Aurora Cannabis Inc.

Good morning, everyone, and welcome to the Aurora Cannabis Second Quarter Fiscal 2020 Conference Call for the three months ending in December 31, 2019. 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 CDAR and EDGAR databases. I'd like to remind everyone that this call is being recorded today, Thursday, February 13, 2020. I would now like to introduce Mr. Michael Singer, Interim Chief Executive Officer and Executive Chairman of Aurora Cannabis. Please go ahead, Mr. Singer.

Good morning, everyone, and thank you for joining today's call. With me today is Glenn Ibbitt, our Chief Financial Officer. Given that we just addressed the market last week with a very fulsome call on our succession plans, board expansion, business rationalization, and pre-release of certain Q2 financial information, I think this call will be a bit shorter than normal. I'll do a quick review of the quarter, including operational highlights. Then Glenn will discuss our financial results in greater detail, followed by a question and answer session. To start things off, I'd like to address the current state of the market, which I briefly summarized on last week's call. First, the past year has been challenging for the broader cannabis industry. With issues of retail constraints, evolving consumer demand, and provincial distributor inventory management adjustments. As we said in our first quarter conference call, it's important to remind ourselves that the Canadian consumer market is just over a year old and will take time to develop. But we remain extremely bullish on the long-term potential of the Canadian medical and consumer markets, as well as established international medical markets. We firmly believe cannabis is a secular growth story But as is the case with all growth industries, we need to be patient as the markets evolve. With that as a backdrop and consistent with what we told you last week, our total net revenue, excluding provisions, totaled $67 million for Q2. We did not record some product return and price reduction provisions that Glenn will address shortly. It's worth highlighting that our core consumer revenue actually saw modest growth quarter over quarter before the impact of these returns and price reductions. We are proud of our strong cultivation capability, highlighted by over 30,000 kilograms of production in fiscal Q2. Our Q2 2020 gross margins on cannabis net revenue of 44% were impacted by the provision for returns and price reductions we took in the quarter. I'm also proud to report that our high-tech cultivation facilities continue to deliver leading indoor cash costs to produce below $1 a gram and in this quarter came in at $0.88 per gram on the heels of $0.85 per gram in Q1. While we continue to leverage our coast-to-coast supply agreements to offer a broad range of premium consumer products across Canada, Aurora also remains focused on supplying medical patients with consistent premium products. In Q2 2020, the number of total active registered patients of 90,307 was relatively steady compared to Q1, which in the face of market challenges, demonstrates the value of Aurora's products and patient loyalty to the Aurora family of brands. We are a few weeks into the second wave of legalization of cannabis 2.0 products, and I'm very proud of the Aurora team, particularly their focus and energy around the 2.0 launch at the end of 2019. We began loading in small volumes in Q2 2020 with positive market feedback from distributors and retail customers about our product quality. Those products include bates, concentrates, gummies, chocolates, mints, and cookies, and they are available in markets across the country. We have selectively partnered with a variety of organizations, prioritized our resources, and built the inventory to ensure that our consumers across Canada will have access to our high-quality derivative products. Our assumption is that the 2.0 market will also develop slowly. with previously discussed market constraints affecting the rollout. But the good news is we're managing the business accordingly and feel very confident about our prospects. I'd now like to turn the call over to Glenn, who will discuss the financial highlights of the second quarter, and then we'll open up the line to questions. Glenn?

Thanks, Michael, and good morning, everyone. The figures I'll be going over today can be found in our financial statements and MD&A and are all in Canadian dollars. For our second quarter of fiscal 2020, the period from October 1st to December 31st, 2019, we saw our net revenue excluding provisions of $10.6 million coming in at $67 million. Our total cannabis net revenue excluding provisions came in at $63 million for the quarter. A bit more specifically, our medical cannabis revenues in Canada remain steady quarter over quarter at $26 million. Our Canadian consumer cannabis delivered $33.5 million and our international medical dropped to $1.8 million. To get into a bit more detail, as I just noted, during Q2 2020, our Canadian medical cannabis net revenue came in at $26 million. Our patient base continues to exceed 90,000 clients. which although being relatively flat quarter over quarter is indicative of our strong medical position and that market also faces headwinds mainly from cannibalization into the consumer market. We continue to work at maintaining and growing our leading position and are making certain internal operational changes that are designed to maximize the lifetime value of our key patients. International medical sales declined from $5 million in Q1 to $1.8 million in Q2 as a temporary sales restriction due to a permitting issue impacted our sales in Europe. As we announced early last week, that issue has now been resolved. I'm pleased to note that our products are once again available for sale as we fill back orders and return to growing European medical from the previous run rate. Similar to the Canadian market, we expect our European business, particularly our German business, to grow sequentially, but in the short term, slower than originally anticipated. A recent EU GMT certification of our Aurora River facility, with a run rate of approximately 30,000 kilograms annually, will allow us to allocate significantly more product to our export markets as they develop. Consumer cannabis net revenue, excluding provisions, was $33.5 million, up 11% from the prior quarter. In Q2, we recorded a provision of $10.6 million against revenue, which captured the impact of returns from provinces and price reductions that we'd agreed to. This included our assessment across the provincial ordering system for products still deemed at risk. The significant majority of this provision was related to products sold much earlier in calendar 2019. In Q2, we saw a pickup in ordering of 1.0 products late in the quarter and also had a good launch into the 2.0 system with approximately $3 million in deliveries to provinces in late December. However, during the quarter, we did see a drop off in our market share in flour, as the market shifted significantly towards value brands, which we define as retailing for less than $9 per gram. Last week, we launched our competitive brand in this category, Daily Special, at a price point and an average potency that we think is a very compelling proposition for the consumer. In fact, we believe it will compete strongly with the grey market and help grow the overall size of the legal segment. We'll clearly be monitoring our performance here closely. During Q2 2020, the company generated $2.4 million in wholesale bulk revenue as compared to $10.3 million in the prior quarter. As we've said before, we are opportunistic with wholesale and do not attempt to predict quarter-to-quarter revenue levels. Our average Q2 net selling price for cannabis of $5.54 per gram represented a slight decrease from the $5.68 reported in the prior quarters. This decrease is primarily attributable to the previously mentioned returns and lower program selling prices for wholesale cannabis. We produced over 30,000 kilograms of cannabis in Q2 as compared to 41,000 kilograms in the prior quarter. In Q2, we took decisions at the cultivation level to prioritize planting of higher potency but slightly lower yield than cultivars at our major facilities. We also took the opportunity to conduct some R&D with potential new High THC Cultivators. In Q3 and Q4 2020, we expect our continued refinement of yields and operational efficiencies to deliver production at a quarterly rate that averages 150,000 kilograms annually. Our cash cost to produce per gram of dried cannabis increased slightly to $0.88 per gram, up $0.03 from the prior quarter. We are pleased that we continue to deliver on a very important KPI for our operations, sub $1 cost to produce. This is the leverage that allows us to launch such a powerful new entry into the value market while maintaining strong, healthy, and sustainable margins. Shifting now to SG&A. For Q2 2020, we reported just shy of $100 million for SG&A versus $81 million the last quarter. The increase is primarily due to an increase in salaries and benefits from targeted corporate headcount additions and annual merit increases. An investment in consumer education for the 2.0 product rollout and campaign expenses related to the launch of the Aurora Drift brand. I want to stress that we recognize the importance of reducing our cost structure, and as reported last week, we have taken decisive action to make change immediately. Consequently, as we discussed last week, we expect to manage our business to an SG&A target range of $40 to $45 million per quarter. which we plan to achieve as we exit fiscal Q4 of 2020. Clearly, this represents a substantial decrease from today's reported number. To achieve this, we are focusing on our core operations in the Canadian consumer market, the Canadian and established international markets, and certain US initiatives. An important part of this initiative is to reduce the complexity of our business and to instill a culture of financial discipline across all of our operations. As such, we believe there may be further opportunity to find additional medium-term cost efficiencies. Turning to our balance sheet, I'd like to highlight once again the amendments to our credit facilities that were announced last week. These amendments include the complete removal of all EBITDA ratio covenants that had originally been set to commence in the period ending September 30th, 2020. The complete removal of the fixed charge coverage ratio covenant. Adjustment of the total funded debt to equity covenant of 0.2 to 1, commencing in our fiscal third quarter 2020, from the 0.25 to 1 that had been in place until now. Introduction of a new minimum liquidity covenant of $35 million. and the introduction of a covenant requiring Aurora to achieve positive EBITDA thresholds beginning of fiscal Q1 2021 that we believe are consistent with our announced changes. These thresholds are mid-single digits for the first couple of quarters of fiscal 2021, increasing in the back half of the year to a total of $51 million cumulative for the entire fiscal year. We also used $45 million in restricted cash to pay down our debt and thereby reduce debt service and costs. And finally, we downsized the total facility by $96.5 million through the elimination of Facility D, which had been earmarked specifically for the construction of Aurora Sun. When we reduced the scope of Aurora Sun significantly, Facility D was no longer available nor necessary. I should emphasize that we saw both actions as net positives for the company's financial position. Staying with the balance sheet, you'll note that we finalized the goodwill and intangible and PP&E asset impairments in our Q2 financial statements, totaling $762 million for goodwill and $210 million for intangible and PP&E asset impairments, both within our previously disclosed ranges. Turning to liquidity, as of December 31, 2019, our consolidated cash position was $156 million, excluding the $45 million of restricted cash. We had used our at-the-market financing program and had raised gross proceeds of $325 million in the period from July to December 2019. We have roughly $200 million remaining under the existing ATM program. Our announced reduction in CapEx and SG&A Costs should provide comfort to our investors that we are laser focused on the health of our income statement and balance sheet. We expect the utilization of the remaining ATM capacity should be sufficient to fund operations and remaining capital expenditures to the points where positive EBITDA and pre-tax flow are achieved. Driving Aurora to be a profitable and robust global cannabis company is extremely important to our team as our call last week demonstrated. Our goal is to manage the business with a high degree of fiscal discipline, and we look forward to sharing further developments and progress with you in the coming quarters. I'll now turn the call back to Michael.