Good morning, ladies and gentlemen, and welcome to the Rubicon Organics Q3 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, November 15th, 2022. I would now like to turn the call over to Margaret Brodie, CFO, and Director. Please go ahead.
Thank you and good morning, everyone. Big day for Rubicon. We began our thesis to cultivate the highest quality organic cannabis possible in the right-sized facility to generate strong operating leverage and to focus on the premium segment with premium brands delivered against targeted consumer insights. Rubicon is now at the stage where our thesis is proven, and I am proud today to announce that we have delivered in Q3 record revenue, net profit, our second successive quarter of adjusted EBITDA profitability, and achieved free cash flow for the first time. In addition, we are now tracking adjusted EBITDA profitability for the year 2022, and we expect this trend to continue, but I always must put a caveat that in the cannabis industry there is Q1 seasonality. Rubicon Organics continues to be a market-leading premium LP.
We began Q3 as a top 10 licensed producer, and in September, Rubicon has a number nine position in Canada for total flower, pre-roll, and hash. In Q3, we increased our market share in flower and pre-rolls to 3.2% of total market, thus making us one of the fastest-growing LPs in Canada. In our key segment, premium flower and pre-rolls, we were the number two LP with 8% market share, and we have seen our share of product mix improve favorably to Simply Bare and 1964. We expect this trend to continue and are currently at the stage where demand is larger than our available supply. I'll come back more to this later.
Our net revenue grew 52% for the twelve months ended Q3 2022 compared to 2021, and 49% net revenue growth for the three months ended Q3 2022 compared to Q3 2021. Our strategy is to focus on innovative and novel genetics, cultivate organically to the highest standards, and deliver quality consistently. We believe that together with our team, delivering consistently to provincial customers, these three elements are key to developing equity in our premium brands that consumers will love and be loyal to.
In Q3, Simply Bare Organic remains the number one premium brand in Canada in flower and pre-roll for the fifth quarter in a row, with a 5.1% market shelf share for the twelve months ended September 30th, and retains the number one premium brand position across flower and pre-rolls in our home province of BC, with an 8.4% share in the three months ended September 30th. Our 1964 Supply Co. brand competes at the very top of the mainstream pricing segment. 1964 has become the number one mainstream brand in BC in the 3.5 g format category, which is the highest sales volume category. 1964 has been a major contributor to our revenue growth and been our largest growth driver in 2022 thus far.
Since the beginning of this year, we have seen the foundation of our investment thesis proven out, namely that the premium segment will outpace the growth in the total market as consumer taste preferences evolve and the development of a brand promise within the category is beginning. This trend is allowing premium brands like ours to emerge. While the pace of the overall cannabis market growth has decelerated, the premium segment continues to grow, as you can see in September. For the rolling three months, the growth rate was 28%, as compared to 13% in the overall cannabis market. In addition, in 2021, the premium segment was 18% of total cannabis dollars spent, and we have seen that number grow to 20% thus far in 2022.
We expect the premium cannabis segment to grow to over a quarter of the category value and where most of the gross margin will be achieved. It is important to have quality competition in the premium segment of the market to allow the segment to grow, and this is beginning to emerge, making all competitors better. For Rubicon to continue to win, we need healthy competition on shelf, building the category to give consumers choice and allow us to stand out. With our portfolio of brands and market and our recent entrance into the infused pre-roll market with live rosin pre-rolls in Simply Bare and hash or diamond-infused pre-rolls in 1964, we expect our innovation to keep us in a leadership position. Now to the fun stuff.
In the three months ended September 30th, 2022, Rubicon Organics reported record net revenue of CAD 10.5 million, a second successive quarter of positive adjusted EBITDA, achieving CAD 1.9 million, net profit from operations of CAD 2.2 million, operating cash flow of CAD 1.4 million, and the first quarter of positive free cash flow of CAD 400 thousand. Furthermore, Rubicon's year-to-date adjusted EBITDA is now CAD 600,000 , and we remain on track for 2022. The company has maintained a strong balance sheet with CAD 6.8 million in cash and CAD 22.7 million in working capital at September 30th. We currently have CAD 8.4 million in cash with CAD 4.7 million in receivables.
We delivered positive operating cash flow in the Q3 of 2022, in addition to achieving positive free cash flow for the first time. With our existing secured debenture due in December 2024, Rubicon has a strong position with its current trajectory to repay or seek competitive long-term mortgage financing in the coming years. Rubicon's cash position and working capital mean that we are confident in our ability to fund growth in the final quarter of 2022 and into 2023. We completed our BC Hydro grid connection in September, which has been the single largest capital project of 2022. The cost savings of being on the hydro grid are significant to our business and are expected to result in well over CAD 1 million in operating cost savings annually.
We are looking at other capital projects for 2023, but we expect those to be relatively modest in nature, with the largest likely being putting tables into the parts of the cultivation room where they are not in place. These tables will increase yield by adding to our cultivation square footage available, but also improve airflow, thus the quality of our plants. Any CapEx is being evaluated based on maintenance, quality, efficiency, and yield. In terms of costs in general, given the high inflationary environment in which the company is operating in 2022, management continues to monitor costs closely and is actively seeking cost savings initiatives that can be seen in the prudence in which we are incurring operating expenses. The area looking forward that we see the largest inflation in 2023 is in salaries and wages, given the overall inflationary household pressures.
In terms of revenue, we earned CAD 10.5 million in revenue in Q3 2022, a 49% or CAD 3.5 million increase over Q3 in 2021. This increase in net revenue was 12% growth compared to Q2 2022 and delivered despite the challenges in Q3, including the strikes in BC and Quebec, as well as the cyber incident affecting deliveries in Ontario. We believe the largest contributor to our revenue growth is a step-up in our product quality. This revenue growth was expected in the summer months, given typically higher consumption rate, and we are extremely happy with the improvement in our rate of sale of our products and the product mix between Simply Bare and 1964, and much less Homestead.
This means that our gross margin results are more favorable with a rate of 39% in Q3 2022, as compared to 32% in Q2 and 25% in the same quarter in 2021. The launch of new strains in the spring and summer, together with improved quality, is leading to better mix and higher consumption demand for our products. We have seen our distribution points in Ontario, the number of SKUs carried in each store, increased 90% from Q1 to Q3 2022. We have successfully completed our highest volume of orders in September 2022, driven by the restocking of shelves in BC, product listings in Ontario, and the movement from online to in-store SKUs at the SQDC in Quebec. We also received repeat orders for our recently launched infused pre-rolls available under 1964 and Simply Bare.
We believe that infused pre-rolls will continue to drive a large share in the overall pre-rolls market. While it is early days, the feedback on our quality is very positive. Our revenue growth has been delivered relatively evenly across our key markets of Alberta, BC, Ontario, and Quebec, which together make up 98% of our sales in Q3 2022 and 97% in the nine months ended September 30th. As you may know, selling to Crown corporations means that the credit risk around our receivables is very low. After our revenue, our gross profit before fair value adjustments is impacted by two things. Firstly, our production costs, and secondly, the inventory expense to cost of sales, or the costs incurred in drying, processing, packaging, and shipping our products.
In terms of our production costs, we have seen a slight increase in our costs in the third quarter related to the increase in plant density, plant handling techniques, and the number of plants in situ, meaning additional labor is required during the cultivation cycle at harvest. In addition, there has been a notable increase in the cost of fertilizer and other input materials due to inflation, as well as the need to use additional inputs given larger crop sizes and an increased number of plants on-hand. This cost increase was expected and is having a direct impact on our increased quality and yield from Delta. We do expect to offset some of this increased cost by energy savings now that we have completed the BC Hydro project.
We have seen gross profit benefit from higher production throughput from the facility, meaning that overheads are also spread over a large number of units and our per-unit cost reduced. Overall, our gross profit before fair value adjustments in Q3 of CAD 4.1 million means we are on an annualized run rate of around CAD 16.4 million of gross profit. Reviewing our performance on a 12-month basis, the net revenue is CAD 31.3 million, a 52% or CAD 10.8 million increase as compared to the same period in 2021. We have enjoyed a growing positive gross profit trend over the last five quarters and expect this trend to continue through the remainder of 2022 and into 2023, with the possible exception of Q1 seasonality.
Here's my favorite slide, and you can see that Rubicon Organics has now truly turned the financial corner with positive operating cash flow of CAD 1.4 million and both profit from operations and adjusted EBITDA profitability. This profitability is driven by a large increase in our revenue, increased throughput at the facility, and continued prudence of our spending and OpEx. While the cannabis market has taken longer and been more expensive to deliver with lower sales price points than was anticipated, Rubicon is now emerging as one of the few companies delivering on profitability and its thesis, the premium market is where the profitability lies. At the beginning of 2022, we set a three-pillared strategy composed of clear business priorities with the goal of delivering sustainable profitability. Firstly, optimizing yield and increasing quality from our production facility.
Secondly, improving product mix to maximize the Canadian domestic market opportunity. Lastly, to obtain the requisite certificates to enable us to build an international route to market. The strength and success of delivering on our strategy from the first two pillars within our domestic business has led Rubicon to having more demand for its cannabis products in Canada than our available supply. Thus, we needed to assess the international opportunity. In reviewing our business model, we are prioritizing the domestic revenue channels to continue to develop our brands and achieve consistent profitability in Canada. While we believe that there will be opportunities in the international markets, we have decided to continue to focus on the Canadian market in the short term and thus, for the time being, will not continue to pursue an EU GMP certificate or maintain other certifications only needed for international export.
Rubicon does expect to continue to evaluate and investigate international opportunities in future. The Delta facility's nameplate production is 11,000 kg. In Q2, we hit a yield run rate of approximately 10,000 kg of what we call internally LMSA, or large, medium, small, and A, which go into our flower and pre-rolls. Our focus is on top-shelf product, and thus we do not measure ourselves on any other cannabis output. In the third quarter, we had crops above our nameplate capacity and some below due to seasonal growing pressures and some maintenance downtime. As with any agricultural system, we're going to see crop variability, and I expect going forward, we will consistently deliver over 10,000 kilos from the facility, and there will be times we're over 11 and times below, impacted by maintenance schedules, genetics, and trials.
We also continue to see an increase in our average THC that have exceeded our internal quarterly targets, with some genetics testing as high as 29% THC. I'm pleased to say that our average THC in the last five crops hit 26%. Not surprisingly, these ultra-high THC results have corresponded to an increase in the rate of sale of those genetics. The work done by our cultivation and processing teams in 2022 has resulted in a step change in flower quality and we believe directly resulted in an increase of rate of sale of our products. Our priority and focus remains delivering super premium quality cannabis flower products in the Canadian market. We plan to continue to work to optimize yield and quality in 2023 with relatively modest capital spending planned, as I mentioned before.
Our marketing and sales team have done a tremendous job in terms of taking the improved product quality from the Delta facility and driving growth of both Simply Bare and 1964. While Simply Bare has maintained its leadership position in the premium market, 1964 has risen through the ranks and, as I said earlier, delivered one of the fastest-growing brands in Canada, ranking number 10 nationwide, while only launched nationally in the autumn of 2021. The 1964 Comatose strain has developed a cult following, and 1964 overall has delivered 291% growth in net revenue compared to the same period of 2021. Given that we are now supply-constrained, we are managing our margin mix with decisions on format size and gross margin per gram in each SKU in Q4.
Rubicon is actively seeking ways we can cost-effectively and efficiently satisfy the demand for our cannabis flower products, such as through focused contract grow relationships which deliver on our quality standards. As we look at Rubicon's financial achievements in the last 12 months, the business is delivering. With our current revenue trajectory, full portfolio of brands in key markets in Canada, and current business structure, we remain on track to deliver on our guidance of positive operating cash flow in the second half of 2022 and positive adjusted EBITDA in fiscal 2022. We are also aware that we see the threat of recession in Canada, which, coupled with high inflation, may make consumers' overall purchasing power for their cannabis budget smaller and could impact the sector in the next 18 months.
While we cannot predict the likelihood of a recession, we believe that Rubicon is well-placed in its cost base, brand portfolio, and balance sheet to weather such a storm. In 2023, we expect to build on Rubicon's leadership position in the premium cannabis market. At our AGM on December 13th, we plan to lay out our 2023 priorities and plans, including continuing to optimize our cultivation processes at Delta, improving our product mix to continue to maximize gross margin per gram, maintaining our operating costs while we seek new revenue and gross profit pools to deliver increased profitability, including, firstly, seeking ways to fill the demand for our cannabis products, including the possibility of contract grow to Rubicon Organics' quality standards. Secondly, launching new cannabis products and line extensions which do not rely on the Delta facility capacity, such as possible line extension to the Wildflower brand.
Thereafter, our focus is on improving systems and efficiencies at site and making Rubicon a great employer. With Rubicon's current position, where demand is greater than our available supply, our strategy is working, and from here, we are actively planning on how to meet demand and incrementally grow our net revenue and gross profit, and we expect to build these without significant incremental cost to our business, thus driving additional profitability. In the coming weeks, we'll be releasing our ESG report for 2021. A little later than planned, but we believe that continuing to measure our ESG journey is an important part of building the cannabis sector in Canada, and we intend to continue leadership in this area.
We also welcome the news of the Cannabis Act review now underway by the federal government, and we will share our views with the federal government on how to change for the better, overcome the hurdles, and ensure a thriving Canadian cannabis industry. Jesse McConnell, who co-founded Rubicon, is currently on parental leave and has submitted his resignation to the board effective December 31. We expect to continue to have Jesse as a large shareholder and board member moving forward, and I would like to express my thanks to Jesse for the fantastic company he has built. In addition, the board is underway with their search for a CEO successor, evaluating both internal and external candidates. The existing leadership team continues with the strategy and is focused on the next milestones, and you can see, given the Q3 results, the business is delivering.
In addition, I'd like to thank Julie Lassonde for her contributions on the board and all the coaching and mentoring she did in her time with Rubicon. I'm also thrilled to announce that Melanie Ramsey has been promoted to Chief Commercial Officer and Director. Mel has been with Rubicon since 2018 and been a major part of developing Rubicon's brands, and from here on out, will be taking responsibility for the entire commercial organization. Final thanks to the employees at Rubicon for your hard work and dedication to growing the best cannabis on Earth for the Earth, and this is why we are here today. Rubicon Organics is in an enviable position in the cannabis sector with our premium market position, strong balance sheet, and positive trajectory. We would now like to open the line for analyst questions. Operator, may you 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 star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Neal Gilmer with Haywood Securities. Please go ahead.
Yeah, thanks very much. Good morning, congrats on the quarter. Strong EBITDA numbers, and what I want to get a little bit better understanding from you, Margaret, is the BC Hydro project that was completed in September and the CAD 1 million of annualized cost savings that that provides. I'm assuming that we really didn't see much of that in Q3. We'll see more of an impact of that in Q4. Does that primarily go through the operating expense line, or are we going to see a benefit to gross margins as well from the completion of that?
You're correct. It will be through our production costs mostly because, and then allocated to our inventory. What you're going to see is that really sitting right in our, out of our gross profit.
Okay.
It's a really major project. Pardon me, go ahead.
Yeah, that supports your comments about your continued improvement in gross margins going forward with the exception of the seasonality in Q1.
Yeah. You know what? Our product mix as well have been very favorable. We're seeing growth in both of our key brands, Simply Bare and 1964, and really thrilled with the real pull-through of the markets rather than push out, I would say.
Thank you for that. I'm curious to sort of see, you know, you obviously commented that you can't control a recession, and we're all sort of grasping to sort of see how the consumer responds. Have you seen any, you know, initial trends as you've started into Q4 as far as any impact of that? Or are you sort of seeing the momentum that you guys achieved in Q3 continue into Q4 here?
You know, I think we're going to look to be relatively flat in Q4, and waiting to see how things go, I think, as we look into 2023. Look, we as a management team and then with the board went through a SWOT analysis in August evaluating our product portfolio, our cost base of our products, and making sure our listings were there so that we had products on shelf available to consumers in every product, in every province that would win in a recessionary environment when there's smaller amounts of dollars in pockets, including, you know, do we have the right pre-rolls listed for the lipstick-type index where you take the small luxury. We believe that we're in a good place on that overall.
I think it remains to be seen if truly people's wallets are smaller as we go through the winter months and heating and electricity, and food costs really are going to be the big question mark.
Yep. No, fair enough. Okay. Thanks for taking my questions, Margaret.
Thank you.
Your next question comes from Michael Freeman with Raymond James. Please go ahead.
Morning, Margaret, and congratulations, Mel. Thanks for taking it. Congratulations on this extremely strong profile. My first question is on 1964. You mentioned this is your strongest growth driver over the. I wonder if you could describe some of the reasons why this brand in particular is growing so fast. If you could break down sort of the portion of revenue that is relative to your-
Absolutely. To start with, I would say we are seeing and have available, given the product quality that we have very little Homestead. We only sell Homestead when something doesn't meet our product quality for 1964 or Simply Bare. You know, that we expect going forward, that's going to be less than 10% of our market. I consider that, you know, it's great for the consumer to find it, but not what we're focused on. Look, 1964 has had a tremendous take-off in market. The strength of the Comatose strain has really given it a lot of kudos.
What we want is when consumers pick up 1964 and primarily really with that Simply Bare, they're getting the best expression of the strain that they're going to see. For Simply Bare, you're going to find novel and unique genetics. I expect that to be about one-third of our units in 2023, and the remainder probably two-thirds to 1964. We are at a point where we have to be choiceful in which direction we go and where we place our product given the demand. You know, the success of 1964 has truly been, I think it sits at the top of the price range that it's in. The product quality is excellent.
You know, it started out really focused on legacy strains that people knew and loved. We believe got great value for that.
Okay. All right. That's really helpful. 1964 offerings are gonna be.
It's a large pool of customers right at that price point as well. I think that's the other end consumer.
Very helpful. Now you mentioned the points of distribution in Ontario increasing 90%, I think you said. That's pretty excellent penetration. I wonder if there are other jurisdictions in which you're solid penetration during the last.
Great question. You know, in BC, we have a very significant leadership position at 8.4% of the premium market. We know we do well in BC. We love it. You know, it's where we're from and we really care about the BC consumer. Ontario, the numbers are great. Quebec, it's you know, you get listed in every store because of the way the SQDC drives. That's good news. Alberta is a very different market than the other three. I actually don't have the distribution numbers. It's something that I'll take a note of and ask our team to look at. You know, data can be challenging, but I know we have built our Alberta profile quite a bit this year.
The teams work very hard to tell our story to consumers. I'll come back to you.
Very helpful. Last one from me. You mentioned different impacts on sales coming from BC market, Ontario market, and Quebec. I wonder if you could give a rough number on how much that impacted those different disruptions.
Sorry, you're talking about the strikes?
Yes, the strikes and the.
Yeah. You know what? It's something that we really struggle to quantify because to Rubicon's mind, what happened to a certain extent was the BC strike, you know. There was basically a three-week downtime, although the strike only lasted two weeks because it took some time to get things back and going. Shelves were restocked, and we believe we did very well in that restocking, where because the store shelves went empty, they basically sold out all their old inventory. They had the opportunity to come in with additional. We also saw and Rubicon did well with the new strains coming back on and filling the shelves. We also saw a lot of people go back to the black market in that moment, and the black market dealers took advantage of it.
It's hard to say if there'll be a long-term impact on that. Really, we've tried to quantify it, we've struggled to quantify. I think there was a financial impact. There was also a financial impact in the Ontario deliveries, and then the rotating strike in Quebec. Again, given the data, the growth rates that we're in, you know, we can't look at last year in the same way. It's not Tide soap, unfortunately. As you know, it's challenging to figure out what would be true in different circumstances in cannabis. It's not a great answer, but we've struggled with the same thing.
No, that's just fine. Thank you very much for that color, and congratulations on the strong quarter.
Thanks, Michael.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Oh, one moment, please. If there are no further questions at this time, please proceed.
Thank you. Well, I want to say thank you everyone for dialing in today, and, you know, we're excited about where Rubicon's going. Thank you very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.