Good morning, everyone. Welcome to Rubicon Organics' second quarter 2021 financial results conference call. As a reminder, this conference call is being recorded on August 20th, 2021. 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. I will now turn the call over to Marc Charbin, Investor Relations. Please go ahead, Marc.
Thank you, operator. Good morning, everyone, and thank you for joining us 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 two 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. 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. Lastly, by staying true to our pledge of 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 leaders in premium in British Columbia, our home province with very discerning cannabis consumers.
In larger cannabis markets, we have consistently ranked in the top five 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 one 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've increased our quality threshold 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 II of our high-potency flower development program and have commercialized a select few of these high-THC strains. 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 four, 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 four, you can see that we continue to dominate the premium organic cannabis market in Canada, with number one 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. 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 five, 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 buying 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 Q4 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. 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. With COVID travel restrictions easing, we are expecting to receive our EU GMP onsite audit in this fourth quarter. 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.
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 CAD 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 ingrained in our DNA.
Our facility was built with high-efficiency LED grow lights. We divert our waste through composting and recycling. We use living soil with local agricultural inputs. 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 CAD 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. We've developed a framework to measure and create a baseline for water consumption on which we can improve in future years. Our ESG report also ties in strongly to our commercial goals.
With a cutting-edge ESG strategy, we feel that we are enhancing our differentiating factors in the organic and premium cannabis market while providing added justification for our premium pricing in each product category, and executing on our mission of growing the best cannabis on Earth and for the Earth. 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 Q2 2021, Rubicon Organics reported net revenue of CAD 4.6 million. This is a CAD 3.6 million increase relative to Q2 2020 and a CAD 500,000 increase over Q1 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 for listing in late June or early July and will be hitting the market across Canada over the course of Q3, ramping up our revenue trajectory. Sequentially, we benefited from sales growth in the last two 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 CAD 200,000 in Q2 were it not for a CAD 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 it's the best cannabis in the Canadian market. Secondly, as we commence cultivation about six 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 CAD 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 CAD 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 CAD 4 million in cash and CAD 26 million in working capital.
Subsequent to quarter end in early July, unfortunately not quite at June 30th as we were hoping, we received the proceeds from our debenture issue, which added approximately CAD 10 million to our treasury. This is the only significant debt that we carry. We remain confident that our balance sheet will continue to support our growth objectives with CAD 13.3 million in cash as of August 18th, 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. 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. 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 and expensed with the associated revenues for the sale of the product, unlike most other LPs. This means that our production costs of 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 rear view mirror, Rubicon Organics is focused and ready to deliver with high-quality products in the super premium, and mainstream categories, now listed in the key Canadian markets. With international opportunities expected to be realized in the next six 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.
Thank you. As a reminder, if you have a question, please press star one on your telephone keypads. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Neal Gilmer from Haywood Securities.
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 market, 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 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. Incrementally, that'll be about 125%. The SKUs that we're most excited about are a 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. 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 our live rosin. That's only been in limited time offer so far. We've had two drops of that, both of which sold out in a matter of hours. 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. Now that they're seeing the demand of that product, I'm anticipating that category to grow pretty significantly. 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 and focused on flavors, and our full spectrum PAX Pods are the nicest PAX Pod in the market today.
That's great. Appreciate that color. Maybe the follow-up from me sort of follows on your ending comments there, Margaret, with respect to just understanding the moving parts and the gross margin, and maybe a little bit more on the inventory sort of 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 your quality standards? Then you sort of take a look at your revenue profile versus your production cost and the inventory expense to sales, been fairly similar the last three quarters.
As that revenue ticks up in the second half of the year, I understand correctly that we wouldn't see much change in those two sort of cost of goods sold line, and that's what drives an improvement in gross profit margins?
Correct. You've got two questions there, and I'll answer the first, which is around the inventory. 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 routes 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 capitalize the biological assets under IAS 41, as the industry does, we had to take a proportionate write-down to the cash cost as well as the fair value. We weren't very happy about that because 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.
Hopefully it helps us next quarter. We're very confident in what we're doing on cost and sort of leading to the second part of the question, the production costs 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 CAD 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. Thank you very much. I'll pass the line.
Thank you. Your next question comes on the line of Rahul Sarugaser from Raymond James.
Morning, Jesse, Margaret. Thanks for taking my question.
Morning, Rahul.
Morning. 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. You also referred to specifically on an order pull as expected from Ontario in September. Could you give us a little bit more color on that? Also, given that you continue to overperform in the western provinces, how do you expect, the eastern provinces and the larger populations there to continue to drive those order inflection points through the second half of the year?
Great question, Rahul. I'll start with the first question, which is largely around pipe fill, and I'll divide that into two, our own listings and timing in the Ontario market around that inventory pipe fill. Recall, as I mentioned, in quarter two, almost none of our new listings have been shipped, so you don't really see any of that impact in these earnings. It's going to be pretty significantly incremental. We're 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, we won't be able to book a slot for quarter three.
It is the 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. I think that is in parallel with timing for inventory pipe fill in Ontario. Different LPs have meshed different times when 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 till late August or 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 sort of driving the walk-by traffic. 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. 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 product, 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. Thanks. That's really helpful, Jesse. A follow-on question sort of looking at the balance sheet, and I guess it's equally a question for you, Margaret. Previously, you folks had guided to turning profitable 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. Given the CAD 13.3 million in cash that you said you have on hand now, Margaret, as well as the, I guess, the CAD 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 for the company?
I'll take that one, Jesse. Thanks, Rahul. 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 with Simply Bare. We are on track for EBITDA positive over the course of the next few months. We're very pleased with that. We're sitting in a strong balance sheet, and we expect that you're going to see that from us. You're going to start to see some strong revenue trajectory off the back of that, not only with the growth of Simply Bare, which we're bullish on.
We do think that there's quite a bit of room for Simply Bare to continue to grow, 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. You're going to see that from us over the course of the next, I would say, four months, and we're very confident in that, i.e., EBITDA positivity.
Terrific. That's all from me today, and good luck with the second half of the year.
Thanks, Rahul.
Thanks, Rahul.
Your next question comes on line of John Chu from Desjardins Capital.
Hi, good morning. My first question is just on the cost associated with launching these new brands and all these new SKUs into new markets, provinces and all that. Can we expect to see some of those costs start 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. Our team is built. We have a fantastic innovation and marketing team. Any incremental growth in cost would be directly associated with sales at this point, if we needed more people to drive that. It's not on the marketing side.
Okay. Maybe just talking about the last two weeks of June, which I believe you said was really the driver for the quarter-over-quarter growth. Now that we're seeing more momentum on that, and then tying in with that, some restocking of the provincial wholesalers, is that two weeks a bit of a good read-through for us in terms of how to expect to see revenue growing as more stores open? Is that kind of like a pent-up demand and then it starts to level off to something a bit more consistent through the rest of this second half of the year?
Oh, sorry. Go ahead, Jesse.
The last two weeks in June were not a significant pipe fill event. It was more of a return to normalized buying patterns. This is what we've sort of consistently 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. I think you can expect June is going to look, the last few weeks in June are going to look more what it's going to look like on a go-forward basis, and that is, from Rubicon's perspective, not inclusive of the doubling of SKUs that we have in the marketplace. Only a few of our SKUs are included in that.
I'd just remind you, John, that many of the distributors' buying patterns result in some chunky revenue based on when shipping dates are versus purchase orders. That was a little bit chunky on that, but you're going to see definitely accelerated growth from us coming out of Q3.
Okay, 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, or submissions in, prior to that window closing? Just maybe some of the broader dynamics of how that impacts the competitive landscape.
Yep. That's another great question. 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 bi-monthly call for product. That was moved to a quarterly call for product, with the current state-of-the-art being a recent call last week, which was their August call. The next product call will not be until April, two quarters away. In the June product call, we got substantially all of our listings in, which we made reference to in our operational update. The August product call, we expect to hear those answers this afternoon. I was hoping to have that update for this call today. We haven't been contacted from the OCS yet.
On a go-forward basis, my understanding at current is that the OCS will not be doing another core product call until April at the earliest.
You feel pretty confident.
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. There is 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.
Sorry, last question. Some of these new products that you talked about launching in the next month or two, that's from the June.
Correct.
Listing submission period? Okay.
Yeah. The timeline, John, is typically the product submission goes in, and then you can expect to see purchase orders for products in market approximately two months after that. Most of what we are referencing right now is some product going in August from the June product call, and then the bulk of those orders going in in September, three months after the listings were accepted.
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.
October, November.
No, October, November. If it comes in in August, it's approximately two months after that that you'll receive the purchase order. Consumers would see those products in market largely in October, November. The OCS does make certain exceptions, sometimes accelerates it depending on their product need, and sometimes delays it depending on how they're trying to rationalize their inventories. Most of those listings would typically land approximately two months after they're approved for listing.
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 one or two replacements. 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 a 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's looking for.
Okay. That was very helpful. Okay. That's it for me. Thank you.
Thanks, John.
Thank you. As a reminder, if you have a question, please press star one on your telephone keypad. Okay. At this time, there are no further questions. I will turn it back over to the presenters.
Thank you. Well, thank you, everyone, for joining the call today. We're very bullish on our quarter three, quarter four outlook. The team is in place. Our innovation are listed. Our quality has come up significantly. We are looking forward to making the turn toward profitability here later in this half. Thank you very much for joining the call.
This concludes today's conference. You may now disconnect.