Good afternoon, everyone. Welcome to Aurora Cannabis Second Quarter Fiscal 2019 Conference Call for the Three Months Ending December 31, 2018.

Listeners are reminded that certain matters discussed in today's conference call, or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks and uncertainties relating to our Aurora's future financial or business performance.

Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Aurora's annual information form and other periodic filings and registration statements. These documents may be accessed at SEDAR's database or on sedar.com.

I'd like to remind everyone that this call is being recorded today, Monday, February 11, 2019. I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley..

Thank you, Josh. Good morning or rather good afternoon, everyone and thank you, for joining us for today's call. With me today are Terry Booth, our Chief Executive Officer, Glen Ibbott, our Chief Financial Officer, and our Chairman, Michael Singer.

Today after markets we posted yet another strong quarter with $54.2 million of net revenue demonstrating continued rapid growth based on the consistent execution of our consumer and medical strategies. Delivering strong quarters is getting to be a habit at Aurora.

Revenue growth was 83% quarter-over-quarter and that comes after an average of 44% growth quarter-over-quarter over the previous six quarters.

In consumer market, which launched on October 17, 2018, we posted a strong performance with $21.6 million in net revenues however this is only the beginning and we anticipate strong continued growth as more product comes available to the market. We also continue to grow our medical business.

While we allocated a significant percentage of our product available for sale to the consumer market we are committed to and have continued to grow our patient base since our last update by nearly 10% to over 73,000 patients across Canada. We are a medical company at heart.

We support our patients not only with high quality product, but also with advocacy, education and scientific research. We have completed our involvement and are commencing some 40 clinical trials and medical case studies in addition to seven pre-clinical studies.

The scientific and clinical data we generate support the case for the medical benefits of Cannabis and resonate strongly with the medical community.

Having such a broad scientific program establishes Aurora as one of the clear leaders in the medical space and provides us with the credentials to engage with prescribing physicians and other medical professionals building strong relationships and customer allegiance.

It also increases our profile as a highly credible, medical operator in the international marketplace allowing us to engage with and become a preferred partner to a growing number of governments worldwide.

All of this positions us exceptionally well to capture a larger part of the medical market both at home in Canada and currently 22 additional countries abroad as we scale up output and have more product available for sale. Ensuring patients receive their required supply of medicine remains a core priority.

And last quarter, we provided 2,446 kilograms of dry cannabis and 746 kilograms equivalence of cannabis extract to this segment, an increase of over 20% from the previous quarter. On the inception of the legal consumer cannabis market in Canada the federal government brought in 10% excise tax on cannabis sales.

Unlike any other prescription medication sold in Canada medical cannabis patients are taxed for access to their treatment. Aurora disagrees with this practice and we're not collecting tax from our medical patients, but rather are absorbing the cost despite the slight negative effect on our revenues.

The Canadian consumer market provides an extremely good opportunity for us. Consumer response to the legalization of cannabis has been strong. Overall based on the statistics provided by Health Canada for the period October 17 to December 31, 2018, we achieved over 20% market share.

Approximately one in five grams of product sold to Canadian consumers comes from one of the Aurora brands and we continue to have top ranking strains in our markets across the country.

While the start of consumer sales did encounter its challenges, which is to be expected with any brand new and extremely complex new system, we responded and we delivered solid execution. In the consumer market we predominantly sell to our partners, the provinces. But we're also participating in this new market by investing in retail organizations.

In addition to our investment in Alcanna, who operate North America's largest chain of non-government owned liquor stores and are targeting a large number of retail outlets across the country. We strategically invested in Choom Holdings and High Tide, two emerging leaders in the Canadian retail space.

To address the continued strong market demand from the Canadian and international medical market and the Canadian consumer market we are ramping up production rapidly.

Currently based on planted rooms approved by Health Canada, we're running at an annual production rate of about 120,000 kilograms or 120 million grams per year and we expect to reach over 150,000 kilos of annual production by the end of next month based on planted and approved rooms.

On the sale side, we expect to see a further increase in product available for sale for fiscal Q3 and we'll continue accelerate production. We anticipate having approximately 25,000 kilograms available for sale in our Q4, that's the quarter ending in June, 2019.

The cornerstone of our production ramp up is our Aurora Sky facility in Edmonton, which is now fully complete and two-thirds of the facility is now planted with the remaining rooms to be systematically planted by the end of this month subject to Health Canada licensing. Recent harvest at Sky show that we have dialed in the facility extremely well.

We are achieving harvest above our target yields. With the technology in Sky tried and tested, we're very comfortable in our anticipation that at full capacity Sky will produce more than 100,000 kilograms per year of high quality cannabis.

In the quarter, we also achieved other production milestones that will help us increase our production of high margin products. In October, our Aurora Vie facility in Quebec received its sales license from Health Canada for soft gel production.

Softgels are an increasingly popular alternative way of consuming cannabis and Aurora Vie is now producing about 1.4 million softgels per week.

This production will be aided by our extraction partner, Radient Technologies, which recently received its processor license and will now be able to operate its high throughput cannabis oil extraction process commercially. Radient facility in Edmonton is currently capable of processing 200 kilograms per day of cannabis into oil.

Radient is expanding its facilities to enable the processing of 1,000 kilos per day of medical cannabis and more than 10,000 kilos per day of industrial hemp. Industrial hemp production is important for the creation of CBD products.

These non-intoxicating cannabis products are becoming increasingly popular for their numerous therapeutic and wellness effect.

Leveraging the high throughput capabilities of Radient, our leading R&D capabilities and cultivation capacity we intend to launch a broad line of CBD based wellness product in the near future, a market that is gaining considerable traction globally and which represents an incredible opportunity for early leaders such as Aurora to establish a solid market footprint both at home and internationally.

Our ability to execute on this objective is strengthened by our substantial hemp assets gained through our ownership of Agropro, Europe's largest organic hemp producer as well through Hempco in Canada and ICC in South America.

Product development capabilities with the team that has proven time and again its ability to innovate and to work with regulators to introduce innovations in jurisdictions with restrictive new and evolving regulations position us well to operate in this high growth segment of the market.

Advancing our global footprint continues to be a priority and we made great progress in fiscal Q2. Aurora's presence now spans 22 countries on five continents. A look into two regions Europe and Latin America with a combined population in excess of a billion people.

In Europe, we continue to capitalize on the strong central presence we established in Germany. In early October, we became the first private company to be granted an import permit for medical cannabis into Poland.

Later in the quarter, our distribution subsidiary Aurora Deutschland, shipped our products to a pain treatment center and hospital in Warsaw. Similarly, we completed our first shipment of medical cannabis to the Czech Republic.

We're working with Czech Medical Herbs a pharmaceutical wholesaler of cannabis products to provide cannabis to meet the growing market demand there.

In November, Aurora became the first medical cannabis producer to be selected by the Luxembourg Health Ministry to supply medical cannabis flower making it the seventh European Union member country where we have exported plants or products.

While the Luxembourg market is not particularly large, our position as a sole supplier is a good indication of the quality of our regulatory teams, our ability to execute and the strong reputation we have built with medical regulators around the globe as a highly trusted partner in the medical cannabis sector.

Going forward, we intend to further expand within Europe and to capitalize on our substantial early mover advantage. As mentioned in our last call, we established a leadership position in Latin America with the acquisition of ICC Labs, a leading cannabis company with over 70% market share in Uruguay and medical cannabis licenses in Colombia.

We're in the process of integrating ICC and we look forward to reporting on the exciting progress they have made. One item to highlight is the opening of ICC's laboratory and processing facility in Uruguay. We were honored to count the President of Uruguay as our guest of honor at this event.

The facility has the annual capacity to extract cannabinoids from approximately 150,000 kilograms of raw hemp biomass which we'll feed into international distribution channels.

In December, we further expanded initiatives in Latin America when we entered into a letter of intent to acquire Farmacias Magistrales, a Mexican pharmaceutical manufacturer and distributor. Farmacias is Mexico's first and only federally licensed importer of raw materials containing more than 1% of THC.

Once completed, this will provide us with first mover advantage in one of the world's most populous countries, where more than 130 million people will have federally legal access to a range of Aurora's non-flower medical cannabis products containing THC.

As you heard, Q2 was yet another quarter where Aurora aggressively moved to capitalize on the opportunities available to us on all fronts. We're very proud of our progress and congratulate all of our employees and team members that have contributed to this success. I'll now ask Glen to discuss the financials for the quarters.

Glen?.

Thanks Cam and good evening, everybody. Aurora's financial performance in our fiscal second quarter 2019 reflected the company's continued execution across all market segments as Cam just described.

Again we had very strong quarter-over-quarter revenue growth with the first full quarter of shipments to provincial news outlets contributing to an 83% increase in sequential net revenues and 363% increase year-over-year.

Overall net revenue increase to $54.2 million for the quarter compared to $29.7 million in the first quarter of fiscal 2019, $11.7 million in Q2 of last year. Q2 revenue included $21.6 million of revenue from the Canadian consumer market and $26 million from Canadian and international medical markets.

Revenue growth was negatively impacted however by the introduction of the excise tax in cannabis by the federal government. As Cam mentioned Aurora made this decision to absorb this cost rather than pass it on to medical patients. In Q2, we paid close to $3 million in excise tax related to medical cannabis sales.

It is important to understand that our financial statement also contains gross revenues as an IRS [ph] requirement reflecting the amount we actually charge per customers. However, we believe the best measure of our operating performances as net revenues and as such we'll continue to focus on and communicate of our net revenues.

Should the combined efforts of ourselves and a number of medical patient advocates convince the Canadian government to remove the unfaired [ph] excise tax on medical cannabis, then our net revenues would increase to include the revenue that we're currently deducting with excise tax reinforced.

In Q2, extracts represents about 22% of cannabis revenue compared to 31% last quarter. This decline was a result of temporary oil extraction capacity constraints at our existed facilities as we move through a rapid scale up.

This is largely been alleviated and will significantly improve with the recent licensing of Radient Technologies facilities and going forward we expect revenues from derivative products to increase as a percentage of our sales.

Based on the demand for our softgel products, new extract based products in development and upcoming shipments of oil based products for Europe [ph].

The average net selling price of dried cannabis and cannabis extracts decreased to $6.23 and $10 per gram respectively, as a result of lower wholesale pricing in the Canadian consumer market and the introduction of the excise tax.

In the future, we expect the average selling price to begin to increase the gain as the larger percentage of our products are sold in international markets, temporary oil extract constraint we faced is removed and as we start the shipment of oil based products to Europe.

Also as new product forms are launched and if the government removes the excise tax at medical cannabis. Our cannabis production in the quarter increased by 57% to 7,822 kilograms. This increase in production can be attributed to capacity added by both Aurora Sky and Markham and Bradford results.

As noted by Cam, we expect to achieve annual production capacity of at least 150,000 kilograms by the end of next month. Based on Health Canada approved and planted rooms, Product available for sale will continue to grow as our production hits full stride.

As Cam noted in fiscal Q4 that's April to June, 2019 we expect to have approximately 25,000 kilograms of product available for sales. For context, in the first five weeks of calendar 2019 we have harvested more volumes in our entire annual production capacity was a year ago.

This puts us in a strong position, we strategically allocate product to various higher margin markets specifically the Canadian and international medical markets. Our cash cost to produce increased to $1.92 per gram and gram equivalent adds up $0.47 from last quarter.

This was a result of temporary inefficiencies during the scale up production at Aurora Sky as well as increased labor and inventory management cost and preparation from consumer legalization in October. For our successful launch into the Canadian consumer market at Aurora was all hands on deck.

As we've seen throughout the industry there were a lot of start-up challenges but powered through this phase and have now moved on to optimizing production and distribution processes. We expect future production cost to go down as Aurora Sky is producing at its full capacity.

As we've discussed before, we expect cash cost to produce will fall to well below $1 per gram at Sky's cost facility. During the second quarter, we continue to make targeted investments to secure talent and enhance infrastructure to maintain our leadership within the Canadian and international medical cannabis markets and the Canadian consumer space.

We've now grown to over 2,000 employees across Canada, Europe and South America all of whom are working hard and focused on realizing this incredible opportunity to maintain our leadership globally and to open and lead new international markets in growth initiatives.

Overall as we indicated in early January, SG&A costs were relatively flat quarter-over-quarter growing by 2%. Within that, G&A costs for the quarter were $43.6 million, a $7.7 million increase over the last quarter.

Most of this increase over $4 million is due to milestones paid related to acquisitions made in prior quarters and for expenses related to our US listing cost. We also absorbed a full quarter of the G&A cost of MedReleaf another Q1 acquisitions where it contributed $1.3 million to this increase.

Looking ahead, we will prudently control our G&A cost but we do expect them to increase as our global expansion demands ongoing addition talent, staff and operating capacity. Marketing expenses decreased by 30% to $22.7 million over the prior quarter.

As we've discussed previously marketing cost related to efforts in Q1, 2019 and early Q2 for awareness and brand building in advance of consumer legalization brought us significantly after the implementation of Cannabis Act.

In Q2, we did pick up full quarter of sales and marketing costs from Q1 acquisitions and this represented an increase of $2.6 million over the previous quarter.

Going forward, we expect our sales and marketing expenses to increase as we build out medical sales and marketing capabilities into our international markets and continue to support the rollout of the Canadian consumer market. R&D expenses decreased slightly compared to Q1, 2019 despite expected quarterly variations in R&D throughout fiscal 2019.

We, along with our industry leading science team are committed to innovating high margin targeted medical and consumer products for the global cannabis industry. Under IFRS, we're required to estimate the fair value of investments and derivatives that we hold including warrants in the Green Organic Dutchman and CTT pharma.

With the broad stock market and cannabis stocks in particular hitting a low end in late December, we recorded several non-cash related fair value adjustments in our P&L which negatively impacted net earnings.

As we've noted in prior quarters, when we have seen non-cash gains, we expect this volatility and fair value measurements will continue to produce swings and non-cash gains and losses in our P& in the future.

As of December 31, we had $46.8 million in cash in equivalence subsequent to the quarter we closed US$ 345 million convertible note offering with number of high quality, US, European and Canadian institutional investors.

The terms of the notes provide us with the optionality [ph] to potentially settle the balance which is maturity of five years in cash, shares or any combination thereof. With maturity following in the timeframe within which we believe we will be strongly cash flow positive.

It provides us with the options and flexibility to limit future share issuances. Proceeds of the placements are earmarked predominantly to fuel corporate growth domestically and internationally.

With the rapid scale of our production and the related increase in product availability, it continued very strong demand for our products, our planned expansion of derivative product portfolios of these higher margin products and continued disciplining in our operating cost.

We are very comfortable in reiterating our earlier guidance of achieving positive EBITDA in our fiscal Q4 at April to June, 2019 with positive operational cash flow all in shortly thereafter.

We are executing well as reflected in these results and in our expectations going forward and we're exceptionally well positioned as one of the key leaders in the global cannabis industry. I'll now pass the call back to Cam..

Thank you, Glen. To summarize, we're obviously very pleased with this past quarter.

the growth we achieved in revenue, the progress we achieved in production capacity the continued expansion of our global footprint and the early and first mover advantage in a growing number of markets, along with the continued product innovation, medical and plant science to all of these things validate our vision that we formed when we started on this journey to create the preeminent global cannabis company.

Looking at the rest of the year, you can expect to see our operating cost trending down as our Sky class facilities come online and we continue to reduce operating costs. We'll leverage our leadership in international markets to accelerate further growth. We'll launch new product innovations and continue to innovate along the value chain.

We've reached an inflection point and we anticipate that we'll be entering a period of sustained adjusted EBITDA profitability fueling further growth of the organization on a global scale.

And the last couple of pieces of news, you may have seen our news release out this morning indicating that we've achieved our first commercial export to the United Kingdom. I want to speak to that a little bit because although this is small scale import, it just shows the capabilities of our regulatory and business development teams.

In understanding new markets worldwide and getting in fast, many of you will have been at or will have heard of the Cannabis Europa Conference that took place last week, when I was there we were talking very intensively with people from both the UK and from France and it's my belief that the UK will turn out to be a very substantial market for medical cannabis, with France looking good perhaps 10 or 12 months behind.

Institutions are also coming into the Aurora story as well. One of the benefits of the recent convertible note was that it brought in these high quality long-term investors and in addition to that, we do have some more catalyst coming in this quarter one of which will be the first sale of derivative products in Germany.

In Germany, we will receive a premium on our derivative products just the same as we do with our dry flower. And with that, I would like to hand this back to Josh the operator and open the call to questions..

Thank you. Your first question comes from the line of Tamy Chen with BMO Capital Markets. Your line is open..

Cam, could you elaborate bit more on the initial supply chain issues that we saw coming out the gate of Rec [ph] launch and what Aurora's experience has been and are we largely past those issues now?.

I mean look anybody who tells you they know how the consumer market is going to play out, how much product is going to be available in the middle of the year and at the end of the year. I think they're pulling your leg. It's very, very easy story.

What I can tell you is that, from Aurora's perspective we were very pleased with our logistics and operations out of the gate and that's why we think we had a very quick and smooth start compared to some of our peers in the consumer market. It is obviously it's going to take some time to iron out all the bugs.

We're going to have to see a better retail infrastructure in provinces across the country in order to see, the kind, the level of sales that I think everybody is anticipating. But you know it's going to take just a couple more quarters I think then some people who are most optimistic thought at the beginning..

Okay, and in terms of the value add products that are expected to come later this year. Just talk a bit about what you're doing in terms of both the product development side for these products as well as just thinking about laying the necessary parts of the supply chain for these products as well..

Yes I’ll start and then maybe Terry might want to weigh in and provide some color as well. So obviously we're doing a few things. One, we have an excellent new product development capability under Dr.

Shane Morris, he and his team are responsible for among other things getting our softgels rolled out and also our Aurora Cloud, the first vape cartridge permitted in the medical cannabis market in Canada and so they're working very hard on making sure that we're prepared for all of the additional segment that will become available once the new regulations are enforced and we anticipate that to happen somewhere around the middle of the year.

Now bear in mind a couple of things, one, we're going to emphasize, although we're going to enter virtually every segment of the market. We're emphasizing as the product forms and the segments of the markets where we think we can generate the highest margins.

And then the second thing to bear in mind as well, is that we continue to see ourselves and define ourselves primarily as a medical company.

So we're not going to be dumping all of the additional production that we generate through Aurora Sky and our Bradford facility being at full capacity into that consumer market, we're going to make very careful decisions with respect to product allocation across each of our distribution channels remembering that some of our priority starting with the Canadian medical segment and then moving onto the European medical segment.

Now I'm going to ask Terry to chime in as well..

Thanks Cam and good afternoon, everybody. With respect to product development as Cam mentioned Dr. Shane Morris is an expert. He's worked both sides of that fence at Health Canada and now with private license producer.

We brought a couple of products to market that weren't' there before, we expect to be first mover on other products in this space and those products will be the ones that are most profitable products and in the consumer use market, we're allowed to be doing that, we expect in the next six months, from your edibles and your beverages and whatnot.

So we don't want to give the tip of the hat to exactly what we'll be putting into the market, but know that we're on top of it and know our product development team is world class..

That answered your question, Tamy..

Yes, thanks. And I just had one last one if I may. In terms of international, how are you thinking about on the Hemp and CBD opportunity with respect to the US and also the EU and obviously regulatory frameworks are quite different.

How are you positioning the company for these markets and how are you anticipating the regulations in these areas to develop that would allow you to enter?.

So I want to speak to EU and then maybe Terry can weigh in on the US.

So one of the things that we're doing in Europe is, making very clear arguments that Europe should move forward in harmonization country-to-country so as not to disturb the common market and that would be consistent with appropriate behaviour within the European Union, that would apply the way we see it both to cannabis and to hemp product.

And it's very, very important in a single market like that, if you want it operate as a single market, you have to have a harmonized set of regulations, so we're working on that very hard right now. Terry, did you want to speak a little bit to - we do not give away too much of our strategy just yet in the US, but..

Yes, the FDA or rather FARM Act that was put in place that allowed for the hemp production and distribution in USA didn't really touch properly upon the CBD distribution. I think states in the US seizing CBD products that have been developed and have been on sales for some time.

So it is a bit of legal confusion in the states New York City [aimed][ph] today, but on the notes - and they seized products in the CBD industry, so you have to have both sets of those regulations working the act of the law, but there's regulations that fall under it. We're on top of that market.

We've got obviously - we're first mover in the hemp space out of any other of our competitor certainly Hempco, RTI, Argopro, [indiscernible] and ICC are very well versed in the hemp industry and will enter when it's proper to enter and when it's legal to enter into the United States market..

Okay that's all from me. Thank you..

Your next question comes from Matt Bottomley with Cannacord Genuity. Your line is open..

Congrats on the first full quarter of adult use. I just wanted to touch more on the distributor supply, demand dynamics. More with respect to where you see pricing going, so when I look at the data.

It seems like the bottleneck might me more on the infrastructure side when it comes to the government being able to facilitate sales to all potential Canadians and I think product form will add a lot to that as well.

but how much visibility do you have on aboriginal the provinces you're in with respect to pricing and where is your sort of downside scenario maybe as a percentage of where it might go by the end of the year, considering more and more products availability coming online with an increasing number of LPs [ph]..

I think it's going too far to assume downside on prices in 2019, we just don't know how quickly other companies are going to be able to ramp up and how much product are they going to be able to get, into the system. So I think I would stop that assumption that there's going to be pricing pressure.

At the moment, we believe that Aurora is getting higher average price for our products both dried flower and [indiscernible] products then selected other companies in the sector.

And one of the things that we actually may see, one thing that we may see, if there continues to be significant excess of demand over supply, is more flexibility from the provinces with respect to pricing of certain premium products, would you agree with that Terry?.

Absolutely, Matt. I agree with Cam. And if I lose sleep over anything, I lose sleep over our ability to supply this global cannabis market. It's coming at us very fast. You're seeing with respect to adult usage, the addition of Whistler Pharmaceutical. Their average price to promise is $11 per gram, they managed to sign contract.

So premium brand, value added products that are coming online with changes to the Act, will certainly increase our price per gram. I do not see it going down anytime soon.

I see this world expansion of the cannabis space [not even being close] [ph] to being set properly and it's at least five years before we have an oversupply situation for companies that can export under EU, GMP compliant facilities..

Terry is absolutely right, if you take a look around the world. And some of you heard me say this before, that there's no shortage of cannabis in the world, but there is a massive shortage of legal regulated cannabis. Particularly cannabis that can achieve - cannabis products that can achieve EU, GMP certification.

And just think about it this way, Europe is a market between 450 million and 500 million people depending whether you count the UK at the moment. And there's precisely one EU GMP production facility in Europe.

There are total of 8 EU GMP certified production facilities in the world and we have two of them, plus we have our EU GMP certified distributor Aurora Deutschland.

The future for us is a question of how much supply can we get out there and like we have indicated, we're going to be focusing primarily on the higher margin medical markets and also on the higher margin products within those segments..

That's good to know and I appreciate that. I just wanted to confirm as I understood though, so the domestic sale price just in Canada alone are you expecting that pricing to see in line or potentially increase in 2019 specifically, outside of all the international upside..

I think Matt the high quality cannabis pricing will go up without a doubt. Right now they're - it's baby duck to move away. The provinces aren't distinguishing the differences in high quality cannabis from not so high quality cannabis.

Consumers that have chosen their products will demand those products and have given us an opportunity to go back to the province, say hey, we have an awesome demand for these particular products. We're going to be increasing our prices.

We're not going to continue to sell our cannabis at the same price that our competitor sell it at, if it's not as much in demand. So it's all about high quality products will drive this market and the provinces I believe will be paying up for that before too long..

And the pricing that we're able to achieve is really important consideration to where we allocate products. So we put together a very sophisticated demand planning and product allocation protocol and that is guiding us on a rational basis as we move forward to figure out, how much of our product we want to sell in each of our distribution channels..

Great. Appreciate that. Just in the interest of time and it did a lot of Q, just some housekeeping questions. I'll just do them back to back quickly. One is just the percentage of oil contributions, revenue from oil.

Should we expect the adult use side of that to remain relatively flat, just considering we're not going to have derivatives products to Health Canada put some into the regulations. I think you did about 10% of your rec sales for oil and produce.

And the second thing, is just how us analysts should be factoring in the potential growth profile in your international markets? Because there's been a lot great positive news flow from yourselves and a lot of other license producers, where these initial shipments and it seems like, almost a dozen or two markets now.

How do you think the international export growth is going to outpace your Canadian medical growth in the next year or so, obviously it's going to outpace it, but I'm just curios if you can give any more variables or any other inputs to help with model it out. I'll leave at there. Thanks..

Do you want to start, Glen?.

Yes, sure. Matt. So oil into the Canadian consumer market are derivative. We were constrained of our ability to extract and produce in the launch of the market. We really had a focus on getting product out the door to meet our commitments to the provinces.

Going forward, you've seen the launch recently softgels and certainly the oil, the drops and stuff that we produce and sell, provinces sell well and they sell to your earlier question well above those minimum prices you were talking about and we get sort of in the 5.5% net range for dry cannabis, but we're talking over 9.5 [ph] for our derivative products in a per gram basis.

So they're good pricing, but certainly good uptake as we're able to supply those markets. Even in the adult market or in the consumer market there nowhere to go, but I think on the derivative product side.

But the international export I think this is a really interesting year for us calendar 2019, now that our facilities are really ramped up in terms of production in terms Sky coming along. We've been able to make those as Cam talked about earlier the strategic allocation decisions, but where to put that next gram of Cannabis.

So we're now directing a significant supply over to Europe and as Cam said, we'll also be help within this quarter first oil sales in Europe or in Germany for us. So I'm very excited to see how quickly we can accelerate that market. Our colleagues in Europe are building up, their sales force.

They're doing continue medical education positions lots of awareness campaign, really a pharmaceutical model over there. It's the lacking of supply from EU GMP compliant facility. So we got that now and we're able to direct and we're able to direct significant stream of supply over there.

So we'll see how that plays out over the next few quarters I guess little premature to try to put percentage on that yet, but it's going to be as high as we can possibly make that because it's our top market in terms of return..

Understood. Thanks guys..

Your next question comes from Jason Tandberg with PI Financial. Your line is open..

I wanted to touch on some specifics on the key retail landscape in your capacity. So can we talk first about pre-rolls. What was your capacity in this time period? And sort of where I know you're ramping up with the Wagner Dimas investment.

Where were you plan to be by the end of the year in terms of that pre-roll capacity?.

In terms of specific capacity pre-rolls. Okay, give us a second so we can pull this up. I'm not sure if we have those data available right now. What I can tell you, is obviously we like those products because they sell for 50% more than dried flower and we also very much like the Wagner Dimas technology.

That's actually really interesting case because we have the Canadian license rights to that technology exclusively. Our US spin off Australia Capital also owns 15% of Wagner Dimas, so it's an example of how, what we're doing through Aurora and Australia can dovetail very nicely.

Glen, do you have any clarity I mean that's pretty specific question [ph]?.

So you asked the question about capacity, so it's different than the sales we're actually making. So the capacity is ramping up really rapidly, we've introduced automation in this process. And pre-rolled are probably in the nature just under 20% of our sales and of the dried cannabis sales in the consumer market, but that doesn't speak to capacity.

And we have significant capacity..

We've now taken delivery on three Wagner Dimas machines and the capacity that has been reported to us is 500,000 pre-rolls per day. In my opinion and we see many of them, the very best pre-roll machine in the industry without a doubt.

It's got an excellent couple of young fellows in California working on and now we've introduced our automation team to those fellows and we're approving it even further. So we'll have the ability to feed the need for the capacity. I do see the hemp cigarettes are getting a lot of traction now in Europe.

So those are going to be similar machines and we're going to get that market segment as well I hope. We'll see how it goes, but Wagner Dimas a great company with great machines that will meet our demand..

Okay, can we talk extraction? You mentioned that the extraction was a bit of bottleneck if your Q3. You also mentioned that you added some color in terms of your partner Radient's whether capacity is going to look like now, they're received their processing license.

Is there any way to quantify what your internal capacity was like in Q3 and where you expect that to go once Radient's add off - at full capacity?.

Well it's going to remove the constraints. So I would expect that you would see our percentage of revenues coming from extracted products increase now that we do have that capacity over Radient.

You want to me quantify, Glen do you have any numbers?.

No, we've got our MedReleaf extraction capabilities coming on. We've got Radient and plus we've kind of optimized our processes. There's only one thing that's important to understand, is our launch into the consumer market. If you recall, we got our license for sale at the Sky facility in October 2017. The day the consumer use was legalized.

That really, the usual helped Canada licensing has the little bit of a change to the way we process things. We essentially moved all bunch of our staff down to Cremona to work at our Mountain facility, changed some of our process at Mountain facility.

It really was all hands on deck to get this out and have a very successful launch, but it did impact our ability to produce all of the products that we wanted, out of all the facilities it was very complex time with the products moving between different facilities and where we had sales license and where we're producing, so that's all being optimized right now.

I think the best way to look at it as Cam said, there is no constraints going forward as lately is, our own internal capabilities and the capabilities of Radient. We'll be able to produce whatever the market is going absorb and we'll be able to produce things like softgels at extremely high volumes..

And we do love the softgels, it sells for a bust at the per capsule and since there's lovely margin on those, so we want to sell as many of those as we can possibly can..

When Glen was speaking to logistics around moving all of our equipment and our labelling and our palletizing down to the facility that wasn't anticipated to be used for logistics was quite a challenge, we made it.

It was a massive effort by the Mountain facility and the Sky management and hats off to those guys for coming out of the gate probably the best out in the space..

And the other thing to keep your eye on is, is derivative sales in Europe. Obviously getting those cannabis oils and subsequently different form factors into Germany is going to be very big deal for us, my anticipation is, that a lot of European markets at least initially will be extremely keen on non-flower forms cannabis products.

So that will be a contributor to our overall sales from derivatives as well..

Okay, great.

and my last question, you'd mentioned in your MD&A that your current annualized capacity is 120,000 kilograms per annum and you mentioned by the end of March it will be 150,000 so that delta of 30,000 is that coming from Sky being at full capacity or is other capacity coming online in that scenario?.

Primarily Sky and also the Bradford MedReleaf facility in Ontario..

[Indiscernible]..

Yes and all of it in Whistler [indiscernible]..

Whistler is also included in that as well. Okay. Perfect. Thanks very much..

Your next question comes from Michael Livery with Piper Jaffrey. Your line is open..

Just was wondering, when you talk about the pricing improving in the mix benefits.

Could you give any sense of how much to quantify that and order of magnitude?.

As to what we think will happen to pricing?.

Exactly..

In the consumer market, I think you're talking about?.

Right yes..

Like I said, that's kind of month scheme. It's really, really hard to project. I could see it I think probably coming up, I think you would agree Glen but as to how much and over what period of time, I'm not sure that anybody has that kind of level of insight into this market. What do you think? So we're getting head shaking around..

And I'm just curios when you referenced some of the benefits, that mix should add and everything else.

How much visibility do you have on the - next say two, three quarters for how much capacity drives that? Is it a more gradual pretty modest improvement or is that something we should have expect to see it going forward?.

I think it's going be a significant improvement because we're meeting the mandate. And the mandate is to provide the products to the consumer market, same as the gray market is producing. The reduction of the gray market is only going to come with the production of our markets products.

Once that is established, you're going to see significant improvements in profit. And certainly the derivative market we all know is more value added market. It's a more popular markets about 50% of the market in the United States, in some cases it's now past that 50 market to 55.

I see that's where this is going and certainly in our European countries you're going to see flower being reduced and to deal with Mexico in purely derivative deal which is great for us and we don't have to grow it down there.

We're not going to have any growing down there, we're just going to ship a raw derivative full spectrum down to the our partners. So it's - I can't see any turnaround in the average pricing per gram going down. I really can't. And remember [indiscernible] cost producer.

So if it does, if it does go down we'll be there to compete on a very high level and you may see some casualties out there..

In [indiscernible] that actual scenario that Terry just mentioned if in fact there is a lot of supply in Canadian consumer market at any point whether it's next year or the year after that a scenario that we plan for and as a low cost producer we're going to continue to thrive in that market.

Glen has modelled out what our margins will be at each of the different wholesale price points and it continues to look extremely healthy for us. Well below point that which other companies would have to stop competing because they simply can't produce at that low cost and they won't be able to compete..

Thanks. Just one more on the cost side. It's similar question. You saw the sequent increase in cash cost per gram but obviously you've got some capacity improvements and scale building.

Where does that go, how much of your higher cost in this past quarter were transition related and sort of the growing pains of adjusting to the new rec market and by order of magnitude when you talk about the costs improving, any rough sense of how to think about that?.

Michael, there's a couple of things to tell both there. You would have seen our trend previously, last quarter we were about $1.45 per gram produced and that was without the impact of high capacity Sky facility and without Bradford coming on and again very high volume facility. So we were definitely working on trending in the right direction.

It was determined by a couple of things, it continuous improvement [indiscernible] and a lot of automation. It's also improving yields as well. So Cam alluded to earlier that we're now at Sky [indiscernible] proven out the ability to produce and in fact we're hitting well above our, say about our yields for each of the room.

So [technical difficulty] because we don't add more people, we don't add more nutrients, we don't add more, we just get more out of the plants when we dial in all the environmental variables to increase yield. So what we see coming than this anomaly we had into quarter. I'll describe a little of it where we were removing folks all over the place.

We physically move people down from to work in other facility just simply to get all the product out the door before we get ourselves licensed from Canada [technical difficulty].

It's a similar story across the organization when we just had those one-time launch into the consumer market costs that are now going [technical difficulty] being into production, but the automation being dialed in over the last couple of months, we had more people, had more labor in Sky. Now that's reducing as well.

So we really see the $1.45 the last quarters' more representative of our cost across most of our facilities and then when we stated publicly at the large scale, the Sky class facility will be well below $1 gram to produce there.

Again as you look forward couple of quarters, that's where most of our volumes will be coming from, so you should see our overall cost per gram to produce to trend down to the dollar range or below $1 across the company..

Your next question comes from the line of Martin Landry with GMP Securities. Your line is open..

Just wanted to dial down a little bit in your production cost as well, quickly. Wondering if you're able to break down packaging and depreciation on a per gram basis, in your COGS because you did mention that your packaging cost went up and I just want to understand a little bit better that aspect..

The packaging cost went up in the consumer market, yes. There is more requirements as you know Martin then under the Cannabis Act.

On a per gram basis, that we're still we're not at the volumes at yet, but I want to get into per gram, but you'll build into a forecast because the volumes we saw in Q4 while they're great start, they're nothing near what's coming up.

So we'll gain the efficiencies of scale and some of the investments and some of the automation over the next few quarters. So I feel in comfortable now in predicting where that per gram on packaging goes..

Martin it's Terry here. Another key factor was our packaging machines that weren't all set up yet.

We now have two and maybe three across the country fully automated packaging machines that we're trying to get one commissioned because of the late date from Health Canada, so those are now all running and there's a lot less people working out on them and they're filling a lot more packages, [indiscernible] lot more labors, I expect for that price to go down by glances on cost per gram basis almost impossible to nail that..

And it's also moving target because it keeps changing as we bring new technology into the game..

Okay, that's fair enough and then, you do talk about your yields being higher than you expected at the Sky facility.

Can you share what else are those yields?.

I don't think we want to be too precise until we have, even more harvest on our belt. But we can say, we have enough harvest that we have - we can say with confidence that we're getting more than we need out of each harvest in order to achieve that target of more than 100,000 kilograms a year at the facility at Sky..

Okay and last one from me. You talk a lot about international exports and right now I think these are going come from market in Mountain but wondering is there a intention to get your EU GMP certification for the Sky facility..

Absolutely, that process is started. You need to be in full production before you even apply for the initial audit from the people that do EU GMP certification.

So our internal term from the EU have been through Sky, they have some recommendations for us and we expect to be ready, once we get into full production and once we have the corrections as they may recommend and then we'll course on the audit, so timing on that it is really sort of Health Canada thing.

Once we get fully licensed, then we get fully funded [ph] then we at least have one all 70 rooms of these go through one cycle, then that process will begin. So it is not too far. But it is our intention..

And we feel like, what we're going to be successful in this. We have the expertise within the company to do this. We have the guidance from our European colleagues and you've been in the facility I think Martin and we're essentially already operating to that level of standard of GACP and GMP..

Okay, thank you..

Your next question comes from Graeme Reindeer with Eight Capital. Your line is open..

I wanted to ask about the market share figure that you had there about 20% in the consumer market. I was wondering if there was any indication of how that's trended, now that we're roughly month and a half into the next quarter..

Sorry, I missed the last part of that.

Are you asking how we came up with that number?.

No, he's asking, how we did January and early February..

Yes, we haven't seen - we have a lot of our own insights. We have analytics team that are deep into this, but we haven't seen anything that we could share publicly. So there is data feeds, you may be aware of this, certain provinces do give us data feeds on in our own sales or the competitor sales as well.

So we know exactly where we are for instance on Ontario, but we're also under contract not allowed to use that publicly and disclose that. So I can't give you more on that, but we certainly haven't slowed down at all in terms of our production and shipment.

This is how I played out, I'm not sure how the other fellows are doing in this industry, in terms of what they're delivering..

It's a little murky, we don't have that the kind of data gathering analytics company you do with a pharmaceutical industry. So the clarity is less than optimal, let's say..

And just to add, we have to understand some of these provinces did underestimate the demand and we're not that ready to give them more than what our contract requires when we're getting double in other locations.

So we're going to meet our contractual commitments in the adult usage market, the best we can and we hope to increase the skews in those adult usage market, but it is not something we have top of the priority list and providing cannabis for a lesser price, if we don't have to..

Okay, is there a figure you target internally in terms of what you want for target market share in the consumer market in Canada?.

You mean globally. Global, we have some big purchase..

He's talking in the Canadian consult market..

No, it's back to the discussions we've had in the past about our allocation. We've been a very strong team that's deep into a lot of analysis and a lot of recommendations that come up to the executive for strategic allocation decisions.

So we mean our minimum commitments, but even within the allocation of provinces we look province by province where it makes sense to supply either our commitment or more than our commitment. But in terms of allocation the medical market is first. International and Canadian.

Terry talked about earlier the opportunity to ship back extract base products to Mexico, where we're shipping to Germany this quarter. There is a lot of allocations that we can now make, that we've got the supply and we've got the global footprint.

So our percentage that we sell into the Canadian consumer market will be whatever is left, after we've fully allocated all the other prior value markets..

Okay, thanks for that Glen. The other question I had here is, looking at the inventory balance at the end of the quarter. If my math is correct, I get about 15% of that inventory balance is finished goods.

But I was wondering if you could provide a bit of color on the process of moving from work in process to finished goods and just tying that through with the 25,000 kilos of available for sale, by the target you set out..

I'm not sure I'll answer your question exactly, but here's what we've tried with being more precise and prescriptive with the way we describe our production and are available for sale. So yes, I mean there is a biological assets that are currently growing. It doesn't sit in our inventory for very long.

We've got lots of market to allocate this to, but what we've done with the guidance we gave in early January then reaffirmed here today, is try to turn production into available for sale.

So as you know, there is plans in rooms right now Sky, they're growing but they're in eight week cultivation cycle and then there's harvest and dry and sometimes there is, certainly there's packaging.

Sometimes there is further manufacturing when they're going to extract, so we've got a full usually three months from the time we put a plan in a room to the time it's available for the market. So we're trying to be more precise with that when we put out the 25,000 kilogram bigger for Q4.

And we're saying that's the amount we'll have available for sale in that quarter which means it's growing right now, it's growing right now. It will be available for sale in Q4, so finished product at that point.

I hope that answers your questions well enough because it's generally I think fairly fuzzy in the industry right now and trying to see through the [indiscernible] in terms of where they're actually at in terms of production and whether they're going to be to deliver to the markets on a quarter-by-quarter basis..

Yes, that helps thanks. And just one last follow-up there. I mean, there was a talk of lot of different bottlenecks in different points of value chain. Has the acquisition of Anadia and the work that you on analytical testing, has that helped Aurora at all in terms of getting product to from the work of process stage to the finished good stage..

No, I don't think that's had any direct impact. I mean the acquisition of Anadia has had lots of other impacts, but I wouldn't name that as one of them..

Okay, great. That's it from me. Thank you very much guys..

There are no further questions at this time. I turn the call back to the presenters..

I want to thank everybody again for joining for this conference call and we look forward to doing it all over again and another quarter from now. Thank you..

This concludes today's conference call. You may now disconnect..