Rubicon Organics Inc.

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

Rubicon Organics second 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 company's website, rubiconorganics.com.

Before we begin, I'll refer you to Slide 2 of our presentation, which contains Rubicon's caution regarding forward-looking statements. I'm 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, Marc, and good morning, everyone. At Rubicon Organics, our mission is to be the global leader in premium organic cannabis products.

We are accomplishing this by first focusing on the fundamentals and delivering the best value proposition to the consumer through the right ratio of price and quality. Secondly, we are differentiating our products, flavors and effects through certified organic methods.

Third, by building out a robust brand portfolio in each of the good, better and best pricing segments. And lastly, by staying true to our pledge to environmental sustainability, as evidenced by our industry-first ESG report.

This approach gives Rubicon Organics the right to win in the premium cannabis market segment. Our second quarter market share update demonstrates that our strategy is working.

We remain the industry market share leader in premium in British Columbia, our home province with very discerning cannabis consumers. In larger cannabis markets, we have consistently ranked the top 5 brands and expect that our recent and upcoming product launches will grow our market share in these markets over the coming quarters.

It is noteworthy that while our Simply Bare Organic brand has only been in most markets for a little over a year, we've been able to significantly grow our brand and SKU line, while many of our competitors have had to reduce their portfolios. I attribute this to our relentless focus on innovating in order to deliver a high-quality and consistent product to our customers.

In our MD&A, we mentioned that we have increased our quality thresholds for Simply Bare Organic in quarter two. Like any good business, we are in a continuous improvement process and increasing our quality in all factors of our business is critical.

Specifically, we have completed phase 2 of our high-potency flower development program and have commercialized a select few of these high THC streams. The first of these new offerings was made available in Quebec in July, with the majority of them coming to market later this month and in mid-September.

Turning to Slide 4. Our strategy to win in the premium segment is premised on the notion that premium and super premium cannabis consumers care about the flavors, aromas and effects of their cannabis and are willing to pay a little more to enjoy the best experiences of those characteristics.

Like many consumers today, we believe that this can be best achieved through organic cultivation methods. Turning to Slide 4.

You can see that we continue to dominate the premium organic cannabis market in Canada with #1 market share in flower and pre-rolls in each of BC, Ontario, Quebec and Alberta. To savvy cannabis consumers, organic is not just a product feature.

There are significant benefits as organic cultivation methods elevate the terpene profile and create richer flavors. This is especially important in Cannabis 2.0 products, such as our live rosin products and our recently launched PAX pods, which were put out in June to fantastic reviews.

Organic cultivation also appeals to mindful consumers that prefer knowing that there are no unwanted chemicals in their cannabis and that the products they consume have a lower environmental footprint. And as you know, most of our inputs are derived locally from the ground or the ocean.

As one of only a handful of organic certified cannabis producers in Canada, we expect that organic cultivation will continue to be a pivotal driver to our strategy to win the premium segment of the cannabis market. Turning to our quarter two highlights.

We have made significant headway in both distribution and innovation that will accelerate our revenue growth in quarter three and in quarter four. We are now more widely distributed with products available in eight provinces and territories with the Yukon and New Brunswick added during the quarter.

Most importantly, we've begun to commercialize our product innovation pipeline in earnest with an additional 25 SKUs recently added for a total of 44 SKUs provincially listed across five different brands. As you can see on Slide 5, 1964 Supply Co, our premium brand and Homestead, our mainstream brand, have been listed with five new provinces recently, including three of the major cannabis mine [ph] provinces, Alberta, BC and Ontario.

This represents more than a doubling of our current product portfolio and is aligned with the good, better, best strategy that we have consistently communicated. We expect to see a significant acceleration in revenue growth from these new listings at the end of September and into quarter four as we begin shipping the majority of these new offerings to provincial distributors in mid-September.

As the volume of market sales is significantly higher in each of the premium and mainstream pricing segments, we forecast strong top line growth while still maximizing our aggregate gross profit. Our first shipments of 1964 and Homestead sold out within two hours in BC, so we are very encouraged by the potential of these brands as they reach even larger markets later in quarter three.

Speaking of new markets, we are in the late stages of contract finalization to open up a new domestic sales channel. On the international front, we are in close communication with our German audit partners.

And with COVID travel restrictions easing, we are expecting to receive our EU GMP on-site audit in this fourth quarter. And in parallel with that, we anticipate announcing other international routes to market, the details of which we'll be releasing soon.

I've spoken about our top line growth trajectory and its acceleration now to address our cost base. We've been very consistent with our cost structure, which contributes to our confidence that in quarter three, we are making the turn toward profitability.

Because we expense all our direct production costs, it's all about revenue growth for us, as any incremental sales primarily go to the bottom line. You'll recall that in the second quarter, we went through a restructuring in response to the COVID store closures, which reduced our cost base on an annualized basis by approximately $2.6 million.

These savings will be recognized in quarter three and quarter four, but the incremental cost of the restructuring was largely expensed in the second quarter. In June, we published our Inaugural Environmental, Social and Governance Report.

We are proud that we're the first cannabis company in the world to provide this and formalize our commitment to the highest ESG standards with the publication of this report. For those of you who know us well, you know that environmental stewardship, sustainability and governance are engrained in our DNA.

Our facility was built with high-efficiency LED glow lights, we divert our ways through comp posting and recycling, we use living soil with local agricultural inputs and we employ recyclable packaging. In the near-term, we expect to further reduce our carbon footprint through the reception of a BC Hydro upgrade that provides annualized savings of $2 million a year, reinforcing that sustainable business is good business.

We have now taken our ESG mandate even further by providing identifiable targets for improvement. We have set a target for 100% circular packaging and 80% waste diversion by 2025, and we have developed a framework to measure and create a baseline for water consumption in which we can improve in future years.

Our ESG report also ties in strongly to our commercial goals. With the cutting-edge ESG strategy, we feel that we are enhancing our differentiating factors in the organic and premium cannabis market.

We're providing added justification for our premium pricing in each product category and executing on our mission of growing the best cannabis on earth and forward years. Just as customers care about where their products are coming from, increasingly, investors are evaluating environmental and social factors as part of the investment decision process, and we are determined to stay ahead of the curve in this respect.

With that, I will now pass the call over to Margaret.

Thank you, Jesse, and good morning, everyone. In the second quarter of 2021, Rubicon Organics reported net revenue of $4.6 million.

This is a $3.6 million increase relative to the second quarter of 2020 and a $500,000 increase over the first quarter of 2021. As compared to the prior year, the increase in net revenue is attributable to reaching 44 SKUs and expanded distribution across Canadian provinces with access to BC, Alberta, Manitoba, Saskatchewan, Ontario, Quebec, New Brunswick and the Yukon.

The majority of these SKUs were confirmed to listing in late June or early July, and we'll be hitting the market across Canada over the course of Q3, ramping up our inventory -- our revenue trajectory, excuse me. Sequentially, we benefited from sales growth in the last 2 weeks of Q2 as retail stores began to partially reopen, particularly in Ontario.

We reported slightly improved gross profit as compared to the prior quarter. Gross profit would have been $200,000 in Q2 were it not for a $600,000 inventory write-down.

Two factors caused this write-down. First, as Jesse mentioned earlier, we have increased the quality threshold for Simply Bare Organic as we are determined to ensure the best cannabis in the Canadian market.

Secondly, as we commence cultivation about 6 months before it is available for sale, we ramped up our inventory, anticipating reopenings of stores that did not materialize given the third wave of COVID-19 impacting store access and the retail cannabis market in the second quarter. This meant that we had excess inventory ready for our Q2 sales, which we have now written down by $400,000 to the net realizable value of our Homestead brand.

Fortunately, going forward with the reopening of stores across our key markets, we are ready to see the improvement in sales from our 1964 and Homestead brands as we now have two more brands in market available for the biomass that we create. We reported an adjusted EBITDA loss of $3.4 million in Q2 2021.

This adjusted EBITDA was comparable to Q1 2021 with the increase in net revenue offset by continued investment in bringing new brands and products to market. We ended the quarter with over $4 million in cash and $26 million in working capital.

Subsequent to quarter end and early July, unfortunately not quite at June 30 as we were hoping, we received the proceeds from our debenture issue, which added approximately $10 million to our treasury. And this is the only significant debt that we carry.

We remain confident that our balance sheet will continue to support our growth objectives with $13.3 million in cash as of August 18, 2021. Turning to our financial objectives.

We are maintaining our goal of monthly EBITDA profitability and operating cash flow positive in H2 2021. The impact of store reopenings that we saw in late Q2 has certainly continued into Q3, and we expect to see material contributions from 1964 and Homestead in new provinces, particularly Ontario and continued market leadership from Simply Bare Organic in the super premium market.

And I'll take this opportunity to expand on a comment that Jesse made earlier. Rubicon Organics expenses its production costs directly to cost of goods sold as incurred rather than being capitalized in expense with the associated revenues for the sale of the product, unlike most other LPs.

This means that our production costs at full capacity are currently being expensed through the P&L; and that as we achieve sales volumes closer to full utilization, we expect to realize significant operating leverage. As we start to see the store closures of COVID-19 in our rearview mirror, Rubicon Organics is focused and ready to deliver with high-quality products in the super premium, premium and mainstream categories now listed in the key Canadian markets.

And with international opportunities expected to be realized in the next 6 months, we believe that revenue generation opportunity ahead of us is significant. This revenue growth, coupled with our low cost base, consistent production costs and a strong balance sheet means we are in an excellent position to deliver near-term profitability and to continue to gain share of the premium cannabis market.

We would now like to open the line for questions. Operator, please open the line.

Good morning.

Good morning, Neal.

Thank you very much for taking my questions. Maybe I want to just try to dig a little bit deeper on some of the new SKUs you said you're bringing to markets.

And I noticed, I think it was in the MD&A, you talked about the live rosin going into Ontario. Do you have any sort of initial feedback and a little bit more color on how some of the nature of the new SKUs that we'll see in the market over the course of the next few months?

Great question, Neal. Well, as previously mentioned, we've over doubled our SKU count in province.

And so incrementally, there will be around 125%. The SKUs that we're most excited about are few new Simply Bare strains, which we anticipate having pretty significant gross margin associated with that.

We've already seen the preliminary results of that in Quebec where we launched our Pink Kush. And the feedback has been that that's the best Simply Bare product that we have launched to date.

The other two products we're really excited about are live rosin. That's only been a limited time offer so far.

We've had two drops of that, both of which sold out in the matter of hours. So that's something that we're looking to work more closely with provinces to ramp up the purchase orders associated with that.

It's a new category for a lot of the distributors. So they're becoming more familiar with it.

But now that we're seeing the demand of that product, I'm anticipating that core category to grow pretty significantly. And then lastly, another SKU we're really excited about is our PAX pods.

Most of the competitors in the marketplace today have a distillate-based and quite often artificial terpene PAX pod. As you know, we're quite focused on the premium side, we’re focused on flavors.

And our full spectrum PAX pods are the nicest PAX pods in the market today.

That's great. Appreciate that color.

Maybe as a follow-up for me sort of follows on your ending comments there, Margaret, with respect to just understanding the moving parts in the gross margin. And maybe a little bit more on the inventory write-off.

With your new standards for Simply Bare, is this something that we would see not necessarily at the exact same levels, but just given the fact that you have that focus on the high quality that we'll see some small amount of inventory write-off on sort of a regular basis, just for their quality standards? And when you sort of take a look at your revenue profile versus your production cost and the inventory expense, and sales, and -- I'll call it, fairly similar to the last three quarters.

So as that revenue ticks up in the second half of the year, I understand it correctly that we wouldn't see much change in those two sort of cost of sold line and that's what drives an improvement in gross profit margins?

Correct. So you've got two questions there, and I'll answer.

The first, which is around the inventory. And I'm going to change your nomenclature to a write-down, not a write-off.

Fair enough.

We believe that we can sell the product that we have. And in fact, our auditor will kill me for saying this, but they said it's quite different than other companies.

We do have route to market. And with the Homestead brand, we will be able to clear out and turn into cash that product.

Frankly, that product is above the cash cost that it's sitting on -- that we sell it above the cash cost that it's sitting on in our inventory. But because we capitalized the biological assets under IAS 41 as the industry does, we had to take a proportionate write-down to the cash costs as well as the fair value.

We weren't very happy about that because we wanted to -- we didn't feel it was appropriate because actually, we're going to see that improvement in gross margin as that product clears through in the next quarter. But hopefully, it helps us next quarter.

So we're very confident in what we're doing on cost. And sort of leading to the second part of the question, the production cost that you're going to see for us are going to go down and are going down.

You've seen a trend of it rising and then coming down. We expect in the winter months, it will be more expensive seasonally, with additional heating costs, et cetera.

But broadly speaking, that should be relatively flat other than some seasonal impacts. The BC Hydro impact will be about $600,000 savings a quarter for us.

We've been pushing for three years to get that done, but dealing with a large beast. And once that's in, you'll see that directly next year in 2022.

Otherwise, we're bullish on driving forward that any revenue growth is really incremental right to the bottom line.

Okay, great. Thanks very much.

I’ll pass it on.

Good morning, Jesse and Margaret. Thanks for taking my question.

Good morning, Rahul.

Good morning. So I guess, looking at your PR this morning, you referred to sort of confidence in ramping revenue in the second half of the year, primarily based on additional SKUs as well as the new brands, but you also referred to specifically an order bolus expected from Ontario in September.

Could you give us a little bit more color on that? But also given that you continue to overperform in the Western provinces, how do you expect the Eastern provinces in the large population there to continue to drive those order inflection points through the second half of the year?

Great question, Rahul. I think the -- I'll start with the first question, which is largely around pipe fill, I'll divide that into two, our own listings and timing in the Ontario market around that inventory pipe fill.

Recall, as I mentioned, most of -- in quarter two, almost none of our new listings have been shipped. So we really hadn’t seen -- you won’t really see any of that impact in these earnings.

It’s going to be pretty significantly incremental. We are starting to see that revenue ramp happen today with some of those new listings being in marketplace, but by far and away the bulk of those, about 70% of those don’t land until September.

And even some of those you won’t be able to book a slot for quarter three. So it is that latter half of September and early October, when we really see that inflection point with over double the number of products we currently have in market will be in market.

And I think that is in parallel with timing for inventory pipe fill in Ontario, different LPs have mentioned different times and they expect to see that based on the new store openings. Our view has been that we don't really see that inventory pipe fill happen until late August, early September, that it wasn't going to be an event that happened in July, given the pace of COVID closures and the return to the office and sort of driving that for walk-by traffic.

And then turning to your second question, BC market versus Ontario. We've been tremendously successful here in the BC market, maintaining our leadership position in premium throughout.

Of course, it is our home market, so we're able to work more closely with stores here. And we've been in market here for about six months longer than we have in the major markets.

So when you turn to the Eastern markets, it's really only now that we're getting a larger footprint, more doors open. People are becoming more familiar with our products, and we're going through that education process that we're expecting to see some strong market share growth in the Eastern provinces that will reflect what consumers already know about us out here in BC that Simply Bare and 1964 are tremendous quality and consumers love those flavors and those effects.

Perfect. That's really helpful, Jesse.

So a follow-on question sort of looking at on kind of the balance sheet and I guess it's equally a question for you, Margaret. Previously, you folks had guided to turning profitable kind of in the middle of this year.

Of course, COVID retail shutdowns had an outsized impact on your revenue. But of course, should hopefully have the opposite and positive impact as retail opens up.

Now given the 13 -- I believe $13.3 million in cash that you said you have on hand now, Margaret, as well as the -- I guess, the $26 million in working capital, do you have a revised sort of timeline estimate? And/or revenue number that we should be thinking about where at which point Rubicon turns into an EBITDA positive or even potentially cash flow positive company?

I'll take that one, Jesse. Thanks, Rahul.

We are -- the timing of the new SKUs landing in Ontario is our turn. The first significant 1964 product is into market in mid-September, as Jesse said, that, coupled with all the new SKUs that are going in Simply Bare.

So we are on track for EBITDA positive over the course of the next few months. We're very pleased with that.

We're feeling -- we're sitting in a strong balance sheet, and we expect that you're going to see that from us. And you're going to see some strong revenue trajectory off the back of that, not only with the growth of Simply Bare, which we're bullish on.

So we do think that there's quite a bit of room for Simply Bare to continue to grow. But also with 1964 sitting in the premium category where there's significant amounts of volume that's done and Homestead clearing out our vault and keeping us driving forward.

So you're going to see that from us over the course of the next, I would say, 4 months, and we're very confident in that, i.e., EBITDA positivity.

So my first question is just on the costs associated with launching these new brands and all these new SKUs into new markets, provinces and all that. So can we expect to see some of those costs are to come off into Q3, Q4?

Or are they expected to remain elevated for a while during the early parts of that launch?

I can take that one, Jesse. We're expecting them to be relatively consistent.

We are -- our team is built. We have a fantastic innovation and marketing team.

And any incremental growth in costs would be directly associated with sales at this point if we need more people to drive that. It's not on the marketing side.

Okay. And then maybe just talking about the last 2 weeks of June, which I believe you said is really the driver for the quarter-over-quarter growth.

So now that we're seeing more momentum on that and then tying in with that some restocking of the provincial wholesalers, I mean, is that 2 weeks a bit of a good read-through for us in terms of how to expect to see revenue growing as more stores open? Or is that kind of like a pent-up demand and then it starts to level off to something of a more consistent through the rest of the second half of the year?

I think -- sorry. Sorry, go ahead, Jesse.

The way -- the last 2 weeks in June were not a significant pipe fill event. It was more of a return to normalized buying patterns.

So this is what we sort of consistent. We've seen over the last 6 weeks is a movement to a more normalized buying pattern coming from the stores and the distributors.

In our view, we have yet to see the large pipe fill event happen to-date. So I think you can expect to see -- you can expect June is going to look -- the last thing, we can do, look more what it's going to look like on a go-forward basis.

And that is from Rubicon perspective, not inclusive of the doubling of SKUs that we have in the marketplace. Only a few of our SKUs are included in that.

And I'll just remind you, John, that many of the distributors' buying patterns result some chunky revenue based on when shipping dates are versus purchase orders. So that was a little bit chunky on that, but you're going to see definitely accelerated growth from us coming out of quarter 3.

Okay. And then my last question.

Can you talk about just the listing window for Ontario. I think that closed not too long ago, and then there's going to be a fairly long break until the next window.

Can you talk about whether or not you got all your listings in, submissions in prior to that window closing? And then just maybe some of the broader dynamics of how that impacts the competitive landscape?

Yes. That's another great question.

And I think my first caveat will be -- I'm not speaking for the OCS here because they have a tendency to change their mind a little bit as they are understanding how best to create efficiencies in their own organization. Initially, they were looking at a bimonthly call per product.

That would then move to a quarterly call per product, with the current state-of-the-art being a recent call last week, which was our August call and the next product call will not be until April, so 2 quarters away. In the June product call, we got substantially all of our listings in, which we made reference to in our operational updates.

The August call, we expect to hear those answers this afternoon. I was hoping to have that update for this call today, but we haven't got in contact with the OCS yet.

And then on a go-forward basis, my understanding encourages that the OCS will not be doing another core product call until April at the earliest.

And I would add. Just a reminder, with that product call in April, it will take some time then for the product to actually land in store.

It's a very large window of time where those listings in Ontario are absolutely critical to building market share and with the opening of new stores, getting consumers understanding your product.

And sorry, last question. Some of these new products that you talked about launching in the next month or 2, that's from the June, submission period?

Okay. Yes.

So the timeline, John, is typically the product submission goes in, and then you can expect to see purchase orders for products in market approximately 2 months after that. So most of what we are referencing right now, some product going into August from the June product call and then the bulk of those orders going in, in September, 3 months after the listings were accepted.

So then the August listing that you're hoping to hear from this afternoon, we can hear about new product listings, I guess, for November-ish?

October, November. So if it comes in, in August, it's approximately 2 months after that, that you'll see the purchase order.

So you'd see those -- consumers would see those products in the market largely in October, November. But the OCS does make certain exceptions, sometimes accelerate it depending on their product need and sometimes delays it depending on how they're trying to rationalize their inventories.

But most of those listings would typically land approximately 2 months after they're approved for listing.

And how many submissions did you make for the August call? Was that single digit, double digit, just ballpark number?

Approximately 20 submissions there. Some are large gross margin pools.

Some are smaller, and there's also 1 or 2 replacements. So I would say incremental SKUs, approximately 15.

Others is about margin optimization for us, where we see a rate of sale change or decline in the category, and we're looking to replace it with a SKU that we feel is going to have higher rates of sale, which is part of the ongoing process of keeping your product portfolios up to date and the value proposition aligned with what the consumer is looking for.

Thank you. Well, thank you, everyone, for joining the call today.

We're very bullish on our quarter 3, quarter 4 outlook. The team is in place.

Our innovations are listed. Our quality has come up significantly.

So we are looking forward to making the turn toward profitability here later in this half. Thank you very much for joining the call.