Good morning, everyone. Welcome to Rubicon Organics fourth quarter and year ended December 31st, 2022 financial results conference call. As a reminder, this conference call is being recorded on April 3rd, 2023. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for research analysts to queue up for questions. Before we begin, I will refer you to slide two of our presentation, which contains Rubicon's caution regarding forward-looking statements and non-GAAP measures. Today's presenter will be Margaret Brodie, Interim CEO and CFO. I will now turn the call over to Margaret Brodie for the presentation.
Thank you, operator. Good morning, everyone. Today, I am reporting on Rubicon Organics fourth quarter and full year ending December 31, 2022, and our outlook for 2023. 2022 was a turning point for the business with significant growth and proof in the original thesis that cultivating high-quality organic cannabis in the right size facility will generate operating leverage. Furthermore, it provides evidence in our belief that focusing on the premium segment with premium brands delivered against targeted consumer insights can deliver profitability in the Canadian cannabis market. Rubicon is now at the stage where our thesis is proven, and today I'm proud to announce that we have delivered in 2022 record net revenues of CAD 35.5 million, or a 57% increase over 2021. Three-quarters of Adjusted EBITDA profitability, achieving CAD 1.9 million in 2022.
Operating cash flow of CAD 2 million, positive free cash flow of CAD 2.2 million in the second half of 2022. We also successfully extended our debenture for 18 months to December 31, 2024. Following from our financial success, we grew our national market share from 1.8% in 2021 to 2.4% of flower and pre-rolls in 2022 and 6.3% in the premium flower and pre-roll market. Looking at our fourth quarter, we saw consistent performance with Q3. In Q4, we had net revenue of CAD 11 million, an increase of 61% from the same period in 2021. We achieved Adjusted EBITDA of CAD 1.3 million, positive operating cash flow of CAD 2.8 million, and positive free cash flow of CAD 1.9 million.
The cannabis market overall has grown, and we saw our market share remain strong with 2.4% of share of national flower and pre-roll and 5.4% of premium flower and pre-rolls. In the last 18 months, Rubicon has now passed a number of key milestones. We initially hit monthly Adjusted EBITDA positive back in September of 2021, then delivering operating cash flow positive in Q4 2021. In Q2 2022, we hit Adjusted EBITDA positive and today reporting that we have delivered three consecutive quarters and a full-year positive Adjusted EBITDA. After delivering the Adjusted EBITDA in 2022, the results led to operating cash flow positive for the full year and free cash flow in the second half. Excuse me.
For 2022, we had a three-pillared strategy composed of clear business priorities with the goal of delivering sustainable profitability. Today, I can comment on the success against that strategy. First, we focused on optimizing yield and increasing in our quality of production from the Delta facility. In 2022, the company completed two significant facility upgrades with the installation of new dehumidification units and the completion of the BC Hydro grid connection. We also invested in process improvements and throughout the year, continued to identify opportunities for cost and quality efficiencies. In terms of our production, from January until August, we saw a significant increase in both quality and yield of cannabis produced. In the autumn, with certain facility maintenance and seasonal growing conditions, we had a relative plateau in production.
In 2022, the company has now achieved repeated crops over our nameplate capacity of 11,000 kilos and seen an increase in our average THC per crop, with certain strains as high as 29%. We believe that our quality step change was experienced by consumers beginning in April 2022, leading to an improved rate of sale of our products and increased demand. Secondly, we sought to maximize our product mix to maximize the Canadian domestic market opportunity by improving gross margin for each gram produced from Delta. Through our approach, the provincial distributors and our consumers would have access to a great range of product formats and strain varieties. In 2022, our strategy has proven successful, as evidenced by Rubicon achieving 6.3% market share of the premium market, flower and pre-roll market, excuse me.
In 2022, there was also a noticeable increase in competition with the rise of craft producers, and we believe that this competition led to the super premium brand, Simply Bare, experiencing a relatively flat year on revenues despite an increase in units sold. In contrast, 1964 had tremendous positive groundswell in the market, with momentum beginning in the summer of 2022. We saw a decline in the pre-roll market, where a portion of consumer preference shifted to infused pre-rolls, and Rubicon did not begin playing in that category until the fall, and we are working to regain our share of that category. In the third quarter of 2022, our third priority, excuse me, was to obtain the 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. Given the demand in Canada, in Q4, we decided to prioritize the domestic revenue channel. We decided to not continue to pursue or maintain any certifications needed for international export. We expect to review the international file later in 2023 and 2024. 2022 was our first full year of brands in market nationally.
Simply Bare has established itself as a leader in super premium and organic category with its flavor-forward genetics. As the premium category continues to experience minor price compression and increased competition from craft producers, we welcome the challenge. We are working hard to get better and continue to win and grow Simply Bare as a % of our volume sold. Our 1964 brand has received national recognition, winning Indica of the Year at the KIND Awards in December with our hero strain, Comatose. That has resulted in a surge in demand. We are determined to replicate this success with other strains and looking for ways to fulfill the increasing demand for our product. Our Homestead brand serves as an outlet for biomass that does not meet the quality standards of Simply Bare or 1964.
Although we have significant demand for this brand, it is not the focus of our business, yet it remains a profitable outlet for our biomass if need be. In 2022, we acquired the Wildflower brand in Canada with plans to expand this brand into the wellness market through 2023 and 2024. We firmly believe that Wildflower has good potential in this market, and we are excited to see how it develops in future. Finally, our LAB THEORY brand targets the small market of premium concentrates and consistently delivers high-quality products to its following. Although it is not the focus, it is not our focus brand to drive growth, we have noticed an increase in demand in the latter part of 2022.
The premium cannabis market is growing faster than the overall market, exiting December with a 26% growth rate compared to 24% in the overall cannabis market. We expect this segment to become a quarter of the cannabis flower market category value, delivering strong growth margins. Competition in the premium segment is crucial to give consumers choice on shelf, and we have seen increased competition, but Rubicon is well positioned to win given the consistency of our product quality and retail distribution. In terms of winning in the premium landscape, we expect over the next 12 months to see consumers shift away from the THC percentage as the only metric for purchase decisions and move towards terpene profiles within each strain and batch. Rubicon expects to benefit from this trend as our organic grow methodology generally delivers cannabis flower with a higher level of terpenes than hydroponically-produced flower.
Following on from my comments earlier on the financial highlights, in addition to delivering record net revenue of CAD 35.5 million, Rubicon achieved a third quarter, third straight quarter, excuse me, of positive Adjusted EBITDA growth, which led to a full year of Adjusted EBITDA profitability of CAD 1.9 million. We delivered positive operating cash flow in the quarter four of CAD 2.8 million and CAD 2 million for the full year 2022, in addition to achieving CAD 1.9 million of positive free cash flow for the second half. In terms of the balance sheet, at December 31, 2022, the company had CAD 8.2 million in cash and CAD 19.3 million in working capital. We currently have approximately CAD 8.4 million in cash and CAD 4.8 million in receivables.
With our existing secured debenture due in December of 2024, Rubicon has a strong position with its current trajectory to repay or seek competitive long-term mortgage financing in the coming years. Our cash position and working capital mean that we are confident in our ability to fund growth in 2022, 2023, excuse me. In 2023 and beyond, the company plans to continue certain strategic capital investments to improve quality yield, increase efficiency, and/or decrease operating costs within at Delta, the Delta site, with items such as additional tables for plants in the cultivation area, a second boiler, and automation opportunities. The company's capital expenditures committee reviews every proposal for quality and yield improvement, risk management, and payback of expenditure to cost savings.
In terms of costs in general, given the high inflationary environment in which the company is operating, we continue to monitor costs closely and are always actively seeking cost-saving initiatives, and that can be seen in the prudence in which we are incurring our operating expenses. You can see from the chart that in the fourth quarter of 2022, the company earned CAD 11 million in revenue, an increase of 5% when compared to the third quarter. As I said in our third quarter earnings call, the net revenue in the fourth quarter would be relatively flat next to the third quarter, as we had certain facility maintenance and downtime, which impacted our crop yields and availability of supply in the autumn. This was offset by the positive momentum for Rubicon in the pre-roll category, followed by the launch of infused pre-roll.
During Q4, we also began selling through the OCS flow-through program, which has been proven useful for products that do not yet have consistent supply or demand. In Quebec, we benefited from additional listings. You can see from our results, 2022 had a steady growth of revenue and helped us to realize the impact of operating leverage on gross profit. 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. The production costs are expenses incurred, and in the fourth quarter, we had a decrease in our costs with positive impacts from the BC Hydro connection being seen.
We have also seen our inventory expense to cost of sales being product costs incurred after the harvest door benefit from higher production throughput from the facility, meaning that overheads are spread over a larger number of units and our per-unit cost reduced. Overall, our gross profit before fair value adjustments in Q4 2022 was CAD 4.5 million, meaning that we are an annualized run rate of around CAD 18 million of gross profit. As we look at the year and the full 12-month run rate, our super premium brand, Simply Bare, delivered a flat net revenue compared to 2021, but increased volume of units. The brand performance was affected by increased quality competition, price compression, and the market decrease in flower and pre-rolls, with a large share of consumer preference shifting to infused pre-rolls.
In the second half of the year, performance improved with the launch of new strains, larger formats, and an infused pre-roll offering. In contrast, the premium 1964 had its first full year of sales in all key markets. The brand has hit the right price-to-value ratio with consumers. We consistently have more demand than we can fill. The year was also impacted by various external factors that impacted consumers access to the legal market, such as the August labor strike in BC and the Ontario cyber attack at the same time. There were rotating strikes in Quebec at the SQDC stores throughout 2022 and ongoing. Although difficult to quantify, anecdotal evidence is that some consumers return to the black market from these events.
I'm also pleased to report that Rubicon's revenue growth has been delivered relatively evenly across all our key markets in Alberta, BC, Ontario, and Quebec, which together make up 97% for 2022 of our net revenue. As you know, selling to Crown corporations means that the credit risk around our receivables is very low. You can see that 2022 was a turning point for Rubicon, delivering positive operating cash flow of CAD 2.3 million and Adjusted EBITDA profitability of CAD 1.9 million. I would point out that Adjusted EBITDA is an important measure. As for Rubicon, this strips out non-cash items, but in addition to the EBITDA calculation, such as share-based payments and gains and losses from biological asset standards, which in particular can have large swings, as we saw approximately CAD 4 million in movement in our P&L between Q3 and Q4.
The profitability was driven by 57% increase in our net revenue from 2021, increased throughput at the facility, and continued prudence with our spending and operating expenses. While the cannabis markets have been slow to find the right balance with lower price points and more costly to deliver than initially anticipated, excuse me, Rubicon is now emerging as one of the few companies delivering on profitability and its thesis that the premium market is where profitability lies. Before I discuss what is next for Rubicon, where is the Canadian cannabis market? Firstly, the legal cannabis market in 2022 was over CAD 4.5 billion, and we believe that somewhere around 40% of customers still buy in the black market, in particular in the premium segment.
The legal cannabis sector grew 24% in 2022, with the premium category growth rate exiting 2022 at 26% growth. Over 70% of LPs are in arrears on their excise remittance to CRA, and we expect to see more CCAA and bankruptcies in the sector in 2023. We have seen a more fragmented landscape with the rise of smaller and craft LPs, but market pricing, getting products listed, and competing without scale is a struggle, and we expect, unless exceptional, many will not survive. In terms of the cannabis stock market, we've seen over 86% decrease in share prices in the sector since the most recent highs in February of 2021, and a general lack of interest in both retail and institutional investors. Relative to the Canadian industry, where is Rubicon?
Getting the Delta facility to consistent quality and output took longer than was originally forecast. As you can see from the consumer reaction and demand in 2022, we are now achieving that quality and consistency. We believe we're on the right trajectory for the future. With others focused on survival, Rubicon is looking to seize opportunities for growth in the industry and continue to focus our resources and efforts where we have the right to win. Our goal is sustained profitability, demonstrating that investable companies exist in the cannabis sector. On to 2023 key priorities. What is next for Rubicon, and what's our plan to win in the cannabis sector? We intend to be laser-focused to deliver each one of these. Firstly and foremost, always to optimize yield and cultivation at Delta.
We are a flower-first business, and our priority is delivering super premium quality cannabis flower products to the Canadian market. Producing at scale in a greenhouse environment is subject to seasonal impacts, and commercializing new strains to meet demand in market and our brand standards can be a challenge. While we have some CapEx for site, such as tables for the remainder of the facility that will increase yield, we are driving 2023 to be a year of steady and consistent quality production. Secondly, we seek to maximize the Canadian premium opportunity. We aim to improve and maximize gross margin per gram produced by producing the right genetics in the right product formats for customers at the right price. We plan to grow the Simply Bare brand and premiumize 1964 brand to improve gross profit.
To meet increasing demand, we are working to launch products that do not require the Delta facilities capacity, such as through contract grow relationships to Rubicon's quality standards. These projects are expected to incrementally boost net revenue and gross profit. We want to drive efficiency in our processes and systems. To improve efficiency, Rubicon is evaluating new information systems and plans to implement them in the second half of 2023, reducing reliance on manual processes and key individuals. Though it will drive some short-term costs, this will increase system reliance and repeatability, readying Rubicon for further growth. We aim to create a proud and engaged team who deliver outstanding results. To deliver a premium product and minimize costs associated with labor turnover, we prioritize team member engagement and pride.
We have set clear goals and rewards that are linked to recognizing hard work and accomplishments, in addition to a number of other alternate initiatives. Rubicon had changes in our leadership and governance in 2022. I'd like to thank everyone who had part in the journey in getting Rubicon to this stage. We are looking forward to what's next and to build a business. Two weeks ago, Rubicon announced that Michael Detlefsen had joined the board of directors as well as four board nominees, Len Boggio, Doris Bitz, Ian Gordon, and Karen Proud. Michael, Doris, Len, Ian, and Karen bring a wealth of expertise across diverse fields, including strategy, marketing, manufacturing, finance, governance, and regulation.
The nominees will be board observers and do not have any voting rights until their successful election at the AGM, which is expected in summer of 2023. The board decided that the CEO will be determined once the new board is fully onboarded, and the new group will make the selection of the permanent CEO. For the time being, I will continue as interim CEO and CFO, and the existing leadership team continues with strategy and is focused on our next milestone. You can see, given the Q4 results, the business is delivering. Rubicon Organics is in an enviable place in the cannabis sector with our premium market position, balance sheet, and positive trajectory. We believe that our cannabis quality, brand positioning, and product offerings will drive continued growth in net revenue, resulting in an increase in gross profit and Adjusted EBITDA for the full year 2023.
With a stable cost base, this anticipated growth in net revenue and gross profit would improve our operating leverage. Additionally, we expect to achieve positive cash flow for the full year, pending opportunistic investment decisions. As a business, we are now looking at a number of alternatives to increase the volume of product that we have available for sale to fill the demand we have for our quality products. We believe that despite any market volatility, inflationary pressures, regulatory change, our product quality, brand portfolio, and balance sheet has positioned Rubicon to win in the premium cannabis market. We would now like to open the line for analyst questions. Operator, please open the line.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the Star followed by the one on your touch-tone phone. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Neal Gilmer at Haywood Securities. Please go ahead.
Thanks very much. Good morning. Maybe just to start, Margaret, sort of one of your comments towards the end of your prepared remarks, can you I don't know what color you can provide, but give us a little bit of sense as sort of what your options are as far as increasing your capacity. If you're saying your demand is outstripping what you can do through Delta, are you looking at, like, contract grows? What's sort of the nature? Obviously, if you haven't signed anything or done anything, you can't provide specifics, but just a little bit of, you know, sense as to sort of what some of your options might be out there to increase that capacity.
Thanks, Neal. Good question. Yes, I don't wanna give away all of our hand in terms of our plans until we've got things locked and loaded. Look, everything's on the table for Rubicon. Contract grow being challenging to find partners that we really trust, and wanna work with that will deliver quality, but it is something we're pursuing. We're also looking at a variety of other things in terms of renting space, you know, partnering with people, et cetera. Look, we're in an environment where there are a number of distressed assets around Canada, and I think that Rubicon will be able to look at ways that we can capitalize on that.
Okay. Thank you for that. Moving on. Obviously, there's a noticeable increase in gross margins in the second half of the year. I'm going to assume that part of that is the BC Hydro connection, which was in September. You know, you still had an increase, I guess, even before that occurred. I'm wondering, as we look out to 2023 here, you know, is there further room for margins to expand, or is this where we sort of finished off Q4 here, sort of the normalized level going forward?
The answer is yes, of course, we're working on that. That is the key focus in terms of our second priority for the year. Always focused on maximizing gross profit with every product. Look, product mix is a huge part of that. Us driving demand. Excuse me. We can't drive demand, but us creating the right situation where we have strong demand for Simply Bare will increase that margin. We've got a lot of really exciting genetics coming down. Because the product quality has come up, we have way less Homestead available for sale, and that product is going more into sixty-four and Simply Bare. Overall, we do expect, you know, some better product mix.
I can't put an exact number on it because obviously we're in a market where there's a lot of changeable factors. I'm very bullish.
Okay. Thanks. maybe my last sort of housekeeping item, you know, some potential CapEx work that you wanna do this year. Do you guys have a, sort of a range of a budget that you've assigned-
Yeah.
set aside for this year?
Yeah. You know, sort of CAD 3 million-CAD 4 million would be a general, a good number to look at. That's not all signed off and approved. We take things one at a time.
Yeah.
Tables are moving forward. We have part of the facility that doesn't have tables in it. Anecdotally, I can tell you that one challenge, we have one compartment that our cultivation team doesn't love. I've told them their challenge is to have it be the compartment that they are most proud of by the end of this year. You know, we're, every gram has to be great. Every project that we look at has to have payback to it, in either cost, quality, or efficiency. While we have set the budget for the year, every time we go to undertake a new project, it's reassessed before we actually pull the trigger. I'm very happy with where the facility is overall.
We just did a facility maintenance check or had a external party review the facility itself, and we're quite happy with where it's at. Maintenance, I think, is the name of the game in this industry at this stage. What we've seen is Rubicon's certainly been part of working very hard and driving very fast to get plants out, but now it's making sure that we can have that consistency, that, you know, we have scheduled downtime to make sure things are in the right position, and looking at, you know, keeping our assets in good order.
Great. Thanks for answering my questions.
Thank you. As a reminder, should you have any questions, please press Star one. Next question comes from Michael Freeman at Raymond James. Please go ahead.
Hey, good morning, Margaret and team, and congratulations on executing so well against your strategic plan this year and delivering on profitability. Not many can say this. My first question is on changes to the board. You gave a little bit of color on some of the skills and background of the new board members, but I wonder if you could share some thoughts on how their direction or their potential direction might shift Rubicon's trajectory moving forward.
That's a great question. Look, Rubicon sees a really tremendous opportunity in the market right now. You know, as I mentioned in my remarks, that most of the industry is just focused on survival. That's a really great time for us to look at how do we build one of Canada's great businesses. These are the moments, I think, the potential for David versus Goliath of the big companies that got all the money in the beginning. I don't necessarily think they're gonna be the ones that win in the Canadian markets overall. We've built a team with the new board. If you look at each of them and their skill sets, you know, Len comes from... He was the chair of the CPA Canada, the Canadian accountant industry.
He is known for governance and understands finance very well, obviously. Karen Proud, strong regulatory background, understands the workings of Health Canada and has worked in and out of that for a number of years. Doris Bitz took a business with her team from CAD 70 million in revenue to CAD 900 million. She's moved to being over multiple sites, built strong in manufacturing and brand. Ian Gordon was part of the team running one of Canada's biggest businesses, Loblaws, managing their brands, manufacturing experience. Who I miss, Michael Detlefsen, involved in a number of industries and a lot of expertise on agriculture, but also on strategy and winning. Look, we are building a company to drive forward, get bigger, and win.
Look, one of my personal ambitions is to have us be one of the most admired, if not the most admired Canadian cannabis company. I think it's a long answer. I should be more succinct, but what I'm trying to say is we've got a really neat opportunity ahead of us right now. I'd like to take this team, demonstrate to them the strategic plan that our executive team has put forward, you know, get them on board over the next three months and drive forward and focus on that. I think it's gonna be an interesting year.
Absolutely. Thank you very much for that. My next question is on sort of your you know, rough guidance for next year's, thinking about growth and top line, gross profit and Adjusted EBITDA for all of 2023. I wonder if. You know, it's hard, of course, to put a finer point on these numbers, but I wonder if you could speak to sort of ranges of growth you're thinking about for these, in these, across these metrics, and any potential disruptions you could see that would hamper your ability to execute on these goals.
I think I would say if you took our Q4 and put that across four quarters, you'd see double-digit growth from us. You know, even if we can hold the line there, I think we'll deliver everything that was, that is there, which includes, you know, increased gross profit, increased cash flow, and et cetera. Profitability, obviously. Further to that, look, the industry has lots of ups and downs. You know, we're, I think we're at a strong position. In terms of disruptions, that's about why you're getting a hesitation from me. The disruptions, you know. One thing we've learned is there will be disruptions. Do I know what they will be? No.
I believe our team has gotten used to sort of dropping and rolling, having been in the industry for quite a while. We're very lucky. We've got really experienced and talented people who are really dedicated. You know, the biggest disruption I think would be, would be a big event in the industry that we can't actually foresee. Regulatory change, I only seeing as positive. Do expect some regulatory change, but we don't know what that is. We've seen the OCS make positive changes in terms of their markups. Can't quite quantify everything that's gonna happen there. Even if in the wider markets we saw, you know, a turn to recession, et cetera, an official recession, I don't think I think, you know, Rubicon's well-placed to weather all of that.
Excellent. Thank you. Last question. During 2022, Rubicon made the decision to step away from international for the time being. I wonder how the company's feeling about this strategic decision, and if there is any update on international you're willing to offer.
Great question. Look, we get a ton of inbound inquiries for international. There's no doubt about that. What we've seen, though, is incredible price compression in the international markets. We firmly believe it's gonna take longer for them to turn on. Also, the revenues would be very chunky in terms of consistency. We believe that a lot of companies are gonna spend a lot of time and money you know, hitting their heads against the wall, and that we can learn from what they do as time goes on. You know, we've got demand in Canada, and it's profitable today. That's the focus. We will continue to watch it. It takes a tremendous amount of senior time and our skilled team members' time.
If we're going to do international, we're gonna focus on it and do it properly. We don't have the biomass right now. I'd like to prove the Canadian market is strong and grow from there, and I believe that there will be an opportunity. It's just not today. We'll probably pick up the file again, as I said, end of this year and reevaluate and just suss it out. I do believe international will be part of our three-year plan, but exactly what that looks like, yet to be seen.
Terrific. Excellent. Thank you for the questions, and I'll jump back in queue.
Thanks, Mike.
Thank you. At this time, we have no further questions. You may proceed.
Thank you, everyone. Well, I just wanna say thanks for dailing in. We did have a tremendous year. A big year, lots of change. I think the table has been set for what's to come in 2023 and beyond, very much looking forward to reporting on that as we get there. That's the end of the line, operator.
Thank you. Ladies and gentlemen, this concludes the conference call for today. We thank you for participating. We ask that you please disconnect your lines..