Aurora Cannabis Inc. (NYSE:ACB) Q1 2019 Results Earnings Conference Call November 12, 2018 10:30 AM ET
Cam Battley - Chief Corporate Officer
Terry Booth - CEO
Glen Ibbott - CFO
Michael Singer - Chairman
Tamy Chen - BMO Capital Markets
Martin Landry - GMP Securities
Matt Bottomley - Cannacord Genuity
Graeme Kreindler - Eight Capital
Good morning, everyone. Welcome to Aurora Cannabis First Quarter Fiscal 2019 Conference Call for the Three Months Ending September 30, 2018. Listeners are reminded that certain matters discussed in today's conference call, or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks and uncertainties relating to our Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. These documents may be accessed at SEDAR's database or on sedar.com. I'd like to remind everyone that this call is being recorded today, Monday, November 12, 2018.
I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley.
Thank you, Christine. Good morning, everyone and thank you, for joining us for today's call. With me today are Terry Booth, our Chief Executive Officer, Glen Ibbott, our Chief Financial Officer, and our Chairman, Michael Singer.
I'd like to start with a few initial comments before we get the formal program. This is another very strong quarter for Aurora characterized by strong performance in terms of growth, integration, operations and logistics, rising production and new licenses, international expansion and a fast start out of the gate at the launch of Canada's adult consumer use market.
One key figure we'll be talking about through the call is our top line pro forma revenue number of $35.8 million for the quarter. Obviously we were delighted with these results. The bottom line is that we've been executing extremely well across the Board. We've had no stumbles during this busy and critical period, I had consumer legalization and we now anticipate sharp increase in production and revenues over the coming quarters.
Now, in the first quarter of 2019 we continued our strong momentum experienced over the past several quarters beginning to position Aurora as a preeminent global cannabis company. Today, we'll talk about our progress in the quarter. Again it was a busy period. So I'll talk about it in terms of our success at generating continued growth, increasing our production, our achievement in enhancing and diversifying our product offering, and growing our international presence.
In our industry, seed to sale has become somewhat of cliché but for Aurora we have achieved vertical integration. However, it's important to note that we have gone far beyond that to establish a leadership position across the value chain through building and identifying the right assets, assembling the industry's top talent, and leading our industry through innovation.
But first let's briefly talk about our successes in the Canadian adult consumer market which began on October 17. This was a major milestone and Aurora is pleased to be one of the strongest participants. As I am sure you've heard, the public response was overwhelming with strong demand across the country. Aurora was well prepared for adult consumer use having strategically built substantial inventory that enabled us to meet just about all of our supply obligations.
Included in this were high demand, higher-margin products such as our industry leading pre-rolls and capsules. Our nationwide placement of product was aided by the work that we had done before October 17 to reinforce our brand recognition. While, it's still early days we are able to report that Aurora has had some of the most popular strains and brands in this system.
In Ontario for instance, according to the Ontario Cannabis Store website we achieved 30% market share with San Rafael the brand launched by our wholly-owned subsidiary MedReleaf having the most popular and two of the three best-selling strains.
Likewise in British Columbia and Prince Edward Island, again according to government source data we were strongly represented with various products across our different brands ranking in the top 3, 5 and 10 of the most popular strains. In fact as of today, Aurora has four of the top five brands in BC.
So again while it's still early, it is clear that our brands have resonated strongly with the market and we built a significant early market position and that validates our preparation for the launch of the adult consumer use market and the success of our production and roll-out strategies.
Similar to other Canadian L.P.'s, we are facing demand that outstrips supply. We anticipate this dynamic to continue for some time. However, we are successfully and rapidly scaling up our capacity increasing product availability and driving accelerated growth across our different markets.
Furthermore, Alcanna North America's largest nongovernment liquor retail chain in which we have a 25% ownership interest are developing a chain of Cannabis retail stores. Alcanna reported achieving approximately $3.7 million of sales in the first 19 days from its first five stores with the average dollar amount of each transaction 2 to 3 times greater than what they see in their liquor stores.
We understand this strong customer end demand is continuing. Alcanna is positioned well to achieve the maximum permitted number of 37 stores in Alberta in the first year of legalization and is targeting expansion in provinces where regulations permit privately owned retail Cannabis outlets.
I'm pleased to say that while we capitalize on this significant opportunity of the Canadian adult consumer market, we have continued to service our core medical cannabis business.
To ensure that we were able to honor our commitment to our existing patients our top priority, we held new patient intake steady while building up inventory for the consumer market. The market opportunity for the consumer market in Canada is exciting.
At our core however, we are a medical company striving to help patients in Canada and internationally. To enable us to meet demand from all markets, ramping up production continues to be top priority. In the quarter, we increased production compared to the prior quarter by 126% to almost 5,000 kg and nearly quadrupled as compared to last year driven by the addition of the CanniMed and MedReleaf facility, as well as the first harvest from Aurora Sky and Aurora Eau.
Presently, we have eight facilities with operating licenses and six including Aurora Sky with the sales license and we are progressing toward our first harvest in Denmark. The Phase 1 facility in Denmark has a capacity of 8,000 kg per year and will play an integral role in serving the European medical cannabis market.
Currently based on rooms and production, the company is running at an annualized run rate of approximately 70,000 kg and anticipate getting to approximately 150,000 kg per year annual run rate around the end of this year 2018.
On-deck are the Sky Class facilities Nordic 2 in Denmark and in Aurora Sun in Medicine Hat Alberta. Construction of Sun is underway with first planting expected in 2019 bringing our total funding capacity to over 500,000 kg annually.
Our Sky Class facilities are state-of-the-art and highly automated with an expected production cost of well below a dollar per gram. These low cost while delivering product of consistent high quality are a function of the yield and production efficiency technologies implemented to an extent not seen anywhere else in the cannabis industry.
Extensive automation including robotics delivers economies of scale while on the energy fiber harnessing the power of the sun and we capture access heat for reuse. The facility features further technologies to optimize energy use such as accessing free heating and cooling energy during the warmer and colder months respectively.
Electricity consumed by the facility is supplied through two independent substations feeding two independent electrical rings which have been set up with interconnect, as well as a backup independent power generator to ensure full redundancy. The electrical rings are monitored and controlled by a digitalized management system with switch gear to move power through the facility quickly and efficiently.
The systems described above have now been commissioned successfully and will contribute to significant energy savings compared to more traditional facilities that would yield a similar production output on an annual basis.
Finally the facility is equipped with many yield optimizing technologies such as complete control of environmental variables and disease and has prevention. All of this makes the Sky Class facilities the leading cultivation facilities in the world to produce large quantities of high quality products at low cost targeting our rapidly growing market at home and across the globe.
As we complete construction of our facilities, bringing them fully online requires both production and sales licenses from Health Canada. In the quarter, we made progress with licenses granted at several facilities. Our Eau facility in Lachute, Quebec was granted a production license in September. This 4500 kg per year facility is built to EU GMP standards as are all of our facilities and will allow us to complement our larger production facilities by supplying niche cannabis markets.
We held the grand opening of Aurora Eau on November 5 and I am pleased to report that all these are planted and are working towards obtaining the sales license for the facility right now. At several of our facilities, we also received Health Canada licenses for the production of cannabis derivative products including oils, softgels and capsules.
At present, about one-fifth of our revenues are coming from - actually I believe its higher because it's about third of our revenues are coming from derivative products, and we expect this to continue over time mainly as our innovation teams continue to develop new products.
A good example is Aurora Cloud something that we're very proud of. It's first and as far as we know the only the vape type product permitted for sale in Canada by Health Canada. Aurora Cloud is a high potency CBD vape-ready oil cartridge. That Aurora is the only LP able to offer this type of product is testament to both the abilities of our product development, and regulatory teams and our commitment to innovation.
Other higher margin products that we're able to offer today include capsules, softgels, pre-rolls and topical creams. We've many other product in the pipeline as well as work with our strategic partners such as CTT and Evio Beauty to bring new products to market.
This is important for a couple of reasons. First, more and more consumers both medical and recreational are choosing to ingest cannabis through derivatives rather than smoking dry flower; and second these represent higher-margin products for us.
Delivery technologies obviously are important focus of our product development team but we're also heavily engaged in medical research. We have the largest science team in the industry to our knowledge and between Aurora, MedReleaf and CanniMed we completed or are engaged in some 40 clinical trials and case studies and are progressing on 7 at preclinical study and we're in the planning stages of a large number of new clinical trials.
The objectives of this study is both to develop marketable intellectual property such as more narrowly targeted higher-margin therapeutics and to further strengthen our brand recognition with medical professionals on a global basis. We continue to deliver growth organically but we’re executing well on strengthening and positioning the company for global leadership through M&A.
In the quarter, we've continued to execute on this strategy building our business across the value chain through strategic acquisitions to build, enhance and diversify our strong leadership position. In July, we closed our acquisition of MedReleaf. We've discussed this extensively previously and the contributions MedReleaf make to Aurora to our position as a leading global cannabis company they are tremendous.
The integration of MedReleaf is well underway and progressing smoothly. In fact it will be completed by the end of this month November. Given our piece of acquisitions, we have made the integration a core competency under the experience leadership of André Jérôme, our Senior Vice President of Integration.
To give you an example, CanniMed was fully complete - the inspiration of CanniMed was fully complete within the 90 day timeline that we had set out ourselves and we're starting to accelerate the company and derive a strategic synergies that were part of the rationale for that acquisition.
For instance, both cultivation capacity and oil processing capacity has dramatically increased that CanniMed and we're leveraging the clinical trial that CanniMed had completed and that are ongoing. CanniMed also has and continues to make contributions in terms of product development.
Finally, we're leveraging CanniMed exceptionally strong network of prescribing physicians and the company's educational processes and capabilities and will be deploying this model globally to drive even further growth.
The MedReleaf integration is also progressing extremely well and we're already putting in place programs to realize the numerous strategic synergies. These include MedReleaf's operational methods underlying its industry-leading production yields, their data-driven cultivation practices, their product development and their medical research capabilities.
Furthermore, MedReleaf consumer brands and product have resonated exceptionally well with the adult use of market making an important contribution to our successful launch in this new market.
In August, we also closed the acquisition of Anandia Labs, the industry leader in cannabis plant science and cannabis product testing. It too is in the process of being integrated. The amalgamated R&D teams from Aurora, CanniMed, MedReleaf and now in Anandia provide us with the leading research team in this industry and an enhanced stability to generate higher plants and oil yield introduced new high margin products and more effective patient solutions, all part of our innovation efforts through the value chain as described earlier.
As I mentioned, the legalization of Cannabis in Canada on October 17 was a very significant milestone. However, we continue to see and focus on the much larger economic opportunity and that's the global medical cannabis market. At quarter end, Aurora was present in 20 countries across five continents and we continue to entrench that presence through acquisition, business expansion and strategic partnerships.
We significantly increased our presence in South America in the quarter when we entered into an agreement to acquire ICC Labs, a leading cannabis company in the region with over 70% market share in Uruguay, and medical cannabis licenses in Columbia. Combined with mid-Columbia, which we acquired through MedReleaf, we now have a very strong platform to grow throughout the continent. ICC shareholders have now approved that deal and we anticipate receiving the final regulatory approval from Uruguay required to complete the transaction very shortly.
As well as access the local expertise and a low cost of production, ICC has developing a state-of-the-art GMP compliant extraction facility at Uruguay with a capacity to process 150,000 kg of CBD, Cannabidiol seed per year. What's more, this facility is located in Uruguay free-trade zone which exempts exports from any local tax.
Long-term, the global CBD wellness market is a huge opportunity. We are proactively acting on this potential and see opportunities to realize synergies between ICC and our majority ownership in Hempco in Alberta. These opportunities are further amplified through our acquisition of Europe's largest organic hemp company in September.
Agropro and its sister company, Borela produced process and distribute organic enhanced products globally and have substantial land under contract with the capacity of more than 1 million kg of organic hemp per year . Previously, they had selectively harvested the seeds as a food supplement leaving millions of dollars of hemp biomass on the field each harvest.
We intend to work with them to extract and refine the entire hemp plant into a wide range of CBD based wellness products while continuing to develop their markets for other hemp derived products. With this larger presence in the CBD space, we're embarking on a CBD focus strategy that covers the entire value chain from supply through genetics, research and clinical trials to product development and distribution and distributing product to international markets across five continents.
Other international expansion achievement in the quarter includes the letter-of-intent that we signed with the government of Malta to establish a feed to pharma medical cannabis facility on that island. We will be the majority interest in a joint venture with the largest pharmaceutical wholesaler in Malta and serve the domestic Maltese and Southern European markets.
Another milestone in Europe was achieved post quarter when we were the first nongovernment business to be granted approval by the Polish Ministry of Health to supply medical cannabis into that market. Poland is now our sixth cannabis market in Europe making us the leading cannabis company on the continent. We are not done, we're targeting market entry into multiple other jurisdictions and anticipate driving further growth as we capitalize on our early mover advantage in these critically important markets.
Not to leave a continent behind, in the quarter we completed our first export of cannabis oil products to Australia. The product was supplied to medical patients by our local partner Cann Group, who have also received plant genetics from Anandia to enhance their cultivation program while they're also in the process of developing and Aurora Larssen projects designed cultivation facility with capacity for up to 50,000 kg of cannabis annually.
Cann Group's long-term plan include export and the facility is been located at the Melbourne International Airport. As you can see, the first quarter of fiscal 2019 was very active and very productive and also for Aurora have business as usual.
I’d now ask Glen to discuss the financials for the quarter. Glen?
Thanks. Good morning everyone.
Aurora's financial performance in first quarter fiscal 2019 reflected the numerous achievements and quite gratifying progress Cam just described. We had very strong quarter-over-quarter revenue growth with extract based products continuing to comprise more than 31% of our cannabis revenue resulting in a healthy gross margin of 70%.
This quarter included just over two months of MedReleaf's results consolidating from the acquisition date of July 25. Overall, revenue increased to $29.7 million for the quarter up 55% from Q4 of fiscal 2018 and 260% from the same quarter in the previous year.
Revenue growth was mainly attributable to much higher patient numbers and increased product availability following the acquisition of CanniMed and MedReleaf, continuing development of our international markets and the first glimpses of the impact of the Canadian adult use market.
On a pro forma basis including MedReleaf and Anandia Agropro as though they'd been acquired July 1, 2018 revenue would have been $35.8 million reflecting a 333% increase in revenues over the prior year.
As I noted a moment ago, consistent with last quarter extracts represented about 31% of cannabis revenue. A year ago oils were 20% of cannabis revenue. We expect the percentage of sales attributable to oil and extract based products to increase in future quarters as new products are introduced including Aurora's recently licensed softgel capsules.
The inclusion of MedReleaf's results had a mix impact on selling prices. The average net selling price of medical dry cannabis increased by $0.37 over the previous quarter due to MedReleaf's higher net sales price of $8.19 per gram. However, overall average sales price cannabis extracts decreased by $1.40 per gram as we integrated MedReleaf's extract pricing.
As Cam noted earlier, we were well prepared and had a successful launch into the Canadian adult consumer use market. We began shipping cannabis to provincial wholesalers at the end of September and recognize the small amount of revenue about $600,000 in Q1 2019. This number only includes a small percentage of shipments delivered to several provinces by September 30. Since then, we've been pleased with our performance in this market to-date both in terms of market share and average selling price.
Post-acquisition rapid improvement in CanniMed’s facilities and production methodologies resulted in a $0.25 or 15% decrease in our cash cost to produce a gram of cannabis dropping to $1.45 from a $1.70 in the previous quarter.
As more production comes online from Aurora Sky, we expect production cost per gram to continue to decline. Our cannabis production in the quarter more than doubled from the previous quarter up from 2212 kg in equivalent to almost 5000 kg in equipment. The significant increase in production in Q1 results from continuing yield improvements, the integration of our recent acquisitions and the first harvest from all-in Sky.
Supporting our existing patients in Canada and Europe required almost 2700 kg in the quarter allowing us to continue to build new high-quality inventory in preparation for the adult consumer market in Canada. As Cam noted as of today's date we are now producing at an annualized rate exceeding 70,000 kg. Our mission is to build a global leader in the cannabis industry.
On the corporate side, we have continued to support this objective by investing in the infrastructure and talent required to pursue the unique and significant opportunities in the adult consumer use and the international medical markets. This is partially reflected by our headcount which is now over 1600 skills and very motivated employees.
G&A costs in Q1 2019 were $35.9 million, a 59% increase over the $22.6 million in the last quarter. This change is a result of the increased headcount, new office space and other expenses to accommodate our rapid growth including our U.S. listing cost. Both 6 million of the increase is from the incorporation of MedReleaf expenses, some of which are related to the acquisition or nonrecurring such as certain public company costs.
To establish strong brand awareness in advance of the October 17 adult use legalization, we invested in a significant number of marketing activities. We also continue to build out our internal sales and marketing talent and capabilities. Overall, these expenses incurred by 99% to $29.4 million from $14.8 million in Q4 2018. Over 80% of the increased spend was directly related to the October 17 launch and is nonrecurring. As you are aware, the scope of marketing has been significantly curtailed pursuant to the Cannabis Act as of October 17, so going forward we expect our sales and marketing expenses to be quite a bit lower until regulations change if and when they do.
Innovation is also crucial to our objective of building a high margin business in the global cannabis industry. As markets develop, there will be more consumer demand for customized strains new delivery mechanism and also continued internal productivity initiatives such as higher-yielding strains and techniques. The combination of Aurora's R&D team along with those of MedReleaf and Anandia have given up unsurpassed signs and product development capabilities.
Work on these initiatives along with the process improvement and enhancement efforts at Aurora Sky have resulted in a healthy increase in R&D expenses compared to the prior quarter. With our industry-leading times and product development teams working extremely hard, we expect our investment in research and innovation to continue to grow although not at the same pace as our revenues grow.
We are well-funded to execute on our growth strategy including accelerated international expansion, targeted acquisitions, increases in our talented staff, support for science and innovation, and investing in our world-class facility. As at September 30, we had $147.8 million in cash and equivalents, a $58.6 million increase from the previous quarter and well over $400 million of market value in publicly traded strategic partners.
In conclusion, Aurora's delivered another quarter of strong revenue growth with very healthy margins. Had a successful launch into the adult consumer use market and continue to invest in talent, science and technology to position us to achieve our mission of building a high margin global cannabis later. The company is in robust financial health and is well positioned to capitalize on this once-in-a-lifetime opportunity.
I’ll now pass the call back to Cam.
Thank you, Glen.
We are obviously very pleased with our progress in the quarter and the platform that we have in place to achieve continued growth. We're vertically integrated across the value chain enabling us to capture more margin, accelerate the development and market introduction of higher-margin products for the consumer wellness and medical markets, increase operational efficiencies and target a rapidly growing global audience.
We continue to be successful in the international medical market and have made a great entrance into the consumer use market in Canada. Our scale and capitalization enable us to act on opportunities very quickly positioning up exceptionally well to capture leadership, capitalize on the enormous potential of the global cannabis industry and to accelerate growth.
We're strongly committed to delivering shareholder value and before we open the call to questions, I'd like to mention a couple of initiatives that complement our strong growth. First is our spin-out of Australis Capital which was completed in September. Canadian beneficial shareholders received units of Australis consisting of one common share and one share purchase warrants and an opportunity to participate in the attractive U.S. cannabis market. There is incredible growth potential in the U.S. with high-quality operations, attractive innovators, and a large market of patient and consumers.
However, as cannabis remains a schedule one controlled substance in the U.S. alongside heroin, these companies access to capital is constrained. Australis brings to the U.S. market a management team and board with vast capital markets experience and deep cannabis industry backgrounds to identify and evaluate and pursue investments.
Today Australis has announced three exciting transactions, has successfully increased its capitalization, and is working diligently on delivering growth. Second, is our listing on the New York Stock Exchange where we commence trading on October 23. Achieving that listing is a reflection of our success and growing as a company and will allow us to attract a larger audience of global institutional and retail investors.
The last thing I want to mention after a quarter is good as this, is that Michael and Terry and Glen and I are incredibly proud of our team. The performance of our people across every function has been stellar. We couldn't be more proud.
And Christine, perhaps now you can open the call for questions.
[Operator Instructions] Your first question comes from the line of Tamy Chen, BMO Capital Markets. Your line is open.
Just had a couple of questions here. First is just to confirm your 70,000 kilogram run rate. So I just want to confirm how should we think about that, is that - so fiscal Q2 is essentially the 70,000 divided by 4 that will be your production or will it still take you some time to get there given the harvest lead times?
So that is very specifically our annual run rate that we've achieved and it's comparable to the $45,000 figure that we cited in our last quarter. And it will take us a while. That's the annual run rate but it will take us a while and we will ramp up. Now the other thing to bear in mind is this a moving target, so by the beginning of calendar 2019, we're looking at in excess of 150,000 kilogram annual run rate and then we're targeting by the beginning of 2020 that's when we're targeting about 500,000 or 500,000. And Glen, do you have something to add?
Yes, Tamy, it's an excellent question. We're right in the heart of this ramp up or right on the curve. But you're right, I mean, those are base that are planted and growing and in production but the harvest cycle you're not going to see that level of harvest in Q2. They're planted, producing does take a couple of months to grow, little bit of time to harvest and dry. So you're really going to see that level of production coming towards the end of the quarter in terms of harvest and availability to the market.
The second question is obviously you supplied in the first two weeks of October, but could you talk about now we're past October, your ability to supply with the inventory you've got on hand and production coming on in terms of how much you've committed to the provinces going forward and your ability to supply that going forward? We've also heard that the provinces are taking products from any producer that has. And I'm wondering could you speak if you're in a position to also be able to supply more than your original commitment should the province's come around asking for more?
We will be, but remember that we're in the process of ramping up right now. We just got the sales license for Sky, that's great. We've got additional harvest coming out of there, we're anticipating our sales licenses at Aurora Eau very soon, and we're having our first harvest in the next couple of weeks. So we will be able to ramp it up but we can't make commitments like that. I understand what you're asking because we've heard the discomfort of provinces who across the board have not been able to achieve sufficient supply. We, we think have done better than other companies and some of our peers. We will be ramping up, we'll be able to pick up some of the slack soon but we can't do that immediately.
And lastly for me is, could you talk a bit about your - how your wholesale pricing in the adult use market has been, your positioning in of products in good better best?
Tamy, what I can say rather than good better best is better average pricing is about what you would expect just for dry cannabis. Don't forget we're selling capsules and oils and pre-rolls and all these there at a higher price than just dry cannabis.
So to date and - this is a very small sample size but to date we're averaging a little over 550 a gram or gram equivalent. You can extrapolate what you want from that. I think we need a longer sample size, we need to see but the demand, the strong demand from consumers persists and as we've demonstrated high quality and the ability to supply, this is an ongoing negotiation with the provinces so those that can supply with high quality and consistently may be able to demand even higher pricing than we're currently getting right now. So it's very initial stages but as I said earlier very pleased with their ability to supply and the pricing on average that we've gotten to date.
So just to add to that, it's Terry Booth here. The other factoid that is coming around the corner is product development. And as we put more gel caps on the shelves, more CBD cartridges on the shelves, and other product developments that are coming down the pipe, you'll see an increase in the price per gram that we're garnering from these provinces.
The demand speaks for itself as Cam reiterated. There is a high demand for the Aurora MedReleaf product in these provinces, other provinces initially wanted everybody to come off sort of flat because they didn't know really who had the champagnes and who had the bubbly and certainly we feel that we have the champagnes that have in a medical system and that will eventually - that demand will lead to higher pricing in provinces without a doubt.
Your next question comes from the line of Martin Landry from GMP Securities. Your line is open.
My first question, just to clarify you're talking about Ontario having 30% of the total supply, is this 30% of the sale indoors and/or is it 30% of the sell-through?
As far as we're aware and as you know it's hard to accumulate the data but this is the actual sales of cannabis into the Ontario system selling to the provinces but they're actual sales. Martin it's in early days but where we can get access to data some provinces are more forthcoming than others at this early stage. We have, our market development team has been looking under the covers trying to get insight onto what's moving what's not, how we're doing relative to the other folks that type of thing. So they're actual sales. It looks to us like we achieved about 30% of the Ontario sales to date.
And to your knowledge that 30% share in Ontario, is it representative of what you have in the rest of the country or did you over index in Ontario?
We don't know. We don't know because we don't have clarity. Only some provinces have any kind of information posted publicly available right now. So we've just pulled what we were able to from the province's website.
The other thing to be noted is that we did supply the skews that we said we would unlike other competitors. And by virtue of supplying the skews we've gained confidence in these provicences. Yes of course they're all asking for more, they underestimated their own demands but we have a medical market to maintain, we have a European market to maintain. So we're going to maintain supply as per our contractual commitments. When additional product comes online, we'll be ready to supply that as well and that's when we'll do the upticks.
There is other anecdotal places you can go. If you go to the BC website, you can sort cannabis products by best sellers. If you sort by best sellers you'll see that we are four of the top five selling strains from the beginning of - from October 2017. So the glimpses we can't say what that means in terms of a percentage but we're certainly pleased they were at the top. So again, we'll get more and more clarity over the next few quarters. But it's been a very nice start.
So Martin, just to sum this up, our sense is that we're doing well, very well out of the gate in the consumer system but we just don't have access to a ton of data right now. And as Terry said, I think we're doing a very, very good job of balancing out, maintaining supply on our menu for our 67,000 registered patients across the country and making sure that they have access to a variety of medical products. In addition to continuing to ship product to our international markets, to be able to do so well across all three market segments is something we're very proud of.
And as we as we speak today, are you completely sold out or do you still have some inventory that you can supply to the provinces?
We wouldn't sell out. We have a budgeted amount of cannabis per month for our patients, for our European countries, and for the adult use market in our provinces. Who would sell out of all their Cannabis that would be a mistake we would not make.
Yes, no, so we do additional inventory and we are replenishing the orders to all the jurisdictions that we're serving, which I believe is 12 out of 13 in Canada now.
And just my last question is on Aurora Cloud, your vape cartridge. Is this going to be potentially available for the recreational market?
Not yet. That, we'll have to wait for the new regulations anticipated with respect to concentrates and edibles. Now the one thing to remember there is the Cannabis Act itself says that those regs are allowing for those products to be sold have to be in place by one-year post legalization, so October 17, 2019. But we don't have to wait that long and my suspicion is given that if you know what else is happening in October 2019, that is the federal election, I suspect that we'll see regulations allowing for at least some of those products and maybe all of those products coming sooner than a year from now. So I think we may be looking at a matter of months.
And Martin I expect the cartridge to be available in direct market way before the beverages and edibles just in fact that we have a medical market underlies the ability to apply the healthcare and get it on the shelves.
Yes, and it really helps that we have a got amazing product development team. Dr. Shane Morris who heads our new product development is really killing it and he is the one who led the effort to get the first CBD date on to the market when nobody thought that was possible. So we’re very, very pleased with that.
And what's the selling price of that cartridge and on a program like your equivalent as well if you can?
Yes, I actually don't know that off the top of my head nothing. I owe you an answer on that one Martin.
Your next question comes from the line of Matt Bottomley from Cannacord Genuity. Your line is open.
Yes, so maybe just switching over to the quarter itself on the OpEx side. So I understand the commentary that proportionally with a lot of the selling of marketing expenses are going to come down given that you had to do prior to October 17 but how do we look at these lines sort of at the consolidated level maybe just directionally going forward obviously there is going to be lot of more investment in your international operations and more consolidation of deals closing.
So roughly 60 million or 70 million in total of your admin cost and your selling general admin I imagine directionally that is going to increase over the next couple of quarters but am I not understanding something on that maybe just going forward on directionally where that’s going to flow?
Yes Matt the sales and marketing really was a unique sort of time where there was just - I mean I think most of the major L.P.'s or you’re putting a lot of effort into brand building, brand awareness that type of thing we sponsored a number of high profile events and concerts and all sorts of things to get the name out there. But certainly can’t continue on that level. I’d say the sales and marketing is going to normalize much more like it looked in Q4.
So closer to half of what we did in Q1 as I noted 80% of the increase spend in Q1 is kind of one-time nonrecurring. There will be a little bit of spillover into Q2 just because we were able to market right up till the 16th of October. But now we’re into a more focus on sales and lower dollar cost activities in the market inside. So Q4 2018 is more representative of how I see this sales and marketing expense normalizing.
The G&A is a little bit high this quarter it was very, very active quarter with a U.S. listing with the integration of some pretty major companies like MedReleaf and things like that. So that kind of blew up the G&A a little bit in terms of cost that will go away I am not going to say it’s not dropping by half the way marketing well but it should normalize down a little bit. That being said that is part of the growth globally as we continue to bring new companies in those fold.
So we’re going to pick up the market leader in South America within a week or two here and need to build out you know the support capabilities for company that’s got the potential to lead and open the South American market for us. So G&A I would expect to drop a little bit in this quarter but it will continue to stay pretty steady and grow as we become more complex globally. I hope that helps.
Just wanted to shift to this whole purchase order process out with the provinces right now. So obviously you’re allocating first and foremost to your medical patients and then also your international stream. With what’s left over for sales into the Canadian Reg market, is it fair to say that the province are buying whatever is offered to them. I am assuming there has to be some sort of level of minimum commitment but is it month by month right now or how are these provinces actually taking product and communicating how much visibility there is on what their ordering might be?
I would say it’s a little bit of map the province is all our different system in place. Our production team has told me that we could sell every gram we produce up until the end of June that’s every single gram that we produce here if we wanted to into the metal usage market.
So as I said earlier we're tampering it. We’re meeting our commitments and when we have extra supply which we will start to ramp up supply from Sky, we will allow that for sale in the adult usage market. Remember that the medical market and the European markets fetch us more dough full stop.
One of your question is will the provinces take whatever products available. Yes I think they would and the story there is an excess of demand oversupply. So I think they are taking whatever product they can get from whatever producers.
From our perspective we do have commitments to our provincial partners and we're going to go all out to meet them but one of the things I think that we’re doing exceedingly well is that product allocation among the three market segments. We’re not leaving our medical patients twisting in the wind. We’re making sure that they have access the range of products they need. Still we’re also we’ve launched I think quite successfully into the consumer market and what we found is that our product are very well known.
So the brand awareness is there and that suggest that some of the sales and marketing efforts that we made over the past quarter have actually borne fruit. And then at the same time, we’re opening up additional markets around the world.
So that product allocation I think has been outstanding. And by the way I just have a note here with respect to Aurora Cloud Martin question it's priced at $75 per unit the Aurora Cloud CBD vape cartridge and its $52.50 per unit for compassionate patients which are those who are on federal or provincial disability or make less than $25,000 per year.
And that’s only the cartridge as we encode there and of course the patient that it is a universal type of produce that fits in many different way.
Just one last question on my end just on the international stage. If you could provide any color if there is any on what's happening in the German tender process right now for domestic cultivation and in between various markets you were talking about on the call Poland, Colombia, Australia and others. Which markets do you think are going to be the largest contributors to your current fiscal year 2019 for us to maybe focus more of our attention on going forward I will leave it there? Thanks.
In our opinion certainly the EU is going to be the front runner amongst those nations that you mentioned. As far as the German tender goes, we’re quite happy that it still not out when it comes out we will be prepared. We were selected in the first round and then it was [indiscernible] from other L.P.'s that ended up having it being delayed.
But we’re quite happy to continue to be the leader in Germany and actually widening that gap between others. It's a difficult country to get into. If the EU GMP compliant the hurdles are high and as you’ve seen as not many been able to sell cannabis in Germany and the ones that have don't have the proper distribution channels that set up yet. We were ahead of the game in the acquisition of Pedanios which is now Aurora Deutschland.
But yes, it’s the EU for now for sure and but we’re not turning away on any of other nations I think South America you saw what happened with Mexico that’s moving very quickly. We’ve been in discussions again I’ll say that either, but we’ve been in discussions all over this world as Cam mentioned in over 20 countries right now expect that to continue to increase at the same pace that it has over these last 18 months.
Yes, so in the short-term Matt Germany is going to be the major driver that system is growing very, very quickly it’s somewhere between 30,000 and 50,000 patients in the entire system. We only have clarity on the first 30,000 because those are reimbursed by insurers and that's the only really good data that we have to track patients but it’s growing very rapidly as you would imagine with patient reimbursement.
As Terry says the EU I think it’s going to be very, a very rich market for us and it’s the various entry that are potentially particularly important here. You have to have EU good manufacturing practices certification in order to sell into those markets and we currently have three of I believe seven total licenses with EU GMP certification and that would be our Aurora Mountain facility, our MedReleaf Mountain facility and the former Pedanios which is now Aurora Deutschland itself on the distribution side.
Also our Denmark facility which is the first facility other than better to grow cannabis in the entire EU. Yes, my comparison Denmark don’t even have a hole in the ground and we have a facility built and are growing cannabis there. We started construction on the Base facility in Denmark Nordic Sky but it is not necessary means that having 250,000 square feet of very hybrid greenhouse and the guys in Denmark, Matt Petersen amazing job in being able to put this together so fast the Ministry of Health in Denmark was there with us and management team just six weeks ago.
Everybody is very excited about the Denmark market. We've done a great job of only having it in legislation and not having a prohibitive regulations. So we’re going to be able to move more products we believe in Denmark then we’re able to move in Canada. So it's an exciting place to be in and the EU is our focus in regards to answering your question.
Your next question comes from the line of Graeme Kreindler from Eight Capital. Your line is open.
You discussed earlier about maintaining the medical market, I just was wondering if you could share any indication on if active patient's numbers have changed at all in the subsequent weeks from the introduction of adult use legalization?
I feel you’re asking there has been some initial concern that patients might leave the medical system for the consumer system is that what you are asking? We’re actually we’re seeing the opposite, we’re seeing strong demand for new medical patients and we actually held the line on patients to make sure that we wouldn't end up in a situation whereby we didn't have enough product run up variety of products to satisfy the demand of our patients.
So we’re actually seeing very strong demand and I think I reported elsewhere as well from some of the aggregators and clinics that they have seen an increase in business, an increase in demand since October '17.
And the other thing bear in mind is at least for now given the supply constraints in the consumer system, I don't think patients are going to be departing and using consumer cannabis anytime soon. And of course there are some additional advantages to remaining in the medical system for one you can write the cost of your medicine off on your federal taxes. And two, we’re seeing slowly rising incidence of insurance coverage for medical patients which will never be the case for consumers.
That attach to that we’ve got the pharmacies coming online fairly soon with the changes in the new act. So you’re going to see cannabis be in dispensing shoppers’ drug mart to only select few licensed producers pharma city, pharma choice. That again is going to remove more stigma around medicine. And as we get closer to competing clinical trials, getting drug and identification numbers or pseudo drug identification numbers more insurers will cover this product.
The future is bright for the medical cannabis system and we’re medical cannabis company globally that's our focus. It is drug usage it’s a small sliver of a very big piece of pie. We will manage that when we take it as we have I think we'll know at least both says that we’re the leaders in these drug usage market in this country so far. But it is early and we’re going to keep our nose to the grinding stone congratulations to achieve I thought it might be a little worst than it was for Aurora but this Aurora team is pretty impressive and pretty proud of how we put together something that was a bit of essential.
And my other question here gentlemen, talking about Agropro and other Hemp and CBD initiatives. Can you give any comments surrounding what Aurora thoughts are with the pending farm bill in the United States and what the opportunities might be within that vertical?
Love the opportunity. The Agro protein is a young man in [indiscernible] is full name I call him Manny. He is top notch professional. He is going to be incorporating more upgrades to the organic supply in Europe and it’s a quite significant supply.
The CBD market is really what you're speaking to I believe they have market I have been quoted the same it will be perhaps larger than the recreational use tariff market in 20 years because of its full utilization. It’s a food, it's a fiber, it’s CBD as well as it’s used for plants and for pets and for animals. And it doesn't have any intoxicating THC, just little bit nothing to screw you up.
So that - to answer your question, Agropro we deal in early with ICC Labs, Hempco, those three are going to be a major focus, we have the CBD national team, we have a CBD clan, it's going to set up the distribution channels earlier than the THC channels, and in America it'll hats off. Let let's hope that they are able to pass that those action, laws that are in place right now hopefully they can take CBD off of schedule one maybe before THC.
You're seeing the American system really move quickly now especially with the [extract sessions], two more states added to the adult usage market that East Coast is just - my lips are wet my mouth is watering to get a piece into that but we have to wait, well that our little brother Australis managed the American markets for now and we're on top of it.
The other insight into the U.S. market is of course ALPS, Aurora Larssen Projects are involved in many bids with respect to high quality facilities, the Americans are starting to get that as Canadians are building the right things up here. And guess what, we got that from the Dutch. So like we invented it but we certainly have taken the ball and started to build amazing facilities up here in Canada, at least Aurora has anyway.
Your next question and your last question comes from the line of [indiscernible] from PI Financial.
This is actually Jason calling in PI. Great quarter, just wanted to get an idea of what the product split was or anticipate in the adult use in terms of pre-rolls versus dried flower versus oil, if any insight in terms of what the market's demanding and what you're able to supply on that side?
We don't have those data yet, Jason. I'll tell you what the market is demanding right now on that cannabis product period. So we know that the pre-rolls are selling incredibly well, they're flying off the shelves. But most of the product being sold right now is dried flower. In some provinces I believe that we've been the only company with capsules on the market and they've been flying off the shelves as well.
So there is very strong demand across the board. I think if there's one that is an outperformer, I would say it's the pre-rolls. And that plays very well to our strategy because we've acquired a proprietary access to proprietary system from Wagner Dimas that produces excellent pre-rolls with low wastage and so we're quite bullish on that. And the nice thing about the pre-rolls and it can't be emphasized enough, is these are value added products, they're high margin products. I mean, what are we getting for a half gram pre-roll, Glen? Anyway, we get a much higher price than what we would do for flower. So we're excited about that.
And then just last question, your cost to produce came down nicely this quarter. With all the various facilities that are coming on line going forward, where do you expect your cost to trend? You expect it to go down more or is there some fluctuations as some of these other facilities come online?
Jason, what we've seen is we had a little bit of a blip last quarter when we brought on CanniMed, and we knew we were getting something that had a lot of potential but they weren't that efficient at that time in terms of production. So we've come back down - the cost per gram to produce at mountain is actually lower than the average cost that we reported and so both MedReleaf and CanniMed are doing well. We're bringing them down in terms of cost to produce, but they're little bit higher resulting that average of $1.45.
What would really impact this average is as Sky ramps up, we've said that we expect Sky to produce well less than $1 per gram. So you can think if that becomes the majority of the volume that we're producing, that's going to bring that average cost to produce well down. And I'm not trying to project any numbers for you. And that's why we're kind of being a little bit coy about that, the cost to produce in terms of the Sky facilities but I'm very, very optimistic.
I mentioned in my remarks that we're building a high margin global cannabis business. That's very important to us. So on the sales side of course we're developing new products not the higher contribution products that are in demand, pre-rolls and capsules and things like that. But certainly on the production side, we talked about efficiency and world class production, why does that matter?
It matters to us because the money that flows directly to the bottom line, this is our EBITDA. So saving $0.50 a gram on the scale that we're producing at and will be producing at is very, very important. So directionally you can expect it to continue to decline as the volume from Sky become a larger majority of what we're producing.
Yes, I'd add that at Sky obviously our greatest efficiency will come when it's at full capacity and so once again like Glen said, I don't think we want to project out the next quarter right now but I will say that the long-term trend is positive and further evidence of that is what we've managed to achieve at the CanniMed facility.
When we went in there we knew that we'd find a good stable consistent production system but we also suspected that that the production methods had not been - there hadn't been a continuous improvement committed to it, and that is in fact what we found. Since we got possession of the CanniMed facility, we've actually managed to enhance yield by 40% already and we were targeting even better than that.
So this is an asset within this Company and is one of the things that attracted us to MedReleaf because we believe that these - Aurora and MedReleaf were the two highest production efficiency per square foot companies in the industry. And that commitment to continuous improvement is ongoing and we put together an expert team from Aurora MedReleaf and Anandia that is devoted specifically to continuing to wring greater efficiencies out of our production and it's combining best practices from all those three background.
And consistency of the grow is absolutely key to go forward. Our philosophy of controlling environment at the ends degree, our philosophy of incorporating automation is going to avoid crop loss. Avoiding crop loss is absolutely key. [indiscernible] and Auroras never had a crop loss nor do we expect that we ever will, touch wood.
But so far so good, [indiscernible] from MedReleaf and I’ve been involved in some of these grow meetings just poked my nose in and there's a lot of heavy talk going on in those rooms and bringing on similar input, similar delivery mechanisms, similar bands of environmental controls for different strains and having different strains of different environmental controls, pretty special and not a lot of companies out there can do that.
Certainly we knew MedReleaf could, we knew Aurora could CanniMed could and those are we targeted, those are three medical cannabis companies that are growing at consistently high grade, top notch, high yielding cannabis. And that has resulted in it being very popular in adult use market as well as we're seeing in the early days here. So, we're in good shape, we're in great shape. Aurora is set to continue this awesome growth and successful growth and successful integration.
It was our biggest risk, I think I mentioned in the last quarterly call. We've reduced that risk by having top notch world class integration teams, very satisfied saw the MedReleaf has gone off. ICC and Agropro and Anandia integrate, they're smaller but we're getting better at it. So we're looking for successful integrations across the Board.
There are no further questions at this time. Mr. Cam Battley, I turn the call back over to you.
Thanks Christine. And I want to thank everybody once again for participating in the call today. We look forward to speaking to you again next quarter, at which time we hope that we have just as many exciting things to talk about as we did today, and I anticipate that I will be just as highly caffeinated at that point as I am today.
This concludes today's conference call. You may now disconnect.