Matt Bottomley: Okay. Great. I’ll get back in queue, and I appreciate all the details on that, Miguel.
Miguel Martin: You got it. Thank you.
Operator: Our next question comes from Tamy Chen from BMO Capital Markets. Please proceed.
Tamy Chen: Great. Thanks. First question is going back to Australia. So Miguel, you talked about how the number of approvals continues to grow, a significant increase compared to 2016. I just wanted to revisit this part, like, what has really caused the Australian market to experience such rapid growth, like, we see some other medical markets that legalize, but the growth just isn’t as significant. Like, has there been some further regulatory changes over these last few years that have really increased or yeah, increased the acceptance of medical cannabis amongst physicians there. Just curious what is driving this quite rapid growth.
Miguel Martin: Yeah, Tamy. It’s a great question. I think I would tell you there’s probably three key aspects to this. First is that the TGA, which is the primary regulatory agency has done an exceptional job at rolling out regulations and having it be easier for all steps of the process. And so what do I mean by that? The process in which physicians or clinicians can sign up to be a prescribing physician, the ease in which pharmacies can be registered and be allowed to service the patients, the patient’s ability to register through. As I mentioned, it is a very large reimbursed market, so the economics works well. They have a compassionate care program for those that are economically challenged to have access this to medical cannabis through that, so that would be the first part.
The second part is, they’ve also been very thoughtful at the local level. So there’s — sometimes there’s tension between the federal legalization and what happens at the state level, we have not seen that in Australia. And so you’ve seen a very specific sort of cadence and move forward. And then, I think third, culturally cannabis has been accepted in this market. And I think that those companies that have operated there have done a really good job, which is why we’ve seen such consolidation in market share, the largest market share company in that market, has over a 30 share. We’re number two in the low 20s, and then there’s one right below us. So all of that, I think, has come together. They have to be. Now unlike some other markets, we’ve seen — because the TGA is being so rigorous with their authorizations and their review of acceptable products, we don’t — we think this will continue to be a market that advantages those companies that have that type of rigor to their production, to their certification, and this is all happening in the absence of other formats that we see being larger in other markets, particularly ingestibles and vapor products.
And so those will be coming online and can only grow this overall market. So we’re excited about it. It’s a part of the world that this is sort of an important piece, and we’re really, really excited about this acquisition.
Tamy Chen: Great. That’s helpful. Sticking with that, I was curious to understand why now for timing of acquiring the rest of the stake in MedReleaf Australia? Is it just you’ve seen the market experience tremendous growth and it felt like now was the right time? And lastly, did you say that this business, Middle East Australia has a higher gross margin than your current international business? Thanks.
Miguel Martin: Yeah. So let me take the second one first, and then I’ll take the first one. So currently, we are the supplier, we are the manufacturer for MedReleaf Australia. They have their own sales organization. They have their own clinic connection organization. And so our margins were lower. So my statement was that upon acquisition, it would be similar from a margin standpoint to other markets that we have, say, in Western Europe or Eastern Europe, which are some of the highest margins you see in cannabis globally as those margins today are in the low 60s. In terms of why now, I would say, there are a couple of things. One is, as I talked to you about earlier, I mentioned earlier about our analysis about regulations, market size, and our ability to sort of leverage that and we felt that we are in an inflection point because of the size of the market, because of where the regulations were and because of our ability to leverage innovation in some of these new formats coming on.
Clearly, the other side, the owners of the business also had to be aligned that this was the right time. And I can only say great things about what they’ve done to build this business. Like I said, the founder is an ex-pharmacist and that team has done just a superb job in building this business, and we collectively thought this was the right time to take the next step. And with the products that we have online to be able to leverage in Australia with the cash position that we have and everything else going on, the collectively, both Aurora management as well as the ownership of MedReleaf Australia felt this was exactly the right time for us to think this deal happen.
Tamy Chen: Okay. Great. Thank you.
Miguel Martin: You’re welcome.
Operator: Our next question comes from Doug Miehm from RBC Capital Markets. Please proceed.
Douglas Miehm: Yeah. Good morning. My question just has to do with capital allocation. When you look at the Australian acquisition and the amount of cash used versus shares issued. Can you walk through the decision making process there? And why you decided you needed so much dilution relative to the $10 million or so of $8 million that you paid out, especially given that your balance sheet is so much better now and you’re on the cusp of turning free cash flow positive. Thank you.
Miguel Martin: Sure. Well, Dough, I’ll make a couple of comments and then I’ll low Glen to get there. I think we are — we’ve worked incredibly hard to take out almost $0.5 billion in the convertible debt and really want to demonstrate that the company is being incredibly thoughtful with the financial decisions that we make. Now that’s not going to come at the expense of growth. And so, it was our opinion that, that was the right allocation to use that amount of stock versus the amount of cash in order to retain maximum flexibility with that cash position. And I think, I understand your point about dilution. But I think from a shareholder standpoint, if you look at that valuation and you look at the trailing 12-month revenue as of December 31, was about AUD40 million.
And the fact that it’s accretive day one, we believe that was the right allocation for this deal going forward. But listen, I understand the question, but all-in-all, if you look at where we are now, free cash flow positive by the end of the year, roughly $200 million in cash on hand, no debt on the cannabis business, and now with this piece coming online, which may be as large as Canada, which would make it the largest federally legal medical cannibals market in the world, we feel really good about it, and that was the structure of the deal. But Glen anything you want to add to the allocation there?
Glen Ibbott: It’s pretty thorough, Miguel. Doug, I will note, we’ve been very consistent in our messaging over the last couple of years that the share issuance, we’ve really tried to refocus that on incremental accretive new business. So it’s a strategic focus as opposed to back a number of years ago, a number of cannabis companies used to fund operations. So this is not about funding operations. This is about adding that incremental revenue and margin that Miguel talked about, very accretive. The value of this is quite compelling. So all the strategic reasons that Miguel laid out. But we see shares as a valuable tool when we are looking at it strategically. So that was part of the thinking on this as well, consistent with what we’ve full view in the market over the last couple of years of what we reserve our shares for.
Douglas Miehm: Okay. That’s helpful. And then just maybe as a follow-up there, given that this group is going to be a reasonable sized shareholder of the company, would you expect them to be long term shareholders of the company?
Miguel Martin: I don’t know. I mean that’s going to be up to the shareholders of it. We would hope everybody would be long-term shareholders of this company. But that’s their decision, and I think is not — doesn’t have any bearing in terms of how we run the company of the deal or anything going forward.
Douglas Miehm: Okay. Great. Thank you.
Miguel Martin: You got it. Thank you.
Operator: Our next question comes from Pablo Zuanic from Zuanic Associates. Please proceed.
Pablo Zuanic: Good morning, everyone. Miguel, just thinking about the potential acquisitions you need to make in Germany following what you did in Australia. Maybe explain the difference of your on-the-ground business model. In the case of Australia, you were shipping from Canada, right, and pretty much MedReleaf Australia was taking care of everything else. In the case of Germany, it seems to me that you have more assets on the ground, more feet on the ground, but once we have the change in the narcotics law and other changes, do you think you will need to make acquisitions in Germany or pretty much is about investing on what you have already? Thanks.
Miguel Martin: Got it. I mean, Pablo, I think, for Australia, we found such a great partner that we were comfortable with not going all the way through. And obviously, it impacted the margin when you’re just a manufacturer thus the trigger to buy the rest of it so that we could experience the same margins that we see in other parts of the world. Germany was different. And obviously, that you’ve been covering this for us. We, very early on, again, to go back to those three criteria. We got very comfortable with the regulators and the regulatory process. We got very comfortable with the size of the market and the fact that it was going to be a reimbursed market with also a large self-payer. And we also got comfortable with the unique proposition that they offered there to have in-country manufacturing and be aligned with the government and first mover status.
It was for that reason that you’re right that we have quite a significant amount of headcount and infrastructure both in Berlin where we have sales, marketing, finance, back office and very importantly, government relations work there, as well as the production team that we have at [indiscernible] and I think that shows our flexibility. And if you go east and you look at a country like Poland, we’ve got sales and marketing in Poland, but we don’t do any production in Poland because we can bring product in at a very efficient way with our new genetics coming in from Canada. If you look at, say, a market like the Czech Republic, we work with partners. Same thing we do in Switzerland and with Austria. And so I think you have to be flexible. But at the core, you have to have the products that patients and clinicians want, and we’re able to do that incredibly efficiently, out of Canada.
But as markets get there, we’re going to continue to make investments, and we’re thrilled to have that opportunity now to be completely integrated in Australia, which will look a lot like we have in Germany.
