Aurora Cannabis Inc. (NYSE:ACB) Q3 2019 Results Earnings Conference Call May 15, 2019 10:30 AM ET
Cam Battley - Chief Corporate Officer
Glen Ibbott - Chief Financial Officer
Terry Booth - Chief Executive Officer
Conference Call Participants
Vivien Azer - Cowen and Company
Chris Carey - Bank of America Merrill Lynch
Tamy Chen - BMO Capital
Luke Perda - Seaport Global
Michael Lavery - Piper Jaffray
Jason Zandberg - PI Financial
John Chu - Desjardins Capital Markets
Doug Miehm - RBC Capital Markets
Rob Wertheimer - Melius Research
Good morning everyone. Welcome to Aurora Cannabis third quarter fiscal 2019 conference call for the three months ending March 31, 2019. During today's call, Aurora will be referring to an earnings presentation which listeners are encouraged to download from the financial reports section of the company's Investor website, investor.auroramj.com.
Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked, could constitute forward-looking statements that are subject to the risks and uncertainties relating to Aurora's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. These documents may be accessed via SEDAR and EDGAR databases.
I would like to remind everyone that this call is being recorded today, Wednesday, May 15, 2019.
I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley.
Thank you Chris. Good morning everyone and thank you for joining today's conference call. It's a beautiful sunny day in New York. With me are Terry Booth, our Chief Executive Officer, Glen Ibbott, our Chief Financial Officer and our Executive Chairman, Michael Singer.
For today's call, I will start by discussing some of our operational highlights of the past quarter and Glen will discuss the financials. I will then briefly return to present our outlook for the rest of the year and beyond. And then we will take your questions.
As we do each quarter, I am going to start with a few ad hoc observations to frame the conversation, then proceed to the formal comments. Now, our operator Chris mentioned that a short earnings call presentation is now available in a financial section of our investor website, investor.auroramj.com and I would like to draw your attention to something new we have developed on slide three. It's a dashboard of key performance indicators. They really tell the story of our solid performance during the quarter, but more importantly they make it very clear where we are headed including our path to profitability.
So for those of you can see it and even for those who don't, I am just going to run through very quickly nine of these key performance indicators that we brought together to simplify and clarify the snapshot of where we are and it includes some very important results for us in the quarter, including growth across all distribution channels. So our consumer cannabis revenue in Canada, up 37%. Our medical cannabis revenue in Canada, up 8%. And our international medical cannabis revenue, up 38%. And that all averaged out to 20% quarter-over-quarter growth.
On the next line, you will see our cash cost to produce per gram came down significantly from $1.92 to a $1.42. So that's down 26%. We knew this was coming. We knew that that would result from the scale, efficiency and technology of Aurora Sky, but it is very gratifying to see.
The next point you will is that our average net selling price per gram is actually a little bit down. It's the only one of these key performance indicators that we marked as yellow rather than green. And so our average net selling price per gram came down about 6% over the quarter. And the reason for that, we will go into more detail later, is essentially that we haven't had the time to scale up or at least we didn't early in the quarter. We hadn't had the time to scale up our derivatives production. And the reason it's yellow rather than red is because we have already got indicators. So that will be turning around in this quarter.
Our gross margin is up, a small amount 1%. But our gross margin on cannabis revenue is up and we are very, very proud of that. We have always empathized our gross margin. We will continue to do so. And then also our active registered patients is quite notable because that was up 5% in the quarter to 77,000 and it's up another 7% or 8% since then. That's significant because some companies in the sector have been indicating that they have seen softening demand on the medical side. We have not seen that. In fact, we have been managing it very, very carefully so that we don't add too many patients. Now we got the production, we can continue to increase that.
And then the last two key performance indicators I want you to focus on are kilograms produced and SG&A because they really tell the story of our pathway to profitability. We doubled our production. It's up 99% quarter-over-quarter to over 15,000 kilograms. And the other critical key performance indicator here is our SG&A, up only 1%. And this is further to the commitment that we made in January that we were shifting gears and focusing on disciplined execution and cost management to ensure that that pathway to profitability comes to reality. So I am happy to say that we are still tracking for positive EBITDA in this quarter.
So the snapshot here before we move on to the formal comments is industry-leading production and production efficiency, industry-leading gross margin, industry-leading product quality, yield and no crop loss, industry-leading global footprint and unparalleled technology. In this phase of the sector's development, I would say absolutely that the number one critical success factor is the ability to produce and sell an enormous volume of cannabis. And we have got that in this phase.
All right. And now onto the formal comments. Looking back at the first three quarters of our financial year, we are very pleased with the progress we have made. We have consistently executed on our growth and expansion strategy, resulting in continued revenue growth while improving efficiencies and scale to drive margin improvement. We are proud of this progress and very pleased that while many in this sector are still trying to decide how to build their cannabis business, we have already successfully built a strong and thriving business with solid fundamentals that's positioned as a global leader.
Now let's look at our achievements in the third quarter. Our net revenue was $65.1 million, a 20% increase over $54.2 million in the second quarter. We produced almost 16,000 kilos of cannabis, double the volume compared to the previous quarter. With Aurora Sky ramping up very successfully, our cash cost to produce per gram fell by 26% while SG&A cost were relatively flat over the same period, due to disciplined cost management. In the quarter, Aurora continued to be a solid performer in the Canadian consumer market with leading market share and high brand awareness. Our consumer revenue has continued to exceed our expectations. We achieved 37% growth compared to Q2.
While increased production was the fundamental driver of growth, I think it's important to understand how well our products performed in terms of brand resonance. An analysis of over 6,000 reviews on list.com conducted by a covering analyst showed how well the Aurora brands performed in this respect. Two of the top three most highly regarded brands were ours, with all our brands in the top 11. While in an undersupplied market, the ability to produce remains king, longer-term we know the brand strength will play a key role in capturing and keeping market share and going by these numbers we are very well positioned in the consumer market.
We are also looking forward to an improved retail infrastructure across Canada, which will further increase consumer engagement. There are still many consumers that have yet to purchase their cannabis legally. Furthermore, people who do not transact in the illegal market, but are interested in cannabis appear not to be engaged because of the reported shortages and the currently under developed, physical retail infrastructure. The launch of brick-and-mortar stores in Ontario is a great step forward in this regard and with increasing supply, we will see a growing network of retail stores. In this respect, I would like to mention our partner, Alcanna, who recently opened another of its beautiful Nova Cannabis dispensaries at 499 Queen Street West and Toronto. Sorry for the advertisement, not really. In general, in line with what has happened in other consumer jurisdictions, a well-developed physical retail network should result in strong growth.
While we performed very well in the consumer market, medical cannabis remains the cornerstone of Aurora's identity. In the last quarter, we undertook many initiatives to strengthen our leadership position in this segment, both nationally and internationally. Some have suggested that legalization of consumer cannabis in Canada would result in a drop-off in the number of patients buying in the medical system as people would head to stores to self-medicate. In our experience, nothing is further from the truth. Every day, the number of global physicians prescribing cannabis to address real medical issues from PTSD to palliative care is growing. Many of these patients would only seek treatment through traditional channels such as their trusted family doctor or clinic rather than seeking advice in a dispensary. In addition, through the medical channel, patients can seek reimbursement for their expenses through tax reduction and an increasing number of companies including medical cannabis in the benefits policies. So despite the introduction of consumer legalization, we continue to experience growth in our patient numbers, up 5% this quarter to over 77,000. As of yesterday, our patient numbers in Canada have increased even further to 82,745, in line with our production acceleration towards the end of the quarter and into Q4.
Additionally, three of our brands were included in the Shoppers Drug Mart online marketplace for medical cannabis, which opened this past January. In the quarter, we also introduced product identification numbers or pins to 78 of our medical cannabis products to make it easier for patients to apply for reimbursement under health insurance plans. We are recognized as a leader in medical cannabis. This is not just due to the high and consistent quality of our products provided by our three medical brands, but also because as an organization we are integrated throughout the value chain to advance medical knowledge to support physicians and other health practitioners and to service our patients with excellent products, customer care and information.
Through our knowledge, we have the broadest medical research program in the industry with over 40 clinical trials and medical case studies underway and completed. This creates incredible brand strength with physicians worldwide who are still the key drivers of growth for the medical sector. We own CanvasRx, which provide critical services to both patients and physicians looking to understand medical cannabis and its uses. We engage with health authorities internationally with physician networks and with pharmacies. It is this rigor in our medical cannabis program that has enabled us to grow our presence in the medical cannabis markets, both domestically and globally. Currently, we are present in 24 countries on five continents.
This past February, we added to our European presence with the purchase of a 51% ownership interest in Gaia Pharm, renamed Aurora Portugal. This new division has received permission from the Portuguese Health Ministry to construct an EU GMP European Union Good Manufacturing Practices compliant cannabis cultivation facility. The first phase of the facility is expected to be complete in Q3 2020 and will have a capacity of 2,000 kilogram per year with a further 2,000 kilos coming on when the second phase is complete.
Another significant advancement in Europe was our win in the recent public tender competition in Germany to cultivate and distribute medical cannabis. Aurora was one of the three winners in the competition, which was judged based on the design, quality, security and logistics of the growing facility. Of the 79 applicants, we received the highest ranking and won the maximum number of lots in the tender. The lots will allow us to provide a minimum supply of 4,000 kilogram of medical cannabis over a four-year period. We will start constructing this month and expect to ship cannabis from the facility starting October 2020. We are very pleased with this win, which solidifies our leadership position in Germany and reflects our industry-leading facility design. This was an important skill that we developed early on with our acquisition of the facility design business, Larssen in 2017.
While the quantities of the tender are very much smaller than what we anticipate that size of the German medical cannabis will grow to, it is a critical win that will strengthen our brand in the local market as well as through the rest of Europe. Another development strengthening our brand in Germany is the introduction of full spectrum extract. Here too, we established early mover advantage and are developing the market. As an aside, using the Canadian medical market as a proxy for how other international markets will develop. This provides a good indication of the scale of the opportunity were pursuing. In Canada, we already have over 1% of the population registered in the medical system. Translating this to the international markets in which we have a very strong first and early mover advantage, it is clear to see that very substantial additional capacity is needed. Hence, our upscaling of Aurora Sun in Medicine Hat and the construction of Aurora Nordic in Denmark.
With scientific studies increasingly augmenting word-of-mouth and anecdotal evidence, we think it's fair to assume that destigmatization of cannabis and adoption by physicians will follow an accelerated curve in comparison to Canada. Work is to be done to develop these markets obviously and for now, they remain supply restricted but the opportunity is there and we are executing extremely well in this regard.
In terms of our production facilities, in the third quarter, both MedReleaf Bradford and Aurora Sky in Edmonton were fully licensed by Health Canada. Bradford is now fully planted and provides a production capacity of 28,000 kilos of premium hang-dried and hand manicured cannabis. Aurora Sky is, we believe, the single most advanced cannabis cultivation facility in the world. The 800,000 square feet facility has a production capacity in excess of 100,000 kilos annually. Sky, a massive closed system indoor facility with a glass roof deployed state-of-the-art technology to produce cannabis of high and consistent quality while benefiting from a high degree of automation to increase efficiency. This means target production cost of less than $1 per gram. Sky is now fully planted and successfully ramping up to maximum capacity. The increase in production seen in Q3 over Q2 will continue with increased product availability for sale in Q4.
At Aurora Sun in Medicine Hat, our newest and most evolved Sky class facility, construction is progressing very well with the erection of the metal structure and glass insulation almost complete. The design of Aurora Sun includes a number of technology advances as compared even to Aurora Sky and will further improve our economic efficiencies. As I mentioned, we announced an upscaling of Aurora Sun in the quarter. The facility will now measure 1.6 million square feet and with Sky class efficiencies is targeted to produce over 230,000 kilograms per annum. Sun also represents an advance in our production process with the facility focused solely on high and efficient production with the dry cannabis shipped to other facilities for further processing. In February, we announced a new facility Aurora Polaris that will focus on post-harvest processing. Strategically located adjacent to Aurora Sky in Edmonton, Polaris will be EU GMP compliant and serve as our Center of Excellence for the production of high margin, value added products such as edibles. Our product development team in collaboration with our market development specialists and internal market forecasters have identified these products, those products that we anticipate will sell best and have the best margins. These products include edibles such as hard baked goods, chocolates, mints as well as vape products, cosmetics and softgels that we will produce at Polaris. Products such as infused beverages are also under development. But considering the anticipated relatively low market share of these products, we are not rushing this as we rather get it right than get there fast launching a product with limited market resonance.
Leveraging its proximity to the Edmonton International Airport, Polaris will also serve as a domestic and international logistics and warehousing hub. Polaris is expected to be completed by the end of this year. In the interim, in anticipation of new regulations permitting these new products, we are installing production lines at our other license facilities to ensure that we will exceed market demand with a broad complement of products and not have the level of shortages that the industry experienced on October 17 of last year. Polaris demonstrates the scale that we have achieved in our operations. We are not cottage industry, but rather a pharmaceutical level in the industrialized operation that requires complex systems to drive operational efficiencies, consistent, high-quality output and product innovation. You have heard today the advances we have achieved in the consumer and the medical business, both domestically and internationally. Polaris will help us institutionalize our innovation culture and maintain our global leadership.
Now Glen will discuss the financial highlights of the third quarter and over to you, Glen.
Thanks Cam and good morning everyone. Aurora's financial performance in the third quarter of fiscal 2019 reflected our continued robust execution across all market segments, as Cam just described.
Our net revenue increased to $65.1 million for the quarter, compared to $54.2 million in the second quarter of fiscal 2019 and just $16.1 million in the comparative period last year. Of this, cannabis revenue was $58.7 million, a 23% sequential growth across all three market segments, driven largely by a 37% increase in consumer market cannabis sales. Underlying this growth was the increased production that Cam discussed from Aurora Sky and our Bradford facility. Medical cannabis sales in Canada grew by 8% or $1.9 million as a result of continued growth of our patient base.
As Cam indicated, we continue to support the growth of the Canadian medical market and in line with our patient first culture, have increased availability of the medication that patients need. We continue to take the position that medical cannabis like all prescription drugs should not be subject to excise tax. For that reason, we continue to absorb the cost of the tax for our patients. This negatively affected our revenue in the quarter by $3 million or 5%.
Extracts represented about 18% of cannabis revenue in Q3 compared to 22% last quarter. Our oil extraction facilities have been operated at maximum capacity for the past two quarters and as a consequence the relative contribution from extracts fell slightly as our total revenues grew. During the quarter, we installed additional extraction capacity at some of our facilities and that capacity is now online. Furthermore, our extraction partner Radient Technologies has now entered commercial operations, which we anticipate will start making a noticeable contribution from the end of Q4 onwards. Finally, installation of EnWave's rapid low-temperature drying technology at Aurora Sky and Sun facilities will increase speed of extraction in future quarters taking it from a matter of weeks down to a day.
The average net selling price of cannabis decreased to $6.40 in Q3. This was partially a result of product mix as we recorded a 48% increase of dried cannabis sales into the consumer market which has a lower wholesale pricing structure. The ASP was also impacted by the first full quarter of excise taxes on medical cannabis, which Aurora absorbs. And finally and most importantly, the relative decrease in contribution to revenues from extracts impacted the average selling price as well. Going forward, with significant additional extraction capacity coming online internally as well as from Radient, we anticipate the relative contribution from higher selling price products to increase towards the end of the current quarter.
The significant improvement in our cash cost to produce cannabis more than offset the decrease in average selling price. As Cam noted, it's a key driver of our financial performance and the cost to produce was down $0.50 from last quarter, 26% to $1.42 per gram in Q3, the a result of increased production coming out of Sky and Bradford creating significant economies of scale and it was also a result of reduction in the temporary labor that we had employed to prepare for the commencement of consumer sales in Canada. We expect production cost to continue to go down as Aurora Sky produces at full capacity in Q4 2019 and Q1 2020 and reiterate our expectation that production costs will be well below $1 per gram.
So tying all of this together, in Q3 our consolidated gross margin was 56%, up slightly from Q2 of this year. This reflected the improvement in our cash costs offset by a lower percentage of extract sales and the increase in the consumer market sales. We expect gross margins will continue to improve as we introduce new product lines, expand our extraction capacity and increase international sales, all of that combined with the continued improvement in production efficiency.
Cannabis production in the quarter increased by almost 100% to 15,590 kilograms driven mainly by the ramp up in production at Sky and Bradford. Much of this production increase came towards the end of the quarter. At March 31, we had WIP inventory exceeding $45 million in fair value, which reflects the significant harvests during March.
A few more words on our ramp up with Sky. In order to reach the 100,000 kilogram production capacity, two parameters are critical, the frequency of harvests and the yield per harvest. I am pleased to note the frequency is nearing our target rate. Sky is reaching a real cadence in production. This means that we will comfortably reach the stated capacity of more than 100,000 kilogram per annum harvest rate in the first quarter of the new fiscal year. I should also note that the yield per harvest has actually been substantially above target. The average of the last 10 harvests there has been more than 20% above our targeted yields.
With the successful ramp up of Bradford and increase in production yields across our other facilities, we anticipate harvesting at a rate in excess of 150,000 kilogram per annum by the first quarter of our fiscal 2020. On a planted rooms basis, our capacity already exceeds 150,000 kilogram per annum. For Q4, we expect to have over 25,000 kilograms of cannabis harvested and dried. With the implementation of new regulations permitting the sale of a broader portfolio of derivative products later this year, we are planning to allocate a sizable fraction of this production of the inventory for further processing to ensure we will have a broad portfolio of new products in sufficient quantities available for sale when the higher margin products will be permissible in Canada.
Over the past several quarters, we have invested significantly in building out the talent and the infrastructure to lead the Canadian and international cannabis industry. Now, much of that infrastructure is in place and ready to support our growth. In Q3, SG&A cost grew by 1% compared to Q2 of this year. Within SG&A, sales and marketing actually decreased 28% as the reduction in pre-cannabis act spending was partially offset by higher shipping costs, which are related to our increased sales volumes and an increase in sales representative headcount. For G&A, while we saw a 16% increase, greater than 6% of this was due to a new Health Canada cost recovery fee which is calculated at 2.3% of sales. Q3 2019 G&A also reflected the first full quarter of ICC integration and a partial quarter of Whistler costs. Going forward, we anticipate SG&A to show increases in line with the growth of the organization but certainly at a rate significantly lower than our anticipated revenue growth.
In Q3 2019, our adjusted EBITDA loss decreased by 20% in the quarter to $36.6 million from the $45.5 million in Q2. I should note that we have defined adjusted EBITDA in our Q3 2019 MD&A. Through the combination of substantial revenue growth, a declining unit cost of production, increased availability of higher-margin derivative products, increased shipments to the EU and ongoing disciplined operating cost management, Aurora continues to track towards achieving positive EBITDA beginning in this current fiscal Q4 2019.
Our financial position remains solid. At March 31 we had almost $350 million in accessible cash and over $70 million in accounts receivable. This compares to about $75 million in cash and $15 million of AR at June 30, 2018. The increases are largely due to draws on the BMO-led credit facility, the issuance of senior secured notes in January 2019 and the increased level of sales in our business. In addition, we recently completed the filing of a base shelf prospectus and an ATM supplement, a long term strategic measure that provide the flexibility to access growth capital, if or when required, to provide the gas to continue executing on our global expansion and partnering strategy. We implemented this base shelf prospectus and ATM supplement as part of a prudent maturing capital structure and normal part of housecleaning as we filed our Q3 results.
In conclusion, I am very proud of the team at Aurora. Kudos to all for delivering yet another strong quarter. We continue to grow stronger fundamentals each quarter, expect significant growth and are financially healthy. We are executing our growth strategy and consequently, I believe we are very well positioned to further strengthen our position as a clear leader in the global cannabis industry.
I will now pass the call back to Cam.
Thank you Glen. And as you have heard today, we have built an extremely strong platform for growth that's generating continuing solid results. We have several initiatives in place that will drive further growth and further secure our leadership globally.
Now let's look at a few. One exciting development has been the appointment of Nelson Peltz as our strategic advisor. Nelson has a decades long track record of building businesses and generating exceptional shareholder value and has deep experience in the consumer products business. We are working with him on multiple initiatives, including our partnership strategy. As we communicated at the time, our partnership strategy is differentiated. We do not believe there is a change of control transaction at this point with so much growth still to come is in the best interest of our shareholders.
Rather, we are well-positioned to explore the benefits of multiple partnerships across a variety of industry verticals. Nelson's experience and his connections in these areas will prove, we believe, very valuable in this respect. We are excited about the opportunities in the cannabis and also the hemp space globally and we continue to explore multiple opportunities with Nelson. We don't want to put a timeline on things right now but I want to stress that we are approaching this very strategically, methodically and thoroughly.
One important area of attention is the U.S. which appears to be moving toward a more open legalization, particularly in the areas of industrial hemp and CBD. We are assessing where in the value chain we will be able to generate the most value. We are well positioned to pursue multiple angles through our deep research and product development capabilities, our regulatory expertise as well as our extensive global hemp infrastructure which we intend to expand through acquiring the shares in HempCo, not already owned by Aurora. CBD for both medical and wellness applications has incredible potential and we intend to fully leverage our capabilities, our infrastructure and our partnership potential to maximize shareholder value creation.
You can also look to us to continue to build on our leadership in Europe. In addition to our entry into Portugal and our recent tender wins in Germany, we recently have been selected as the exclusive supplier to the Luxembourg Health Ministry for medical cannabis. While this is admittedly a small country, Luxembourg has demonstrated that it is an innovator in cannabis legislation within Europe. For example, it's the first country in the European Union to propose legislation that would allow for the consumer use of cannabis. Our association with the Ministry of Health will help us be on the forefront of opportunities within that could translate into further growth in other European countries as the market matures.
As I said at the top of the call, while many in the industry are still evaluating how best to build their cannabis business, we have built a solid and rapidly growing business that is exceptionally well positioned to capitalize on the enormous global opportunities in cannabis. In fact, we built a global leader. Our fundamentals are improving rapidly and we have the know-how, the scale, the credibility and the reach to execute.
That concludes our prepared remarks. And now I would like to ask our operator, Chris, to open the call for questions.
[Operator Instructions]. Your first question comes from Vivien Azer with Cowen and Company. Your line is open.
Hi. Good morning.
So as we think about the capacity ramp and the expansion on Sun, cam, I think it might be helpful just revisit the rationale for laying down so much capacity. Certainly in the near term, the market is clearly very tight. One of your competitors extended their view the supply and demand imbalance last night saying, 18 to 24 months. So two part question. Number one, the longer term rationale around building out all this capacity when ultimately we will go into an oversupply situation? And number two, if you could comment on your expectation for the switch to oversupply from a broader market perspective? Thanks.
Yes. Sure. So I will start this off and then maybe hand off to both Terry and Glen. Looking at our view of the need for capacity, the first thing is that you are right. The market is undersupplied in Canada and we see continued strong demand. We also were not necessarily in line with some people's expectations as to what max capacity will be, particularly given the advent of the new products as per the new regulations that will be coming up this year. So there is that.
Second thing is and we said this before, the central fact of the global cannabis sector is a massive excess of demand oversupply and we know that we are going to have to supply a lot of international markets with product that we have cultivated in Canada. So that's why we are doing this. And also, we have a massive cost advantage here. There are a lot of companies that are promising to have X capacity available in 12 or 18 or 24 months. We are delivering it now, but we are also delivering incredibly economically. So we are going to have massive capacity to supply the Canadian market, to supply international markets and we don't see any shortage anytime soon.
Terry or Glen, did you want to weigh in and add to that?
Sure. Thanks Cam. I think I said last quarter that if there is one thing that I lose sleep about is our ability to supply the global demand for cannabis. I now lose a little bit more sleep with my two-week old baby. But it is definitely something that still is at the top of our agenda, increasing our capacity to feed the global need. It took Canada five years to meet its demand for the population 33 million. So you just put that math into perspective with the EU, with Australia, Mexico and other countries that are coming online, it would take nearly 50 years to meet that demand. But we are not going to take that long because of the scale, we are now able to build upon. The market is moving in a very, very fast pace. You are seeing what's happening in the United States with the bank SAFE Act, with the Farm Act, with the number of states that are now flipping over to medical and also picking on adult usage. There is no doubt in my mind the U.S. will be legalized in the next three to five years completely, albeit at a state level. So those types of demands are there. The East Coast of U.S.A. does not have the growth capacity at this point that the West Coast has. Add them all up, the demand will be significant for the product for many, many years to come.
That's helpful. Thanks. And just to follow-up on the second part of the question. Any view on when the Canadian marketplace might be able to produce enough supply to meet demand?
I will answer that. That's a bit of mug's game Vivien, I think, is putting those estimates out there. I think anybody who tells you they know when the market will be properly supplied is probably pulling your leg. We have seen a lot of predictions not be correct. From our perspective, all we need to do is keep executing the way we are and that's the way we look at it.
Okay. Very helpful. Thank you.
Your next question is from Chris Carey with Bank of America Merrill Lynch. Your line is open.
Hi. Thanks very much. I just want to start off.
How are you? I have a near term question and then sort of a more longer term philosophical question. But on the near term, I think you said that you would anticipate that the 25,000 kilos that you have available for sale would actually go for value added product forms, potentially later in the year. So would you anticipate growing sequentially from a kilograms sold standpoint in fiscal Q4 relative to Q3?
The answer is yes. I am going to let Glen go into more detail on this. Glen?
Yes. I think what we said and hopefully you can hear it. I understand I am coming through a little bit quietly on this. But we said that we would allocate a portion of that to inventory for the value add products. Listen, what we are trying to do is learn from them the challenges of the industry last year in the initial launch of consumer legalization and we absolutely have to have sufficient inventory to launch these products properly. So if that means taking a little bit of revenue to Q4 and putting it into inventory into new products, then that's what we will do. But the other part of this, Chris, is we have today and in the past that we are tracking to EBITDA positive in Q4. So that does mean, definitely you can do the math, there has to be a significant increase in our sales volumes from Q3 to Q4. So we may trade those often to make sure that we are making the right decisions for the long term future and long term value of the company to establish ourselves properly in the new product portion of the consumer market in Canada, but also to meet our commitments in terms of EBITDA profitability. So you would expect to see continued significant growth on revenue and volume sold in Q4.
Okay. Makes sense. And then kind of longer term and somewhat connected to the prior question. So I guess based on what you put out there, you are going to get to roughly 400,000 kilos capacity in Canada over the next few years, potentially 40% plus or minus of the total market. We will see how things go with prevalence and new product forms. But when you think about that 400,000 kilos ram capacity, how are you thinking about the evolution of the ability to use international exports as a lever if you can find a home for that much supply in Canada? So said another way, how quickly will some of these markets open like Europe because even this quarter kilos sold to Europe are still very small? So just how do you see that evolution over time?
Well, I mean the first thing to remember is that Germany, for example, where most of our international medical cannabis sales have gone thus far, has been constrained by supply. That market has been constrained by supply. And we are just at the point now, we are ramping up to the point where we will have a lot more to sell into Europe. Now, how quickly will these markets develop? Well, that's an interesting question. And we are actually actively involved in sharing best practices with governments around the world so what we see truly accessible systems for patients and to help them accelerate development. I think it will happen very fast, some market more than others. But if you take a look at Germany, for example, that's a really exciting market. We talked about Canada having more than 1% of the population with a script for medical cannabis. If we assume that that's going to happen in Europe and probably faster because most patients are getting insurance reimbursement, you are talking about very short term to like 850,000 patients in that one country alone. So these markets are opening up so fast. Recall what Terry said that our biggest nightmare is we just want to produce more cannabis and be able to supply these opportunities. So that's happening. Remember that when we emphasize we will have about 400,000 kilograms of production in Canada, we don't see any constraints for years and years on the ability to export and a lot of those export markets are premium priced. Europe, for example, we get the benefits of the currency differences.
So just to add to that, Cam, the German market is one thing. We know that that's going to real soon start to take traction as we actually are able to send pharmaceutical reps around educating physicians and having seminars and courses. But countries like Australia, where Cam did a great job in working with the government in cutting some red tape, literally went from less than 500 patients last year went up to well over 5,000 now. So that's a country that will be importing for some time. They have no production facilities. People have to recall, Canada has had production facilities for over 15 years, if we include the MMAR program. So as these countries scaled up, we know the medicine is true, we believe the medicine 100% in different product forms and different means of administration and that's all coming online as this industry matures, this wave of cannabis required globally for medical purposes is significant and getting into these countries as first mover medically will set ourselves up excellent for any adult usage planned in those any other countries.
I also want to add to that. Something that's really important about Aurora is that from the very beginning, we have taken an approach of emphasizing purpose-built highly economical facilities. And that's a critical part of this equation as well. There a lot of companies that are producing or trying to produce cannabis in Canada. Not everybody is able to do so economically. We are doing so more and more so economically. So low cost and premium quality is a very neat trick to pull off. We are doing that. And I like where that positions us in the Canadian market as well on a go forward basis.
Got it. Thank you very much.
Your next question is from the Tamy Chen with BMO Capital. Your line is open.
Thanks. Hi everyone. My first question is, on this new potential accounting change, the IFRA 16, I am just wondering, do you have a view on if that will have a material impact in the way you recognize your operating leases and how that could affect the potential change in how you would report your EBITDA going forward?
Yes. Tamy, of course, I am not sure if everybody on the call is aware, but under IFRS there is a new standard coming out and that's for us in next fiscal year, so Q1 2020, that will require essentially most leases to be capitalized and then amortized or depreciated over time. So that will effectively move some operating costs off the P&L and into depreciation. Tamy, right now, I mean, we own pretty much all of our facilities. We do have some lease cost for some land at the Edmonton International Airport and we do have office leases and those are likely to end up as capital asset. So there will be some sort of impact to EBITDA. I don't think it's significant for us as it might be for some others that are leasing a lot of their facilities. So we will see. That analysis is ongoing. It's a big project, as you might expect.
Okay. So that means you would adopt, that would happen in your new fiscal year. It wouldn't happen next quarter.
That's right, yes.
Okay. Got it. And my second question is, I wanted to touch again on the more near term revenue outlook in the Canadian market. I am just trying to understand, from what you are seeing there, is there the ability to sell through materially into the current distribution channels in Canada as long as you have got the supply? Or would you need to see a material ramp of new retail store openings across the country to absorb the level of volume that you are seeking to in the fiscal Q4 quarter?
The current infrastructure, everybody knows, is too small. But in addition to that, there hasn't been consistent supplies. So what we have heard from some stores is, different parts of the country, is that regular consumers know the day that new inventory is delivered and they all descend on those stores at that time with great big lineup. And as a result, the most in-demand product, sometimes sell out in an hour or two. What that shows is that even within the current infrastructure, there is not the consistency of supply of the most desired product yet. Now we also know that provinces are allowing for ramp up of brick-and-mortar stores. That's great. It will add infrastructure. We also know that the regulations will be in place this year to allow for new product form. So you put that altogether and we are very confident that we will continue to perform exceedingly well in the consumer system. And we think the consumer system will start to pick up speed and accelerate its growth. And then also, let's not forget the medical side. We anticipate a continued demand in Canada for Aurora products and MedReleaf and CanniMed products in the medical system. The picture altogether, I think for us, is very, very favorable.
Okay. Got it. And on that consistent supply point, if I can just squeeze in one more. What sort of products are you seeing are the ones most in demand? And how is Aurora's product offering in comparison to that?
Well, you heard earlier in the call that our products are exceedingly highly ranked, all of them in the top 11. So it's everything from certain kinds of dried flower, connoisseurs really like certain flowers, to oils as well. It's also across not just THC, high-THC, but also CBD products are very much in demand. So it's pretty consistent picture across the board and we anticipate that we will see the same thing for our concentrates and edibles as well.
Got it. Okay. Thank you.
Your next question is from Brett Hundley with Seaport Global. Your line is open.
Hi. This is Luke Perda, on for Brett Hundley. First question. So as we approach the legalization of value added products inside Canada later this year, there seems to be an overwhelming focus on the beverage side of the market as you have noted, in part given strategic partners that are in place for a number of the Canadian LPs. And it's interesting because if you look at certain parts of the legal U.S. market, beverages have lagged behind considerably relative to vapes. Part of this is because the American beverage products don't have the R&D and marketing support that we presume Canadian beverage products will have, but we are also wondering if common consumer desires are being overlooked here and whether or not the Canadian LPs and their partners are trying to force a square peg into a round hole. Can you talk a bit about your own views on how the value added product market might develop inside Canada and what kind of opportunity you see on the vape side?
Yes. I will start and then I would like to hear from Terry on this as well. I don't want to be too much of a negative on beverages. It's just that we have made, what we think is, a pretty rational decision to focus our priorities in terms of the new product forms in areas where we know that there's strong demand, in part based on the model that we have seen in the U.S. consumer legal state and where we believe that we can deliver something that's highly differentiated and good for consumers and also where we think that we can generate the highest margins. Now, we said before with respect to beverages, that may turn out to be a great market segment. It's not yet in the U.S. consumer legal states.
As you point out, it's something like 2% or under of the market. And there are some good products out there that are well-formulated. It's just that perhaps it's going to take a little bit of time and some marketing and some experience to change consumer taste whereas, as you noted, vapes, vape pens are exceedingly popular and have rapid and high uptake. So we think that that's going to be a terrific market segment that doesn't need a lot of market development. That will be pretty much readymade.
They are so discreet. You can stick them in your pocket and your purse. They don't create smell, just a little bit of vapor. And I think that that will be very attractive to new consumers who just want to try it out. What's all the fuss about? Let me try one of these vapes. So we are focusing on what we think will be the best sectors or market segments for us but with the highest margin and where the demand is already clear.
Right. So the proven market is certainly not in beverage. And there are some big players in the United States. Heineken, for example, did have some brands in California. It's a very different effect when you drink an intoxicating cannabis beverage. It's not like alcohol. It doesn't lead to another and another. It's actually the more you have, the less you want in a very short amount of time once it starts taking its effect. It also has the potential. It doesn't have the rapid onset that we think it has, to have adverse effects over time. There are not going to be any cannabis bars like there are alcohol bars anytime soon. You mentioned marketing in Canada. That's still not allowed and it won't be allowed for beverages either, as far as we know. The gummies and the vapes, they are the best sellers. They are the best margins in the states. Certainly, if we are leaning towards any beverage, it would be on the wellness side of that, which we think there's a tremendous market potential there. But on the intoxication side of the fence with respect to cannabis drinks, the market is just not there and it's not proven to be a popular item anywhere. And it's not able to market like typical beer companies or booze companies are allowed to market. So it's a small step for us. But certainly, we are going to be focused on what we feel sells best and provides the best margin.
Thank you. And just one more for me. You have gone out and you have purchased Whistler. You also have an investment in TGOD. It seems that you really believe in the forward market opportunity for organic cannabis. Do you see Aurora becoming a big player on this side of the market? And can you talk about the forward market opportunity overall in your view?
I will start and then pass this on to Terry. We see it obviously as a part of the picture. And so, yes, there's going to be a segment of the market of consumers and patients who prefer an organic product. It's not necessarily the be all and end all. Organic has advantages and disadvantages. It's just another piece of the market to us.
Yes. The organic market in cannabis is a popular one, as is the organic market in hemp. We have the largest organic producer of hemp under our wing now in Lithuania, Agropro and Borela. So we know that there continues to be a move to more organic products in the cannabis space and Whistler has the very best, for sure, in the Canadian licensed producer space. We will wait and see how TGOD executes on growing organic at scale. It is a difficult thing to do. We wish them the best of luck. We do still have a right to 20% of their production supply.
Where you run into some problems with organic is, of course, microbial. You have to watch the dirt very, very close. It's a growing and living breeding medium that if it gets out of control, even a little bit, you can have crop loss. Whistler have been doing it for five years. So they have eliminated crop loss over the years completely and know what they are doing with respect to organic with more grow room.
It also demands the highest price. They have done a tremendous job with the provinces and maintaining. They are not going to drop their prices of their cannabis and if you don't want it, you don't have to take it. But guess what, it flies off the shelf before everything else. So that we will watch and we will continue to increase organic supply, if indeed organics are the way to go.
On the food and beverage side, on the edibles, I think that that may be even a bigger picture for organic cannabis making organic edibles and sugar-free edibles. So I think that the organic supply of cannabis is an important piece of the puzzle. And it's just a matter of, if we can grow it at scale and continue to grow it at a smaller scale, much like the organic vegetable market.
I will add that, you have heard me say before that we like to, on important strategic questions, we like to measure twice and cut once. So as Terry indicated, if we find there's an increasing appetite for organic cannabis products, we will be there. But we don't want to over-commit to that until we see that the demand is there. So measure twice and cut once. We think it's a prudent way to operate.
Your next question is from Michael Lavery with Piper Jaffray. Your line is open.
Good morning. Thank you.
I just wanted to touch on the U.S. You expect legalization federally in a few years like roughly everybody. Can you just give us a sense of how you envision entering the market? And would I be hearing you right that you think some of your capacity you already have planned would be available for export to the U.S.? And if that's the case, what would be needed from a regulatory perspective to allow for that?
So the first thing I want to do here is emphasize that we are not making any news on that point today. And then I want to reiterate what we have said before. We obviously will be in the U.S. and we will be in the U.S. in a big way at some point in the future. It will always be in a way that is consistent with U.S. federal law. We will enter when it is permissible on a federal level in the U.S. There are some ways to enter earlier. We will also do this in a way that is consistent with the requirements of our exchanges.
But Terry, I know, wants to speak to this. Terry?
Sure. Yes, the U.S. is an interesting country, to say the least, with respect to cannabis. The states all have much different regulations, varying regulations from state to state. I feel Nevada is probably the best state for Canadian companies to enter into. And the regulatory changes that are forthcoming, we don't know what they will look like. If they don't erase the state to state line in the cannabis space, once it's legalized, then it's a very difficult market to operate at scale in.
Right now, they have multiple state operators, multistate operators that have small facilities in their various states. And that's not really the Aurora way of doing things. And if we do go to the states, we will be focusing on large populations that are not fully established that have regulations that we are able to operate in with profit. If they erase the state lines, that whole picture changes. If you are able to cross those state lines, then it becomes a massive cannabis market.
As far as the export into the states, again, we don't know when that will happen. We are allowed to export to a number of countries now. I don't know why we wouldn't be allowed to export into United States. The demand will certainly be there, if indeed we are allowed to export into United States. And we look forward to rudders down, the sails getting there, getting that going sooner rather than later.
The hemp industry in the United States, the Farm Act, allows for the usage of CBD derived from hemp with 0.00 THC. That's a limited market at this point, as it only includes topicals, if you really want to go to the letter of the law of federal legislation. The FDA is looking at the ingestible CBDs in the space and yes, I know, many states already sell it. They are selling it federally illegal, as the states that have legal cannabis selling statewide are selling federally legal. But it is something we have to figure very, very closely.
You have to understand, Aurora is not being blind to what's going on in the United States. Australis is doing well for a startup company. It's done four or five deals. It's our little brother. We have back-end rights with Australis and more to come on that later. But it's something we feel very confident as do most, will be legalized. It's how it's legalized is the question.
Is it going to be legalized medically state to state or adult usage state to state all at once? We don't know. Nobody knows. And I don't think the government knows. So that's a ways away. It's one step at a time and we are taking the steps necessarily to do that in an organized fashion. As Cam said, measure twice, cut once.
That's really helpful color. Thanks. Just to follow-up sort of the flip side of the question. To what extent do you have any of your capacity plans, even sort of vaguely earmarked for the U.S.? And if you have the opportunity to export there, would you have to rethink a little bit how that gets put to use?
Go ahead, Terry.
Again, we don't know. That's certainly not in our capacity plans at this point. We have a strategy of entering into the U.S. and that strategy is obviously confidential. But I would expect, if we have an over capacity in Canada and the rest of the world, we would love to ship to the U.S. But I don't think we will have that capacity depending upon the timing. Even if they announced that they are going to have a legal system, it would take years to get the regulations in place and proper capacity in place.
And certainly, as first movers, it's natural to go to your MSOs just to really look at, there is cherry picking to do on the MSO side of things. But there is no need to rush into it. It's going to iron itself out. We have got some overvaluation there. And I think you will see a significant rise of valuation as they move towards legalization. But valuing these MSOs just based on their retail doors is, in my opinion, a mistake because you can always open more retail, states can always open the door to more retail.
We are seeing that in Canada. We are seeing the value of the retail stores that had got lottery wins drop significantly. So we are quite happy that we didn't jump into that fray. Does that answer your question? We don't have any plans to export anything into the United States at this point. It's not our future just yet.
I think that's the key point. If I understood you correctly, you asked if we are counting on supplying the U.S. from Canada. Absolutely not. We have not built that into our plans at this point. The other thing to emphasize is once the opportunity exists to build production in the U.S. for us, we build the best cannabis production facilities in the world. I think we have clearly demonstrated that with the highest efficiency, use of automation and technology that nobody else has thus far been able to touch. And the result of it is premium product at a real economical cost. So once the opportunity exists, you can expect that we are going to be looking at using our technological lead to build that capacity ourselves in countries around the world.
Thank you. That's very really helpful color. Thanks a lot guys.
Your next question is from Graeme Kreindler with Eight Capital. Your line is open.
Hi Graeme. Graeme, you still there? Did you go to sleep?
Your next question is from Jason Zandberg with PI Financial. Your line is open.
Hi guys. I wanted to drill down a little bit on your medical cannabis sales. As an industry, we are starting to see medical sales decline and that's very typical in other regions that have adopted an adult use program that medical sales tended to trail off a little bit. You guys have seen a growth in your medical, although not a huge number, but nevertheless growth. What do you attribute that to? Is it your coverage of the excise tax? Is it providing product identification numbers? Can you sort of give your opinion as to why you are bucking that trend?
Yes. It starts with the fact that we make great medical cannabis and everyone knows it. Listen, it ticked up a little bit and you are right. It only increased about 5% in terms of patient count in the last quarter, 8% increase in Canadian medical cannabis revenue sequentially. But let me emphasize, that was our choosing. We wanted to make sure that we had exactly the right product allocation for each of our distribution channels, Canadian medical, Canadian consumer and international medical. And so we actually could have turned on the taps and brought in a lot more patients.
Now why is it? I am not kidding when I say we produce great medical cannabis product. We also have an extremely good reputation across all of our brands, Aurora, MedReleaf and CanniMed among physicians. So our credibility supported by our clinical program in the medical community is outstanding. Now let's get to where medical can go in Canada. And obviously, for us, we see increased demand and increased patient counts and increased Canadian medical cannabis sales, which is great because medical cannabis patients tend to be sticky. Consumers, you never know. But with a medical patient, they are likely to stay with you as long as you keep them happy.
The other thing that would be a bit of a wild card to keep your eyes on would be the possibility that the excise tax which, as you point out, we have been absorbing for our patients, could be eliminated. I will remind everybody that we had a press conference not that long ago in Ottawa along with a patient advocacy group called Canadians for Fair Access to Medical Marijuana and also on the stage with us were members of parliament from the conservatives, the liberals and the New Democratic Party. And there is strong support in all three caucuses to start to treat medical cannabis the same as other prescription medicines. And if we get that excise tax and ultimately the GST and HST removed from medical cannabis, it will be, first of all, justice, but it will also be an appropriate reason for patients to stay in the medical system.
And before we stop on this point, I want to emphasize that patients who are using medical cannabis to manage the symptoms of a chronic health condition should be getting their medication by prescription. They should be getting their cannabis by prescription and consulting with their physician. Physicians and frankly pharmacists should know about all of the medications that patients are consuming. So there are good reasons for patients to stay patient and certainly good reasons for patients to come to Aurora.
That's a great answer. Looking forward in upcoming quarters, would you expect to see that trend continue in terms of continued growth on your medical cannabis? Obviously, the rec market will continue to grow. But do you expect that to happen continually with your medical sales?
Yes. I don't want to predict the whole market, although I think it will actually be good. But on an Aurora basis, yes, we expect our patient count and our Canadian medical cannabis revenue to continue to grow.
Was your question global or a Canadian question? Because obviously the 22 countries that we are operating and do not have regulatory systems and those medical systems are just starting now to blossom.
Yes. I was referring to the Canadian market.
Yes. And I understand the question because we have seen differential results across different companies in the sector. But we have always emphasized medical cannabis. We supported that with a great clinical program. We are really, really good to our patients as customers. And so yes, we do anticipate continued growth on the Canadian medical side.
Okay. Great. Thanks very much.
Your next question is from John Chu with Desjardins Capital Markets. Your line is open.
Hi. Good morning. Maybe just a quick question on Europe and how you plan to allocate your increased production between Europe and we will call it the value added market. So the way I look is Europe is effectively fairly a limited competition to drive that many EU GMP sort of like facility. And then you also have edibles that has a lot of competition from a lot of smaller players here in Canada. So how would you try to prioritize the two? And maybe just talk about what the margins you get? Which ones are higher?
Sure. Yes. Let me start and I know Terry will want to weigh in on this. Let me start by telling you how much we love Europe. Europe is a market where, as you point you, there is very little competition. There's only one producer in Europe right now and it actually is one of eight that are EU GMP-certified. And that is Bedrocan BV in the Netherlands. And of the remaining EU GMP-certified facilities, we have got two, two out of seven. And we are undergoing audits right now to add additional facilities. So very, very limited competition, very limited supply. It's a supply constrained market and we are really ramping up now to be able to supply that market.
So the bigger picture here is the question of product allocation. And we have developed a very sophisticated product allocation protocol and team that we are very proud of that works on demand planning so we know where the demand is going to be and helps us calculate where we are going to generate the highest margin. Now it's no secret that the Canadian consumer system is a lower margin distribution channel for us than Canadian medical and international medical.
The margins in Germany, for example, are extremely good, in part because of currency differences, but not completely. And you will see us allocating more of our product to Europe and frankly to other jurisdictions around the world as those markets open up. And again, we are going to be a big part of that simply by removing supply constraints. So we do make a constant series of decisions on a rolling basis with respect to product allocation.
Sure. Thanks Cam. It's interesting, the product allocation team, I have felt sorry for them for the last year for sure because we didn't have the products fro them to allocate. We are now definitely starting to have that product allocate. And certainly in the Canadian consumer usage market, it is lower. The provinces underestimated the demand. We underestimated the demand. And it continues to go up. We don't know what the demand is until it's met.
The European market, we have boots on the ground now in Italy, Germany, Malta, Portugal, the U.K., the Netherlands and these are our boots on the ground. These are not small contracts or small pieces of companies. We distribute cannabis ourselves in Germany. Now getting that contract, only three LPs of the 79 applicants were awarded that contract. Obviously the demand in that contract is going to go up. And obviously the first movers that successfully execute will have first crack at the expansion of facilities. That's when the dirt will really hit the road.
The fall of 2020, again I lose sleep over being able to supply this global market. The European market is going to go nowhere but up. We will start, maybe not this quarter on the hockey stick, but we will start shipping in bulk to Europe before too long. We are the first to sell high-value derivatives in Germany, which are now starting to get some traction with the doctors. We are going to educate the entire EU the best we can with our team of physicians and PhDs and thought leaders in the cannabis space. It is just waiting to be cracked. It's not even scratched the surface yet in Europe.
You are seeing the increases, they still will take whatever we can give them. So we have to take care of our medical patients here in Canada and we have to have a presence in the adult usage market in Canada. If it was a pure business decision on a mature industry, 20 years down the road, we might, at these prices have pulled the pin on the adult usage market in Canada 20 years from now.
But we are not going to do that. We are Canadians. It's Canadian medical patients first. It's European patients second. And it's the adult usage market third. But we will dominate in the adult usage market as well because of the quality of cannabis that we grow, because of the cost per gram of cannabis that we have and because the increased capacity that we continue to bring online.
Everybody remember, we are building a Sky class facility in Denmark as we speak. We are growing cannabis in Denmark quite well in our Phase I of Aurora Nordic. So once we can start supplying Europe from there, it will help with our international initiatives.
Yes. And in terms of helping you understand, another reason why we love Europe so much, if you think about it, that's a population including the U.K. of around $500 million, okay. so a lot larger than the U.S. But whereas in the U.S., with its patchwork regulatory system, there are thousands upon thousands of producers. In Europe, there's one and us and a handful of other Canadian companies with high barriers to entry because they believe in tight regulation. So we will be in the U.S., obviously, as soon as that's permissible. And we are also prepared to operate in two very, very different markets. The U.S. and Europe appear for years and years to come to be very, very different. And so we want to be set up to succeed and win in Europe. And we are already building the infrastructure for that right now. We are very, very pleased with the direction Europe is going.
Okay. Great. That's very helpful. And then just quickly, maybe just a quick update on EnWave. When do you think that's going to get integrated and can make a meaningful impact? And then same on the Radient? You received your first shipment. Are you happy with what you got? And then when can we start to see a more meaningful impact to your numbers around efficiency and everything? Thank you.
Glen, we haven't heard from you in a bit. Do you want to address that one?
Yes. Can you repeat that. Sorry, I just missed it.
We are talking about when we anticipate contribution from the integration of the EnWave technology and also Radient's demonstrating commercial capabilities? And yes, we are very, very pleased with RTI. So when we would expect to see contributions?
Yes. As you would have seen through press release, Radient has just been recently licensed and we have, I believe, received our first commercial batch back from them, still relatively small volumes. We expect to see that actually impacting our ability to produce derivative products toward the end of this quarter. So we are kind of in the last six weeks now. So I will say June, we will start to see some of their product making it into our production chain. Most of that extraction goes into products that still take a little bit of time to show up on the shelf. So towards the end of the quarter. EnWave will just shorten the drying time and allow us to speed up extraction, which in effect, does accelerate our capacity. That's still being implemented. So we won't see that in Q4. We will see that in Q1.
The other point I will add with EnWave is they also reduce the risk of crop failure or production failure with a very short timeframe from off the plant to dry. There is risk in drying systems, where molds can come in and other bad creatures and more people are around it. When you shorten that time, it once again de-risks the process of the production of cannabis.
Yes. And I do want to emphasize, we haven't had that problem, but we know it exists. And what we have just talked about here and you have got two great examples, RTI and EnWave, those are really consistent with our overall business strategy, which is to reduce all risks as much as possible and also to accelerate the entire process from cultivation through to production, getting it to market. That is consistently across the board our strategy. And so you picked two really good ones to focus on. And they are entirely in line with our global strategy.
Your next question is from Doug Miehm with RBC Capital Markets. Your line is open.
Yes. Hi. Just with respect to how we are thinking about the Q4, I know that you have indicated that you are going to show some positive EBITDA, so really part A and B there. How important is it that you actually do that? Is it more important that you have enough product for the value add launch? Or is this thing what you are going to do in terms of producing that EBITDA for Q4 the most important thing? And then part B of that is, just with respect to the recent acquisitions, so Whistler, HempCo and Chemi, are they contributing to you guys having positive EBITDA in Q4?
I am going to start and then hand over to Glen. So actually, I would say that one of the most important things that we did when we put out that guidance in January that we were targeting positive EBITDA in the June quarter, in this current quarter, was we signaled our discipline and it's showing. If you take a look at our revenue growth compared to our SG&A growth, SG&A being relatively flat, it's showing. We have been just focusing on that disciplined execution. So setting that target on its own has been remarkably beneficial to us. And we have been getting that feedback from institutions as well.
It is important, I think, to differentiate by showing a clear path to profitability. And it's something that we have made a commitment to that differentiates us from a lot of our peers. And so it is very important to us. But the nice thing is, with where our production has gone, we can kind of have our cake and eat it too. So we can continue to track towards positive EBTIDA in this current quarter and have sufficient product supply to have the inventory to produce those new higher value added products that will be allowed by regulation. It's a great, great situation to be in and it's happing at exactly the right time for us.
Now the second question that you had was with respect to the recent acquisitions and whether they are anticipated to contribute to achieving positive EBITDA, I will defer to Glen on that, but certainly not substantially. We were tracking that way before these things.
Yes. Thanks Cam. So just for the first part of your question though on the Whistler and the Chemi and those, they are not running negative. They are running positive. They will contribute but not substantially, as Cam said. We based our EBTIDA positive forecast on our core cannabis business. We do have this quarter about $6.5 million of revenue from other business lines that are non-core cannabis and they do contribute at least a 50% or greater margin on average. So that will help, but we are really trying to drive the discipline and the growth in the core cannabis piece of this.
The allocation decision, there are some really healthy debates internally. But as you would expect, a lot of this is dependent on when Health Canada is going to allow the introduction of these new products into the market. You see various signals at times from the regulators as to when LPs will actually be able to start shipping products to eventual distribution centers. So should that happen towards the end of the year, should we get clarity that those sales won't start towards the end of the calendar year, we may have more product to allocate into revenue in Q4 and Q1.
Should it be available earlier, then we will have some decisions to make. How much of that actually goes into inventory as opposed to revenue? But as Cam said, at least we have got the production now coming to make those decisions. The EBITDA piece of this is very important to us, not only in terms of the commitments we have made to the market but also as internal guidance as to our priorities. But we still have a focus on the long term value that we are creating and it's very important to launch properly into those product segments that we want to capture towards the end of the year.
Okay. That's very helpful. And then just my follow-up question. Cam, with respect to the basically capabilities that you are putting in place outside of Aurora Polaris in anticipation of the launch of the value add product, could you just give us a little bit more detail because as I think about this marketplace and the sort of the problems that we observed in Q4 of 2018, the rec launch, I just want to make sure that you guys are following the proper steps to ensure that you are going to have products? So do you have all your vape lines going? And where are they going in? Where do they stand? Licensing and that sort of stuff. And then I am finished. That's great. Thank you.
Okay. So you asked for a little bit more detail. We can give you a little bit, but not a lot. We don't want to show necessarily all our cards. But what I can tell you is that all of the capabilities for the market segments that we prioritize, it's all in place. And as Glen had indicated in his comments, we wanted to make sure that from an Aurora perspective anyway, we won't be seeing some of the challenges that the entire industry faced not being ready for consumer legalization in October of last year. So we have across multiple facilities, we have got the capabilities in place to produce those products. Polaris is going to be amazing. It will be world class and I think there will be nothing like it once it's opened up. But we do not need to wait for it to be online for us to deliver those product forms.
Okay. Thank you.
Your next question comes from Rob Wertheimer with Melius Research. Your line is open.
Hi everybody. Your production ramp has been impressive so far with no real material hiccups and stumbles and so forth. And the question is a little bit, if you can give us anymore background on just how you do it. But other people in the industry have had crop failures and the product hasn't grown as well as yours. And so how do you evaluate the risk of that? Do you see little issues pop up and quickly mitigate them and fix them so there's no risk of a larger issue? Or you do not have the issues pop up because there is more automation because of more, anyway I am wondering if you could just expand on that a bit.
Yes. I really want to speak to this. And I am going to start by making Terry blush because the first and greatest credit for this is Terry's vision. Terry went in a different direction from every other founder and CEO in this sector when he decided that cannabis production should be purpose-built. So north of Calgary, our mountain facility, that's the first purpose-built cannabis production facility in the world, to our knowledge.
And what that does is it gives you GMP, by the way, GMP standard, everything from the cultivation rooms to the airflow inside and the ability to manage all of the environmental variables, the lighting, the temperature, the humidity, the CO2, the nutrients. And every other peer of ours that is producing at mass scale has done something different again as we have all scaled up. Whereas we have gone with these massive indoor facilities with a glass roof, the Sky class facilities. All of our peers producing at mass scale are doing it in retrofitted greenhouses.
And you can argue there are advantages and disadvantages to each approach. We really like our approach because as you have heard me say earlier, at this phase in the sector's development, the number one critical success factor is the ability to consistently produce and move and sell a large amount of cannabis. And our entire business strategy is set up to do exactly that. So you control the environment, that reduces the risk of pathogens and pests and therefore crop loss. And touch wood, we have never had a crop loss and I hope we never do.
Terry, you probably want to weigh in on this because you are the expert here.
I do want to weigh in. You nailed it on the head. And to most respects, with respect to environmental control, CO2, micro mold, humidity, temperature, when all of those factors in, we have to stay within a certain band or you will lose control of your facility. One thing affects the other. With a typical greenhouse, you have environmental risks, with the roofs opening to cool them down. You have risks with the variable temperatures, whether it be raining or snowing or hot and sunny. So environmental control is a short phrase but a very, very difficult thing to do right.
Secondly, you mentioned automation and you nailed it on the head a bit there because automation takes the human being out of the picture with direct contact to the plants. That is one of your highest risks of disease are the human beings.
And then the last one is GMP. And GMP is the direction of the really, essentially, it's the direction of the product flow. You never go backwards. You never go from a dirty room to a clean room. It's a flow process. It's a pharmaceutical process. It's highly recognized throughout the world in the pharma industry.
And those three factors along with 40 PhDs and the top QH team in the world and some very experienced horticulturists and growers equate to no crop loss.
And by the way, I have got to add this before we wrap up and I know we have only a couple of minutes left. We truly believe we have invented 2first century cannabis cultivation and we also believe and this is central to our business strategy that you have to do that if you want to build a global enterprise. You have got to have that consistency. You have got to mitigate risk. You have got to do it economically. And it's got to be scalable and replicable on a global basis. That's what we set out to do from the beginning. And now, at Aurora Sky, we think that we have validated that Sky class concept to do exactly what we have been planning to do from the beginning.
Thanks so much.
This concludes the Q&A portion of today's call. I will now turn things back over to Cam Battley for any closing remarks.
Yes. I just want to thank everybody for joining us for the call. And obviously, we are really looking forward to the next one as well for our year-end. So take care and everybody have a great rest of the day.
This concludes today's conference call. You may now disconnect.