Rubicon Organics Reports Fourth Quarter 2021 Financial Results and Operational Update

Published: April 22, 2022

Rubicon Organics Reports Fourth Quarter 2021 Financial Results and Operational Update

Rubicon Organics Inc., a licensed producer focused on cultivating and selling organic certified, premium cannabis, today reported its financial results for the fourth quarter ended December 31, 2021 (“Q4 2021”). All amounts are expressed in Canadian dollars.

“Building premium brands that consumers love and are loyal to begins with a culture that prioritizes quality. We have invested in our facility and our cultivation systems which have resulted in a progressive reduction in our production costs quarter over quarter with corresponding increases in yield and quality, helping us to sequentially grow our margins. We also continue to make progress toward exporting our brands internationally. Together, with cost-saving measures undertaken in the first quarter, we reiterate our guidance of achieving positive Adjusted EBITDA and operating cashflow in the second half of 2022,” said Jesse McConnell, Chief Executive Officer.

Q4 2021 Highlights

  • Net revenue of $6.8 million was an increase of 43% from the same period in the prior year
  • The Company achieved its first ever quarter of positive operating cashflows of $0.5 million
  • Maintained position as #1 brand in the premium flower and pre-roll category in Canada with Simply BareTM Organic2
  • Process improvements at the Delta Facility have driven cost savings resulting in a $2.2 improvement to gross profit before fair value adjustments when compared to the fourth quarter of 2020
  • The Company completed a greenhouse climate system upgrade with the recent commissioning of newly installed HVAC units and progressed with its BC Hydro power upgrade, designed to both reduce the Company’s annual operating costs by $1.6 million and make further progress towards one of our ESG goals

Q4 2021 Select Financial and Operational Results

Three months ended
December 31,
2021

$
December 31,
2020
$
Product Sales 8,814,293 5,756,749
Excise Tax (1,999,110 ) (982,261 )
Net revenue 6,815,183 4,774,488
Gross profit 1,529,802 (718,866 )
Loss from continuing operations (1,590,430 ) (4,805,606 )
Adjusted EBITDA3 (570,480 ) (2,958,525 )
Cash and cash equivalents 11,583,443 12,136,459
Working capital 20,236,272 4,166,180

In Q4 2021, Rubicon Organics earned $6.8 million of net revenue, an increase of 43%, or $2.0 million, relative to Q4 2020. The increase in net revenue is attributable to continued growth of the Company’s flagship Simply BareTM Organic brand, and the launch of 1964 Supply CoTM and Homestead Cannabis SupplyTM into large provinces during 2021.

The Company reported an improvement to Adjusted EBITDA of $2.4 million with a loss of $0.6 million in Q4 2021, as compared to a loss of $3.0 million for Q4 2020. Rubicon improved its profitability by driving higher net revenue through the launch of its two new brands nationally. This increase to net revenue resulted in higher utilization rates allowing for increased operating leverage over the companies fixed cost base. Together these results drove a contribution of $1.5 million of gross profit before fair value changes. Furthermore, the Company began realizing the benefits on operating costs of the Company’s previously announced restructuring.

The Company reported a loss from continuing operations of $1.6 million in Q4 2021, as compared to $4.8 million in Q4 2020. The significant improvement in profitability reflects the factors impacting Adjusted EBITDA described above as well as other non-cash adjustments.

Q4 2021 Annual Results of Operations

Year Ended
December 31,
2021

$
December 31,
2020
$
Net revenue 22,611,804 9,387,320
Production costs 9,155,425 8,051,854
Inventory expensed to cost of sales 9,500,187 3,967,624
Inventory written off or provided for 1,651,258 1,394,363
Gross profit before fair value adjustments 2,304,934 (4,026,521 )
Fair value adjustments to cannabis plants, inventory sold, and other charges (798,047 ) 3,362,559
Gross profit (loss) 1,506,887 (663,962 )
Loss from continuing operations (14,520,740 ) (14,349,541 )
Adjusted EBITDA4 (8,006,273 ) (11,081,996 )
Cash and cash equivalents 11,583,443 12,136,459
Working capital 20,236,272 4,166,180

Net revenue
For the year ended December 31, 2021, net revenue increased by 141% or $13.2 million compared to the prior year. Revenue increased with the ramp up of Simply BareTM Organic product availability and provincial distribution as well as the launch of 1964 Supply CoTM and Homestead Cannabis SupplyTM. The Company experienced growth in its existing provincial markets of British Columbia, Ontario, Alberta, and Quebec and launched into New Brunswick, Saskatchewan, Manitoba, and the Yukon.

The Company launched several new strains, product formats and brands throughout the year ended December 31, 2021. At the beginning of 2020 the Company had two strains for sale in 3.5 gram jars of Simply BareTM Organic and by the end of the fourth quarter of 2021 had over 60 SKUs in markets across Canada in its various brands and formats. The expansion of the brand portfolio with 1964 Supply CoTM and Homestead Cannabis SupplyTM in key Canadian markets opened new sales channels and drove revenue growth in the second half of 2021.

As previously disclosed, the revenue of the Company was impacted in the first half of 2021 by COVID-19 cannabis store closures, particularly in Ontario, along with reduced orders from provincial distributors as they were focused on selling through inventory built up in the fourth quarter of 2020 and the first quarter of 2021. With the launch of new products and the re-opening of the stores through 2021, this impact has dissipated.

Production costs
For the year ended December 31, 2021, production costs increased by 14% or $1.1 million compared to the prior year. Production costs for the year ended December 31, 2021, were higher than in the comparable periods as operations were being ramped up through the first half of 2020 and the Delta Facility was not fully planted until the end of March 2020.

The Company realized a $0.8 million decrease in production costs in the second half of 2021 compared to the first half of the year. Absolute production costs are expected to be relatively consistent quarter over quarter while crop yield is anticipated to improve. Further cost improvements are expected upon completion of the BC Hydro power project. Due to seasonality at the Delta Facility, the Company expects to incur moderately more cost in the winter months when additional energy is consumed to heat and light the facility.

Inventory expensed to cost of sales
For the year ended December 31, 2021, inventory expensed to cost of sales increased by 139% or $5.5 million compared to the prior year. Inventory expensed to cost of sales was 42% of net revenue for the year ended December 31, 2021 (December 31, 2020: 42%). Production improvements offset by higher sales of 1964 Supply CoTM and Homestead Cannabis SupplyTM products, both of which return a lower gross margin than Simply BareTM Organic products, kept the cost of sales relatively consistent year over year.

Management expects an improvement to cost of sales as a percentage of net revenue as net revenue increases and operational efficiencies are realized from process improvements and the completion of certain capital projects.

Loss from continuing operations
For the year ended December 31, 2021, loss from continuing operations increased by 1% or $0.2 million compared to the prior year. A significant decrease in the fair value adjustments to cannabis plants, inventory sold and inventory written off ($4.2 million) was offset by real operating cost improvements, as a percentage of revenue, and increased margin. The Company also reduced its debt burden and associated carrying cost.

Executive Changes
The Company is also announcing the departure of Tim Roberts, formerly President. The Company would like to thank Tim for his contributions over the last three and a half years, in building our commercial strategy, driving a culture of discipline and his boundless energy to fulfill Rubicon Organics’ mission ‘to grow the best cannabis on Earth and for the Earth’.

Outlook
During the 2021 fiscal year, the Company maintained significant market share in the premium and organic product categories with its Simply Bare™ Organic brand capturing 7.6%5 of the premium flower and pre-roll market. We grew revenue 141% year over year and launched the full suite of Rubicon brands and invested behind them to ensure that we are able to launch innovation at different price segments to satisfy consumer preferences. This resulted in demand for Rubicon products outpacing our supply.

In the fourth quarter of 2021, Rubicon Organics defined a three-pillar strategy for 2022 focused on yield and quality, improving product mix to optimize margin, and launching international products, each of which we expect will have a positive impact on our profitability and cashflow.

Our first focus is to optimize production processes at the Delta Facility to increase yield of our super-premium cannabis. We have completed facility upgrades, invested in process improvements, and continue to identify opportunities for cost efficiencies. The Company installed new climate control systems, most critical being the dehumidification units, and refined its cultivation system. We expect this will enable us to achieve an annual run rate of 11,000 kg’s of super-premium cannabis by the end of 2022. Maintaining high quality flower with greater THC content from each crop continues to be a priority and we anticipate our improved product offerings to enter the market in the second quarter. Our Delta Facility is expected to also benefit from the upgrade to the BC Hydro grid resulting in further production cost savings in the second half of 2022.

The second pillar is to implement our commercial strategies within the Canadian domestic market to maximize the gross profit for each unit produced from our Delta Facility which, coupled with delivering increased quality of flower and higher THC, is expected to drive more volume into our Simply BareTM Organic and 1964 Supply CoTM brands.

The premium cannabis market is gaining momentum and outpacing the growth of the total market6 and this is expected to benefit the premium product innovations we are bringing to the market. 2022 is expected to be the first full year with all five of Rubicon’s wholly owned and licensed brands in market with national distribution. Future innovation in flower, pre-roll and 2.0 products are expected to be launched under the existing brand portfolio.

Our third pillar is to open the routes to market for our products internationally by obtaining key certifications and agreements to launch into Israel and Europe, with our first exports expected to occur in the second half of 2022.

Rubicon believes that the combination of new brands in key Canadian markets and increased product offerings enable us to capitalize on our momentum and, coupled with a continued increase in production quality and yield, we expect strong topline and margin growth in 2022.

We believe that the cannabis sector will have significant volatility in 2022 as there are ongoing changes in the retail stores environment, provincial mandates and increased competition. With the COVID-19 wave in the first quarter we experienced staff shortages at our facility and lower than forecast demand in January and February which we believe is attributed to seasonality and changing COVID mandates for access to Quebec stores. In March we saw a return to our previously forecasted sales levels. Notwithstanding this volatility, we expect to sell everything we cultivate and have available for sale during 2022.

From a capital management perspective, Rubicon intends to extend its existing debt facility or find a new facility at similar rates to keep cash optionality in the business.

The Company performed a cost review in the first quarter of 2022 to drive the business towards profitability as quickly as possible. In order to demonstrate their commitment to drive to profitability, the CEO and CFO proposed reducing their cash compensation for the second quarter to $nil and this has been accepted by the Compensation Committee of the Board. The CEO and CFO are in discussions with the Compensation Committee on a revised compensation structure.

The Company achieved positive operating cashflows for the first time in the fourth quarter of 2022. The Company’s current expectation is to be operating cashflow positive and Adjusted EBITDA7 profitable in 2022. We believe that despite any market volatility 2022 our focus on our three pillars coupled with our brand portfolio expansion achieved in 2021 will position Rubicon to continue to deliver on its commitments and win in the premium market.

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