Aurora Cannabis Inc. (ACB) Q3 2023 Earnings Call Transcript

Aurora Cannabis Inc. (NASDAQ:ACB) Q3 2023 Earnings Call Transcript June 14, 2023 8:15 AM ET

Company Participants

Ananth Krishnan – Vice President, Corporate Development and Strategy

Miguel Martin – Chief Executive Officer & Director

Glen Ibbott – Chief Financial Officer

Conference Call Participants

Michael Lavery – Piper Sandler

Frederico Gomes – ATB Capital Markets

Pablo Zuanic – Zuanic & Associates

Robin Holby – TD Cowen

Tamy Chen – BMO Capital Markets

John Zamparo – CIBC

Operator

Greetings. Welcome to the Aurora Cannabis Third Quarter and Full Fiscal 2023 Conference Call. As a reminder, fiscal 2023 is comprised of three quarters ending March 31, 2023. All participants will be in listen only mode and a question-and-answer session will follow the formal presentation. This conference call is being recorded today, Wednesday, June 14, 2023.

I would now like to turn the conference over to your host, Ananth Krishnan, Vice President, Corporate Development and Strategy. Please go ahead.

Ananth Krishnan

Thank you, Rob. We appreciate you all joining us this morning. With me today are Aurora’s CEO, Miguel Martin; and CFO, Glen Ibbott. Prior to market open today, Aurora issued a news release announcing our fiscal 2023 third quarter and year-end financial results. This news release accompanying financial statements and MD&A will be available on our IR website and will also be accessed on SEDAR and EDGAR shortly after this call. In addition, you will be able to find a supplemental information deck on our IR website.

Listeners are reminded that certain matters discussed on today’s conference call could constitute forward-looking statements that are subject to risks and uncertainties related to our future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in our Annual Information Form and other periodic filings and registration statements. These documents may similarly be accessed via SEDAR and EDGAR.

Following prepared remarks by Miguel and Glen, we will conduct a question-and-answer session with our covering analysts. We ask that you limit yourself to one question and then get back in the queue for follow-up.

With that, I will turn the call over to Miguel. Please go ahead.

Miguel Martin

Thank you, Ananth. Q3 marks the end of our abbreviated fiscal 2023. We’re very pleased with our strategic and financial progress. First and foremost, our business transformation plan is working as we have now generated positive adjusted EBITDA for two consecutive quarters. Part of that plan included a commitment to rationalizing expenses. We’ve done so over the last three fiscal years by approximately $400 million. Today, we’re announcing an additional $40 million annualized savings that we believe can be achieved by March 31, 2024, the end of our fiscal 2024 year. This incremental reduction puts us squarely on the path to reach our net financial milestone, which is positive free cash flow. Glen will provide more context on this in his remarks.

Milestones aside, the cannabis industry is still full of challenges, but we’ve not taken our eyes off what we view as Aurora’s greatest opportunity, solidifying our position and focusing on resources on the global medical segment will remain the number one Canadian LP. There is and will continue to be real and profitable growth opportunities in the global medical market for companies such as Aurora. We have been able to sustain and grow our high margin medical cannabis revenue over time and our diversified presence affords us some resilience to macroeconomic and regulatory risks.

Our view is that the momentum for top line expansion and profitability remains very strong. And as we’ve said many times, Aurora’s expertise in managing the complexity of multiple jurisdictions regulatory frameworks, our unwavering commitment to science, breeding and genetics sets us apart in this industry. And these are the capabilities that will position us to win new business in medical and for that matter, recreational markets as they open up. Our ability to invest and grow is supported by our strong balance sheet which we’ve worked hard to improve over the last few years. We believe we’re among a very small group of LPs and MSOs that have a robust balance sheet and net cash position. And this gives Aurora a staying power and the necessary capital to be targeted and opportunistic in the midst of rapid industry rationalization.

Let’s now briefly touch on the quarter before Glen does a more complete financial review. Our international medical revenue represents a global portfolio of profitable markets, where we remain a leading cannabis provider. As part of our commitment to bring high quality, consistent and innovative cannabis products for these patients, we recently introduced two Canadian grown high THC cultivars that are popular in Canada to German patients. These proven products get physicians even more options to prescribe patients individually tailored treatments.

While the German market for rec is exciting and something the industry is eagerly awaiting, any enhancements to the current medical industry will have a more immediate impact. In particular, the German government is currently working to deschedule cannabis in the first part of the legalization bill. With Aurora’s leadership position in the German medical cannabis industry, we are well positioned to benefit from these proposed changes. Staying on the topic of Germany as one of only three companies with a medical domestic production license in that country, Aurora will have a significant advantage and role when the German adult use regulatory framework is developed.

Turning to the Canadian medical market, our focus remains on serving insured patient groups, which represented some 82% of our Q3 Canadian medical cannabis net revenues, up 100 basis points from Q2 and up 500 basis points from Q3 last year. Our industry leading share remains at about 25%, roughly double that of our closest competitor. Looking forward, you may have read that we launch new program for Canadian patients that is designed to support and empower cannabis patients on their wellness journey. Alongside the advice of a healthcare professional, Aurora patients can use the award winning Strainprint app by logging their symptoms and consumption habits to better understand which strains, THC, CBD levels and doses best work for them. This is technology and innovation at work, all for the sake of better patient outcomes.

Switching to Canadian adult rec, despite ongoing macro challenges that are impacting this industry, Aurora has been able to maintain our net revenue position compared to Q2, while also increasing our gross margins by 5%. When comparing to Q3 of last year, we are seeing net revenue increase by $4.1 million. We’ve been able to do this by leveraging our science driven cultivation advantages, while continuing to invest in product innovation and product availability.

Finally, let’s discuss Bevo, one of the largest suppliers of propagated vegetables and ornamental plants in North America. Q3 plant propagation revenue represented a significant increase in Q2 as we entered prime seasonality as the segment delivers its highest revenues in the late winter and spring months as orders are fulfilled. We have also completed repurposing the 800,000 square foot Aurora Sky facility for orchid and vegetable propagation. We expect to see revenues generated from the Sky facility in the final quarter of calendar 2023. And once executed, Bevo’s financial contribution could be significant. This rapid expansion serves to increase Bevo’s production capability and extend its shipping range in Canada and the U.S.

Now that we expect to see positive adjusted EBITDA on an annual basis, we see our next financial milestone as maintaining a net cash position and generating positive free cash flow.

And with that, I would now like to turn the call over to Glen for our financial review.

Glen Ibbott

Thank you, Miguel. Good morning, everyone. I will walk through the Q3 [indiscernible] momentarily, but first, let’s review our balance sheet. Aurora already has one of the strongest balance sheets among Canadian LPs. As of Monday, June 12th, we have approximately $230 million of cash and cash equivalents. And this should be more than sufficient to fund operations until we reach positive free cash flow, which we are working to achieve by the end of calendar year 2024.

Miguel noted our plan to capture an additional $40 million in annualized cash flow savings this fiscal year. We’ve already put into motion most of the actions to achieve these savings including the closure of production at our facility in Denmark, further targeted reductions to external SG&A and operations costs and a number of other initiatives and investments.

In Q3 2023, our operations used a net $15.1 million excluding changes in working capital. The $15.1 million includes about $2.1 million in nonrecurring termination costs. So our rate of operating cash use for planning purposes is approximately $13 million per quarter. To be a bit more prescriptive, this fiscal year we’re working on taking out a minimum of $5 million quarterly from operations as we eliminate less efficient operations, and focus on supplying the globe from our very low cost yet high quality production facilities. Removing a minimum of $5 million quarterly through a number of defined and targeted efficiency and cost reduction initiatives in operations and in SG&A.

Combined, these will bring us down to low single digit quarterly cash used in operations during this fiscal year, with nine months remaining for the end of the calendar 2024 to achieve the remainder. Of course, this is all before considering revenue growth. In addition, compared to Q3, we’ll also save approximately $2 million a quarter in interest as we pay off the remainder of our convertible debt. Currently standing at about CAD80 million and intend to pay that off by the end of this fiscal year.

Finally, quarterly capital expenditures were $3.6 million in Q3, on par with the previous quarter. For fiscal 2024, we’ve also pulled in CapEx, but that required to keep our facilities maintained and working efficiently. We expect to hold quarterly maintenance CapEx at an average of $2 million in fiscal 2024. That will save over $1 million a quarter compared to Q3. We’re seeing the benefit of alignment of production and sales volumes as significant excess inventory is an issue we seem to have put behind us. At the same time, we are realizing the benefit of our long term commitment to science and quality cultivation. And that demand for our products globally is beginning to outpace supply. So we see upside opportunity, but are expanding capacity prudently and smartly.

Revenue growth, as it arrives, is incremental on our path to positive cash flow and could accelerate the timing of reaching our goal. This road to positive free cash flow, while also preparing to realize incremental revenue opportunities. Certainly, distinguishes Aurora during the period of intense and rapid industry change and rationalization. Aurora is positioned with balance sheet strength and realistic growth prospects to thrive over the long term as the global cannabis market expands. The actions I just outlined are the starting point on our journey to reach positive free cash flow by the end of calendar 2024. To make sure that we can be opportunistic, during this period of industry rationalization, we will exclude any growth CapEx from our free cash flow target. That is discretionary, but that we might deploy to increase shareholder value even further.

We currently have approximately CAD80 million remaining on our convertible notes due in 2024. Subsequent to our year end of March 31, we repurchased about $50.9 million in aggregate principal amount of convertible senior notes. The total cash consideration was approximately $46 million. And we issued 6.4 million common shares in settlement of a further $4 million of principal on this debt. And we will settle the remaining convertible debenture balance by maturity next year. We do not intend to refinance the notes.

I should remind you that we continue to have access to approximately $241 million under our Base Shelf Prospectus. During Q3, we issued 4.7 million shares for net proceeds of $3.6 million. And we filed a new shelf in March as the previous one was expiring. Note that our intentions regarding further share issuances would only be for strategic purposes and that includes debt repayment.

Now let’s review the P&L in each of our businesses. Q3 total net revenue grew 4% to $64 million as compared to $61.7 million last quarter and up 27% compared to the year ago period. For the second consecutive quarter, we achieved a modest positive adjusted EBITDA, which we attribute to both revenue growth and cost containment. Overall, Aurora’s Q3 adjusted gross margin before fair value adjustments was 48% versus 45% in Q2, which remains among the industries best.

Canadian medical revenue was $24.2 million in Q3, down 6% from Q2. The business is steady, but the revenue trend was impacted due to the timing of shipments at the end of Q1, which resulted in higher Q2 sales. Again, demonstrating the value of our diversified portfolio of global medical businesses as markets developed. International medical revenue is $13.8 million, steady compared to last quarter. With continuing growth in our export business to Australia, offsetting a slight [Technical Difficulty] we have made the decision to close our Nordic production facility in Denmark and we’ll supply our very important European business from our Canadian footprint, where we have much lower per unit costs, higher quality and a much more reliable supply. We believe this change in addition to reduced cost will allow us to compete even more effectively in the growing European market where we already have a substantial leadership position.

As usual, driven by our focus and leadership in global medical markets, medical cannabis representing about 71% of Q3 cannabis revenue and 86% of Aurora’s adjusted cannabis gross profit. Medical adjusted gross margin was 60% down only slightly from 61% from the prior quarter and within our target range of 60% above. We expect the supply of Europe from Canada will improve European medical margins over the next fiscal year. The stability and strength of our medical adjusted gross margins is an important gross profit driver that truly distinguishes Aurora from its major competitors. Consumer cannabis net revenue is $14.5 million, steady compared to last quarter, which we view favorably. This demonstrates our Aurora’s agility and deliver compelling product even with ongoing macro challenges in the consumer market.

Adjusted gross margin before fair value adjustments on consumer cannabis net revenue is 25% in Q3 compared to 20% in the prior quarter. The increase from Q2 was primarily driven by a shift in mix towards core segment brands as consumers responded to our product innovation. And in the plant propagation segment, our controlling stake in Bevo enabled us to recognize $10.8 million in net revenue during Q3, up from $6.6 million in Q2. As a reminder, Bevo has a seasonal cadence with two-thirds of Bevo’s annual revenue and adjusted EBITDA being realized in the period from January to June. On an annualized basis, Bevo business is steady and predictable and supports our ability to generate positive adjusted EBITDA and eventually positive free cash flow.

Adjusted gross margin before fair value adjustments on plant propagation was 36% in Q3 compared to 15% in Q2. This was expected as the seasonality of the vegetable and ornamental plant industry in the late winter and spring months yield higher margins relative to the rest of the year as there’s a high volume of production and orders being fulfilled in these months.

Finally, adjusted SG&A was $28.4 million and adjusted R&D is just below $2 million, reflecting our ongoing commitment to keeping SG&A well controlled. This was accomplished through the successful execution of our business transformation plan that included rationalizing our operations footprint and focusing our core business essentials.

And a quick look ahead as we’re closing in on the end of Q1 fiscal 2024. We expect cannabis net revenue for fiscal Q1 2024 to be largely similar to fiscal Q3 2023. With the geographic mix weighted slightly more heavily towards the International Medical segment. For plant propagation, we expect to see a seasonally strong quarter as we reach our peak selling period. Furthermore, adjusted gross margins are projected to be consistent with fiscal Q3 2023. And we also expect to maintain our stated objective of quarterly SG&A expense run rate below $30 million.

To close and sum up Aurora’s financial metrics are healthy and strong with a diversified global cannabis business delivering dependable revenue and leading gross profit and supported by a well-controlled SG&A foundation. As we outlined, management is working diligently to even further strengthen both the balance sheet and the company’s free cash flow.

Thanks for your interest. I’ll now turn the call back to Miguel.

Miguel Martin

Thanks, Glen. Several years ago, we embarked on a journey to bring the company to sustainable positive adjusted EBITDA. This has since been accomplished through our focus on the highest margin opportunity within cannabis, global medical, as well as a substantial reduction in cost that have resulted in significant operating efficiencies. We have now set another ambitious target of removing a further $40 million of cost during this fiscal year to support our goal of being free cash flow positive by the end of calendar 2024.

In the big picture, we believe our accomplishments to date coupled with our near term goals, becoming convertible debt free and cash flow positive truly sets us apart from our peers. And as industry rationalization takes hold, we think it is important for our investors to appreciate that we have the necessary capital, business plan and by extension the staying power to not only endure, but emerge stronger than these competitors as the global cannabis industry develops.

Our growth and profitability focus is on the high margin medical business that continues to expand globally, supported by innovation and development of quality products for a loyal patient base. We have and will continue to pull all levers at our disposal to create equity value for our shareholders. And that includes smartly allocating capital between organic growth, strategic M&A and continuing to focus on all the details that build a world class company.

Thank you for your time and interest in Aurora. Operator, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting the question-and-answer session. [Operator Instructions] Thank you. And our first question is coming from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.

Michael Lavery

Thank you. Good morning.

Miguel Martin

Good morning, Michael.

Michael Lavery

I just wanted to ask a little bit of a portfolio strategy question with a thread of capital allocation in it. Basically, just you mentioned strategic M&A at the end of your prepared remarks and also talked about paying down the convert. I guess, maybe some of it is — with the cash balance you have now, is there any reason to not pay that down sooner than later? Do you want to keep some dry powder? Is that part of your thinking? And on those little bit more strategic side, how do you think about the portfolio evolution? Are there things proactively on your radar? Obviously, you’re focused on global medical, but obviously did the Bevo acquisition as well, so clearly open to some adjacencies. How do you think about maybe what the optimal portfolio looks like or if there’s additions you’re looking for or what it would take to be make something interesting to you?

Miguel Martin

Great. Listen — good morning. We appreciate the question. So I think first and foremost, as we think about the portfolio, we continue to focus on those areas in the cannabis business where you can make money. And right now, that’s almost predominantly in the medical aspects, so Canada and in Western Europe. And so we continue to make investments in those areas, which is definitely paying dividends. I mean the margins are 2 times what we see in rec. It’s a much more consolidated piece of business. And importantly in Europe, we’re seeing a sort of a normalization of what the regulations are. EU GMP product that is allowed to be imported from facilities like ours in Canada. And while the regulations are really high, you get a lot of values and scale with those markets. So we’re going to continue to expand there. We’re seeing positive movement in Switzerland and Austria most recently. And obviously, the strength that we have in places like Germany and Poland and Czech Republic and whatnot to make that an obvious piece of expansion.

On the product side, what we’re seeing is incredible advancements in the genetic work that we’re doing in our — we think one of the strongest facilities in the world out of Vancouver Island in bringing high quality genetics, high potency, incredible yields to the medical channel, but also to the rec channel. And so, there is great efficiencies in that from a portfolio standpoint. Beyond cannabis as we see things that are an obvious adjacency like Bevo, which was a wonderful acquisition and a great team, it allowed us to do a couple of things. One is, the consistency and sort of value of a great company like Bevo, but also utilize world class facilities like, we mentioned with Sky, to get value out of that. So we’ll continue to look at that.

In terms of the balance sheet and the debt, as we stated, it is our goal to take out the rest of the converts before their maturity next year, which obviously has a pretty significant impact on interest savings, but the balance sheet is an important one. And we worked really hard to be one of the few companies in a net cash position and we look forward to being opportunistic. There are — in this time of consolidation, we continue to see things that are of interest. But as you know, we’ve been really, really patient. And I think that’s paid off in not chasing some of the higher valuations you saw a couple of years ago. And importantly for us not chasing on the US, which just wasn’t a core setup and I think right now it poses a challenge, particularly Canadian companies.

Operator

Our next question is from the line of Frederico Gomes with ATB Capital Markets. Please proceed with your question.

Frederico Gomes

Hi, good morning. Thank you for taking my questions. Just on your consumer cannabis segment, we have seen a positive market share trend recently or at least stabilization and some gains according to some data providers. So can you talk a little bit about that segment? Is there any chance that you could accelerate market share gains there, especially on [ingestibles] (ph). We think we’re seeing a good pickup there. What is it that you’re seeing in that market? Could that surprise for the upside? Thank you.

Miguel Martin

Well, Fred, thank you for the question. So as you recall, we made an acquisition just about a year ago with a company called Thrive that had a wonderful portfolio of products, including a very super premium product line called Gray Beard. And that team, which is really why we went after that asset was wonderfully adepts at navigating the rec market. And the rec market still presents a lot of challenge. We still see price compression, we still see the growth of value flower at pricing that doesn’t make sense. But we do see spots where you can perform and make some money, concentrates, pre rolls and to your point, ingestibles, which we had some considerable success in.

So as we look at the landscape, right now we have a little bit less than a three share and it does not appear that if you had a larger share, you would have greater profitability. So we’re being very, I think, thoughtful in how we look at all of our opportunities in rec and as opportunities present itself, we’re able to take advantage because of our low cost of production and innovation. I think we’re a little bit of a ways off where there will be strong economics across all aspects of the rec portfolio, but it’s definitely getting better. And we see some glimmers of hope with provincial entities such as the [OCF] (ph) putting in pricing floors and we do see a little bit of the rationalization on pricing, particularly on flower that gives us some hope that in the future you could see more profit opportunities.

And with that we’ll definitely take advantage of it because with the genetics and science and innovation that we have implemented in our medical channel that there’s an easy crossover into rec.

Operator

Our next question is from the line of Pablo Zuanic with Zuanic & Associates. Please proceed with your question.

Pablo Zuanic

Good morning. Thanks. Look, regarding the German market, Miguel, it’s a two part question. What I’m hearing is that, the sources of growth there is mostly coming from the online pharmacy business, right? So the reimbursable business is pretty much flat to down. And even the cash business in brick and mortar is flattish. So it’s online pharmacy driving growth. And that could be significant because we know that in terms of patients that’s under penetrated end market. So first of all, is that true?

The second question is that the concern I have when I check all the websites of those online pharmacies, they have a significant number of SKUs and they pride themselves in that variety they have there. And if you are a LP shipping a few SKUs, maybe you have a disadvantage. I mean, tell me about that? I know you talked about some new [indiscernible], but if you can stress this assumption. Thank you.

Miguel Martin

Yes. Well, thanks for the question, Pablo. I would say it’s not just online pharmacies. And so, what we’re seeing is a growth in the overall prescriber base. Now right now in Germany, it is a bit challenging because of the class of cannabis as a narcotic for a traditional physician or clinician to prescribe cannabis. But that is starting to expand. And one of the things that’s been lost in all of the noise about what’s happening with the German rec business has been stated position of the German government to reduce bureaucracy and to open up the medical cannabis business. Right now in Germany, it’s about 0.1% of the adult population is in the cannabis system where I say in Canada it’s 1%. So we are seeing some expansion outside of the online pharmacies.

And you mentioned the point about their catalog and how many brands are in there. A couple of things on that. First and foremost, one of the great challenges in the German market is the incredible rigor that they have with the testing to have products be acceptable in the market. It has to be in roughly around 10% of the state of potency in their lab. So product quality and availability that meets that spec is one of the key competitive drivers in Germany as opposed to say the distribution system that you’re referencing.

The second thing in Germany what we’re seeing is an interest in more premium quality and higher potency medications. And so therefore, we’ve introduced two proven cultivars from Canada into Germany and the early read is that, they’re well received. The last thing is, we saw a lot of investment as people were getting excited about a possible rec solution and now without being a bit off, we’re going to see consolidation. And so, unlike the rec business in Canada with the top 10 LPs only do 30% of the business. The top five LPs in the medical business in Germany might do two-thirds of the overall business. So there are efficiencies there for the LPs that can navigate that high bar and that can consistently connect with patients. And that will be a benefit both in the online system as well as the brick and mortar.

And lastly, we do think that with the progression of some of the regs, traditional brick and mortar through a pharmacy is going to be much more the prevailing application as opposed to today’s execution that’s somewhat skewed.

Operator

Our next question comes from the line of Vivien Azer with TD Cowen. Please proceed with your question.

Robin Holby

Good morning. This is Robin Holby on for Vivien Azer. And thank you for taking the question. Given the pivot away from the Nordic facility, can you dimensionalize any near term gross margin headwind you might expect from moving supply for Europe back to Canada? And you mentioned this should increase gross margins over time. Could you explain what gives you conviction in the ability to increase gross margins above the 60% gross margin target over time? Thank you.

Miguel Martin

Sure. Thanks for the question. So one of the challenges with that facility, there are probably three primary challenges. The first is the regulations on what would be traditional remediation of pathogens, whether that’s powdery mildew or other things in that facility made it a bit difficult to achieve the same yield in production that we get out of Canada. So that’s one. Secondly, the size of that greenhouse facility did not really lend itself to the same sort of production efficiencies that we get out of our traditional indoor facilities that we have in Canada. And third, because there is no difference in terms of the ability to ship that product into that market when you’re able to utilize the scale and the sophistication and to be honest, the experience that we have with the Canadian facility into that European market, it’s a benefit.

The other thing I’ll mention is that we started in the European markets with Canadian flower particularly. And in the German market and some other European markets, they value for whatever reason the Canadian product as having a higher quality and being more sort of valuable to them. And so, it is a margin increase for us, but also the predictability because of our knowledge and experience with those indoor facilities in Ontario is so much higher that it’s just an overall better system, which is why we think we can grow margins.

Now in terms of the overall margin profile, we don’t see any added costs. And because the economics run through the wholesale list price for the overall system, you’re not seeing the same pricing compression that you would see say in the rec market in Canada. And as we get greater efficiencies in our production as well as in other aspects of the distribution and sales and marketing in those markets, we do see the opportunity to have an accretive margin situation. So we’re excited about that.

Operator

Our next question is from the line of Tamy Chen with BMO Capital Markets. Please proceed with your question.

Tamy Chen

Hi, good morning. Thanks for the question. I wanted to step back a bit and talk about your cost structure. And I suspect, you may also, as a result touch on the new cost savings plan that you mentioned. But I just wanted to understand, if I look at your business now, the majority is in the medical side. Canada as well as International, though Canada is the bigger part. And with respect to the consumer or recreational segment, over the last several while you’ve really narrowed down that business and your focus to be profitable. I’m just wondering at this point now, when I look at your quarterly SG&A on an adjusted basis, it’s about, as you said, around $30 million a quarter. So that’s still $120 million a year of adjusted SG&A, which is a decent amount versus your total revenue figure. So I’m just wondering, at this point now, what — why is it so significant? What are the biggest cost components there that you feel can still be worked down going forward? Thanks.

Miguel Martin

You got it. Let me — I’ll make a couple of comments and then I’ll turn it over to Glen. So, first and foremost is [indiscernible], Tamy, and we appreciate the question. We took about $400 million out over the in the past three years and we’ve announced another $40 million to $30 million that you’re describing in SG&A, there’s still complexity and general cost to the cannabis system that looks a little different than say what I’m used to from a CPG standpoint. The production, the medical, the regulation, the shipping, all of that is complex and therefore creates cost. It’s something we look at a lot and I think people should have great confidence that when we say we’re going to get to this $40 million within the time period, we’re going to get there, but that doesn’t mean we’re going to stop there and as we see other opportunities.

In terms of rec, about $14 million or $15 million a quarter in revenue there and we’ve made significant improvements in terms of the cost profile of that. But as you mentioned, the vast majority of our focus and where we think the real upside is on the medical business which scale does benefit you there, which will help with sort of the scaling of the SG&A versus future growth because we can produce out of those common facilities in Canada and ship around the world.

Glen, maybe I can turn it over to you and you could talk a little specifically about the cost structure for Tamy.

Glen Ibbott

Yes. Thanks, Miguel. I think you covered it quite well. Tamy, as you know we’re in four different businesses, all cannabis related plus Bevo So, supporting global medical in Europe, and becoming quite a nice business in Australia, Canadian medical, Canadian rec and Bevo is complex. And so, we’ve got maybe heavier than you might expect sort of legal regulatory [indiscernible] sort of framework, and certainly shipping, which we run through our SG&A shipping to the provinces, to Europe, to Australia, et cetera, et cetera, runs through our SG&A. This is about serving the globe. So we think we’ve built a good platform. We will continue to see crossroads to kind of say normal course of businesses continue to look for efficiencies every year. And on top of that, we do have public company costs.

So we are looking and we have defined plans that are already in progress to reduce the cost by about $5 million a quarter. But just realizing that we’ve got a platform that’s quite capable of scale. So as we add incremental revenue through some of the opportunities that’s right in front of us we don’t need to scale up SG&A. We believe we can continue to support it at this level and add topline revenue. We’ll start to see those metrics looking a little bit more or less [indiscernible] might expect. Thank you.

Operator

Our next question is from the line of John Zamparo with CIBC. Please proceed with your question.

John Zamparo

Thank you very much. I wanted to ask about the consumer segment and in particular on edibles, and you’ve gained considerable share in that category according to Hifyre data. I wonder if you can frame how much of that has come from glitches or any other brands that offer chewable extracts? And what’s your view on how that matter plays out with regulators?

Miguel Martin

Yes, John, thanks for the question. Yes, we look at the quarter and obviously the decision by Health Canada on glitches, it was considerable. It’s probably was a couple of $1 million of revenue in the quarter associated with glitches. I think it’s an interesting piece, we were really excited about the innovation on glitches and navigating that. We obviously made our submission to Health Canada six months before we launched it and then Health Canada had a concern or questions, I guess, say, on ours and other products. I know that’s an industry fight and we’re going to be talking to Health Canada about that 10 milligram limit.

On glitches, and I’m not going to — I’m not saying it’s going to be the same amount of volume. But the prohibition was having more than 10 milligram in one package. And so, we’re going to continue to have glitches in the market going forward, but it will just be one unit at 10 milligrams as opposed to the 10 by 10 that we had out there. This has been raised I think by a variety of different entities in Canada, the competition bureau and a variety of other industry entities that this is a real sort of gap for the legal regulatory forward license producers versus the illicit market where you see what I would describe as an irresponsible representation of edibles at high potency’s, youthful presentations. And so I think over time this is one that’s going to resolve itself.

But for us, I think this is an example of our ability to pivot. Within six months, we identified that opportunity we’re able to launch it and did seven figures in sales in the quarter, that’s not the last innovative item we’re going to have. We’re launching infused pre rolls, we’re launching other minor cannabinoid gummies which have done really well as well as innovations that we’ve seen in flower and other core aspects that have done well. So in this market, you’ve got to be very agile as Glen mentioned in his comments. We’ve done that. And I think what we’ve done really well that I’m really proud of is we take what’s there and we don’t chase what I would call unprofitable market share and we’re still not in a place in the rec business, we’re having a 10 plus share is going to guarantee that we’re going to have greater profitability.

So as I mentioned before, we’re about a three share, we’re finding the spots that we think are sustainable and profitable and we are seeing some positive movements, the OCS price wars and other provinces decisions on flower and so we’ll get there. And as we look forward in the future quarters, we’ll see things like glitches that we’re excited about. And I do think as I mentioned before that the 10 milligram cap will be addressed at some point.

Operator

Next question is from the line of [Yewon Kang] (ph) with Canaccord Genuity. Please proceed with your question.

Unidentified Participant

Hi. Good morning. This is Yewon Kang on for Matt Bottomley. Thanks for the question. Just wanted to touch on the adjusted gross margins for the quarter. Under the wholesale bulk cannabis business, as well as the Bevo Farms business, adjusted gross margins for these segments ticked up this quarter pretty significantly. So I guess, could you speak to any of the drivers that caused the sequential growth in these margins? Thanks.

Miguel Martin

Of course. Glen, you want to take that one?

Glen Ibbott

Yes. Absolutely. So in the plan propagation business, as I mentioned in my prepared remarks, it’s seasonal. And so what’s really happening in the first half of this fiscal year, but it’s all in our reported Q3 this evening and our reported Q1 is that, just a fully utilized stuff to stuff to the rafters facility that’s really cranking out a ton of plants and therefore revenue. So you’re getting a completely utilized cost structure in that — in those two quarters. That’s why the margins are higher. Through the remainder of the year, we expect them to be a little bit lower, more similar to what we saw in our Q2.

I guess, the one of the beauties I think of what Bevo is doing with the Sky facility is the orchid business that’s being launched at Sky is a little less seasonal to start to smooth some of those comps out in our time propagation margin. Beyond that, the bulk sale cannabis, as we just said, have a lot less excess cannabis. And we’re finding a spots to sell some of our higher potency volume and [indiscernible] some nice margins on some of the core bulk sales. That’s not a segment that we’re leaning on there, depending on what we have talked about at [indiscernible]. And that’s really just seen as an outlet after we’ve got four different channels that are all kind of fighting for cannabis right now. If there’s a little bit left at the end also through the bulk sale process. Thank you.

Operator

Thank you. At this time, we’ve reached the end of the question and answer session. I’ll turn the call over to Miguel Martin for closing remarks.

Miguel Martin

Well, listen, we are thrilled with this quarter and more importantly thrilled about where the company is going. We appreciate everybody’s interest in us and we look forward to sharing the story as we go forward. On behalf of everyone in Aurora, thank you for your interest and take it from there. All the best. Thanks.

Operator

This will conclude today’s call. Thank you for your participation. You may now disconnect your lines at this time.