Rubicon Organics Inc.

Good morning, everyone. Welcome to Rubicon Organics Q3 2023 Earnings Conference Call. As a reminder, all participants are in listening mode to prevent any background noise. This conference call is being recorded on November 15, 2023. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for research analysts to queue up for questions. Before we begin, I will refer you to slide two of our presentation which contains Rubicon's discussion regarding forward-looking statements and non-GAAP measures. Today's presenters will be Margaret Brody, Interim CEO and CFO, and Janice Riesman, Vice President of Finance. I will now like to turn the conference over to Margaret Brody for the presentation. Ms. Brody, please proceed.

Thank you, Operator, and good morning, everyone. Today, I'll provide an update on Rubicon Organics and the performance in Q3-23. highlighting our progress as a leader in the Canadian cannabis market. Rubicon Organic stands at the forefront of the Canadian cannabis industry, specializing in the creation of premium and super premium branded cannabis products. Our devoted customer base recognizes us as a provider of the highest quality premium cannabis in Canada. Holding organic certification and employing living soil techniques, we bring terpene-rich flavors to discerning consumers, Operating from our 125,000 square foot facility in Delta, British Columbia, we seamlessly merge indoor quality with greenhouse efficiency, implementing craft processes executed by a dedicated team of growers, delivering to 97% of the addressable Canadian population. Recent developments from Rubicon Organics, our super premium Simply Bare flour continues to generate excitement with our recent drops of our new Jokers and Bridesmaids strains, which sold out in two days. This strategy of new rotating strains is proving to capture consumers' attention and helps us in finding those unique cultivars, such as BC Organic White Rainbow, that respond well in market and earn the right to be part of the permanent portfolio. With the continuing growth of the infused pre-roll category, our premium 1964 brand launched two new pre-rolls, the one-by-one gram comatose rosin roll that features a mix of flavorful comatose flower and potent comatose hash rosin. Comatose is the 1964 Supply Co. Hero Strain and was voted Indica of the Year by Time Magazine in December 22. And an infused pre-roll, the Super Lemon Haze Heavy Hitter Rosin Roll, which is a 1x1 gram infused pre-roll featuring Super Lemon Haze Flower and Potent Super Lemon Haze Hash Rosin. Following our initial success of our two live rosin gummies, we have also expanded the 1960 portfolio by launching three additional flavors in live rosin gummies. Tropical Punch, paired with Banana OG Live Rosin. strawberry watermelon paired with strawberry cough live rosin, green apple paired with GG4 live rosin. We also introduced two new products under our Wildflower Wellness brand, Wildflower Extra Strength Topical Release Stick, which is available in a 60-gram size and features our highest concentration of CBD at 900 milligrams per stick. The wildflower 1 to 1 CBD to THC topical release stick that is available in a 30-gram size has a balanced concentration of 105 milligrams THC and 105 milligrams CBD per stick. With both product formulations, they are blended with coconut oil, shea butter, and therapeutic essential oils such as Arnica and Wintergreen. Turning to our financial results, in Q3 2023, we achieved net revenue of $10 million for the three months ended September 30, 2023. a 5% decrease from Q3 2022. But for the nine months ended Q3 2023, we achieved net revenue of 30.1 million, a 23% increase compared to Q3 2022. We delivered adjusted EBITDA of 1.1 million and 3.1 million for the three and nine months ended September 30th, 2023, a decrease of 750,000 and an increase of 2.4 million compared to the comparative periods in 22, marking our sixth consecutive quarter of adjusted EBITDA positive. We also achieved operating cash flow of $1.4 million and $4 million for the three nine months ended September 30th, 23, delivering $6.8 million in operating cash flow over the 12 months ended September 30th. We have grown our cash balance in the 12 months by 37% to $9.4 million. We achieved 2% market share of flour and pre-rolls and 5.6% of the premium flour and pre-rolls category. And we achieved 5.1% of national premium edibles for the three months ended September 30th, 23, following their initial launch only in Q2, 23 this year. Subsequent to Q3, 23, on the commercial front, we are driving forward with exciting, innovative new products offerings. On the previous slide, you will have seen our Layer J. This is the first of its kind launched in Canada, which separates it from the rest of the infused pre-rolls and markets. Released under Simply Bare Organic, hitting shelves in BC and Ontario last month, the Layer J contains two layers, one with flower and hash of one cultivar and one with flower and hash rosin of another cultivar. The first two cultivars are BC Organic Cleopatra and BC Organic White Rainbow. Also under Simply Bare, we launched New School Hash, which is created using a combination of new age technology and traditional methods to offer a hash that is terpene forward and a potent smoke. More recently, we have launched edibles under our wellness brand Wildflower with different combinations of cannabinoids, including CBD, CBN, CBG, and all delivered with live rosin THC. The excitement and growth potential for Wildflower continues. The Wildflower brand continues to be the number one topical in Canada with an incredible market share of 26% in the three months ended September 30th, increasing from 9.9% in the comparative period last year and gaining a further 3.5% market share from Q2 23 to Q3 23. The provident is targeting those consumers seeking the benefits of CBD wellness. Anticipating the continued growth in the CBD category, we will remain responsive to consumer demand as evidenced by the introduction of the extra strength stick and the one-to-one CBD THC stick during the summer. Building on the strong wellness category reputation that Wildflower has for an everyday wellness consumer, we have recently launched our four flavors of wellness edibles. These innovative gummies contain all natural ingredients, are made with real fruit purees with no added sugar or colors, and are vegan and gluten-free. The four delicious flavors are in market and include Sweet Dreams Blood Orange, Sweet Dreams Goji Berry, Sweet Dreams Cherry, and Daily Bliss Lemon Ginger. The Sweet Dreams edibles contain CBN, CBD, and live rosin-derived THC and will satisfy those seeking help with sleep, whereas the Daily Bliss flavor contains CBG and CBD designed for those seeking a more energized and focused experience. Through different offerings, thoughtfully crafted with specific cannabinoids, we are reaching the evolving needs and preferences of our diverse customer base. Rubicon Organics is focusing and ready for more growth, and in order to do this, we set our four key priorities in 2023. Firstly, to optimize yield and cultivation at the Delta facility. Secondly, we seek to maximize the Canadian premium opportunity by leveraging the strength of our leading brands. Thirdly, we want to drive efficiency in processes and systems to ready for growth. And lastly, we aim to build a proud and engaged team who deliver outstanding results. Firstly, our priority is to optimize yield and cultivation at the Delta facility. Rubicon is dedicated to providing the Canadian market with super premium quality cannabis flower products as our primary focus. As a flower first business, we prioritize excellence in this domain and constantly strive to enhance our flower quality. We maintain an unwavering and endless commitment to continuous improvement, acknowledging that we can always push our quality further. We now have installed tables fully across all growing compartments in our facility. With this recent installation, we anticipate continued improvements in plant health and an increase in capacity up to 10% for the late 23 harvests and beyond. More high quality flower in turn provides further opportunities to strengthen and grow our highest margin Simply Bare brand. Constant improvements and refinements within our operations lead to continuous improvements within our flour quality, driven from operational execution, which means consistency and quality in our brands. Secondly, we seek to maximize the Canadian premium opportunity by leveraging the strength of our leading brands. Our goal is to optimize the gross margin program produced by offering customers the right genetics and the right product formats at an appropriate price-to-value ratio. We aim to grow the Simply Bare organic brand and enhance the gross profit from our other brands. Responding to capacity limitations, we strategically make product decisions to maximize contribution margins while meeting consumer and customer, i.e., the province's, insights and demands. Now that we have installed tables in each growing compartment of our Delta greenhouse, we have maximized capacity for dried flower at our current facility. Due to the success and market of our first edibles using our partner, we have expanded our portfolio for 1964 with more flavors and launched edibles under wildflower for the first time. With this asset-light strategy, we expect to generate additional sales and gross profit while building our 1964 and wildflower brands with minimal impact on Delta's capacity. We have received the first delivery of flower from our first contract grow partner. This is a significant moment following a lengthy and pragmatic process that began in 2022. Although early stages in what we expect to be a long-term partnership, we are pleased that our diligence has resulted in receiving flower that meets our exceptionally high-quality standards. and all without using our Delta facility capacity. We continue to evaluate high-quality partnerships for both contract growth and co-manufacturing as an asset-light model in order to complement our own premium production and to satisfy the increasing demand for our brands. Thirdly, we want to drive efficiency in processes and systems to ready for growth. We are underway with our ERP system implementation, though it will drive short-term non-recurring costs in 2023 and 2024, New systems will bring efficiencies going forward, and this is a key step in preparing for growth. Lastly, we aim to create a proud and engaged team who deliver outstanding results. At Rubicon, we place a strong emphasis on team member engagement and pride to ensure the delivery of a premium product while minimizing costs related to team member turnover. In line with our commitment to accountability, we released our third environmental social governance report in October. A few highlights to share with you include completion of the hydro power upgrades, reducing the use of natural gas generators, and decreasing our energy usage by 13% and greenhouse gas emissions by 19%, diverting 56% of waste from landfill through recycling and composting, and we achieved 80% diversity across our employee base. The full report is now available to view on our website. Furthermore, we have also reviewed our company values. listening to our people as part of our process and Rubicon's evolution now that we are in a steadier state. Our refreshed values are quality, excellence, integrity, and freedom. These values will guide us on the next phase of our journey. Our AGM was held September 14th, whereby all proposed directors were successful in their nominations. They bring expertise and experience to our board of brand builders, manufacturers, government relations specialists, strategists, and governance experts. I will maintain my role as interim CEO and CFO until the board appoints a permanent CEO. The current leadership team remains dedicated to executing the strategy and achieving our upcoming milestones. We have been able to continue with our trajectory of positive financial results through our three flagship brands, Simply Bare Organic, our premium flower first product, 1964, our premium flower first cannabis products, and Wildflower, our wellness-focused brand, where we continue to drive consistent, high-quality products that are recognized and winning with consumers. We have strategically diversified our offerings to cover a wide range of formats, sizes, and product categories, with this approach allowing us to be competitive and agile, regardless of the market's direction. And this has proven to be particularly significant in 2023 amidst the prevailing economic downturn in Canada. The overall cannabis market continues to grow in 23, coming off record legal sales, totaling 4.5 billion in 22, with an estimated 40 to 50% of consumers still purchasing in the illicit market. Cannabis use is highest amongst 20 to 24-year-old demographic, with 50% having consumed in the last 12 months, pointing to expected organic category growth to continue over time. Recent data has illustrated the continued strength of the illicit market across Canada, as a poll asked consumers if all of their cannabis was purchased at a legal retailer. No province or territory reported results higher than 56%. Ontario came in at 49%, Quebec 45%, and BC was the lowest, with only 38% of cannabis consumers buying all their cannabis in the legal market. Current trends and data indicate that over the next three years, the premium cannabis market will grow by over $300 million. Our thesis has been the premium market is where the profitability lies. And as this part of the category is growing faster than the overall market, Rubicon and our premium brands are well-placed to benefit from this significant growth. Although we continue to see the impact of price compression and THC inflation in the Canadian cannabis market, we expect this to rebalance post-23 bankruptcies, with excess capacity continue to come offline over the upcoming year. According to data from Health Canada as of March 31, 23, approximately one-third of Canadian cannabis greenhouse capacity has already been taken offline, as the industry readjusts following years of excess production. As per the latest HIFIRE data, the premium market has returned to growing faster than the total market after a deceleration in spring and early summer of 23. We do note that with price compression, that classification of premium is now set at a lower threshold. As the market goes through the house cleaning of 2023, we believe that consumers are learning of Rubicon's product consistency, superior quality, and a more unique full-bodied flavor, which are expected to drive market success of our brands to win in the premium category. Canadians are facing headwinds from higher interest rates and a slowing economy. We're observing signs of a long-expected mild economic downturn with subdued growth. Canada's population continues to increase, but on a per-person basis, Canadian GDP has now been in decline for four straight quarters. While we expect that both price compression, THC inflation, and the economic environment will impact our growth in the short term, we believe much of it is due to financial strain as companies move into insolvency and will rebalance later in 24. We believe that in staying the course with our dedication and focus on operational execution, high-quality production towards our brands, together with new and favorite genetics and product formats, we will deliver the right value equation to our consumers. This landscape of distressed assets sets the stage for us to be opportunistic in future. I shall now pass the call over to Janice, who will share some specifics about our financials.

Thank you, Margaret, and good morning, everyone. Looking at our results for the most recent quarter, the company earned $10.1 million of net revenue, a 5% decrease versus the same quarter prior year. We were hindered by a particularly soft July. before recovering to sales growth for both August and September across our portfolio. In particular, Simply Bare was impacted by continued price pressure in the market and the shift from dry flour to infused pre-rolls. In light of the recessionary environment in Canada, we were no exception to consumer buying patterns of down-trading their purchases starting in the late spring and going into the summer. This has been seen within the cannabis sector and many other sectors as consumers tighten their pockets. Turning to the gross profit line, we achieved gross profit before fair value adjustments of $3.3 million, which is a decrease of 21%, driven by the lower absolute net revenue and adverse product mix in the quarter. Despite the disappointing July, we are pleased that we continue with consistent positive adjusted EBITDA, marking the sixth consecutive quarter we have achieved this milestone. We are proud of another quarter of operating cash flow which totaled $1.4 million for the quarter, which is the fifth consecutive quarter of positive operating cash flow. Looking at the ratio of operating cash flow to net revenue, we achieved 14% for the three months ended, which was a one-point improvement against the comparable period. Looking to our balance sheet, we have grown our cash balance by $1.1 million, or 13%, since our 2022 year-end balance, with the cash generated from operating activities driven by the efficient conversion of revenue to cash. As previously communicated, we expect CapEx spend to be less than $4 million for the year, with $2.1 million spent up to Q3 2023. We remain focused on maintaining our strong balance sheet, which is enviable compared to our competitors. Our long-term debt bears interest at a very compelling rate of 7.5%, compared to Canadian Prime at 7.2%. This will be moving to current at the end of December 2023, and we are in active discussions surrounding a long-term mortgage at similar rates. As we look at the rolling 12-month runway, we again see consistent growth in our overall trajectory. Our super premium brand, Simply Bare, did experience a decline in net revenue growth for the rolling 12 months due to a weaker Q3 2023. With increased quality competition and consumers feeling the pinch, we continuously review our Simply Bare portfolio to ensure we have a competitive product offering in market at the right price. 1964 continues to be the primary driver of the company's top-line growth. Building on the success of the Simply Bare Organic brand, 1964 was launched nationally in summer 2021 and has gone from strength to strength. In April of this year, 1964 was ranked as the number one premium brand in Canada. The success of the brand and reputation it has built can be attributed to the strong performance of legacy strains launched, including Comatose, Gelato 41, and Death Bubba. Leveraging the strength of the 1964 brand and its reputation for quality, Rubicon successfully introduced its inaugural line of edibles in Q2 2023 under the 1964 brand, swiftly securing the position of the third highest premium edible by market share. The introduction of 1964 live rosin edibles epitomizes our strategy of collaborating with top-tier third-party partners to enhance the diversity of our premium brands. The established reputation of Rubicon and our brand serves as a solid foundation for future expansions. Wildflower continues to dominate the topical category, delivering continued net revenue growth. We are pleased to be leveraging the strengths of this brand and continue to expand the portfolio as we have recently done with our first edible launch aimed at the daily wellness consumer. Looking at gross profit, we continue to see gross margin expansion over the rolling 12 months, from 29% in the 12 months to Q3 2022, increasing to 37% in the most recent 12 months, as we optimize our product mix and realize operating leverage on our fixed production costs. We have continued to deliver positive operating cash flow and adjusted EBITDA in Q3. Adjusted EBITDA continues to be an important measure for Rubicon as it strips out the non-cash items in addition to the standard EBITDA calculations, such as share-based payments and the gains and losses from the biological assets accounting standard, which can have significant swings. Of the $4.7 million lost from operations for the 12 months ended September 30, 2023, $4.2 million relates to a loss from the fair value adjustments for biological assets. Focusing on adjusted EBITDA, we continue to trend upwards. However, due to a soft July in 2023, we saw a small dip in the 12 months to September 2023. Results in August and September returned to expected levels and we remain on track for 2023 adjusted EBITDA to exceed the prior year. We deliver an operating cash flow to adjusted EBITDA ratio of 156% for the 12 months ended Q3 2023 up versus 132% in the 12 months ended Q2 2023. Our Q3 results continue to bolster our confidence in our business plans for 2023 and set the foundation for another year of strong results for Rubicon. I would now like to turn the meeting back to Margaret to share more about the Canadian cannabis sector and Rubicon Organics.