Glen Ibbott (CFO)

Yeah. I'll take that. So listen, I just actually asked that question of our sales team yesterday. We're not seeing that the ordering sizes pick up, with the exception of those places where the provinces are getting more confident. So they're really, as you might expect with some people that are pretty sophisticated at procurement, and now applying that to cannabis, where they're seeing that they actually have great sales through, they are, of course, ordering more of that product, but they're managing to specific inventory levels that they want to hold.

So I think the ordering patterns are reflecting that. So the amount that they're going to order is reflected in how quickly they think it'll move. They don't want to get caught in the same situation that mid-2019 with too much on hand, and the LPs don't want that either. So that's why we've seen it.

Doug Miehm (Managing Director and Senior Equity Analyst)

Right. But has there been any change in the last, let's say, month or two?

Glen Ibbott (CFO)

No, not that I've been told. Certainly, as I say, they're ordering. We've talked about this, Doug. It started to shift last year, and if anything, with 2.0, they're very sophisticated now. So we haven't really noticed anything with the COVID that has been a significant shift from what the trends we were already seeing.

Doug Miehm (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

We reached the end of our question and answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Glen Ibbott (CFO)

Well, just wanted to thank everybody for obviously taking the time to join our conference call. Once again, this company is laser-focused on controlling the things that we can, and that is our reset plan was aimed at removing complexity out of our business and reducing cost to a level that was consistent where we believe the business to be today, with obviously a lens on an ability to scale that up if and when we see the market changing. But we're very confident in the changes and the measures that we've taken to get us to where we are today. The job's not done. We have the balance of this quarter to sort of get everything in line to ensure that we're going to deliver on our key objectives going into Q1 2021.

And so the team has been incredibly focused and incredibly motivated to ensure that we meet this target. And I obviously want to thank the team and all of our employees for being incredibly supportive of this important focus of the organization. We're more disciplined as an organization than ever before, and all the decisions we make are certainly with the lens of near-term value and bringing true value to our investors. And so you're going to see that as we go forward, and I'm excited about further updates that we're going to provide the market and, of course, our investors as we go forward. So thank you very much for joining. Thank you. That concludes today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.