Good morning, and welcome to Canopy Growth's First Quarter and Fiscal Year 2020 Financial Results Conference. Canopy Growth issued a news release announcing its financial results for the first quarter and fiscal 2020 ended June 30, 2019. This news release is available on Canopy Growth's website and has been filed on SEDAR. On this call this morning, we have Mark Zekulin, Canopy Growth's Chief Executive Officer; and Mike Lee, Canopy Growth's Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Certain matters discussed in today's conference call or answers that may be given to questions could constitute Forward-Looking Statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the Company's annual information form and other public filings made available on SEDAR. During this conference call, Canopy Growth will refer to supplemental non-GAAP measure, adjusted EBITDA. These measures do not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is defined in the press release issued yesterday as well as in this period's management's discussion and analysis document that will be filed on SEDAR. Please note that all financial information is provided in Canadian dollars unless otherwise specified. Following prepared remarks by Mr. Zekulin and Mr. Lee, the Company will conduct a question-and-answer session during which questions will be taken from analysts. I would now like to turn our meeting over to Mr. Zekulin. Sir, please go ahead.

Thank you, Carol, and good morning, everyone. So as usual, I'd like to begin the call with a brief summary of our objectives as a Company, and then speak to our execution as it relates to those objectives. I will also discuss how that execution translates into our financial performance and highlight our broad expectations heading into the future. I will warn now that you can expect a little bit more detail than we have historically given, for better or worse. After I speak, our CFO, Mike Lee, will provide a more detailed overview of the financial performance of our business. And finally, as mentioned, we look forward to taking any questions you may have. On that note, I will add that Rade Kovacevic, Canopy’s President, is also here and will be available to participate in the Q&A session. So what has Canopy been doing? Our first objective is to focus on laying the foundation for dominance in an emerging global opportunity. To us, this means developing intellectual property, building brands, establishing international reach, and ensuring scaled production capability for current and future products. It also means having a formula and level of credibility to ensure smooth and efficient expansion into new product forms, markets, and channels. Our second objective is evolving from builders to operators over the remainder of this Fiscal year, meaning that as our expansion program comes to a close in Canada and as new value-add products come to market in Canada, we demonstrate a sustainable, high-margin, profitable Canadian business. The ambition of our first goal impacts the speed at which we achieve our second goal. However, both objectives are equally important. With that said, I will use the remainder of my time to go over each of these in detail. Firstly, developing Intellectual Property. During Q1, Canopy filed 56 patent applications across its various R&D areas, including several related to pre-roll joint production, cannabinoid isomerization, vape oil, and vape devices. Together with patent assets acquired from C3, This Works, and KeyLeaf, Canopy’s patent portfolio has increased to 110 patents and 270 patent applications. So why is this important to us? Consider growing in a greenhouse to sell dried flower... Growing protected, specialized genetics bred for specialized purposes, driven through efficient patented extraction technology and put into IP-protected delivery formats like beverages or vape products is even better. Or consider market development. Selling medical cannabis in Canada through what is essentially a special access regime is great. The model works, and a strong brand and team like Spectrum Therapeutics can differentiate itself and make money. However, selling a registered, differentiated, clinically proven medicine, produced to GMP standards and covered by insurance programs changes the money-making equation exponentially. These things take time, money, and unique expertise that only a few companies, like Canopy, possess. But each person on this call has seen the speed at which this market evolves. Canopy will bring this future forward, faster and better than anyone else through its investments in research, intellectual property, and clinical programs. Secondly, regarding Brands and New Product Formats. The program with the greatest potential to drive the overall size of the Canadian recreational cannabis market is our multi-year effort to develop unique, high-margin cannabis consumer products. To date, we have not revealed significant information about these products for competitive reasons, but today we will begin revealing some information, albeit at a high level. On vapes, our market research identified many design and functional limitations of current devices, from battery life and device safety to how devices do not remain in place when placed on a flat surface. We believe that most of the products brought to market would be licensed versions of products that the market was already familiar with, with limited differentiation. However, we have deliberately taken a different path. Over two years ago, we started developing our strategy for vapes and how we wanted to enter this competitive market. As the world’s largest cannabis company, we have the resources to develop better vape products that will offer the market something truly differentiated. We have the added benefit of being an end-to-end vertically integrated company, and nobody will be able to replicate this integration like we have as we develop supporting proprietary technology. Our technology team has found new ways to address many of the device design and functionality limitations identified in our market research. Not only do our devices address these limitations, they add functionality that elevates the user experience and brings the industry into a new world of technological innovation. In an effort to protect these innovations, we have filed numerous patent applications covering unique features, functionality, and device design. In December 2019, we will launch over 15 new SKUs related to our new vape technologies. As we get closer to unveiling the new products, we will provide full details surrounding the device options, cartridge formats, strain availability, and flavor profiles. Regarding beverages, we have talked more openly about our belief in cannabis beverages becoming a new consumer product category. We believe that high-quality cannabis beverages that offer sophisticated taste, better bioavailability, and dose control, along with low or zero-calories options will appeal to not only current cannabis consumers but will also expand the cannabis consumer category to include more of the population. In Q3, we will provide more details about the multiple beverage products that we will bring to market later this year. Benefiting from significant collaboration with Constellation Brands, we are excited about the market segmentation, brands, packaging, taste profiles, strengths, and formats of the cannabis-beverage products that we will be introducing. Additionally, you can expect a great line of cannabis-infused chocolate products. Our existing brands will leverage these new formats as line extensions, building on the brand equity and customer affinity that we have already created. We've also created format-specific brands with unique value propositions, clearly focused on their respective formats and consumer preferences. Moving on now to our International Reach, starting with the closest opportunity, the United States. The focus we've had for some time in Canada is now matched by our focus on the CBD and future THC markets in the United States. We now have over 70 staff in place in the U.S., including most of our senior leadership, and our Canadian headquarters team has devoted more time and resources toward this next opportunity. On the THC side, we are very pleased that Canopy was able to close the unprecedented and historic arrangement with Acreage Holdings that will see Canopy acquire all of the shares of Acreage when the production and sale of cannabis becomes federally permissible in the United States. With the arrangement now closed, Acreage is moving forward with plans to leverage our Intellectual Property. As Acreage communicated on their conference call yesterday, they plan on opening Tweed and Tokyo Smoke branded dispensaries going forward. To that end, we expect to open several Tweed dispensaries this Fiscal year. Similarly, regarding medical cannabis products, Acreage anticipates undertaking a national rollout of Spectrum Therapeutics branded products in 2020. On the adult-use side, while continuing with their current brands, Acreage will add Tweed-branded products as a mainstream product line, rolling out in calendar 2020. With the brands will also come the know-how in Canopy to produce these products at scale. While Acreage does its part, Canopy is focused squarely on CBD. Since January this year, our team has been very active developing a range of high-quality CBD products and brands and securing the production resources necessary to bring these to market by the end of this fiscal year. Our accomplishments in these efforts are numerous. We have developed a broad set of CBD products that includes skincare and cosmetics, topical creams, vape products, beverages, edibles, oils, and softgel caps. Our team is developing, in the context of the current regulatory environment, targeted product marketing, advertising, and branding programs for these products, and we are on track to reveal our CBD products this fiscal year. Investors will recall that in Q1, we announced the acquisition of skincare and sleep solution company, This Works. Today, we are leveraging our investment in This Works to prepare one of our new CBD product lines, a range of CBD-infused skincare and sleep solutions. Our team has been working since this past January to identify and contract a robust, scalable, and outsourced supply chain to get CBD products into the market by the end of this fiscal year. Working with American farmers, we have thousands of acres of hemp planted in the United States. In addition, our team has already procured hemp biomass and processing capabilities for the production of CBD for our product launch. Our supply chain will be augmented, starting next fiscal year, by corporate assets including extraction and production resources at our facility in Kirkwood, New York, as well as additional manufacturing facilities for producing vape and beverage products in select locations in the United States. We have already begun work on these facilities, though all locations have not yet been announced. To establish a new CBD business in the United States, we have made significant pre-revenue investments in building a strong team. Our team includes cultivation management, logistics, manufacturing, processing, sales, marketing and, of course, back office support in finance, IT, and Human Resources. Over the past two quarters, we have established offices in California and Colorado and will soon be setting up offices in Illinois and New York. We are currently engaged in high-level discussions with key retailers in the United States and are being constructively involved with them as we collaboratively navigate the regulatory process. These investments in the U.S. CBD market are significant, pre-date any associated revenue, and increase our costs both in the U.S. and other head office, negatively impacting our short-term performance, but we believe are appropriate investments in the future. Next, I would like to briefly speak about select accomplishments in our international business. First, in Europe, you will recall that we purchased C3 late in the first quarter of this fiscal year. Our Spectrum Therapeutics team is working towards full marketing and sales integration with C3 by the end of the calendar year. Our C3 sales team of 30 experienced medical sales professionals will, by the end of this fiscal year, be fully integrated into the existing Spectrum Therapeutics business, representing the largest cannabinoid medicines company in Germany with the highest healthcare provider reach in the medical cannabinoid industry. Our team has made significant infrastructure improvements that by the end of this month will allow for increased flow of product into European markets including into Germany, Poland, the Czech Republic, and the United Kingdom. This includes significant increases in pre-pack and fulfillment capacity to ensure rapid product flow into the pharmacy channel. On the supply side for Europe, our state-of-the-art 300,000 square foot greenhouse facility in Odense, Denmark is licensed and continues to be on track to provide European supply this calendar year pending final regulatory approval of the harvested products. This facility, certified in both Good Agricultural and Collection Practices as well as GMP designations, is currently completing pilot harvests. Commercial scale cultivation has begun, with initial harvests beginning early this fall. Our teams operating in Latin America, Asia-Pacific, Europe, and Africa have all shifted from market building to an emphasis on commercial sales. To that end, we have exported almost 1,000 kilograms or kilogram equivalents of dried flower, oil, and softgel products from Canada since April 1st. To reiterate, the ramp-up of sales teams and operations across all of these continents remains just at the inflection point between pre-revenue ramp-up and commercial sales, with these investments and costs reflected in our financial numbers. Fourth and lastly, I will speak to scaled production capacity, which naturally leads into an overview of our performance in the first quarter of this fiscal year. At the outset, there are a number of things we are proud of that are worth noting, including the growth of our flower, oil, and softgel sales in the medical market, strong growth in dry flower sales in the Canadian recreational market, the sale of over 1.3 million pre-rolled joints, proving the value of the automated machines that we designed in-house, and a significant increase in the quantity of cannabis harvested during the quarter, with over 70% of that in high THC strains. At the same time, as I mentioned at the start of the call, we recognize that this year is an inflection point between the completion of our ambitious national ramp-up and all the investments that come with that, and the need to move into optimized, efficient, high-margin business performance. To that end, we have been focused on improving the supply of high THC flower products, utilization of assets and operational efficiencies as we ramp up. Our manufacturing throughput, and ensuring the continuity of supply of CBD only products are key focal points. While I will discuss our progress on these items momentarily, it is also worth pausing to mention some of the macro variables at play in Canada that we are watching closely, as I’m sure you are. These big picture events are increasingly relevant to our performance today and through the remainder of the fiscal year. Canopy built an ambitious sales and operations structure to succeed in a thriving Canadian market, and we have to ensure that overall market growth in Canada continues and accelerates. The Company looks forward in particular to the successful launch of new cannabis formats and an acceleration in store openings across the country. Today, both Ontario and Quebec, Canada’s two most populous provinces, have one store for every 595,000 and 495,000 people respectively, versus a saturation rate in California, for example, of one store per 10,000 people. As such, we applaud announcements by both provinces to license further retail locations and signal that we believe the sector is ready for more stores to come. Canopy will continue to examine alignment of its strategy to market dynamics as the Canadian retail landscape unfolds, but remains confident in its Canadian plans today, the long-term potential of the Canadian market, and Canopy’s positioning to succeed as the market develops. Having said that, let me get back to our progress operationally. To increase sales of high-velocity flower products, we have now hit an annual run rate of over 160,000 kilograms per year while continuing to bring additional growing capacity online. We have also brought an additional two automated packaging lines online to increase throughput, with a third coming online later this month. To increase supply and in turn sales of pre-rolled joints, we are now operating five days per week, 24 hours per day. We have three automated lines in place and operating and have moved production from a temporary setting to the recently licensed 175,000 square foot Advanced Manufacturing Building, bringing operational efficiencies. To ensure that we have more than adequate supply of extraction inputs for the next generation of value-add high-margin cannabis products, we have obtained our processing license for our large-scale continuous extraction system in Aldergrove, estimated to be online in Q3 with extraction throughput capable of supporting our BC operations. We have also retrofitted the KeyLeaf Life Sciences facility in Saskatchewan, a company with over 50 years of business experience in the extraction industry. This facility is expected to be online by early Q3 and is conveniently located near our hemp farming and outdoor cannabis operations in the province with the capacity to extract approximately 5,000 kilograms of hemp or cannabis per day. To ensure we have consistent supply of CBD products across both medical and recreational markets, we will be able to leverage the 900 metric tonnes of hemp biomass we harvested from 4,000 acres last fall and extract it at the KeyLeaf Life Sciences facility this fall, with an expected yield of thousands of kilograms of pure CBD. We will also further increase hemp extraction with our planned harvest of an additional 5,000 acres of hemp this fall. We also continue to invest in the development of new intellectual property related to cannabis production, processing technologies, and plant genetics. We are now squarely focused on driving demand for our brands and our current and future value-add products in the Canadian recreational market. This includes extensive training programs with retailers across Canada and ensuring we bring high-demand CBD SKUs to market. It also includes communicating to provinces that our supply can now exceed current demand through the existing limited retail platform, thereby providing confidence to expand the number of retail locations being licensed to create further market demand. Next, I would like to discuss the readiness of our facilities and people to produce the next generation of new, value-add consumer cannabis products. During our last conference call, we identified a number of milestones that we expected to achieve on the path to commissioning our new bottling plant, and we have achieved those milestones. The license application for the beverage manufacturing facility was submitted on time, on June 28th. Processing skids, large 20,000 gallon tanks, and piping equipment began arriving in July, as planned. Bottling line systems destined for our facility have begun completing Factory Acceptance Testing in July, with full installation and turnover to operations expected by late October. Automated systems related to the filling and packaging of our vape products are undergoing testing during August and September, with delivery to site and installation beginning later this month and are on track to be turned over to operations by October. The necessary vape filling and packaging rooms have also already been licensed by Health Canada. Lastly, a reminder that automated systems related to chocolate manufacturing are already on site and qualified, with the associated rooms having been licensed by Health Canada. With critical equipment on site, equipment qualification well underway, and a capable and experienced operations team in place, we remain confident that we will begin producing high-quality beverages, vape, and edible products in the third quarter of fiscal 2020. In summary, as I hope is clear from this call, our strategy has not changed. We will continue building capacity in Canada, the United States, Europe, and beyond. Our commitment to build out our CBD platform in the United States and to acquire Acreage when a triggering event occurs has not waned. Our commitment to research and the incredible potential of the medical market has not changed. Building organizational scale, investing in product research and development, and bringing value-add consumer products and medical therapies to market remain high priorities, even though these investments have a meaningful impact on our short-term performance. This is how we will create the most shareholder value over the medium and long-term, in an increasingly complex and competitive global sector. However, we are well aware that our business will in the future be increasingly judged by financial metrics including achieving positive earnings in our consolidated corporate P&L. Based on our current view of the growth of our markets including distribution, retail, and the coming expansion of our product offerings, we expect that Canopy’s net revenue will achieve a $1 billion run rate by the end of the fourth quarter of fiscal 2020. Further, Canopy is committed to its Canadian business delivering positive adjusted EBITDA on a quarterly basis within fiscal 2021. Still further, Canopy’s consolidated operations are forecast to deliver positive adjusted EBITDA on a quarterly basis within fiscal 2022. Finally, we are aligned with Constellation Brands in the expectation that our consolidated operations will begin to deliver positive net income in the medium-term, within the next three to five years. And last of all, before Mike continues with a more detailed discussion of our Q1 performance, I would like to provide an update on the Company’s current leadership transition. As you all know, on July 3rd, we announced a leadership change that saw Bruce Linton leave the Company, myself move from my role as President and Co-CEO to sole CEO, and Rade Kovacevic become President. Additionally, we announced that I have made the decision to leave Canopy once a suitable CEO is found, one that can embody all of the vision and ambition that Canopy has, while bringing fresh energy and experience to drive this incredible Company to the next level. I can confirm that the Company has retained recruiter Heidrick & Struggles, and that this search is now well underway with several exceptional candidates already identified. We expect to complete the transition process within the next several months. This concludes my long remarks and I will pass the call over to Mike to review our first quarter fiscal 2020 financial results. Mike, please go ahead.

Great, thanks Mark. Good morning, everyone. I will begin my remarks with a brief review of our top-line performance. During the first quarter of fiscal 2020, we generated net revenue of $90.5 million on net cannabis revenue of $71.7 million. This includes sales of 10,549 kilograms or kilogram equivalents, which is up 13% versus Q4 of fiscal 2019 or up 291% versus Q1 of fiscal 2019. Looking at revenue by channel, gross revenue in the Canadian recreational market totaled $61 million, including $50.4 million in product wholesale to the provinces, and $10.6 million of revenue from our retail stores. Our gross revenue for the recreational channel includes an $8 million provision for returns that I will discuss in more detail shortly. Gross revenue from our global medical channel reached $23.6 million, including $13.1 million of gross revenue from our Canadian medical channel and $10.5 million from our international medical channel. As you may recall, we recently acquired C3, which accounted for $8.8 million of our international medical channel sales. Looking at our medical channel trends, the Canadian medical business rebounded in Q1 with growth of 13%, driven by increased supply that Mark highlighted earlier, with continued improvements to our export process and higher inventory levels available for export. We expect International Medical to grow in coming quarters. We also had other revenues of $18.8 million, which includes revenue from stores and Deco, This Works, along with revenue from our clinics and merchandise sales. Now, regarding volume sales, during the quarter, we sold 9,060 kilograms and kilogram equivalents into the direct channel, which is up 14% versus Q4. Of this 7,673 kilograms was dry cannabis, which is an increase of 94% versus Q4 of fiscal 2019. We also sold 1.3 million pre-rolled joints, which represented 16% or $9.7 million of total recreational cannabis revenue. In the global medical channel, we sold 1,489 kilograms and kilogram equivalents, of which 46% were softgels and oils, up from 70% in the first quarter of fiscal 2019. Now back to the revenue provision I discussed earlier. Being just nine months into this new adult-use market, we, along with our provincial and territorial agency partners, have been working to improve the overall supply chain for the recreational market. We are striving to streamline business processes with a focus on improving fill rates and reducing out-of-stocks, while also improving inventory turnover, especially as the sector grows. In coordination with our agency partners, we build forecasts into our production plans which take various factors into account, including the phase of new store openings. Given we are also operators of physical retail stores ourselves, we understand that the pace of store openings is affected by numerous factors, most notably the time required to complete the retail permitting process and licensing requirements. During our detailed review of wholesale inventories at the end of Q1, we concluded that there was a modest surplus of oils and softgels in certain locations, leading us to conclude that an $8 million provision for returns was necessary. This charge has been reflected in recorded gross revenue for oils and softgels cash in the recreational market. Taking all of this into account, net revenues for the first quarter of fiscal 2020 align closely with Q4 fiscal 2019, and with our latest harvest of over 40,900 kilograms, we expect to return to growth in the next quarter. Now I would like to turn my attention to gross margin. As a reminder, the cost of sales includes the impact of operating costs of cannabis cultivation subsidiaries not fully utilized, including specific zones of our Aldergrove, and Niagara greenhouses, as well as costs associated with developing vape, edible, and beverage products for which markets will be available later this calendar year. Gross margin in the first quarter of fiscal 2020, before IFRS fair value impacts, was $13.2 million, or 15% of net revenue. Comparatively, the gross margin in the first quarter of fiscal 2019 was $11.1 million, or 43% of net revenue. The lower gross margin percentage in the first quarter of fiscal 2020 was primarily attributed to $16.2 million of operating expenses for facilities that were not yet cultivating or processing cannabis, producing cannabis-related products, or facilities that were underutilized. In my remarks during our prior call, I highlighted the startup costs related to our advanced manufacturing building and new bottling plant, which would continue to serve as a modest headwind in coming months. In the first quarter, we incurred approximately $1 million in expenses related to the commissioning of our advanced manufacturing building. Excluding these costs associated with underutilized assets and non-recurring expenses, the gross margin before fair value impacts and cost of sales and other inventory charges was $29.4 million, or 32% of net revenue. With utilization increasing in these facilities, we expect our operating costs to normalize in the next several months as we work through seed to sale, and we expect gross margins to surpass 40% by the end of the fiscal year. Let me briefly speak about operating expenses. Sales and marketing expenses were $45.1 million in the quarter, reflecting increased staffing as we build out our network of Tweed and Tokyo Smoke-branded retail stores in Canada. Increased staffing in our sales and marketing functions also supports our domestic and international markets and investments into driving brand awareness and educating consumers through various marketing, trade marketing, and promotional campaigns. Additionally, we are also making investments ahead of revenue to prepare for the second phase of recreational cannabis, as well as CBD products in the United States, both of which are expected to launch later this year. Research and development expenses grew to $8.5 million in the quarter, reflecting our investments in vape, plant genetics, applied technology, as well as the cannabis-based medical therapy clinical research, and we expect our R&D investments to expand further with our recent acquisition of Beckley Research and the associated clinical trials underway. G&A expenses grew to $62.3 million, as we built out our global team, back-office functions, information technology, human resources, and legal. Investments in acquisition-related activities totaled $13.2 million in the quarter, including investments related to implementing the plan of arrangement with Acreage Holdings and closing acquisitions of C3 and This Works. Share-based compensation was $87.3 million; it was down $5.8 million from Q4 due to reduced expenses on acquisition milestones. Moving beyond operating expenses, let me spend a few minutes on other income and expenses. We noted in the subsequent events section of our fourth quarter fiscal year 2019 press release associated with the approval of certain modifications to the investor rights agreement with Constellation Brands, as well as terms of existing warrants that Canopy Growth would record a material non-cash charge during the first quarter of fiscal 2020. As I highlighted during our previous conference call and as addressed in the management information circular related to the Acreage deal, we and Constellation Brands agreed to a modification to the investor rights agreement. The new investor rights agreement has two modifications related to the exercise price of their warrants and the expiration date of their warrants, both of which are subject to fair value adjustments. The fair value adjustments, accounted for in our consolidated financial statements and recorded through the consolidated statement of operations, resulted in a non-cash charge of $1.2 billion. Going forward, the revised Tranche A and B warrants will be accounted for as equity instruments and will not result in subsequent re-measurement in the P&L. In addition, the Tranche C warrants will be classified as a derivative liability. The remaining expense in gain items included in that total other expenses, the majority of which are non-cash, are further highlighted in our MD&A for the three months ended June 30, 2019. The Acreage arrangement provides Canopy with the option to acquire 100% of Acreage's shares with a requirement to do so once U.S. cannabis production and sale is federally permissible. In exchange for this option, Canopy made an upfront payment to Acreage shareholders totaling $300 million, which will be recognized as a financial asset on Canopy’s balance sheet. Subsequent changes in the fair value of this option will be recognized through our consolidated statement of operations and will be disclosed in our quarterly report. The fair value accounting of the Acreage option, which may introduce some volatility into our statement of operations. Now, let's briefly review adjusted EBITDA, our supplemental non-IFRS measure for the first quarter of 2020. Adjusted EBITDA is defined as earnings from operations before interest, taxes, depreciation and amortization, and is further adjusted for non-cash items like stock-based compensation and biological assets accounting. We believe adjusted EBITDA is a useful financial metric to help investors understand our operating performance before the impact of investments, acquisitions, income taxes, and non-cash fair value measures. Our adjusted EBITDA for the quarter amounted to a loss of $92 million compared to a loss of $22.5 million in the comparative period last year. From the beginning, our Company has had different aspirations; we have long believed that success in this industry should not be judged by simply selling dry cannabis flower to existing cannabis consumers in Canada. Instead, we believe that the true opportunity will be driven by Canopy becoming a global consumer and medical products company, with an offering that expands beyond traditional consumers, to include those who have yet to try cannabis for the first time. The scope of activities and investments will continue to be greater. We have invested in developing infrastructure to produce what we believe will be a category-defining cannabis beverage. As Mark highlighted earlier, we are investing in a range of new feature- and function-rich vape products. We are establishing a new CBD business and investing in scientific research and clinical trials that we believe will pave the way for cannabis-based medical therapies to enter the market. We are also investing in the development of medical markets around the world. And of course, we have our core operations generating revenue for us today in Canada and Europe. As we continue to mature as an organization, it is important to distinguish the financial performance of our core operations from those ancillary activities; hence we have recently expanded our adjusted EBITDA reporting to include a breakout of existing unchanged metrics into three subcategories as follows: Adjusted EBITDA related to corporate operations and corporate overhead, which will include our Canadian and European results; adjusted EBITDA related to non-operating or underutilized facilities, which contains the costs we often cite, and adjusted EBITDA related to strategic investments in business development, which includes global research and development and spending beyond Canada and Europe. The breakout of these measures was captured in our press release, and for Q1, our adjusted EBITDA related to core operations and corporate overhead was a loss of $57.8 million; adjusted EBITDA related to non-operating and underutilized facilities was a loss of $16.2 million; and adjusted EBITDA related to strategic investments and business development was a loss of $18 million, totaling the $92 million described earlier. Taking a look at our overall net loss on a reported basis, including all fair value adjustments for biological asset accounting, as well as the non-cash $1.2 billion fair value adjustment related to the extinguishment of warrants will be $1.3 billion or $3.70 per share. I would like to now turn to the balance sheet. At June 30, 2019, we had cash and cash equivalents and marketable securities totaling $3.1 billion, representing a decrease of $1.4 billion from March 31, 2019. The primary use of cash during the quarter was for the C3 and This Works acquisitions totaling approximately $430 million, the premium paid for the Acreage call option, which was $395 million in Canadian dollars, and capital spending for infrastructure, which was $212 million. The remainder was related to ongoing debt servicing and funding for operational losses. Finally, I would like to provide an update on the priorities I covered during our last call. One of my key priorities is to strengthen our financial reporting and controls; this includes everything from mitigating our material weaknesses on end user computing that is covered in our MD&A to reengineering our financial close and reporting processes to better support the business with reporting and analytics while also speeding up our external reporting process in anticipation that we will someday be an accelerated SEC filer. I am happy to report that all of these projects are underway, fully resourced, with project plans in place, and we expect to make tremendous progress in coming months. I also mentioned my desire to revisit our ERP strategy, and that work is also underway. I will provide a more detailed update on our Q2 earnings call. On our Q2 earnings call, I will share more about the outcome of our upcoming Foreign Private Issuer Tests, which will help solidify our plans for conversion to U.S. GAAP at the end of FY20. This concludes my review of Canopy's financials for the first quarter of 2020. We would now like to field questions from analysts on the call.

Our first question this morning comes from Andrew Carter from Stifel. Please go ahead.

Hey, thanks. Good morning. The first thing I wanted to ask is about building brands, which has been a long-term focus for the Company that you have reiterated. You've outlined some compelling products for the next generation. But I wanted to ask where you stand today. You've spent a lot on retail infrastructure, obviously participated in campaigns. However, is there any differentiation for what your brand stands for? Outside of compelling products, there are also quite a bit of marketing restrictions. What is going to change in the second wave of the market?

Yes, excellent question. Thank you. As I mentioned, we do have Rade Kovacevic here, our President. He is a guy who hasn't had a chance to talk, so let him fill this one.

Hi, thank you so much for the question. I think we are really proud that many of the brands we brought to the recreational sector we started building five years ago. We have had a lot of time to explain the propositions to consumers to build up brand opinion so far. Additionally, through the retail strategy we have had, we have had the opportunity in the early days of recreational legalization for consumers to interact directly with the brands and have a hands-on feel for them. We have been able to leverage that in terms of the good, better, and best pricing scheme to ensure each brand has a clear place to live among different consumer segments. The goal will be to take the intellectual property, align it with the brand, and then leverage what we built in the current market as we transition into Cannabis 2.0.

Got it. I have a second question about Cannabis 2.0. Have you been able to share any of your innovation details with some of your retail partners or customers? Can you help us understand how receptive they are to this new category? Specifically regarding the beverages where you have made a lot of investments; is the infrastructure out there going to support that form and perhaps push it above what we see here in the U.S.?

Yes, for sure. A few points on that. We started discussing our innovation segments with the Cannabis Boards about six months ago. We had our innovation team go around to help the boards understand the formats coming with a consumer-first mindset regarding why the demand exists and how these products can be disruptive. In the past one to two months, we submitted actual SKU listings with pricing and held in-person conversations with the Cannabis Boards. Overall, there is excitement about the Cannabis 2.0 products, the ability to convert more cannabis consumers from the black market to the legal one, and enrich the overall size of the cannabis market. Specifically related to new formats, many on the Cannabis Boards who used to be in the Alcohol Boards, are comfortable with the beverage sector so we have worked through logistics and shelf spacing considerations. We had a strong trademark in the educational plan to help consumers understand, and there is a significant difference between our approach and the U.S. We are looking at our beverages as analogous to alcohol in terms of on-site time and duration. In the U.S. market, the focus has been on high dose, high strength, single-use instead of an occasion-based approach to beverages. We anticipate our offerings will be more successful because of this approach.

Thanks, I will pass it on.

Our next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.

Yes, thanks. My first question is could you comment on your revenue performance in the quarter in the recreational channel. We have seen some of your peers increase share while yours has been largely flat. What would you attribute this to? Is it not the right mix of products? Your average selling price was also down when backing out the return provision. I'm just wondering what factors contributed to this?

Yes, thanks, Tamy. I see Canopy had incredible success coming out of the gate in October. Not perfect, of course, but between our ability to get our scale facilities running, our logistics, and our distribution, we really got off to a great start. We've achieved a significant market share. In this sector, there's insufficient data to pinpoint exactly what market share is, but I would confidently say it's between one-fourth to one-third of the market share at Canopy. Given that, while our competitors began ramping up their own supply and taking back some market share, I believe we're still within that one-fourth to one-third market share. At the start, we had a good run, but now we’re facing a few challenges, including some retrofitting and updates we’ve made to ensure long-term output consistency. We expect an increase in market share as we address these issues and capitalize on our recent harvests and upcoming value-added products.

Sure, yes. So Tamy, as for your inquiry about average selling price and pricing, our overall pricing is up about 1% for total Company global sales Q1 versus Q4. In the Canadian medical channel, our average price is up about 8% versus Q4. However, in the recreational average price versus Q4 is down about 13%, entirely driven by the mix between bud and our softgels and oils. In Q4, we had about a 50/50 mix between bud and softgels and oils, whereas in Q1, our mix was heavily weighted toward bud, which has a negative impact on overall average selling price.

Okay, thanks. And just my follow-up on the return provisions you took in the quarter. I appreciate the color you provided earlier. I'm just wondering if the inventory review was spurred by provinces looking to optimize their inventory. If discussions indeed involved provinces, did it include how they are thinking about flower SKUs in their warehouses?

Hi Tamy, Rade here. For us, working with all the provinces on business planning occurs regularly. We’re in constant review of various SKUs, inventory levels at provinces, and rates of sale between SKUs. This is part of our ongoing conversation, rather than something new, ensuring we are proactive and cautious to maintain inventory levels as the market normalizes. I think it's more about balancing the rate of sale versus initial forecasts, rather than a cause for concern moving forward.

Our next question comes from Vivien Azer from Cowen and Company. Please go ahead.

Hi, good morning. Just a housekeeping question on guidance first, and then my real question. Mike, you enumerated the sequential change in pricing for both medical and adult use in Canada; but the real standout is the $6138 from international. Can you elaborate on that figure? It seems like an anomaly.

Yes, it is entirely driven by the C3 acquisition during the quarter. As you know, these are pharma-grade products with significantly higher price points than our existing softgel and oil cannabis business.

Is that a good number to think about going forward?

Yes, certainly. And maybe Rade can elaborate on expansion plans for C3.

We aim to leverage C3 across various international markets. As Mike mentioned, it is a high-quality pharmaceutical product; the lead time to expand is longer than medical cannabis flower. In the short term, you will see our mix lean more toward cannabis flower as various regions launch sales. As export processes through Health Canada improve, you will see growth there, and we will average the price toward that of flower sales in the medium to long-term.

Thank you. My real question pertains to gross margin. The sequential deterioration in your reported gross margin was disappointing. I'm surprised by your commentary on the call. Last quarter, your adjusted gross margin excluding costs associated with underutilized assets was 41%. In this quarter, it fell to 32%. How can you grow your kilograms harvested by over 300% and see your underlying adjusted gross margin deteriorate this much sequentially?

Sure. Going back to the normalized 32% I mentioned on the call, there was about six points of negative sales mix in the quarter, due to more dry cannabis sales and less softgels and oils than the previous quarter. This was a full six-point headwind. In addition to that, we also saw an increase in royalty payments related to houseplants, further impacting margin. So when we normalize for that and look back at a normal softgels and oil mix, the adjusted margin would be closer to the 40% target that we mentioned before. That being said, we are also counting on productivity gains to reach that 40% margin as well.

Thank you very much.

Our next question comes from Chris Carey from Bank of America. Please go ahead.

Hi, good morning. I want to take a step back, given the quarter, which we expected to be underwhelming, but the market's reaction suggests otherwise. I think there are reasons to suggest Canopy is well-positioned for sales and margin improvements ahead. Yet, the market needs confidence on this front, especially around gross margins. I think it is important to lay this out. You alluded to something in the prior question regarding share support in Canada. That required ramping production in facilities not purpose-built for cannabis. You were generating about 2X kilograms sold compared to all competitors; but as you've seen issues, you've closed some down and retrofitted accommodations. I'm wondering if these challenges at the facilities were significant and if the retrofits have driven both harvest and margin decelerations. Are we at the point where those retrofits are coming to an end, leading to long-awaited sales leverage on the margin front? If you have historical perspective on cultivation versus sold product compared to the gross margin, that would be helpful.

Yes, Rade here. When we brought those facilities online, we ramped up nearly three million square feet of production capacity all at once to provide inventory for the start of recreational legalization. We were very happy about that decision. However, there were basic things we needed to improve that we knew were the case in our greenhouses, but we wanted to capitalize on that opportunity for initial inventory and sales during the first quarter of legalization. As we took facilities offline, we planned upgrades we anticipated. What we’ve seen in Q1 is both significant harvest increases and our ability to plan for a high percentage of high THC strains, while executing well with our plans has been incredibly successful.

To further clarify, we finished Q1 with a substantial harvest, with an output of 40,900 kilograms this quarter alone compared to a yield of 47,000 kilograms in all of FY19. We produced a large percentage of last year's total harvest this quarter.

Overall, I would give a threefold response. For example, in order to get our pre-rolled joints to market, we had to repurpose some growing areas, transitioning them into a facility that could produce pre-rolled joints. Now that the infrastructure is complete, that production moves to a newly licensed facility where it is appropriately situated and operational. These are natural progressions we made in the early market and are now fixing.

That is helpful perspective. My follow-up is that the 41,000 kilograms harvested should have you in a position for approximately 90,000 kilograms ready for sale. Given that, I'm trying to understand why there shouldn't be a substantial acceleration in quarter-to-quarter sales from here. Can you comment on your current inventory levels and why that shouldn't drive sales in fiscal Q2?

Yes, Rade here. Importantly, as we assess the market, Mark made reference to points about retail distribution in Canada. The challenges we faced in Ontario and Quebec were always tied to having adequate flower supply for retail expansion. Our Q1 harvest represents the amount we need to assure that we can support more retail openings. In just the first 10 days of August, which included a long weekend, our quality assurance team has successfully released over 3.5 tons of flower products and over 2.1 million pre-rolled joints. It shows our capability to handle supply flows through our manufacturing and quality assurance processes and allow us to respond to market demands quickly. Now, we can provide provincial assurances that flower is available to support retail store expansion. The continuity of our products allows us to firmly establish market presence.

Thanks.

Our next question comes from Graeme Kreindler from Eight Capital. Please go ahead.

Hi, good morning and thanks for taking my question. I just wanted to follow up on the discussion regarding harvest figures and the overall inventory. I understood that the future landscape of retail is not going to look like what it is now, but given the amount you harvested this quarter could sufficiently supply Canada in its current format. Is there any view to potentially hold back a portion of inventory to prepare for extractable products? Also, do you have thoughts about adjusting prices to regain market share?

Yes, for sure. In terms of holding back product, there is no desire to retain product. It is about allocating flower inputs to meet demand across the channels, building appropriate levels of finished goods inventory to instill confidence in our customers and provinces. We're not looking to corner specific channels; we’ll only grow as fast as we can support the existing channels. Regarding pricing, we’ve had notable growth in our TWD value brands across markets. We plan to support our well-positioned flower inventories in a way that fits comfortably within our best and better brands, while also looking to capitalize on value flower opportunities once we ensure continuity with our successful brands in stock.

Thank you. A follow-up related to the $8 million charge against sales: Is this a one-time event or can we expect similar provisions in future quarters?

Yes, it's Mike here. It is normal for consumer packaged goods (CPG) companies to have ongoing revenue provision for estimated returns. I would remind you that the supply agreements with the provinces allow for returns at any point in the future. However, with the established processes, I do not expect this provision to continue affecting our P&L going forward.

Okay, thank you for the clarification.

Our next question comes from Matt Bottomley from Canaccord Genuity. Please go ahead.

Thanks for taking the question. Just going back to the sales mix, particularly on the recreational side, can you provide additional color on why oils and gel caps effectively went to zero this quarter? I believe you were around $30 million or $35 million last quarter. Was that a decision to allocate, or were there production issues getting these products out the door? It didn't seem to be a problem on the medical side. Just more information would be helpful.

Yes, thanks Matt. There were no production flow issues related to oils and softgel products actually; the decline stems from product mix and ensuring we allocate products to demand appropriately. It's essential to note that our oils and softgels remain exceptionally popular and have shown increased share within our Canadian medical base and global exports to medical markets. Yet, the current decisions made simply indicate adjusting product placement based on customer purchasing behavior. Education remains key in ensuring optimal customer engagement across segments.

Great. My follow-up is again about the provision. Have there been communications from wholesalers indicating higher likelihood of returns, or was this solely based on your analysis?

Yes, this is more about doing due diligence through conversations we regularly have. We are in constant conversation about stock and product mix in their facilities. So it’s part of our standard operating procedure to ensure inventories align with current market demands.

Our next question comes from John Zamparo from CIBC. Please go ahead.

Good morning. I want to ask about revenue as well. You mentioned the lack of retail distribution points versus Colorado, which is fair, but we’ve seen much of the rest of the sector advance revenues in Q2 versus Q1 on a calendar basis. I'm trying to reconcile that with your B2B and B2C figures, which are down sequentially. Can you help us understand that, as well as the ordering process from the provinces? I understand there can be some lumpiness there.

Yes, absolutely. I think it is fair to say we began great, and our goal is to maintain that share in a growing market. Now our competitors are ramping supply, and that creates a challenge. However, we remain confident in our ability to grow shares going forward. The market overall is expanding, and we must work harder to increase share while expanding our ability to get our products back on the shelves going forward.

Thanks. Additionally, you mentioned the retrofitting impacting production, but you still hit record levels this quarter. Should we interpret that there is stockpiling for Q4 and an ability to shift product mix? What is the current state of your inventory?

Yes, Rade here. It's important to clarify when referring to past retrofit issues. We retrofitted facilities mainly in mid-Q3 and early Q4 last year to catch up to expected demand. Now that we’re fully operational and seeing great harvests from Q1 which corresponds to latest facilities, we’re well-prepared to meet the demand both domestically and overseas.

While we have hit impressive harvest figures in Q1, our focus remains on facilitating orderly growth in support of demand. This quarter we’ve produced over 40,900 kilograms and have about 90,000 kilograms ready to go. The aim is not just to rush inventory to market but to manage growth across different products and ensure balanced supply across the channels.

Thanks.

Our next question comes from Doug Miehm from RBC Capital Markets. Please go ahead.

I wanted to circle back to pricing, especially with respect to products subject to returns. If I understood correctly, a majority of the returns were gel caps. In the event of continued pressure on the market, especially with gel caps, how do you expect margins to rebound to previous levels, given those price levels may have been too high to drive sales to begin with?

So just to clarify, there hasn’t been an actual return; the provision reflects our assessment of inventory levels vs rate of sale, a precautionary step to account for future probabilities. It’s comparable to comparing current products to those we expect to add as we expand. As for the future, we anticipate stronger performance as Cannabis 2.0 products come online. Significantly, market projections show flower share could considerably decline as you see the tiered product offering from our new product lines. This opens up opportunities for higher-margin products including oils, softgels, and other offerings, and may move the balance even further. We anticipate these factors will lead to improved margin recovery as we evolve our pricing strategy and maintain strong brand presence. Our commitment to creating sustained shareholder value over time continues as we leverage our competitive advantage as a highly integrated operation. So our expansion into new product lines should catalyze further revenue growth for Canopy and build on our market position - while continuing to uphold quality and consumer satisfaction across our portfolio. Thank you everyone for your questions and your interest in Canopy Growth. We look forward to providing updates in the future as we navigate this rapidly changing industry.

This concludes Canopy Growth's first quarter fiscal 2020 financial results conference call. A replay of this conference call will be available until September 15, 2019, and can be accessed following the instructions provided in the Company's press release issued earlier today. Thank you for attending today's call, and enjoy the rest of your day. Goodbye.