Good morning, everyone. Welcome to the Aurora Cannabis Fourth Quarter Fiscal 2019 Conference Call for the three months ending June 30, 2019. During today's call, Aurora will be referring to an earnings presentation, which listeners are encouraged to download from the financial reports section of the company's investor website, investor.aurormj.com.

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

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

I would like to remind everyone that this call is being recorded today, Thursday, September 12, 2019. I would now like to introduce Mr. Cam Battley, Chief Corporate Officer of Aurora Cannabis. Please go ahead, Mr. Battley..

our average net selling price per gram which we'll get into in more detail a little bit later, came down as a result of actually increased sales in the consumer market, as well as some bulk wholesale sales that we actually managed to achieve a very attractive margin on higher than our overall gross margin.

And then our SG&A obviously is increasing a little bit at 9%. It is higher than it was in the last quarter at 1% growth, but I think that's explainable in large part because we are heading into essentially Cannabis 2.0 with the new product forms coming onboard toward the end of this year.

I also want to acknowledge that we slightly missed our guidance on our overall net revenue. We projected $100 million to $107 million in overall net revenue. We came in 1% below that at approximately $99 million. That shouldn’t have happened. The reason why it happened, we will discuss a little bit more, but it's essentially these things.

One, these were not our core cannabis revenues. On our core cannabis revenues we came in right at the top of our guidance at $95 million. By the way, the largest revenue figure in a quarter that any cannabis company has ever recorded for cannabis revenues.

And on the overall net revenues, we missed slightly based on our ancillary or non-cannabis revenue. A couple of reasons for that. One, those are more variable than our cannabis revenues. We also have a little bit less visibility into the performance of our non-cannabis units that are independent, that have a separate governance structure.

And then finally, we actually required a lot of some of our ancillary companies and operations, specifically with respect to our analytical testing and our patient counseling, and we can't record revenue internally for intracompany transfers.

Now, the big picture, and most important takeaways here, before we get into the formal comments, I'd emphasize the fact that we've established at Aurora leadership in this sector with respect to not just production, but also revenues on a global basis in terms of innovation and this is the biggest quarter, the biggest revenue that any company in this sector has ever recorded.

So we're very pleased at the progress that we've made and now we'll shift into the formal comments. Now, the past year has been transformational for the cannabis industry overall. It is rapidly maturing into an established operating industry. At Aurora, we prudently built a business that is efficient, scalable, and highly adaptable.

We are a leader in markets around the world. We're committed to defining the future of cannabis globally and that commitment underpins everything we do. In the quarter Aurora continued to be a strong performer in the Canadian consumer market with leading market share and brand awareness.

We achieved 52% growth in consolidated revenue compared to Q3, driven by a strong increase in production, particularly at Aurora Sky. While retail distribution in key provinces has been a constraint in fiscal 2019, we will see retail infrastructure expand in 2020 through the launch of new brick-and-mortar stores across Canada.

With more stores, we expect to see further consumer engagement. Providing safe and reliable access to medical cannabis remains at the core of Aurora's business and our revenues from this market increased 10% compared to Q3. Domestically, our patient roster increased by 10% to over 84,000 patients.

Driving this growth are continued referrals from our CanvasRx clinics and a network of over 60 clinic partners. Internationally, Aurora continues to be the leader and working closely with government regulators and policymakers to implement medical cannabis programs and open new markets.

In Italy, we were selected as the only winner of a public tender that markets - to supply that market with medical cannabis for a period of two years.

While the initial quantities are small, this is an important opportunity to build our connection with patients, doctors, and pharmacies, who have come to know and appreciate our products over the past two years.

This also underscores our ability to open new global markets by engaging with local governments and acting as a trusted partner as we continue to work to ensure patients have access to the high quality medicine that they need.

As well, in addition to the two EU GMP, that's European Union Good Manufacturing Practices, certified facilities we currently operate, we are in the final stages of certification for our Aurora River and Aurora Vie facilities, one in Ontario and one in Québec.

This will bring our EU GMP certified facilities count to four making us the licensed producer with the most EU GMP certifications, something that is rapidly becoming a global standard and ensuring our continued access to international markets where this certification is simply a requirement.

We recently announced our first major partnership in the United States market, our science driven partnership with the UFC, the mixed martial arts organization to study the effectiveness of CBD, cannabidiol as a treatment for pain and recovery in high performance athletes.

This groundbreaking research will generate the data required to establish CBD as an accepted therapeutic ingredient. The intellectual property from this research will lead to the creation of science backed, hemp derived CBD products that will combat the rapidly growing market of untested CBD treatments.

We're excited about the opportunities ahead for us in the U.S. market and we'll continue to take a measured, but strategic approach to how we enter this space. Furthering our scientific leadership, we also announced that we've begun cultivating cannabis outdoors.

The new sites at Aurora Eau in Québec and Aurora Valley in British Columbia will be used for cultivation research to develop new technologies, genetics and intellectual property to gain further efficiencies in our indoor grow facilities and advance learnings about cannabis cultivation.

This is important work that needs to be done to ensure sustainable cannabis agricultural practices that are developed to safeguard both our environment and global consumers. The first harvest of our outdoor grown cannabis is expected to occur later next week at Aurora Eau in Québec.

This cannabis will be sent for extraction and further testing and we look forward to applying the learnings from these test sites to next year's crops. We're committed to defining the future of cannabis on a global basis and we're well on our way.

While we may still be in the early innings of the cannabis industry, the work that we've accomplished to-date has created a company that is uniquely positioned to lead. And that concludes my opening remarks. I'd like to turn the call over to Glen now, who will discuss the financial highlights of the fourth quarter..

Thanks Cam, and good morning everyone. My comments here today reflect the success that Aurora has achieved as we continue our focus on the execution of our business plan. The figures I'll be going over can be found in our financial statements and MD&A and all are in Canadian dollars.

As Cam mentioned our fourth quarter fiscal 2019 results showcased the drivers of our continued strong quarter-over-quarter growth. We reported total net revenue of $99 million, a 52% increase over the $65 million in the third quarter. Our cannabis net revenue was $95 million representing 61% sequential growth.

This growth was predominantly fueled by additional production capacity and available supply from our Aurora Sky and Aurora River, formally MedReleaf Bradford, facilities which drove a $15 million increase in consumer cannabis net revenues, as well as an $18 million increase in the wholesale bulk cannabis trim sales.

For the full 2019 fiscal year ending June 30, net revenue was $248 million. Of this $226 million was cannabis net revenue, an increase of over 427% compared to the prior year.

Our fourth quarter 2019 Canadian medical cannabis sales increased 9% to $25 million driven by our continued success in growing our patient base which currently stands just shy of 90,000 clients. International medical cannabis revenue for the quarter was $4.5 million, up 12% over the prior quarter.

For the year ended June 30, 2019, overall medical cannabis net revenue increased by 150% to $107 million. This increase was primarily due to the addition of revenue from MedReleaf and CanniMed acquisitions, increased European sales, as well as a ramp up in production across our product facilities.

During the fourth quarter our growth in the consumer cannabis market continued with net revenue of $45 million, an increase of 52% over the prior quarter. We finished the full fiscal year with $97 million in consumer cannabis revenue. As you'll note, our fiscal Q4 included approximately $20 million in wholesale bulk cannabis revenue.

We sold cannabis trim for an average price of $3.61 and our margin is 61%. In the future, we expect to sell into the wholesale channel opportunistically and when pricing and terms are appropriate. We will caution against expecting bulk sales of the magnitude we achieved in Q4 2019 to be consistent or repeatable.

However, we do maintain a focus on the bulk sales market and we do believe there will be further opportunities there in the future. Given our patient first commitment, and belief that medical cannabis should not be subject to excise tax, we continue to absorb the cost of these excise taxes on behalf of our medical cannabis patients.

As a result, excise taxes negatively impacted our Canadian medical cannabis net revenue and gross margin by $3.3 million and 4% respectively. Let me address our reported revenue as compared to our updated outlook in August in a bit more detail. We reported at the top end of the range for our cannabis revenue at $95 million.

This is our core business and we are proud to deliver such a strong quarter. However revenues from our ancillary businesses, particularly those that are purposely managed independently at arm's length were lower than expected.

We had expected relative consistency from quarter-to-quarter, but when they reported into us we needed to eliminate significant and more revenue than expected for intercompany work. While we do not have day-to-day visibility in these businesses, we do need to improve our ability to forecast these businesses.

However, because of the lumpiness of these revenues and their relative financial immateriality we are not including them in future guidance. Now continue further down the P&L, our gross margin on cannabis net revenue increased to 58% in Q4 2019 to 55% in the prior quarter.

The increase in gross margin is primarily due to ongoing improvement in our production cash cost per gram. As Cam mentioned, our cash cost to produce per gram of dry cannabis decreased to $1.14 per gram down by $0.28 or 20% during the quarter as compared with the last quarter.

This is primarily attributable to the positive impact of the greater economies of scale and manufacturing efficiencies achieved from the increase in production in the period particularly at Aurora Sky facility.

On a standalone basis, our Sky facility is now in around $1 per gram and we expect further improvements in the coming quarters with resulted increases to our overall gross margin. We see our strength in highly efficient production and the resultant industry leading gross margins at quarter into success.

It allows us the opportunity to continue to invest heavily in the future growth of our business, at the same time is progressing towards positive EBITDA. During Q4 2019 Aurora produced just over 29,000 kilograms of dry cannabis as compared to 15,590 kilograms in Q3.

With production from our higher volume facilities increasing through the quarter, we expect to see a further increase in production in Q1 2020. We have also ramped up our internal extraction capacity and now have enough to meet our current and future needs.

In Q4 we continued to invest in the corporate infrastructure and talent required for expansion and growth of market share globally.

The increase in SG&A expense compared to prior periods was primarily attributable to increased shipping and fulfillment costs related to higher revenues and preparation for the launch of new products including product development and branding costs which includes our UFC research initiative.

Reflecting the year-end audit adjustments that Cam mentioned earlier, our Q4 SG&A would have been about $88 million an increase of approximately $20 million over the prior quarter. We have built a diversified and vertically integrated company currently capitalizing on the tremendous opportunity of the global cannabis markets.

In Q4 our reported adjusted EBITDA loss decreased $11.7 million as compared to $36.6 million in the prior quarter. Considering the impact of year-end audit adjustments we estimate our EBITDA loss to be approximately $25 million, an improvement of over 32% from the previous quarter.

I am extremely happy with the underlying achievements we've made in the last nine months in driving toward our EBITDA target. We have more work to do, but I'd highlight that nearly all of our KPIs are showing sequential improvements.

We saw previously identified production bottlenecks and we're seeing strong sell-through on our product at the retail level. There are remaining constraints to the pace of growth in the Canadian market that we would like to see resolved, including the timing of currently approved and future retail stores.

The resolution of these constraints will impact the timing of our EBITDA positive target, but we do expect these constraints to become less of an issue over the next several quarters.

As we continue to execute on our strategy, the company expects adjusted EBITDA to improve in the future due to higher sales, improved gross margins and prudent SG&A growth. As at June 30, 2019, we have $218 million in cash and cash equivalents compared to $89 million last year.

In August we announced the upsizing of our secured term debt facility to $360 million with an accordion feature for an additional $40 million of capacity.

Further, as I'm sure many of you have seen on September 03, we announced the disposition of our remaining equity investment in The Green Organic Dutchman generating approximately $86 million in gross proceeds.

With these two transactions now closed, we believe we have more than adequate financial resources in the near-term to execute our growth plans. I should also note that we continue to evaluate our global capacity expansion. We have identified opportunities to defer certain CapEx as we rebalance the growth of demand with our increasing supply.

We are continuing to build out our full production facility pipeline, but in concert with the growth of the total global cannabis market. As I conclude my remarks, I would like to note that I am proud to be a part of the best performing LP in the Canadian industry.

Aurora delivered strong revenues and patient numbers, improved on already robust and healthy margins, produced a consistent and meaningful supply of high-quality cannabis, and is well positioned to continue to keep the gas pedal down for growth while also moving to EBITDA positive in the short-term, not the long-term.

This makes Aurora unique in the Canadian industry. I am very pleased with how the Aurora team is focused on solid execution and operational improvements this past year, we are in a good financial position and we have numerous options at our disposal to execute on our growth strategy. I'll now pass the call back to Cam..

Thanks Glen. As you've heard today, we have built a solid platform for growth that's generating continued positive results. Before I open the call for questions, I wanted to provide an update for our outlook for fiscal 2020.

The opportunity in the global cannabis and hemp markets is tremendous, and Aurora will continue to make the necessary investments today to build long-term value for shareholders. However, Aurora will take a balanced approach to these investments with a focus on operating a sustainable and profitable business.

I've [Technical Difficulty] to establishing of substantial operating footprint in the U.S. As part of the U.S. market strategy, the company is considering its shareholders and how various state and federal regulations will affect its business prospects. A number of alternatives to grow Aurora's presence in the U.S.

market are under evaluation right now, and the company is committed to only engage in activities, which are permissible under both state and federal laws. There are market opportunities that are legal at both state and federal levels that can add operating cash flows and be critical pillars of Aurora's strategy and long-term success.

The introduction of new product formats to the Canadian consumer market this fall represents a significant opportunity for the company. We're very excited to introduce a line of new high-quality products across the country in a variety of product categories. We have invested the time to study consumer habits in legal U.S.

markets, which have driven the development of products, the consumers will desire and that are compliant with Health Canada's regulations here in Canada. As we previously discussed, our initial focus in the derivative product market will initially be on vapes and edibles.

To support these new product formats, we've invested significant capital to staff up and scale our operations in terms of both our cultivation and extraction capacity, and in developing new production hubs to ensure that sufficient product is on store shelves for December 17.

On that front, both of our Aurora Air and Polaris facilities are progressing very well and I can say that as of today, we are in commercial production of vape pens, mints, gummies and chocolates, and in the late-stage development in other product categories.

As I said off the top of the call, while many in the industry are trying to decide how they will build their cannabis business, we already have built a solid growing business integrated across all value chains, in fact, the global leader. I'd now like to ask the operator to open the call up for questions..

[Operator Instructions] Your first question comes from Tamy Chen with BMO Capital Markets..

Yes, thanks. Hi, first question is, Glen, could you talk a bit about in the EBITDA reconciliation you've got for the quarter from net income to adjusted EBITDA, there was a note there about, I think there was some change in accounting where it reduced the operating expenses in the quarter by about $15 million.

Can you just talk a bit about what was that accounting change there..

Yes, hi, Tamy. So it wasn't a change, it was our year-end audit adjustments. So as we went through our year-end and scrubbed our financials, we identified some adjustments from prior periods that we needed to correct in order to satisfy our audit, and get our full year financial statements in good shape.

So effectively what happened there is, we did record some adjustments in Q4 that should have occurred in previous quarters -- our previous quarters should have -- the results should have look slightly better and we recorded those through in Q4. So overall non-material adjustments, but part of the audit clean up.

They fall into a couple of buckets, so when, and mainly driven by the level of acquisitions and integrations we did as we scrubbed through some of those acquisitions [find] [ph] some costs that have been recorded, that had been over accrued. And then we also identified some costs that should have been capitalized earlier in the year.

So we've made those corrections as part of our audit..

Okay, thanks. And my follow-up is, I just wanted to understand the CapEx spend in the quarter. I think it increased quite a bit sequentially. How should we think about that? I mean, what was the capital deployed into during the quarter? Is this the go forward rate? Just kind of commentary about that would be helpful..

Sure, yes. Cam, I can start on that..

Yes….

So Tamy you know, a couple of the major facilities that are under construction, Sun and Nordic and we've mentioned a couple of others. You are also aware that we've got Polaris and Air and an innovation center in Comox for our R&D for our research.

There is a lot of work going on in Aurora right now as we scale up, not only for international, but within Canada and make sure we're efficient distributors -- distribution centers across the country and manufacturing for the new products, things like that.

So the CapEx let's say Q4 and spilling into Q1, a little bit would be at the peak CapEx for us. We're over $100 million into our Aurora Sun Belt is progressing quite nicely. As we indicated a little bit earlier in our comments, we are looking at the timing of CapEx and matching out the demand to – or matching our supply to the demand.

As you saw when we launched Sky, we were able to get certain bays licensed in our operation before the entire facility was built in a phased approach, and we're certainly taking that approach to the larger production facilities. So we've just got an awful lot going on, as you know, we're heavily into technology, automation and things like that.

So these that -- these are long-term investments, so they pay off in our operating costs, reduced operating costs, reduced production costs over the long term. So that's where we're at right now, Tamy.

I think you would expect in Q1 to still see a significant CapEx spend, and then it will start to reduce over future quarters, particularly most of these facilities are nearing completion. And then, we'll just have a couple of larger production facilities still ongoing..

Next question comes from Matt Bottomley with Canaccord Genuity..

Hi, all. Thanks for taking the questions. I just wanted to, the two items, one on the -- some of the commentary on the potential volatility going forward and then again on the EBITDA commentary as well.

So, on the volatility side, given that you had a good wholesale bump in the quarter and then within your recreational consumer revenues there could be some speed bumps there depending on how retail is rolled out.

What's the best way for, I guess, analysts to look at this, considering that the wholesale may not be repeatable, obviously you can tell me if that's different, and the recreational revenues could still see potential headwinds. So just trying to anticipate the potential magnitude of the lumpiness going forward..

Yes, I'll take the first crack at this and then hand off to Glen. First thing is, the demand is actually there for wholesale product and you will note that we got an extremely attractive price for trim, $3.61 a gram and that the margins were even better than our overall gross margin.

So if we have opportunities and it's likely that we will, we will proceed with additional bulk wholesale. But the bigger question that you're asking is with respect to volatility and I think that what we're signaling here is just to be aware, as a lot of observers have suggested.

We're anticipating that there may be a bit of a plateau between now and the advent of the cannabis legalization 2.0 products, anticipated somewhere around the end of the year. I think that's really what we're anticipating. There's likely to be across the sector a little bit of a plateau between now and then. Glen, did you want to add to that..

Yes, Matt, what we're signaling there and you know Aurora, and you know how consistently our revenues continue to ramp quarter-to-quarter, to quarter, the revenue curve, the nice smooth, continuously increasing curve.

And we -- specifically for us, I just want to call out the fact that there are constraints on the consumer system right now and the provinces are starting to show that as well.

And as you've seen in July and August where they - they're trying to work through some of the inventories that they have and have slowed their buying and we expect it to pick up and to continue to pick up through the next quarter.

But we did want to kind of signal that, our continued sort of [48%] [ph] quarter-to-quarter growth may take a bit of a pause just due to the industry dynamics. So that being said, we still expect to see growth in the core businesses, and as Cam said, the bulk opportunities may be there, if just the pricing is right, we'll execute on those as well.

This is, one of the things that heartens me and as I look forward is from the data we see from the provinces, is we are number one in the country in sell-through rates. So our product is delivering the right product, the and right quality that consumers are preferring.

So I think as we continue to sell-through at healthy rates, then as the bumps kind of even themselves out and retail stores rollout and will benefit disproportionately I think from that increased market size..

And that it's….

Matt this is Terry [indiscernible] Glen was talking about retail, and a good example would be Alberta. Alberta lifted the moratorium on retail stores, stocked up considerable amount of cannabis and the stores have been granted licenses, but are all not yet open.

They are doing their build-outs, and I remember that [all we’re] [ph] providing right now are tinctures, joints, bud, and gel caps. We have another cannabis 2.0 coming into Canada, which we think is going to significantly drive our revenues for value adds..

Got it. That's very helpful. And then maybe just tying that into some of the comments you made on EBITDA. So, in prior quarters and discussions, you've kind of been hoping to reach that inflection point in calendar Q4 of this year. Now the wording is more sounding like short term, which to me sort of sounds similar - similar points in time.

So is the reason for that slight change just given that plateau you were talking about until the December cannabis 2.0 comes on and then it's a bit of a reset with respect to that inflection point towards EBITDA positive?.

Yes, sure….

I'll take the first crack at this - Glen maybe I can just sort of frame this for a second and then hand off to you for the details. So, we put out guidance at the beginning of the year that we were targeting positive EBITDA and that created a sea change in our behavior and I think people have noticed.

We went from a period of very rapid M&A to shifting gears to a period of really focused and disciplined execution, and I think that's been reflected in our results. Now, would we have liked to be positive EBITDA at this point? Sure.

Part of the reason that we're still working towards that is as Glen mentioned earlier, we would have liked to have seen greater retail infrastructure in Canada. More stores obviously is better for the whole sector and it's disproportionately beneficial to us, as the leaders in the consumer market. So we still are focusing on that.

And I think it distinguishes us a little bit from our peers, some of whom have not emphasized that pathway to profitability as much as we have. This is something where we have listened to what institutions have told us about the importance of having a credible pathway to profitability and we're sticking to that.

Glen?.

Yes, Matt, I think Cam has done a great job of describing that. In terms of our language, all we're doing is we are still at the mercy, I think of the timing of the retail footprint rollout how strongly. We are excited that Ontario has licensed a number of new stores, but you know they should be licensing hundreds of new stores.

So there is still a lot of room to go on the timing of that will dictate exactly how large the market grows over what period of time. And certainly, we don't yet know exactly when the provinces will start loading in for the new products for consumer 2.0.

So will they start buying in advance in December or will they wait until towards the end of the year. So there's some timing there quarter-to-quarter that we're a little uncomfortable with and we'll have to wait to see how that rolls out specifically..

Next question comes from Vivien Azer with Cowen and Company..

Hi, this is Steve Schneiderman sitting in for Vivien today.

How are you guys doing?.

Hi, Steve, how is it going?.

Great Steve..

Great. So, in reference to some of the performance in oils, I mean some of the commentary that we've heard from some of the other LPs have been that there has been a little bit of a destocking across the board.

And the question is that how much has that impacted you? And are you seeing somewhat of a trend in your oil and extract sales?.

Glen? - Cam?.

Yes, I can tackle that. So Steve, yes I am pretty sure the consumer market. Okay, let me start with medical. Our medical market is still running at roughly the two-thirds dried flower one-third extract based, that it has for a number of quarters now. It's a relatively, we had a small increase, I think 37% in Q4 in terms of extract based products.

And, but that's relatively consistent. Definitely the consumer market seems to be heavy preference right now with the products that they have to choose from for the right cannabis. They prefer to smoke the cannabis right now until they get new product forms launched in 2.0.

Our quarter Q4 was over 90% dried flower, so the - and I think we've seen a few of the - few of our peers that loaded, they didn’t have, only on the extract based products they've had – recognized some returns in the recent past. We don't have that issue.

We haven't had that issue, but for sure the consumer market right now is heavily dominated by dried flower and not a lot of extract based sales..

Great, thanks, Glen. And just a follow-up to your earlier point about what we're seeing in the channel, which seems to be a little bit for than we previously would have expected.

How do we reconcile that with the narrative that the market has been grossly under-supplied in the past, has that now caught up to the point where we see balance or are there other factors that are weighing in on that?.

Glen?.

Yes, Cam, I can take that initially. When we talked in the past, Steve, and certainly we've been fairly consistent, it's been - we expect that this is such a new market, we're truly at the launch of a new market. In fact we haven't launched even most of the products that should be in this market.

So there is going to be I think month-to-month and quarter-to-quarter, there will be continuing sort of mismatch I think of demand and supply. Certainly, I think what we're seeing is that several months ago, there wasn't enough supply in the market and the provinces would buy whenever they could. And now in certain skews I think they've overloaded.

As I said earlier, our strong sell-through is important for us and a indicator that our products are moving, but they have kind of overshot I think in terms of inventory build on some skews and they're going to have to work that out as we wait for retail..

Hi, Steve, it's Terry here. I'd just add to Glen's comments. If you look at the statistics on a retail sales of adult usage, again we're limited in there, the number of products that we supply them. But Alberta outpaced Ontario and British Columbia and that is not statistically or historically, rather correct.

Right? The British Columbia Ontario, have a lot more on cannabis people and I think it's a reflection of the number of retail stores that are open in those two provinces. They both are a little bit of a slow roll, but they've also had government changes on the rollout October 17.

So they're a little eight ball in getting retail rolling, but we're starting to see a significant uptick in British Columbia and certainly we expect the same in Ontario. If they start selling as much cannabis per capita as Alberta, you're going to see quite a bump there. We don't know when that's going to happen.

We know it's going to happen in the next six months, but it may not be next week..

Steve, this is Cam. Let me add to that further to Glen's comment. We are seeing some interesting developments beyond street supply and demand for product in the Canadian consumer market. And that is discrimination by consumers towards higher-quality products. And we're seeing the results of that.

If you take a look at how some companies in this sector have had to deal with significant returns in a quarter and that's not an issue that we're facing. So there is some increasing discrimination where consumers are - they are voting with their dollars as to which products they want and we anticipate that that will continue on a go-forward basis.

And once again we think that that militates toward Aurora because we have this reputation for producing particularly high quality cannabis products..

Next question comes from Doug Miehm with RBC Capital Markets..

Thank you. This question is for Terry and Michael and it has to do more with strategy. I know that you've slowed down sort of the acquisition pace, but I was wondering if you could elaborate a little bit further on what you're thinking. I know everything is going to be approached fully legally, federally, and the state level.

But what you're thinking about in the U.S., if you could give us a little bit more information about your approach and perhaps timing would be great? Thanks..

Sure.

Michael, do you want to start this off?.

I'm actually going to start off Cam, this is Terry..

Okay, fair enough..

You wouldn't think that our M&A activity has slowed if you sat in my chair and the amount of work that we're doing with the amount of opportunities that we have in the United States. We started out in the United States with their little brother and Strauss [ph] Capital which we have some back in rates.

Their trade on CSC USA they've done nine deals themselves, smaller deals, but they've set a - set a footprint and actually really teed up some good people to help us with different regulatory issues in the various provinces. We've got a significant MSO review tour of the States, I think that's common knowledge out there in the markets.

And we are laser focused on CBD derived from hemp and the various opportunities that exist in that. When USA passed the Farm Act they leapfrogged across the rest of the world or over the rest of the world in CBD derived from hemp. Some call it CBD frenzy, but I don't believe it is because we know that it works and having it rescheduled in the U.S.

is a tremendous boon to the CBD industry and our strategic partners and Australis Capital [ph] are helping us talk to some of the top companies in the world with respect to that in itself. And there is a couple more hurdles with the CBD industry including the FDA ruling on injectables and we have a good idea on how that's going to go.

But to say that we slowed our M&A activity, we've not closed a bunch recently, but there is a - I'm very busy in that regard, probably 90% of my time is dealt on new opportunities..

And it's Michael, I'll just add that we see the U.S. market as a tremendous opportunity, and I could tell you that this is now a key objective for us in fiscal 2020. We expect with based on what Terry just described that we will have a significant footprint in the U.S. in the coming quarters.

And our UFC is an example of a great first step in that direction. And so, we're certainly encouraged with the progress that we're making and stay tuned, because we are excited about our opportunities..

Okay, great. And then just a follow-up for Cam, again just looking at a couple of quarters with 2.0, I know you talked about the fact that you're going to be launching vapes and some edibles, et cetera, et cetera.

Maybe just on the vaping side, you could give us your thoughts on this whole situation that we're starting to see on the safety side with respect to vaping and e-cigarettes and what your approach is going to be to mitigate any concerns around that? And that will be it from me. Thank you..

Sure. So I mean, the first thing to remember is we've got the benefit of a little bit of time before we have to launch the vapes in Canada - the vape pens. And in that period of time obviously we will be monitoring very closely what comes out of the FDA and the CDC and hoping that we get a finer point as to the suspicions as to where this came from.

You've seen the same media reports that I have where the suspicion is focusing on black market products and of course I would immediately draw your attention to the fact that everything that we produce and everything that we sell to either patients or consumers goes through very, very rigorous regulation under Health Canada.

And in fact, we already have, I think the only vape cartridge that's on the market right now. Our CBD vape cartridge that we call Aurora Cloud and that is very specifically consistent with Health Canada regulations, and in fact tested before it hits the market. So we've got the time.

Let's see how this plays out and if suspicions - initial suspicions are correct that this is something that is coming out of black market illegal vape, but we've got a very highly regulated system in Canada and nothing is going out to either patients or consumers that hasn't passed Health Canada..

Next question comes from Chris Carey with Bank of America..

Hi, good morning..

Good morning, Chris..

Hi, Chris..

Hi, how are you? So I hear you on slowing CapEx, but it sounds like September quarter is still going to be elevated. And even if I take together your credit facility raise and the Keyguard [ph] stake it seems to me like you might need a bit more capital going into 2020. And that's, especially the case, I suppose, if the U.S.

is going to be a big focus in 2020. So, can you just help me think about, not just the September quarter, but how you think about your cash needs and the potential for additional financing as you think about growth opportunities into next year?0.

Glen?.

Yes, Cam. So, hey Chris. Yes, listen, I've read your notes and I wouldn't disagree with most of your analysis. I mean, we do have major opportunities ahead of us. We expect over a period of time measured in short quarters to become cash flow positive from our operating business.

But we are investing heavily in the future, both on the facilities, the production and distribution, and manufacturing or research, as well as looking at some of the opportunities as Terry and Michael outlined internationally, including the U.S.

Now, I have to say, a lot of the ones that we're looking at are actually positive incrementally EBITDA positive and nice revenue. So, I do like those opportunities, but for us to take a business like that, and really accelerated in the - to the Aurora standard and with the aggressiveness that we're known for would probably take more capital.

So we'll cross that bridge as it becomes clear on what the capital need is, but we have tremendous opportunity to continue to be global leaders. So if the decision to continue that leadership requires more capital then we will access that capital at that time.

As you know, we do have non-dilutive sources that we have now, do you guys see and that we'll continue to look at those sorts of sources going forward.

I think we're uniquely positioned to be able to look to those sources and I think that upsizing of our debt, including three of the major Canadian banks and are participating in that sort of bodes well for the future. And we'll look at those non-dilutive sources of the financing and we will be accretive as usual..

Okay, thanks very much.

And then just a follow-up, you mentioned having an idea of how FDA might regulate injectables, I wonder if you can elaborate?.

Sure.

Terry?.

I think what I've said before what keeps me up at night is the supply of cannabis that's no longer an issue with rolling out of the Sky is almost at full production. We - what keeps me up at night now is the FDA decision, it is not the decision that they will make to the negative which way they'll go, with respect to isolates versus broad spectrum.

We are anticipating that to be isolate will be the first step from the FDA as an ingestible mainly because the other 112 or 113 cannabinoids in cannabis and they have not been tested by the World Health Organization. The WHO has come out and said that CBD is safe as ingestible, but they've put brackets around that sentence, this is only for pure CBD.

And I think the phrase is commonly misused, a broad spectrum CBD, there is no such thing, it's broad spectrum cannabinoids minus the THC derived from hemp and/or cannabis. So we are hoping the broad spectrum is something that is approved for ingestibles as we feel it's more effective, but the first step in those ingestibles may indeed be an isolate.

So we're making sure both of those bases are covered in our review of companies that participate in that industry in the United States..

Next question comes from Brett Hundley with Seaport Global..

Hey Brett..

Thank you so much. Hey, good morning. I just wanted to go back to the CapEx question if I can.

Glen, what might be helpful, at least for me personally is, can you share with us an assumption on where, not maintenance CapEx, but where longer term CapEx might be able to shake out, so that some of us on the Street can kind of do the math on using Q4, Q1 at the top and then working down towards that target?.

Yes, I hope I can help you with that a little bit. They said we're kind of a peak CapEx 10 right now with the major facilities underway. A lot of the construction going on right now will be complete over the next quarter or two on our manufacturing and distribution facilities across Canada.

And so what were then starting to look at is, just the timing of the CapEx on our major production facilities, Nordic and Sun.

So as it stands right now, our current plans are to bring those in and phase them in as demand requires and that you could consider that to be over the next year or two, as we phase those in, hopefully and ideal in my world, we need to phase them in earlier because the demand is there. But those are really the drivers.

Now, I need to caution you that - that's our current as we stand right now that's our CapEx plans should we decide part of our move into the U.S. required more CapEx, then we'll reset and re-calibrate at that point.

So that's really how I tend to characterize the CapEx over the next eight quarters is continued spend this quarter and you start to see it trailing off then over the next couple of quarters and then you're really just looking at the timing at Sun and Nordic..

Okay. I appreciate that. And then just my follow-up question is actually coming back to a prior one as well, surrounding vapes.

I appreciate your answer to that question and so far as taking a wait and see and having the value of time here, but for all of us that need to look forward and then try and make guesses about the forward market, can you give us a sense of what your overall capital investment in 2.0 products has been to this point and what percentage might be vapes? And I guess what I'm trying to tie into this discussion too is, do you have any concern whatsoever that the Canadian Government might overreact in the interim and then put a pause on bids while things get figured out in the United States? Thank you so much..

Okay, I'll take the first crack at that. I'm not sure that we actually want to break down percentage wise, how much of our investment is in each of our priority products that we intend to launch with cannabis legalization 2.0. But we have consistently indicated that we are looking at vapes.

We're looking at certain edibles including mints and chocolates and other forms. So, and we do intend to proceed with each of those. Now your next question as to what the Canadian Government might do, that's pure speculation and we don't, we try not to engage in that business.

But I will add this, thus far, according to the best information we have today, these illnesses have not popped up in Canada and that may be instructive. So we have to abide by what regulators say. We're going to watch these developments. We will be responsible about the whole thing, but I want to be careful not to speculate..

Yes, just to add to that Cam, when someone says the word vapes, it's got a lot of information embedded there. What the U.S. Government are pulling off the shelves right now are flavored e-cigarettes. We don't ever tend to sell flavored e-cigarettes as far as I know, we're not in that business.

The cutting agent of those flavored e-cigarettes and flavored single clip [ph] threat or 5 threads vapes is largely expected to be on the cards of these issues. I'm not going to try to make a prediction, but that's what we're hearing.

Normally what you hear comes through and the chemical that's been largely accused of being involved in that is something call Vitamin E acetate that we would never even consider using something like that for a cutting agent in Canada or anywhere in the world, unless it has been tested.

So I think that the vapes are getting lumped into a one big basket and it's really a focused set of vapes largely suspected coming through the black market that cutting agents are being used to add more robust flavor and a bigger plume, if you will, and that's what these kids are all about, is the Hot box look in the car with, and you've seen it driving by when someone takes a big rip, there's a massive cloud coming off their vape.

That is nothing that we would consider manufacturing..

Was that helpful?.

Next question comes from Michael Lavery with Piper Jaffray..

Good morning. Thank you..

Hi, Michael..

Can you give us a sense for your outlook for industry capacity which obviously has projections to rise pretty rapidly, and just how that balance, how that compares to demand and how that evolves over the next say 12 to 18 months?.

You're talking in Canada alone?.

Yes, right, exactly..

Okay. So we don't have official figures for the industry. But here's what I can tell you. We do see capacity increasing. But once again, as we mentioned earlier, there is discrimination based on quality. Right? So some producers will be seen as higher quality producers than others.

And as we've discussed on previous occasions, one of the things that we've done to make sure that we are winners in whatever scenario emerges is to be a low-cost producer.

And with our further improvements in our per gram cost to produce on a cash basis, that puts us I think further in the lead as the mass producer able to produce cannabis consistently at the lowest cost. So that's the Canadian situation.

We don't know exactly when there is going to be sufficient supply to meet all demand, and also that calculation changes significantly with the advent of the cannabis legalization 2.0 products coming towards the end of the year. Now, on a global basis, it's a very different story.

Because of the very small number of licensed, regulated producers of cannabis in the whole world, we see a long-term like multi-year situation where there will be a massive excess of demand oversupply for legal regulated cannabis.

And so that's one of the reasons why we have put so much effort into being first or second mover into international markets and establishing the biggest global footprint of any cannabis company and we're now operating in 25 countries..

I'd like to add to that a recap. I mentioned earlier, the cannabis per capita the analysts I believe have to look at the fact that the Alberta numbers are higher than anywhere else, mainly because of the retail availability.

And as to other provinces of any Quebec as well bring on more retail, you will see an increase in supply, you could probably do some math on that.

I'd like to make an example of Australia for a - which will be a export market for some times from Canada and until they get their production underway has gone to over 12,000 patients, I think month-over-month is growing by 30% Cam or 25%..

Yes..

Very similar to what happened in Canada under the MMPR. So we're seeing countries that put Canadian type regulations in place, have significant uptick in demand. Australia, until a couple of rules were, to a couple of pieces red tape, were very slow growth.

The then cut the restriction on doctors and they improved the application process and now it's going at a rapid pace and we see other countries taking that same sort of approach.

The German market, you'll see that we didn't have a big increase, it's decent increase and the European sales are outside sales, but we didn't have the capacity to supply it up until now. So we're seeing the boots on the ground in Germany now educate physicians and the demand for cannabis will go up as the number of physicians are prescribing.

So it's all about better math, it's still a medical entry into countries outside of Canada and the U.S. and there is no better medical cannabis company in the world in Aurora..

I just want to add to what Terry said. Everybody knows that we identify ourselves, primarily as a medical cannabis company and that's on a global basis, albeit a medical cannabis company that happens to be killing it in the Canadian consumer market with leading share.

But I want to emphasize that everywhere we go in the world our reputation precedes us. Our reputation as a serious pharmaceutical grade, medically oriented research investing company precedes us, and that's really important to us.

It opens doors for us with policymakers and regulators and allows us to have important conversations with respect to how new medical cannabis systems should evolve and to be able to speak to the need for well-regulated systems that actually have real access and proper access for patients so that reputation of ours, our positioning has been incredibly valuable.

It's been an asset for the company..

That's all very helpful.

Just a follow-up, you mentioned being a low cost provider, is your operating assumption that there is price compression coming in that you're well positioned because of the cost advantage, and maybe how do you think about that in the context of your price points on the Italy tender that seems to have been lower than some of the other prices we see in Europe, is that how you think about some of the competitive dynamics?.

So I'll take the first crack and then hand this over to Glen and perhaps Terry if he wants to weigh-in as well.

So, the predictions for a long time have been that we would see too much supply in Canada, well that hasn't happened yet and as a matter of fact, with the troubles at one of the leading producers in the country taking heck of a lot of product off the market and that's been further delayed.

But as responsible operators, we felt like we needed to scenario plan for if and when that happens. And Glen very specifically has done that and has looked at various scenarios with various possibilities of future price compression.

And each of those scenarios has us generating significant margins, because of the fact that we are a low cost, high quality producer.

And now, Glen did you want to pick up from there?.

All right, Cam, you've done a good job of describing it, but yes, I mean this is critically important and underpins a lot of our strategic advantages, our purpose-built highly efficient production facilities. As I mentioned in my comments with Sky delivering currently around $1 a gram and expect it to continue to improve on that.

I think we make, we set ourselves up in a position where we don't think we have competition at that level. So there is a floor that prices can - cannot drop beyond and that's really the operating cost of our major peers.

So it - nobody and, but the authorities want to put major producers out of business, but there is - there is a minimum that prices can drop. So even when we model out where we expect just an absolute sort of nightmare scenario in terms of pricing, we still have extremely healthy margins.

So that again, I think there's so many advantages to being such a highly efficient, low-cost producer, that brings and this is yet another one, we win in whatever market conditions there are. So I hope that helps [indiscernible]..

Yes. I want to add to that as well. I don't see pricing pressure around the corner. I see more revenue per gram with the high-value products coming on stream. We wouldn't be extracting and making pens and cookies and bon-bons for less of the margin on our - but I know it would be crazy. So I see the revenue per gram going up.

In Canada, it has continued to go up by the way in the medical system. The - you mentioned Italy in the low price. It is the Italian contract, which is a very small amount of cannabis.

And the thought behind Italy and certainly the tender was not based on our price, but we want to make sure we got it because the Italian Government, Army rather, presently grows it. And in our opinion it's not the quality that they need for a decent medical system. So getting decent medical cannabis in Italy was very important to us.

And that's what we've accomplished with that task. I don't see that as being the standard for pricing in Europe. Certainly, that was a bit of a different channel and we keep forgetting that we also won one of 73 opportunities - sorry 10 opportunities in Germany to produce and there's other tenders in Europe that are coming on board.

They are not price driven, they are quality driven. They are EU GMP driven, and those are the criteria that will win those tenders, not necessarily the pricing..

Next question comes from Glenn Mattson with Ladenburg Thalmann..

Hi. I appreciate you taking the call. It's getting late in the process here. So I'll just be quick. I wanted to touch on wholesale one more time. You guys talked about tapping the wholesale market opportunistically.

And I just wondered, like what are the parameters around what's going to make you decide when to tap it or not and is there a range you can give us, maybe is there, maybe a couple of 100 basis points of gross margin range of when you'll tap that market? And then being that there is, we're well into the first quarter here, are the conditions currently in line with the conditions you would want to be when you tap the wholesale market?.

Glen?.

Yes, hi, Glenn. The - what - we're just trying to be cautious here. We do see a need for that type of sale in the Canadian market, there is demand as I said in my comments, I think, or I mentioned that earlier. There are a number of LPs that are looking for product as well.

The trim that we sold was to couple of the major extraction companies in Canada looking for input products of a high quality, and there are other LPs that are looking for product as well.

But I don't, because the system is in an ongoing relationship right now, I'm not going to count on those revenues until we have the signature on a contract and in fact, until we see the cash in the bank. So, we're being a little cautious I think in looking forward here.

The current market dynamics do lead you to believe that there will be more opportunities, but we don't want you to try to build that into our forecast until we start to see how sustainable and kind of regular that business is.

We do have the teams internally that are working on this, but now are looking at other opportunities to take advantage of our capacity for production and extraction, and bottling and all the manufacturing aspects.

There is potential to create more business for those in the industry that aren't necessarily interested in producing or in fact can't produce the quality and the levels that they like. So I expect more business to come out of that segment.

It is just right now early and a little less predictable than I would like to before we put a stake in the sand on that..

Great, thanks for the color. That's it from me..

Next question comes from Graeme Kreindler with Eight Capital..

Hi, Good morning..

Hi, Graeme..

Hi good morning. Just wanted to get a quick follow up here with respect to the comments on the U.S. market, particularly on the CBD side of things. There's been some commentary about the FDA giving some more clarity on regulations really being a catalyst to unlock a lot of value in that market and make the operating environment really derisk that.

So my question is, is the entrance into that market in terms of an opportunity that will have a big commercial impact, is that something where you are going to be awaiting more clarity from the FDA, or you could potentially be advancing ahead of that on a state by state basis? Thank you..

Terry?.

I expect we will advance ahead of that..

Are there any particular states that you'd highlight or you think are making strides faster than others that could allow that environment to take place?.

Yes, I've got to be very careful, and I know tremendously when I name the states and the companies that we're looking at, so I'll leave them alone. But it's obviously the states where this is allowed had a high scale..

Next question comes from Andrew Carter with Stifel..

Hi, good morning, thanks for the question. So I just wanted to quickly ask, I guess I wanted to ask about your Canadian medical business it's – you are a leader in Canada right now and it's pretty significant portion of your revenue, the sales did flatten out this quarter.

So I guess, what I wanted to understand, is your outlook for that business kind of given your visibility in your patient base, how sustainable is that number right now? And what are the opportunities for a truly differentiated Canadian medical offering as you see it?.

I'll take the first crack at that. Yes, so we actually saw double-digit growth. So we had over 10% growth in that market and then subsequent to the quarter, we reached almost 90,000 registered patients, which is, makes us by far the leader in Canadian medical.

We are obviously seeing continued demand, differentiated from the consumer system for medical cannabis and there are a couple of good reasons for that. Currently in Canada medical patients can write off the cost of medical cannabis as a prescription product on their federal taxes and we're also seeing an increase in insurance coverage.

So, more and more people in the country who have prescriptions for medical cannabis are able to gain insurance reimbursement for it. So there are some good reasons to do that. And let me add to that, we always emphasized to patients that if you are using medical cannabis, it should be under the care of a physician.

If you are using medical cannabis to manage the symptoms of a healthcare condition it should be under the guidance and the supervision of a physician, just like any other prescription product. So we do anticipate that that medical market will continue and certainly we are seeing patients come over to us from some of the other licensed producers.

So we expect that that will remain a healthy portion of the business for us and frankly one of our defining features..

Sure. And then separately, on that topic, going kind of globally, a nice growth in exports this quarter, but still only just about I guess $4 million or just over CAD4 million of your total sales.

Do you have an outlook for where the pace of commercial opportunities will evolve for you to where that's a more significant portion of your business developing a real critical mask? And then separately, kind of an outlook for when some of your lower cost cultivation is going to be available to you, so you can be more or - even more cost competitive versus shipping from Canada?.

Yes, sure. So the first thing that I want to remind you of is that what we're talking about right now is the June quarter. So we're kind of looking back in time.

And so I want you to think about the fact that as we we've mentioned before, our production ramped up kind of back-end loaded in that quarter, right in June, probably in the last six weeks of the quarter. And so that's when we had a massive increase in production and that allowed us to ship additional product over to Europe.

Can I tell you, obviously what we want to do, we want to ship more product to Europe. And why not? We get a premium price, not just for our flower, but for our derivative products and we now have the ability to continue to do so.

And in addition, we also, as mentioned earlier, we have two additional facilities in Canada, one in Ontario, one in Quebec that we anticipate achieving EU GMP certification. And once again, that will make it easier for us to ship more product to Europe.

Remind me, what was the second part of your question?.

I think he is….

Oh I think the operator cut him off.

Does anybody remember the second part of the question?.

No, we'll get back to him on that..

Yes..

And our last question comes from John Chu with Desjardins Capital..

Hey John, hi..

Hi, good morning. Just a couple of quick questions. So just on the path to positive EBITDA, so obviously you have 2.0 coming online, that will be a higher margin business, but I have to assume that in the early days it is going to be a drag on margins.

And so if it goes according to how you think it's going to go in terms of the rollout, how quickly do you think that business 2.0 can become positive EBITDA? And then tied into that, you're doing, you're increasing your extraction capacity. So I'm just curious how much of a boost can that be to the path towards positive EBITDA? Thanks..

Glen?.

So Cam, I'll start with that. John, good morning. I guess a dispute your proposition that this would be a drag right out of the gate. We're manufacturing commercial scale all of our products right now. We will - our pricing is set and we believe it's sustainable pricing at levels that are, will produce margins that are higher than our current products.

And I see no reason why that would be a drag on earnings. Of course, it is going to be highly dependent on how much the provinces load in and at what point in time they loaded in. So in terms of timing, we'll wait and see on that.

But we don't, we don't expect, we've made the investments necessary and we have the operating and manufacturing facilities already efficient and relatively optimized, so that we are delivering an efficient - efficiently produced products. So, no, I don't see that as a particular issue for us.

In terms of extraction, we have been ramping up our internal extraction capacity and we're now at a point where we can extract every bit of material that we need. So, that's when we look forward, it's not necessarily up. What we've done is removed the constraint that we had previously, but it doesn't necessarily inflect our future revenues.

It's just part of the puzzle of producing these new - this new generation product. So that's just part of the manufacturing process that exist for us, and isn’t a constraint anymore. So I am - I understand your question, but I think it's just part of the version or the Generation 2.0 products that are coming out and we're well prepared for those..

And at this time we have no further questions. I will turn the call over to the presenters..

All right. Well, listen, thank you for everybody who joined this call. Once again, we are very proud of the quarter that we delivered and I also want to emphasize, one more thing. In addition to the positives that we've achieved, it is also fairly significant what didn't happen at Aurora.

And then speaking about some of the tumultuous developments that have occurred in the sector, so at Aurora, we've had no crisis, no scandals, no regulatory problems, no changes in senior management, no production problems, and no crop loss.

We're going to continue executing with that same discipline that we've demonstrated throughout calendar 2019 and we're going to carry that over into our 2020 fiscal year. Thanks again to everybody..

Just a final note for everybody. I'm very, very proud of the team at Aurora.

We've crossed over 3,000 employees now across the globe, and all of those positives that Cam mentioned is attributable to key teams and key members becoming the partner of choice and the employer of choice is a very powerful position to be in and I thank all the team for an excellent quarter..

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