Rubicon Organics Inc.

Thank you, operator. Good morning everyone and thank you for joining us today.

Rubicon Organics first quarter 2021 financial results were released this morning. The press release, financial statements, and MD&A are available on SEDAR as well as on the Rubicon Organics website at rubiconorganic.com.

Before we begin I will refer you to Slide 2 of our presentation which contains Rubicon’s caution regarding forward-looking statements. I am joined on the call today by Jesse McConnell, Chief Executive Officer and Margaret Brodie, Chief Financial Officer.

I will now pass the call over to Jesse.

Thank you Mark and thank you everyone for attending our quarter one 2021 conference call. It has only been six weeks since our last call, bringing the fresh market share update for you all.

As you can see on Slide 3, Simply Bare remains the top selling premium brand and is dominating the organic cannabis market across major provinces. We are top six premium brand in Ontario, Alberta, and Quebec.

And we are both the top premium and organic brand in our home province of British Columbia. These results are a function of product excellence and executing on our innovation pipeline.

I'm especially proud of these results considering our competitors have been in market for a few years now where Simply Bare was launched a little over a year ago. We will grow revenue by sticking with our strategy namely through increased offerings to more genetic portfolio and focusing on both brand and product innovation in the premium and super premium segment.

Since inception we have said we will follow a good, better, and best strategy, starting with best or super premium. Well our best is one of the best but not the best.

We'll soon be launching our better brand 1964 supply code which is currently only available in Quebec and to additional provincial marketplaces after market share within the mainstream premium pricing segment. In the past we've spoken about our extensive genetic library and we've spent the last year putting those genetics through a number of trials.

I am pleased to report that after several dozen tests we are ready to bring a select few of these genetics to market. The first of these high THC and high terpene strains will become available around Canada Day.

In addition to expanding our core Simply Bare strain portfolio, we will also be offering seasonal strains on a limited time offer basis that we anticipate being highly sought after by cannabis connoisseurs. Premium segment has better margins and is where we have a proven competitive advantage with our organic cultivation methodology and the hybrid greenhouse that we specifically built to grow quick premium product at low cost.

We stand by our decision to build the right sized facility and build the right cost structure for the Canadian marketplace, we expect to demonstrate the significance of this strategy as we drive the top line inflecting to profitability in the second half of the year. As you've all seen in recent transactions in the cannabis sector premium cultivation and premium branch cannot be easily replicated even with billion dollars of cash on the balance sheet.

Turning to Slide 4, you can see our recent milestones. We discussed many of these in our last call.

Of particular note is our much improved financial position and balance sheet. The proceeds of our recent bought deal principally to repay debt and we have done just that.

We're paying substantially all of our outstanding debt. On Slide 5 we disclosed in our MD&A that Rubicon Organics undertook a restructuring this month.

There are two factors that led to this restructuring. First, the operational efficiencies that we had outlined in our last call have been implemented sooner than we had expected.

We continue to make significant improvements in our cultivation processes and therefore our plants are requiring less work. This increase in overall quality translates into us also having to spend less time harvesting and processing.

We took advantage of the slowdown in the expansion of the domestic market due to the COVID closures to undertake certain [indiscernible] procedures which resulted in discovery of additional efficiencies in both processing and packaging. Secondly in quarter one 2021, second COVID wave hit resulting in provincial wide store closures in particular in Ontario that've been ongoing since December.

The store is closed and retail walk by traffic significantly diminished, there's been a challenge to grow the top line. This is probably not news to most of you on this call but many of our peers have already reported earnings and expressed as much.

The Ontario closures are still in place and internally we are forecasting them to remain in place until the end of June. In response to these short-term challenges, we took the decision to restructure the business and significantly reduce our cost base and keep the company in a strong financial position.

Unfortunately, this meant we had to part ways with some great people. Our initiatives are expected to save the company about 2.6 million a year in cash cost and we expect to realize additional efficiencies as part of our ongoing continuous improvement process.

It is always darkest before the dawn and we view these COVID challenges as short-term. Vaccines are rolling out nationwide, store level inventories are at all-time lows.

We have already built a robust innovation pipeline and our full sales team remains in place as we prepare for the sizeable restocking advantage that we anticipate occurring on the back of store re-openings. We redesigned our operational process plans to ensure we are able to accommodate the anticipated demand surge in quarter three.

To provide one example as to why we are confident in the demand surge beyond the obvious of simply wanting to spend -- people simply wanting to spend more time socializing outside the current bubble, Ontario has licensed almost 200 retail stores since January of this year, many of whom have yet to open their doors or place their first orders. Turning to Slide 6, we're looking forward to the remainder of 2021.

We have a pretty exciting product pipeline. There are a few big launches upcoming in quarter two, 2021.

First, we'll be launching our first Live Rosin product in Ontario under our Simply Bare Organic brand. We are tremendously excited about this product that we believe will be a much larger category than it currently is and our genetics process and organic methodology is particularly well suited to creating an incredible product.

We also anticipate entering the weight category through PAX or ERA Pods [ph]. We expect this launch by the end of June and once in market we'll be the only organic weight pod for PAX ERA products.

And as previously mentioned in line with our good, better, best strategy we will also be launching our better brand 1964 into new provincial marketplaces. Building the right strategic pricing segmentation strategy to capture margin while ensuring volume is critical to our goal of realizing industry leading profitability.

We've already launched 1964 in Quebec with great success with our province by province pricing restrain strategy, we anticipate the size of the prize for 1964 to be significant. In addition to our innovation pipeline, Rubicon Organics is advancing its industry leadership as it relates to environmental, sustainability and governance practices.

We are mission and values oriented company, and sustainability is one of our four core values. In the coming days you will see proof of our commitment to ESG principles as we outline exactly where we are today and how we intend to improve our best in class standards.

Thank you again for joining today's call, and I will now pass the call over to Margaret.

Thank you, Jesse and good morning everyone. In the first quarter of 2021, Rubicon Organics reported net revenue of 4.1 million.

This is a 3.7 million increase relative to the first quarter of 2020. Although we experienced a sequential decline in that revenue relative to Q4 2020, given the change in buying patterns by the provincial distributors and the limitations placed on retailers for in-store shopping, that came into effect in Q1 2021.

We reported a write off of approximately $600,000 relating to finished goods in Q1 2021. Unfortunately, it was necessary to write off finished product that was entirely on spec.

In December we thought we had pretty good visibility on sales provinces and we were preparing for it by packaging inventory. But given the limited in-store shopping due to COVID-19 closures, the indicated orders were less than planned and this finished product remained packaged for over 90 days.

And in line with provincial distributor requirements, we do not ship product package more than 90 days until we wrote the product off. Removing the impact of this write-off, we would have been gross profit positive this quarter, excluding the impact of fair market value changes.

Considering we experienced a sequential decline in net revenue, we are quite pleased with the progress we are making towards driving gross profit. We reported an adjusted EBITDA loss of 3.4 million in Q1 2021.

Rubicon was built for higher levels of growth than we had experienced. As Jesse mentioned earlier, we have undergone a restructuring to adapt to market conditions.

We feel that profitability is measured by adjusted EBITDA is eminently achievable with more favorable market conditions, the routes to market open and are lean operation. We ended the quarter with over 20 million in cash and over 20 million in working capital and today we have a cash position of approximately 6 million.

While we are pretty comfortable with our balance sheet we are still going to press really hard to extract all the efficiencies we can from our operation. We are currently debt free, although we are looking at lower cost mortgage options for our delta facility in the range of $10 million to keep our cash position strong and expect this to be in place before the end of the second quarter of 2021.

At this point in our growth trajectory, we value the flexibility that cash provides. Turning to our financial objective, we are pushing out our goal of monthly EBITDA profitability to Q3 2021 and maintaining our objective of operating cash flow positive in H2 2021.

We are still in a pretty difficult position in terms of forecasting revenue. If we start seeing retail openings in Ontario we are off to the races, but if current lockdowns are extended further we expect it will have an impact on our ability to deliver profitability in the short-term.

We are very bullish on Rubicon’s ability to drive profitability. As Jesse mentioned, there is potentially a large restocking event once Ontario retailers get the green light to allow customers back in stores and there are hundreds of stores waiting to make their first order.

We have delivered exceptionally strong market share in the premium category to date, and we have a very deep innovation pipeline across our flowers, baked, and concentrates that positions as well to capture additional market share across the premium category. The operational efficiencies and restructuring that we have implemented will drive production costs down, positioning the company very well to ensure that incremental sales fall directly to the bottom line.

We are looking very forward to coming out of lockdown and showing Rubicon Organics’ true potential. So now we would like to open the line to questions.

Operator, please open the line.

Hi there, can you maybe just talk about the wholesaler buying patterns that you're seeing currently, I think you said they were starting to pick up in mid-March last time when you had your call and so I'm just curious whether or not even with the shutdown, whether or not we've been seeing a bit of a reversal of that destocking and seeing some of those purchase orders starting to emerge?

Hi, John. Good to hear from you and a great question.

We have an interesting graph we were building for internal purposes that looking at how those purchase orders have flown in and that in that brief few weeks that Ontario was open, there was a huge surge in POs and then with the COVID closures, we saw a return to the January-February levels. So in addition to the skew rationalization that occurred earlier, Ontario has also indicated that they have spread out the delivery slots, you're probably aware of this for social distancing purposes, meaning that a number of items actually ended up across the board, us and others going out of stock in popular items.

So they really have not returned to normalized wholesale buying patterns yet. And we do not anticipate seeing that until the stores reopen, which could be as early as June 2nd, according to the current provincial government.

Again, internally we forecast that to be a few weeks after that.

Okay, and then maybe just talk about the launching of some of your new products, you gave us a bit of a timeline, Q2 for Live Rosin [ph] and the PAX launch into June, but maybe just a bit more details on the 1964 launch, specifically can you give us an order of which provinces you're looking to roll out first and then the timing of that and then any other type of new products, you had some stuff with Falons that you had -- and now it's previously maybe the timing of when we might see some additional 2.0 products as well?

Well just one minor correction, it's Live Rosin, which is a solventless product and therefore certified organic, which is a little different live resin, and that's something that we anticipate being actually a very strong category as the consumer adapts to that. So the easiest way to respond to that is we are rolling out our new brand on a province by province basis and the strategy inside of each province is slightly different and therefore the timing will fall a little differently in each one of those provinces.

I can't give you specific dates on that right now, but I would broadly outline to late quarter two or early quarter three you'll see 1964 move across the various different provinces. There's just slightly different timings in each province on the product calls and then therefore the time in which that will become available to the consumer.

As for PAX, I believe that the PAX launch is next month, in June. You'll see that in Ontario at first and then some increment, some additional products coming after that in the six to eight weeks -- Alberta first, apologies.

Yes, Alberta is the first market there to see that launched into. We saw the list and we anticipate being in Ontario first, that’s the Live Rosin product.

I expect to see that across the other provinces within the same quarter. And then the various different genetic innovations, the way that has worked is I mean, we have gone -- I said dozens on the call, but probably 100 trials, maybe more than that of various different genetics to understand how they grow best in terms of yield and quality on the cost base side and then of course, to ensure that their high THC and the right terpene profiles are going to be very attractive to the consumer.

And you're going to see that innovation begin to roll out here in the next four weeks, five weeks, the first of our new genetics will begin to hit the market. And then there's a pretty robust pipeline of genetics coming in after that.

Again, it's slightly different in each province, we have -- we see different buying patterns in every province. So we've adapted our pricing range strategy to treat each province specific to those buying patterns.

And we think that that's going to be part of our strategic advantage.

Okay, and then maybe just a last question from me. On the EBITDA positive timeline, maybe just give it a sense of what kind of topline do we need to see to get there because it sounds like from a cost perspective, you've been addressing that.

So it seems like the one hindrance has been the top line which it seems to be a bit out of your control given that the industry headwinds. But can you give us a sense of what type of topline number you need for us to see that positive EBITDA?

Yeah, I mean, certainly the COVID headwinds have been real for the whole industry. And we certainly do view it as short-term.

We're very excited, very bullish on quarter three. You can imagine our frustrations, though over quarter two and the inability to visit stores.

There are hundreds of stores industry wide, but hundreds of stores that are just kind of waiting for our product and excited about it. But just for all the right reasons, they haven't opened their doors and they shouldn't open the doors when you've got lockdown orders in place.

But specifically to address your question, just under 7 million in revenue would be the inflection point for us with our current cost structure to break into EBITDA positivity.

Okay, okay, that's very helpful. I'll get back in the queue.

Thanks.

Thanks, John.

Yeah, good morning, Jesse and Margaret. Margaret, maybe starting with you, with your comments with respect to the restructuring that you've undergone, the 2.6 million in annualized savings, was any of that actually realized in Q1 or is that something you've done post Q1 and we'll start to see that those savings reflected in Q2 onwards?

It will be reflected in Q3 onwards. Frankly, all of that is people, whether -- and obviously a difficult decision for us looking at the growth.

We do expect that there are more efficiencies and cost to come as we move through the year, namely items like repurchasing dehumidifiers, which we were renting before. If you look at our cash, our biggest cash use in the last since March 31st is paying down all of our debt and buying some [indiscernible].

So other than just normal operations, so we're really driving forward. We're also waiting on a BC Hydro update -- upgrade, which will reduce our cash costs as well.

I think that's in the fourth quarter, it is at the earliest. But there are improvements like -- which we're quite excited about, and they're all incremental, but those increments add a lot up.

Okay, thank you. And then I know it's tough for whatever, but still just trying to get a gauge on your comments with respect to the provinces lockdown down.

I understand what's going on in Ontario, obviously sitting here myself. So would you think that -- or is it safe to say, you're expecting sort of flat on a quarter-over-quarter basis, it's not much upside because of the lockdowns we are assuming it's closed through to the end of June?

Not too much downside because it's basically pretty much the status quo in Q2 versus Q1, is that the right sort of way to sort of take a look at the dynamics in the marketplace right now?

I think we'll see that across the market, I would agree with that, Neal. We're -- on one hand we're positive because we've got some new product launches coming out, but initial placed orders have all reduced with COVID.

We've seen Ontario reduce their hours with the curfew there, Ontario and Quebec, excuse me, Ontario stores being closed. That being said, at some point whether that hit us in June or July, it will be very interesting when the large restocking event occurs, how the province will on board different sizes of LPs in the demand.

And we expect it to be very lumpy probably until mid-August. There's going to be a huge -- if you think about the size of companies, the size of orders that are needed for these stores to open up, it's pretty considerable and everybody's going to want to sit in various categories.

You don't want your entire store to be sitting with one skew. So then it will be a very large logistical exercise for the OCS.

So my expectations are that we won't start to see the supply chain even out a bit until August or September. What I can tell you is the businesses, we're working very hard to be nimble and reactive to take advantage of when the big guys can't deliver those large orders, be able to actually come in and do it.

And I think with the smaller organization, we've got the ability to flex on that and be opportunistic to fill gaps.

Okay, thanks. I will pass the line.

Appreciate it.

Thanks Neal.

Morning Jesse and Margaret, thanks so much for taking our questions. So a bunch of my questions already been answered by the previous people through the previous question.

So maybe just looking a little bit beyond Q2 and Q3, Q4 recognizing that there's still some opacity in terms of opening up Intel and your continued confidence that you should be able to turn EBITDA positive come Q3 and then, of course, taking into account the restructuring of costs that you mentioned. So how should we be thinking about some of the primary drivers of that positive EBITDA come Q3 and then hopefully, and how do you assess the durability of that EBITDA sort of into Q4 and onwards?

Great question, Rahul. Well, firstly, our restructuring is twofold.

It's of course, responsible for the closures and six months of having a depressed openings in Ontario, but it's also a response to us simply just getting better. Our cultivation processes have dramatically increased, our processing has dramatically increased, our quality has dramatically increased, and it's just meant we need less people to handle increased yields.

So in that sense, we have cleaned out the organization, which we think is great. When you look at that restocking event and kind of look back a couple of quarters and all the conversations around the industry were about the need for Ontario to open up its marketplace, create accessibility for the consumer, and frankly, that has never came to pass as a result of those closures going in place in December.

So while there is a nice demand surge bump that will happen in quarter three, it's also a leveling up of the demand curve in aggregate. It's not simply a one-time restocking event and I will drive on.

We're talking about nearly 35% increase in stores in the province of Ontario alone. So we really see that whole thing leveling off.

We also see the landscape shifting a little bit through this. LP's that didn't come into this last two quarters and a strong financial position are going to find themselves being a lot less competitive.

The skew rationalization, as you know, brought skew counts down from I'm going to get the numbers wrong, but I'll get the magnitudes right, somewhere in the neighborhood of 2000 odd skews down to around 200 skews. So really significant reduction in magnitude.

So arguably we've got more share on the shelf so better, better options for consumers, more targeted. So we look at the Atlantic going forward as we get into the end of this year, we've built the right sized facility, we're continuing to prove out our domination in the premium category, we've got the innovation pipeline that we've been building over the last year that frankly, we are just in the process of launching right now, specifically around our core business which is high grade flour.

And we've got a more accessibility for the consumer, many more points of distribution that they're going to be able to access in the coming quarters. So there's a kind of a whole industry I think is leveling up there.

And those LPs who remained focused with that process are going to really succeed in that. And I think a lot of LPs who have struggled in the last couple of quarters, you'll see pushed into sidelines here in the upcoming quarters.

Perfect, thanks Jesse. That’s some great color.

And so just -- I mean, as a follow on in terms of looking at that bottom line and trajectory, of course, the other factor of that would drive that on the bottom line will be, margin -- continuing margin improvement that we've seen some modest margin improvements quarter-over-quarter, how should we be thinking about margins over the next couple of quarters and then medium and longer-term?

Well, I think in our Simply Bare portfolio you're going to see -- you should see some of that increase, because when we look at our restructuring some of it -- a lot of the cost that came out of that was overheads and people. But then you see on a unit economic basis, again, our quality and yields are improving and that drives margin accretion.

In terms of if we get away from unit economics and look at the aggregate gross margin pool, the new pricing strategy that we're going to be implementing in the coming weeks to drive the overall size of that margin pool, to give you a simple example Rahul, when we step down in price from our current offerings by around five to $5 to $6 in certain provinces, we access a gross margin pool that's almost twice the size of the one that we're currently in. So we'll still have the offerings and that higher margin domain.

But now that we've got this new genetic innovation, we can begin to offer in that segment just below that. So we're growing the aggregate size of the gross margin pool while maintaining the unit economics and the one that we currently plan.

Perfect, thanks so much for taking my questions. I'll get back in queue.

Thanks Rahul, appreciate it.

Thank you. Well, just a couple of quick comments to close things up, we're very, very bullish on the future of this business.

It's been a challenge I think, for the whole industry in the last two quarters with these province-wide and nationwide COVID closures. We've leaned out our organization.

We've got a bunch of innovation that we've been talking about for the last year, ready to go here, ready to launch in the upcoming weeks. So we're tremendously excited about the future.

Everybody's looking forward to something that resembles normality, getting back to a bit more of a normal life. So, we're just going to stick with our strategy, continue to grow and drive revenue here, and anticipate profitability here in quarter three.

Thanks everybody for joining our conference call. And I'll give you the rest of your day back.