Rubicon Organics Inc.

to Rubicon Organics third quarter 2025 earnings call for the three and nine months ended September 30, 2025. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for analysts to queue up for questions. Please refer to slide two for our caution I'm recording forward-looking statements and non-GAAP measures. Today's presenters are Margaret Boding, CEO, and Grant Ibbott, CFO. I will now turn the call over to Margaret.

Thank you, and good morning, everyone. I'm pleased to share our Q3 2025 performance and an update on our strategic plans as Canada's number one premium licensed producer. Glenn will then take you through our financial results. In Q3, we achieved net revenue of $15.6 million, up 16% year-over-year, marking another record quarter. It's important to note that our growth has come despite our capacity constraints, which we are planning to partially address with our capacity from the Cascadia facility in 2026. We delivered adjusted EBITDA of $1.7 million, our sixth consecutive quarter of positive adjusted EBITDA, and delivered net income of $2.8 million. We expanded our VAPE portfolio with the launch into the all-in-one category. Following the close of the quarter, we also finalized licensing for our Cascadia facility, formerly known as HOPE, with first crops planted October 25 and operations now underway. And we sent a drop shipment to Australia under the 1964 brand, our first international branded shipment and our first time shipping to the country. And we secured additional debt of $4 million. Rubicon continues to outperform the market, growing faster than total market and in key premium categories. In premium flower and pre-rolls, we've grown our market share to 6.2% up from 5.7%. In premium baits, we've made a big leap, now holding 13.2% of the national market compared to zero just a year ago. This rapid market share capture reflects the power of and demand for our leading premium brands. And Wildflower remains a standout, the number two topical brand in Canada with over 27% share. Just a quick note on how we're reporting bait performance going forward. High Fire, the industry data source, that pulls the data has changed its categorization and no longer includes our live resin vapes under the live resin category. To keep things consistent and better reflect the underlying performance, we've decided to report under the broader premium vapes category going forward. Our 1964 brand, the engine of our business, led growth driven by pre-rolls and vapes. Simply Bear saw modest growth but remains an important and profitable part of our portfolio, and Wildflower maintains its leadership with Canada's top-selling topical SKU. We continue to launch new products that reflect our genetics leadership and premium positioning. BBC Organic Black Zope and Apples and Bananas launched under Simply Bare in 1964, respectively. Notably, Apples and Bananas delivered our highest ever terpenes on record in company history of over 5.8%, demonstrating our continued increase in focus on quality, which we believe sets our brands apart from the competition. After our initial all-in-one launch in July, we delivered a second cultivar later in Q3 and expect two additional SKUs in market by year-end. This launch strategy reflects a strong consumer demand for our leading premium bait portfolio. Before I hand things over, I want to take a minute to thank Glenn for his impact already made here at Rubicon. His leadership has definitely been felt across the business, and I'd like to congratulate him and welcome him on board with his permanent appointment as our CFO and Corporate Secretary. And now I'd like to pass the call on to Glenn.

Thank you, Margaret. Good morning, everyone. In Q3, we had another solid quarter. Net revenue was $15.6 million, a 16% increase year over year, despite our current biomass capacity constraints. Gross profit before fair value adjustments was $5.8 million, up 32% from the same period last year. And our gross margin was 33%, compared to 32% in Q3 2024. Adjusted EBITDA was $1.7 million, down $200,000 from Q3 of last year, which was expected as we made some targeted investments in SG&A to support future revenue growth. Now to explore in a bit more depth the drivers of our continued growth. 1964 remains the company's primary growth engine, delivering strong performance across the key segments of pre-rolls, vapes, and flour. The pre-roll category continues to show notable momentum, with revenue up more than 80% over the same quarter last year. In 1964, vapes were up more than 20% over the same period. The brand also posted modest gains in dried flour. even though current limited biomass availability has constrained Rubicon from fulfilling what we believe is significant unmet demand for 1964 flour. We expect the Cascadia facility to partially alleviate this constraint in the second half of 2026. Simply there, our leading ultra-premium brand saw a small decline of just over $100,000 compared to Q3 of last year's. Dried flour was down modestly, but was partially offset by gains in capsules. Wildflower, although smaller in revenue than Simply Bear in 1964, carries stronger than average gross margins. I'm pleased that the brand was up strongly in Q3 2025 compared to last year. 60-gram six were up over 30%, remaining Canada's top-selling SKU in the segment, according to High Fire, and Wildflower gummies were up over 80% from the same quarter in 2024. Homestead revenues remained low, which reflects the strong performance from our operations team in delivering high-quality premium product for our 1964 and Simply Bare brands. As you may know, Homestead serves as an outlet for biomass that does not meet the premium standards of our flagship brands, but it still offers strong quality at competitive prices. Overall, gross profit before fair value adjustments was $5.3 million in Q3, and $14.2 million year-to-date, up from $4.4 million and $10.2 million in the prior year comparative periods. This translates to a gross margin of 34% in Q3 and 33% year-to-date, compared to 32% and 30% in comparative periods last year. Margin improvement was mainly driven by higher volume throughput and efficiency gains. We implemented our pre-roll automation technology in Q3, which is expected to reduce labor costs and increase annual gross profits by approximately $1 million based on current volumes. With pre-roll automation complete, we are now evaluating a number of additional operational efficiency projects that we expect should benefit our overall margin profile over time. We've also seen our ongoing focus on increasing cultivation yield, while never compromising on our quality standards. but it's starting to show results. Our Q3 2025 yields were up more than 10% over earlier in the year. Clearly, the P&L and cash flow multiplier effect of attaining additional high-quality cannabis without significant incremental cost has a meaningful positive impact on margins and on our ability to get more growth from existing assets. We believe we have room to continue to improve the yield at Pacifica. SG&A expenses in Q3 2025 increased $1.3 million over the prior year as we invested in targeted marketing initiatives to drive brand growth and brought on key talent to position the business for near-term expansion. We also saw increases in Health Canada fees, licensing, and insurance costs as revenues continued to increase and we brought on the new Cascadia facility. As a reminder, in addition to incurring $4.2 million in excise taxes in Q3, we, as is the case for all licensed producers, also incur the Health Canada regulatory fee, which is calculated at 2.3% of net revenue and naturally rises as our revenue grows. Adjusted EBITDA for Q3 2025 was $1.7 million compared to $2 million in the prior year. Importantly, this marks our sixth consecutive quarter of positive adjusted EBITDA, underscoring the resilience of our core business and our ability to deliver profitability while continuing to invest in long-term growth initiatives. Turning to cash flow and financial health, despite investing in building inventory for base launches this fall, we still generated half a million dollars in cash from operating activities in the third quarter, as compared to $900,000 in Q3 2024. That's six of the last eight quarters delivered positive operating cash flow. We closed the quarter with $6.9 million in cash and a strong working capital position of $24.1 million. As noted in our press release earlier this week, we have secured additional debt financing totaling $4 million from an existing lending partner at similar terms to our current term debt. This strengthens our liquidity and provides us flexibility to support growth initiatives and strategic priorities. In short, we are delivering strong financial performance and growth within our existing footprint as we continue to increase revenue and margins and generate positive adjusted EBITDA and operating cash flow. By leveraging our high-quality, efficient cannabis production, exceptionally strong brands, and excellent talent, we have delivered this financial performance while also investing strategically for the expected revenue inflection next year as we bring on more capacity. We look forward to the hard but rewarding work of continuing to grow revenue and expand margins through scale and efficiencies, all while maintaining a robust financial position. Now back to Margaret.

Thanks, Glenn. We've recently renamed our facilities to better reflect our regional presence. We now operate Pacifica, located in Delta, BC, and next to the Pacific Ocean, and Cascadia, based in Hope, BC, at the beginning of the Cascade Mountains. I'd like to share an update on Cascadia. In early October, we received full licensing for cultivation, processing, and storage at the site. While the licensing process drifted into the beginning of the fourth quarter, we are now moving forward operationally, and the slight delay gave us valuable time to refine our operational plan and ensure the facility was fully prepared. We've now planted our first batch of crops at Cascadia. As these are our initial crops from this site, we're approaching quality expectations with caution given our high standards. We plan to sell this first batch through Homestead, while our expert team continues to optimize the growth strategy. We anticipate reaching our usual high-quality standards by the midpoint in 26, and we expect to be able to deliver quality for our 1964 branded up. We expect to have the impact of the Cascadia operating costs of around $1.5 million per quarter, with revenue upsides beginning in the second half. We are also adding some capabilities in other parts of our business in order to be ready for a larger top line and more throughput. In 2025, we expect to incur $1.5 million in pre-revenue operating costs at the Cascadia facility. Additionally, we plan to invest around $1.6 million in capital expenditures at the site to support infrastructure, equipment, and operational readiness. And the CapEx plan remains on budget. As at November 12th, the significant majority of the work is complete. Cascadia is designed for continuous production with nine individual clusters of grow rooms, each operating on a staggered weekly planting cycle with cluster sizes varying from 1,600 square feet to 3,500 square feet. This approach supports consistent market supply and aligns with our demand planning. We'll be continuously learning and adapting our cultivation strategy to drive quality improvements with each cycle. This expansion increases our annual production capacity by 40%, and it supports several key strategic priorities. Firstly, unlocking international opportunities. With greater scale, we're now better positioned to pursue select international markets, many of which are showing a gap in premium and super-premium products. And secondly, strengthening our top priority, Canada. The additional capacity allows us to better meet domestic demand, particularly for our high-performing capacity-constrained brands. I get asked a lot about our ability to sell incremental premium flour from Cascadia, And I would like to comment on two areas that give us confidence on this matter. Well, recently there is net new production coming online in Canada for the first time in years and from other competitive international markets, namely Thailand and Colombia. But what we see is that this supply is coming into the mainstream and value segments and not premium. And we're not seeing net new premium facilities turning on. We believe that this creates unique and valuable opportunity for us in the coming years. Secondly, in October, a five-week strike by BC's provincial distributor halted sales in our second-largest market. We quickly redirected branded products to other provinces, showcasing the strength of our supply chain and the strong demand for our brands. This disruption confirmed the unmet demand and reinforces my commitment to expanding internal capacity to capture that opportunity. The strike has now ended, with an agreement expected to be ratified very shortly. We have now resumed sales in BC and are continuing to build momentum across Canada. Throughout 2025, we expect to secure up to 2,000 kilos of incremental biomass and strengthen our manufacturing capabilities through strategic partnerships with co-manufacturers and contract growers. These initiatives reflect our commitment to meeting the growing demand for premium products while maintaining the highest quality standards. Looking ahead, the addition of Cascadia will unlock new opportunities to expand our product portfolio. This facility positions us to explore new segments and format sizes, further diversifying our portfolio of premium cannabis products. On the international front, we have successfully completed test shipments to three different markets, Poland, Australia, and the UK. These initial exports were designed as learning experiences rather than margin-driven transactions, forming the foundation of our crawl, walk, win strategy, the same disciplined approach we've taken in the past that were reasoned for our success in categories such as topicals, edibles, and babes. These shipments are enabling us to build operational knowledge, navigate regulatory pathways, and establish relationships that support long-term success in international markets. Finally, our additional $4 million in debt secured in the form of a $3 million capital loan and $1 million line of credit will enable us to support all the growth opportunities as mentioned prior. 2025 remains a transformational year for Rubicon Organics. A recap of our priorities. Secure additional premium supply via Cascadia and third-party agreements, increased capacity through 2,000 kilos of wholesale biomass, strengthened domestic market leadership, drive genetic innovation with new cultivars, test international markets ahead of broader expansion in 2026, and continue expansion in the vape segment. We continue to forecast growth in net revenue and adjusted EBITDA, excluding Cascadia startup costs as we close out the year. We'd now like to open up the line for analyst questions. Operator, please open the line.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchdown phone. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any case. Once again, that is star one should you wish to ask a question. And your first question is from Neil Gilmer from Haywood Securities. Your line is now open.

Thanks very much and good morning. Margaret, maybe I want to start with some of your prepared remarks on the Cascadia facility and make sure I understood a few things there. First of all, you said you're going to invest $1.6 million. I believe you said by as of yesterday, most of that has been incurred. So is Basically, now the focus, you don't have any more sort of CapEx upgrades to do to the facility. It's just building or planting out all the rooms. When do you expect to sort of be running at full capacity? I understand you commented that your standards as far as quality, you said I think around mid-26, but as you ramp that up, when do you think that we're sort of at that sort of full capacity run rate and you'll get that sort of benefit from the 40% increased capacity through this acquisition?

Thanks, Neil, and good morning. We have largely completed the significant 2025 CAPEX. I'm sure as we go through, we're going to find things where we can optimize over the course of the next 18 months. So very happy with where we're at today in terms of where the facility is and running. As operators, we are planting crops in batches so that they come down on a commercial scale and everything doesn't come down at once. So we wouldn't go in and I don't think it would be wise to plant the whole facility at once so everything came down at once. So the first batch is planted. There are sort of a series of clusters of rooms. What we expect to do is I would expect in the first quarter we're fully planted. Initially we thought by the end of the year. I think it's by the way the two sort of the weekly and two weekly cycles go. It's probably in January we're fully planted. And we're expecting our second harvest. to meet our quality standards. So we do expect to have some revenue coming out of Cascadia in the first half. We're making sure that we are holding the quality standard in terms of it going into our product now. I would say from a comment perspective, the pressure I put on the team is the very first batch out of Pacifica launched simply there. So obviously I'd love to beat that, but I'm recognizing we're in a brand new facility that we haven't operated in before. So the midpoint next year when we expect 1964 quality, we do expect to have some that we'll be able to monetize the production between now and then. But whether it goes in homestead or, you know, there are small amounts that do meet our quality standards, it's hard for us to estimate today, given that it's just been planted.

Yeah, totally understand. Maybe I guess sort of the follow-up on that is that now that it's licensed and came online in October here, how should investors be considering or thinking about your gross margin over the next couple of quarters? I'm assuming it's going to have a short-term pressure on the margins, given your add a new facility that's not operating at full capacity. Is that the right way to think about it, that we should see a little bit of a dip in gross margins for the next couple quarters until it's ramped up?

Yeah, and I'll answer the first part of this, and then I'll ask Glenn to step in. What I would say is we expense our production costs as they're incurred, so you're going to see an incremental amount in there, and almost significantly all of the costs from Cascadia go into that line. because it's just a production facility and everything's packaged in Pacifica. Glenn, maybe you want to comment a little bit further on our margin expectations.

Yeah, Neal, it's a great question. We've said in past quarters that we're going to call out the amount of the Cascadia production costs that we're incurring, particularly pre-revenue. So we'll make sure that everybody's aware of what the run rate costs are at Cascadia. I do expect pressure on the margins as reported under IFRS for the first couple of quarters until we get the volume and the commercial production up. And I will say, and we'll talk about this a bit later, I'm sure we'll get a question on where we expect margins to go. But I think in the short term, as Cascadia ramps up and we start to put more of that production into some of the unfulfilled demand, particularly in larger format bags of 1964 flour or pre-rolls, those necessarily come with somewhat slighter gross margins. It's incremental dollars. I love it, but it still will put some pressure on the gross margin percentage. My expectation of the ramp-up period next year is we'll have some some pressure on the margins from exactly these things, the ramp up and the fulfilling larger formats. But we do have a number of initiatives to push back on that and push margins up.

Great. Thanks. Last one for me. Again, from your prepared remarks, Margaret, you commented on the strike in BC. So you commented that you just diverted, you know, your inventory or product into the other provinces too. You know, I'm trying to figure out how to say this. Do you feel you weren't like overly impacted in the quarter from the strike or, you know, you feel like revenues would have been higher had you not had to, you know, take that strategy and deal with the fact that the strike was going on?

Yeah, look, we looked at this commercially, which was we want to be there for our retail partners here in British Columbia as and when they open back up. At the same time, we have a product that is aging. So we did a slow release. We didn't know when the strike was going to end. So we did a very slow release into other markets. What it showed us, and it provided a proof point that there is significant demand, as we've been saying. I believe that we're going to largely make up the gap from BC with the initial orders back in and with the work that's being done and the demand that we had in other parts of the country. So we're very pleased with it. We did want to have product available. Like, if we took all of the stuff that's in highest demand and pushed it to the other markets, we wouldn't have any product for BC, and we wanted to be ready for one and start paying back on. So it was a bit of a balancing act, I would say. I think we rode the line in the right way, and we're very pleased with what's happened in terms of the demand elsewhere. as that proof point.

Okay, great. Thanks. Appreciate you answering my questions. I'll pass the line.

Thank you.

Thank you. Your next question is from Pablo Zranek from Zranek and Associates. Your line is now open.

Thank you, and good morning, everyone. Look, you've been very clear about explaining the decline in flower sales because of lack of capacity. But I'm just trying to understand, you know, how much is it really demand-driven and how much is supply-driven, right? Like, according to HIFIRE, and I understand it's not perfect data, your flower sales, your pre-roll sales in the last two quarters up about 40% year-on-year. On the other hand, your flower sales, you know, down in the low teens in the last two quarters year-on-year. So, but is there some demand element there or some competition in the premium flower segment that's having an impact? Or is it you are locating more biomass to pre-rolls because it's more profitable than premium flower right now? Just trying to distinguish between, you know, is this solely a supply issue or is there some demand issue that we should also factor here? Thank you.

Great question. You know, from our side, we're not seeing a demand issue. I would say we're seeing a shift in, and I've spoken about it publicly, the rise of convenience and the trust that's actually going into products at this stage. Consumers are shifting to pre-roll. We're being asked for pre-roll. And when we have a certain amount of supply, we want to make sure we're where the consumer is and we're the consumers that want our brands. That's probably the largest shift. We've really been wanting to answer that, and we've seen incredible demand for pre-rolls, as you've just noted, a 40% increase. We're also extremely, extremely happy with where our flower is going and the quality that we're getting out of it, and we believe that we're only getting better from here. One of the pieces that people don't understand externally about our business, we try to talk about it, is that we grade everything through a panel before it goes out. The highest ever grading we've ever had out of our panel is, I believe, 82% on 100, which shows that we believe we've got a lot better. And over the last year, the panel grades have gone up from sort of high 60s to low 70s, mid 70s on our products that are going out. What we're seeing even is even higher terpenes, higher yields, higher results overall. So we continue to believe that we're positioned very, very well. The consumer is shifting their patterns quite a bit. And one of the things that the data is also not showing is that the rise of the very large format packs, which is actually shifting the numbers as well. So, you know, consumers are buying less 3.5 grams and moving more to the 28 grams. And when you're supply constrained, you want to sell the higher margin item, which is the 3.5 grams versus the 28 grams. So we're looking for Cascadia to come and answer that question because in particular for the 1964 package, 28-gram bag, we have very high demand, and it will be a balancing act of managing our gross margin to optimize that, but also fulfilling consumer demand.

Thank you. That's a good call. Look, just take – go ahead, sorry. Okay. Just on pre-rolls, I think in the past you've said that you're not competing in the infused segment, right? So, obviously – very impressive growth given that most of the growth has been in infused until recently. Can you remind us why you're not competing in infused and is there a plan to enter that segment? Thank you.

Great question. We actually are in infused, but it's not a core focus of our business. The reason is When we go to market, we want to go with something that is best to market. So what you'll find in market is essentially their infused live rosin product. It's a very heavy-hitting and relatively expensive premium connoisseur product. Where the largest segment of infused is, is relatively low-priced, high, high, high THC botanical terpenes added volume product. We don't see as much demand from the premium side of the market in that. And where we do, we are answering that. But we believe that a premium product is not necessarily – that we don't need to add botanical flavors to our weed to have it be fabulous. And we're very proud of that. So, you know, I think that's a bit of a race to the bottom in terms of consumers walking in and asking for highest THC, lowest price. we're looking for experience. So it's not a category that, yes, we put some energy into it. We have some beautiful products there that speak to the premium experience, but there's a bit of a different consumer that's looking at that.

All right. Thank you. And one last one.

I have to say, Paolo, I am frustrated. I would love to do better there.

Okay. I hear you. I hear you. That's good. Thank you. And one last one. Luke, again, going back to HIFIRE, The pricing for SimplyBear in 1964, at least based on the data, it's looking very similar, right? And I'm just wondering, is that just the nature of the market? Are the brands, you know, losing that differentiation? Is that something that you need to manage better? Is that a concern or not an issue because they're just different brands targeting maybe different segments, and it's not about the price differentiation between the two brands? Thank you.

Great question. We, you know, from our experience, they're not meant to be priced similarly. I think some of that is happening with retailers in store and certainly not happening on our end. What we do find is some people increasing price on some of our products to take more margin because of the rate of sale on them. But, no, we've got the brands quite pulled apart in terms of the wholesale pricing into market and where their sort of MSRP would be. An eighth of Simply Bare should be around $45, and an eighth of 1964 should be around $35. So to us, there's quite a big differentiation. If you're looking at that on a blended ratio, perhaps it's from how retail data is being scraped. I can't really answer why that's happening, other than I have seen that in the odd circumstance anecdotally in store, but that's not where that's positioned.

Right. Okay. Thank you.

Thank you. Great. Thanks, Pablo.

Thank you. And your next question is from Nicholas Cotolucci from Adrian. Your line is now open.

Hey, Margaret. Hey, Glenn. Congrats on the quarter and also congrats on the role, Glenn. So first question here I wanted to ask you guys about if you have any additional commentary on Australia with the test and learn strategy and how that strategy looks going forward.

Great question. You know, as we've said many times before, we're brand builders, not looking to sell hockey bags of weed internationally. And we believe that there is a long way to go with cannabis in the international markets and what's going to happen with brand. So what we've used the last... these shipments internationally to do is to learn about regulation, learn about how to export, learn about partners, meet people, etc., before we look at what a launch would be, which we do expect to have more information on in 2026. The launch into Australia was a really great – it was our first very small drop, and it was a testing – it was a test case. So it is branded with Single Estate, which is a small premium medical operator under 1964 with one of our genetics that we wanted to see consumer reaction to. It's being packaged now, so we haven't actually heard those results, but very keen to see how in a newer market people react. What we are starting to hear more and more is that there's a very big gap, that the international markets have been filled with a lot of bulk lower value and quality weed. And even the leaders of those businesses in the spring, one of them said to me, ah, no, this market's never going to go premium. They're never going to want it. We're never going to understand it. And called me three weeks ago and said, hey, can we buy all your wholesale product? So I think, you know, the recognition that this will also move towards a CPG model with people at different levels wanting different quality supply is getting recognized.

Got it. And then, shifting to the debt proceeds, how do you guys plan to utilize that, and what are the next milestones that we should expect from Cascadia?

Glenn, I'm going to ask you to jump in on that one.

Yeah, thanks, Nicholas, and thanks for the wishes on the CFO appointment. I'm really excited to team up with Rubicon. I mean, you know what a great company this is, but from the inside, the team is incredibly strong, so Wonderful to be here. In terms of debt proceeds, we've got some margin accretive projects that we're considering. I'll say we've got quite a long list, but we're going through the prioritization right now. And they run the gamut from some targeted investments in the cultivation side of the business to really drive yield. As I said before, without ever compromising your quality, but some great opportunities there. But also a number of projects on the operational efficiency side. So we mentioned just finishing up the pre-roll automation, which has been quite a, I'm going to say very successful on time, on budget, and delivering at the rate that we expected it to. So we've got more of those projects. We're going through the prioritization. Quite honestly, we've got more opportunities than, you know, $4 million we'll speak to. So we want to make sure that we, you know, hit the ones with biggest impact. Obviously, our top priority right now is standing up Cascadia and making sure that's delivering the full inflection. But at the same time, we'll, over the next number of months, announce some more projects that look more like the pre-roll automation.

Amazing. And then the last one for me, Just on the gross margins, I know they improved pretty well year over year. They've been consistent the last two quarters. How does that look going forward? Is this the new base, or are we supposed to see a little bit of compression going into Q4, or how do you see that?

Glenn, I'm going to get you to take that one again.

Yeah, sure. Yeah, this is a really interesting question, Nicholas. You know, I think as we look at the business, we see huge opportunity, some real leverage on the gross margin line. Just, you know, simply bringing on the additional capacity from Cascadia will, over time, help us with volume throughput. You know, all the post-harvest activities, for the most part, will happen at Pacifica. So, you know, scale there, putting more throughput will help on the margins, for sure. Just, you know, as context, there will be some headwinds, you know, over the next 12 months as we stand up Cascadia, as we start to supply some of the larger format products. sizes in the market that we currently aren't supplying. Again, it's nice, it's incremental margin, but in terms of percentage, as a premium positioned company, and it's pretty clear that we're doing very well in that segment, but our margins, we have greater ambitions for those gross margins and quite a ways to go on those. But the nice thing is we've got a very clear pathway to get there. So I would say over the next 12 to 18 months, our objectives would be to get the margin overall, the gross margin of the company up into the mid-40s. I wouldn't say that we're done then, but I would say that's a nice milepost that we can check in, you know, 18 months from now that we're delivering there. Because I think as an executive team, we see a very clear path to that with some of the initiatives I talked about just a bit earlier.

Right. Well, thanks for answering my questions, and have a good day. Yeah. Thank you.

Thank you. Your next question is from Andrew Semple from Benton Financial. Your line is now open.

Good morning. Thanks for taking my question here, and congrats on another solid quarter. Maintain the cash flow profile of the business despite the cost to carry Cascadia. First question, I'm going to return to margins. I'm going to ask about EBITDA margins and maybe press a little bit on the degree of operating leverage we might be able to see ahead. You know, EBITDA margins were 11% in the current quarter. I think it was closer to 15% in the year-ago period. And that's despite gross margins up a little bit more than one percentage point year-on-year. So, presumably, that was largely due to maybe some of the costs to carry Cascadia. Once Cascadia is in full production, do you think EBITDA margins could return to that mid-teens level or perhaps even better than that? I just want to get your thoughts on opportunities for margins and offering leverage ahead.

Absolutely. I'll answer the first part, and I'll get Glenn to come in. But, you know, as with any business, as you're turning on a new facility, there's incremental costs. And we started to see that, and we've started to – we have our direct Cascadia costs, but then we also have costs for transforming our business, which is happening in 25-26, to have much more revenue and more throughput. For example, we needed additional trailers at site, which is an annual cost of $100,000 a year. So those types of costs add up. We needed some more people on various teams to be ready for what's next, those costs are being incurred and the run rate that I believe that we'll be at in the fourth quarter will be fairly consistent thereafter, and we'll start to see the leverage in the second half of next year. And, Glenn, maybe I'll get you to add in.

Yeah, for sure. Our objectives on the EBITDA line are to return it, you know, to where it was or to do better. Gain the leverage. Gain the leverage. I'm sorry. I'm getting quite an echo. The leverage that we'll get on the gross margin line, we don't want that to disappear and not show up on the bottom line. We're about driving EBITDA and cash flow here. So, yes, as Margaret said, we are investing in what we call transformational costs, and I would estimate at least $300,000 in Q3 of what we characterize as transformation to some of the costs that Margaret alluded to and you know, and also just becoming a bigger company. We've got a new facility on insurance costs, et cetera. So, just across the board, but we keep a very close eye on our SG&A costs. It's hard for our team to get us to say yes to new investments, whether it's, you know, but strategically, we want to make sure the dollars are focused on our key account strategy and on the marketing side of the business, we've invested more there. So, You are seeing ramp up with some of those costs that are getting us, you know, not only helping deliver the business that we did in the third quarter, but are preparing us to be that, you know, larger scale, more complex company as we bring on Cascadia and as we start to enter into new markets, new formats. So, yes, short answer is we expect EBITDA margins to come back. And our longer-term objective would have us getting those to, you know, at least 20%.

Great. Okay. That's helpful. Maybe turning attention to the recent financing. Congrats on that, by the way. You know, we can calculate kind of the loan-to-value ratio on Cascadia. I guess it's the percentage of the purchase price. But I'd be curious if you'd be willing to share what the loan-to-value ratio might have been as a percentage of the appraised value. And then do you see room to maybe move that higher over time once that facility is into commercial production? And that's you again.

Yeah, sure. As the company stands right now and until we start to deliver stronger cash flow, you know, I think the term debt, opportunities are somewhat limited you know obviously there's other financing structures we can look at in terms of that nice low rate uh patient term debt um you know i think what we've got now is probably what we're going to have for the next while um they they praised cost listen um margaret's talked before when we acquired the facility that we got quite a what we think is a very good deal on that if you've looked at you know either the cost to construct But when it comes to appraised value, not to go too deep on it, but you can get all sorts of different views on what the appraised value is. But for use as a cannabis facility, it has certain value. But short answer is that I think there's a lot more room in the business in the next 12 months for term debt.

Got it. Okay, that's helpful. And then maybe finally, just on the yield enhancements, you indicated that was up 10% this quarter relative to earlier this year and spoke to further potential gains possible. Maybe just kind of the timing on how you see that playing out and the magnitude of kind of the further yield gains you would expect to see over the coming years.

Thanks, Andrew. Look, we have a – as I mentioned in my remarks to Pablo about how much further that we think we can go on quality in terms of whether it's genetics, milkability, terpene, THC, et cetera. And in terms of how we grow the plant, we also believe that in doing so, we will see gains on – in getting better at cultivation, we'll see gains on yield because they are typically linked. You know, the impact of every few percentage of millions of dollars on the top line, which, you know, given that the cost base is the same, it flows right through. We haven't disclosed exactly where we are on production, but if you think that we're at 11,000 kilos of production capacity from Pacifica, and there's annual maintenance downtime, you want to be in the target of 85%, 90% of any good manufacturing site. We'd like to be moving past that over the next couple of years and have ambitions to grow that line. As Glenn mentioned, the Sweat the Assets projects that we're looking at, we believe we have two fantastic assets right now with the indoor ability and the hybrid greenhouse ability to maximize genetics that we've got in our facilities. So we do believe that we'll be able to get, and I think at a minimum, 10% more yield out of Pacifica would be a good target. We've got ambitions much, much greater than that. And Glenn, if you want to add anything, please do.

No, Margaret, I think you said it well. You know, it's absolutely a top focus for us. And we've got, over the last 12 to 18 months, we've brought in some really great cultivation experts, the people that lead the business, really know what they're doing and marry the science and the art of growing cannabis. So we certainly do have ambitions to focus on that because of the sort of the outsized impact on the corresponding profit line that it has when you can deliver both more revenue at a very low cost to produce. So, yeah, I think, you know, another 10% above where we're at. Very clear path to get there. But we always have greater ambitions to pull on the biggest levers of the business to continue to improve the bottom line.

That's great. I'm looking forward to seeing that flow through. I'll turn it over. Thank you.

Thank you. Once again, please press Thor 1 if you wish to ask a question. And your next question is from Josh Felker from CB1 Capital. Your line is now open.

Hey, good morning, everyone. Congrats on the quarter, and Glenn, congrats on the permanent CFO position. I'm wondering, as you noted the BC strike, you diverted volumes to other provinces. I'm just wondering how much confidence did that give you in your ability to sell the additional demand from Cascadia? Do you think you have any clear view now on the demand for that full facility and the demand that exists in the market?

Yeah, no, it's a great question. And it's been, you know, tough on the province to have a strike. But I would say from a Rubicon perspective, you know, we are our supply and operations planning or FNOP indicates a lot of demand in particular for 1964 flour. We were able to supply quite a bit of that and have it be gobbled up in other markets, whether it's through medical channels, smaller provinces or Ontario. We're very, very pleased with that. So it has increased my confidence even further. We were confident before, but – You add to that the shift in view internationally towards improving and having more premium products and offerings to differentiate in the medical space. I think we're situated extremely well. Next year, we will have a balancing act between the opportunity for gross margin internationally and satisfying our Canadian suppliers.

Got it. And then on the Cascadia facility, you previously indicated an annual run rate of about 4,500 kilos. I know the previous owner is a little more exuberant, noted figures close to 6,900 kilos. I'm just wondering, do you have any improved view on whether that higher level is realistic? And I guess from your view, what production volume would represent there? a success, and then more importantly, when do you think you'll start understanding internally what an improved production number could look like?

Great question. When we talk about our production numbers at Rubicon, we talk about something called LMSA, so product that we can sell as premiums are. That's how we measure ourselves. There is byproduct and other product that can go into a lot of other things. I would say that the 6,900 kilos that the previous owner's had used is achievable. I don't think it's a major stretch target, and I hope in a couple of years we're looking to achieve that. I want to be realistic in terms of expectation setting to say, let's start out with 4,500 kilos. And I'm talking of premium flour in today's market that knocks it out of the park. That's what we're looking at, the 4,500 kilos. We believe that's very realistic. But one of our values is excellence, and I can tell you our team is believes we can do a lot better than that and obviously I'm pushing them to do that. I'd rather turn it on right and not lose crops and do it the right way to get the right level of quality and learn that first because we're not in the business of selling mids.

Got it. And maybe while I stay on overall yields and very sorry to make you do it or to ask the question, but do you have any improved view on the potential bifurcation between domestic and international markets and where you view that additional volume going forward?

Yeah, it's a good question. And, you know, we're in the midst of it. We need the volume from Cascadia to come out before we can start turning on the international muscle more. But that gives us time because, again, we are brand builders and We're not looking to be traders selling wholesale weed. So we are assessing how and where we would launch brand internationally. There will be more from us on that in the new year. What I do expect is that we are looking – we need Cascadia to be online, you know, knocking quality so that we can fill both growth in Canada and growth internationally – I think it's probably in the second half of next year. And my expectation is it's maybe up to 50% of the Cascadia volume. So if it's 4,500 kilos, it's around 2,000 kilos we're looking to take internationally. And I think these are preliminary views. We'll have a better answer probably in our Q4 results in the spring. But I think that's sort of where we're targeting now. But, again, if we expect Cascadia to be at, you know, midway through the year, hitting 1964 quality, we've got to get to that before we can launch. But we're doing the work to be ready to.

Super. Appreciate the call. Congrats on the quarter. Thanks.

Thanks, Josh.

Thank you. There are no further questions at this time. I will now hand the call back over to Margaret Brody for the closing remarks.

Thank you for joining us today. Rubicon Organics is Canada's premium cannabis leader, and we're investing today to build enduring premium cannabis brands to last. My personal recommendation for this quarter, which I always like to get in, is to try Simply Bear's BC Organic Black Zilk. It just launched in Ontario. It's an indica which offers really complex flavors and aromas. but has some sweet notes and a soapy and gassy profile. Hope you all enjoy.

Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.