Earnings Call Transcript - ACB Q3 2023

Operator, 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, Vice President, Corporate Development and Strategy

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, CEO

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 next 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, and our unwavering commitment to science, breeding, and genetics sets us apart in this industry. 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. This gives Aurora 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 give physicians 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 represents about 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 launched a new program for Canadian patients 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 work best 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. 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, CFO

Thank you, Miguel. Good morning, everyone. I will walk through the Q3 P&L 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. 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 non-recurring 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 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. Demand for our products globally is beginning to outpace supply. 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 a 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. 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. 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, including 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 industry's 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 slowdown due to our 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 represented 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 above 60%. 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 Aurora’s agility and ability to deliver compelling products 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. 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's 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 yields higher margins relative to the rest of the year when there is a high volume of production and orders being fulfilled. 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 on our core business essentials. A quick look ahead as we close 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. 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 profits, 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, CEO

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 of becoming convertible debt free and cash flow positive truly sets us apart from our peers. As industry rationalization takes hold, we think it's 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, including 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.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Michael Lavery with Piper Sandler. Please go ahead with your questions.

Michael Lavery, Analyst

Thank you. Good morning.

Miguel Martin, CEO

Good morning, Michael.

Michael Lavery, Analyst

I wanted to ask about your portfolio strategy, particularly regarding capital allocation. You mentioned strategic M&A in your prepared remarks and also talked about paying down the convertible debt. Given your current cash balance, is there a reason to delay paying that down? Do you prefer to maintain some cash reserves? Additionally, regarding your portfolio evolution, are there specific areas you are considering proactively? While you are focused on global medical, your recent acquisition of Bevo indicates you are open to exploring other areas. How do you envision the optimal portfolio? Are there specific additions you are interested in, or what would make an opportunity appealing to you?

Miguel Martin, CEO

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. Right now, that's almost predominantly in the medical aspects, so Canada and in Western Europe. We continue to make investments in those areas, which is definitely paying dividends. I mean, the margins are twice what we see in rec. It's a much more consolidated piece of business. Importantly in Europe, we're seeing a sort of a normalization of what the regulations are. EU GMP products that are allowed to be imported from facilities like ours in Canada. While the regulations are really high, you get a lot of value 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. Obviously, the strength that we have in places like Germany, Poland, the Czech Republic, and so on makes that an obvious piece of expansion. On the product side, what we're seeing are incredible advancements in the genetic work that we're doing in what we think is one of the strongest facilities in the world out of Vancouver Island, bringing high-quality genetics, high potency, and incredible yields to the medical channel, but also to the rec channel. There are great efficiencies in that from a portfolio standpoint. Beyond cannabis, as we see adjacencies 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 value of a great company like Bevo, but also utilize world-class facilities like we mentioned with Sky to derive value from 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 has a significant impact on interest savings. The balance sheet is an important one. We worked really hard to be one of the few companies in a net cash position, and we look forward to being opportunistic. In this time of consolidation, we continue to see things of interest. As you know, we've been really patient, and I think that's paid off in not chasing some of the higher valuations you saw a couple of years ago. Importantly for us, not chasing opportunities in the U.S., which just wasn't a core setup, and I think right now poses a challenge, particularly for Canadian companies.

Operator, Operator

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

Frederico Gomes, Analyst

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 edibles? We think we're seeing a good pickup there. What are you seeing in that market? Could that surprise for the upside? Thank you.

Miguel Martin, CEO

Well, Fred, thank you for the question. 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. That team, which is really why we went after that asset, was wonderfully adept at navigating the rec market. The rec market still presents a lot of challenges. We still see price compression, and 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, such as concentrates, pre-rolls, and to your point, ingestibles, where we have had considerable success. As we look at the landscape, right now, we have a little bit less than a three percent share, and it does not appear that if you had a larger share, greater profitability would follow. We are being very thoughtful in how we look at opportunities in rec. As opportunities present themselves, we're positioned to take advantage because of our low cost of production and innovation. I think we're a bit of a ways off where there will be strong economics across all aspects of the rec portfolio, but it's definitely improving. We see some glimmers of hope with provincial entities such as the OCS implementing pricing floors, and we observe some rationalization on pricing, particularly on flower, which gives us hope for more profit opportunities in the future. We will certainly take advantage of it because with the genetics, science, and innovation we have implemented in our medical channel, there's an easy crossover into rec.

Operator, Operator

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

Pablo Zuanic, Analyst

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 are mostly coming from the online pharmacy business, right? So the reimbursable business is pretty much flat to down. Even the cash business in brick-and-mortar is flattish. So it's online pharmacy driving growth. That could be significant because we know that in terms of patients, that's an 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 pride themselves on that variety. If you are an LP shipping a few SKUs, do you have a disadvantage? Tell me about that. I know you talked about some new products, but could you stress this assumption? Thank you.

Miguel Martin, CEO

Yes. Well, thanks for the question, Pablo. I would say it's not just online pharmacies. What we're seeing is a growth in the overall prescriber base. Currently, in Germany, it's a bit challenging because of the classification of cannabis as a narcotic, making it difficult for traditional physicians or clinicians to prescribe cannabis. However, that is starting to expand. One of the things that's been lost in all of the noise about what's happening with the German rec business has been the German government's stated position to reduce bureaucracy and open up the medical cannabis business. Right now, about 0.1% of the adult population in Germany is in the cannabis system, compared to 1% in Canada. So, we are seeing expansion outside of the online pharmacies. Regarding your point about catalog diversity, first and foremost, one of the great challenges in the German market is the regulations surrounding product testing and acceptance. Products must meet strict potency testing standards. Product quality and availability that meet specifications are key competitive drivers in Germany, rather than the distribution system you referenced. Additionally, we're noting an interest in more premium quality and higher potency medications. Therefore, we’ve introduced two proven cultivars from Canada to Germany, and the early indications show they're well received. Lastly, we saw significant investment as people anticipated a possible rec solution. Now, we will see consolidation. Unlike the rec business in Canada, where the top 10 LPs account for only 30% of the market, the top five LPs in the German medical sector may account for two-thirds of overall business. There are efficiencies in the medical business for LPs that can navigate the high standards and consistently connect with patients. This will be beneficial for both online and brick-and-mortar sales. We expect that the progression of the regulations will eventually favor traditional brick-and-mortar pharmacy applications.

Operator, Operator

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

Robin Holby, Analyst

Good morning. This is Robin Holby on for Vivien Azer. 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? 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% target over time? Thank you.

Miguel Martin, CEO

Sure. Thanks for the question. One of the challenges with that facility presents three primary issues. First, the regulations governing traditional remediation of pathogens like powdery mildew made it difficult to achieve the same yield we get out of Canada. Second, the size of that greenhouse facility did not lend itself to the same production efficiencies that we achieve in our traditional indoor facilities in Canada. Third, there are no additional shipping constraints on that product when utilizing the scale, sophistication, and experience we have within our Canadian facilities as the cannabis production is exported to that market. The other significant item is that we started to sell into the European markets with Canadian flower, and for various reasons, the German market values Canadian products as higher quality. This provides a margin increase for us, but also offers predictability due to our expertise with indoor facilities in Ontario. That's why we believe we can grow margins. Regarding the overall margin profile, we do not anticipate any added costs, and the wholesale price tends to sustain itself. Unlike the rec market in Canada, pricing compression is not a factor in Europe. We expect that through enhanced efficiency in production, alongside developments in distribution, sales, and marketing, we will create a positive margin impact. Therefore, we are excited about prospects.

Operator, Operator

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

Tamy Chen, Analyst

Hi, good morning. Thanks for the question. I wanted to step back a bit and talk about your cost structure. I suspect you may also, as a result, touch on the new cost savings plan that you mentioned. I just wanted to understand, if I look at your business now, the majority is in the medical side, both Canada and International, though Canada is the bigger part. With respect to the consumer or recreational segment, over the last while, you've really narrowed down that business and your focus on profitability. I'm just curious, 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, which is $120 million a year. That's a decent amount versus your total revenue figure. So I'm just wondering, at this point, 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, CEO

You got it. Let me make a couple of comments and then turn it over to Glen. First and foremost, Tamy, we appreciate the question. We've cut about $400 million over the past three years, and we’ve announced another $40 million in savings. Your mention of the $30 million in SG&A points to the remaining complexities and general costs inherent to the cannabis sector. Production, medical, regulatory, and shipping processes are complex and create elevated costs. We are actively seeking efficiencies, and people should have confidence that we will meet our $40 million saving goal, but that does not suggest we will stop there. For recreational, we see about $14 million or $15 million in revenue a quarter and have made significant improvements to the cost profile. The vast majority of our focus remains in the medical sector, where scale helps reduce SG&A, lessening the impact of future growth due to common facilities in Canada that will ship globally. Glen, please share more details on cost structures.

Glen Ibbott, CFO

Yes. Thanks, Miguel. I think you covered it quite well, Tamy. As you know, we are in four different businesses, all cannabis-related, plus Bevo. Supporting global medical in Europe, along with a burgeoning business in Australia, Canadian medical, Canadian rec, and Bevo adds complexity. We face heavy legal and regulatory frameworks, and certainly shipping expenses, which we incorporate into SG&A when servicing the global market. We've built a comprehensive platform and will keep an eye out for efficiencies each year. We have public company costs as well. We are developing plans to reduce costs by about $5 million a quarter, but we believe we possess a scalable platform capable of supporting more revenue without scaling up SG&A.

Operator, Operator

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

John Zamparo, Analyst

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? What's your view on how that matter plays out with regulators?

Miguel Martin, CEO

Yes, thank you for the question. Looking at the quarter, the decision by Health Canada regarding glitches had a significant impact, likely resulting in a couple of million dollars in revenue being affected. It's an interesting situation, as we were excited about the innovation related to glitches and our ability to navigate them. We submitted our product to Health Canada six months prior to launch, but they raised concerns about our product and others. This has been a point of discussion in the industry, and we plan to engage with Health Canada about the 10 milligram limit per package. We expect to continue seeing glitches in the market; however, the regulation limiting potency to 10 milligrams per unit will decrease the volume available. Various stakeholders, including the Competition Bureau, have pointed out this disparity between legal producers and the illicit market, which sells edibles with higher potency. I believe this issue will be addressed over time. We see this as a chance to be agile—by identifying opportunities and launching products quickly, we have generated seven figures in revenue this quarter, with more innovations on the way. We will keep focusing on premium segments while ensuring strong performance through the innovations established in our medical channel.

Operator, Operator

Next question is from the line of Yewon Kang with Canaccord Genuity. Please proceed with your question.

Yewon Kang, Analyst

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. Could you speak to any of the drivers that caused the sequential growth in these margins? Thanks.

Miguel Martin, CEO

Of course. Glen, do you want to address that?

Glen Ibbott, CFO

Yes. Absolutely. In the plant propagation business, as I mentioned in my prepared remarks, it's seasonal. The gains you see in Q3 are due to a fully utilized facility that is producing a high volume of plants and therefore revenue. When rendering the cost structure at maximum utilization, the margins will be higher. We expect margins to normalize post-Q3 towards levels similar to Q2. However, one of the wonderful benefits of what Bevo is doing with the Sky facility is that the orchid business launching from Sky is less seasonal and may help smooth out operational margins. Beyond that, our bulk cannabis segment saw much less excess product, and we're capturing opportunities to sell higher potency volume with favorable margins through core bulk sales. These perspectives should help clarify any confusion.

Operator, 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, CEO

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 look forward to sharing the story as we go forward. On behalf of everyone in Aurora, thank you for your interest, and all the best.

Operator, Operator

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